(本文翻譯自 陳冲 武林高手的內線交易 2022.03.16.)
I liked to read wuxia novels When I was young. Seeing martial arts experts, in order to get a glimpse of the situation inside the house, slipped down from the eaves made me wonder, and as a little boy, I believed it’s a kung fu unique to China. After grown up and studied regulations of capital market, I was surprised to find out that foreigners also have similar skills, called Eavesdropping, a type of insider trading. Composed of “eaves” and “dropping”, eavesdropping literally means “hanging from the eaves of a building so as to hear what is said within”, somewhat the same meaning as if a jade dragon descending fast from the sky. As we can see, eavesdropping is never an easy thing.
Last week, the media reported an insider trading prosecution case. From the view of Securities and Exchange Act, it’s a rare and typical eavesdropping case which can be cited as a warning example in the textbook. The title of the newspaper that day read “Shockingly Chairman S gives his girlfriend 780 million and she bears the responsibility, saying that she eavesdropped on his phone to buy stocks and earn 60 million.”
According to the indictment, the facts of the case related to the legal elements of Article 157-1 of the Securities and Exchange Act are as follows: Chairman S of Company T would like to sell the company to Company D. One day when Chairman S was resting at his girlfriend's house and discussed the details about the acquisition case with the M&A team on the phone, his girlfriend overheard that “Company T is to be sold “. She used the 780 million Chairman S previously gave her to buy T stocks before the news was released and made around 60 million. Although the funds for the stock purchase came from Chairman S, Chairman S was unaware of the above actions his girlfriend did. Thus based on the identified facts, the prosecutor only prosecutes his girlfriend. Chairman S’ girlfriend is an insider defined in the Securities and Exchange Act. However, she’s not an insider of traditional concepts but a Tippee (a person who got news from an insider), a term added to the law when it was amended after studying America Law in 1988, and even more really a martial arts expert who can eavesdrop. The only difference is that the martial arts expert nowadays doesn’t need to be skilled in Qinggong (light skill, a form of Chinese martial arts).
Article 157-1 of the Securities and Exchange Act prohibits insider trading. The article stipulates various types of insider trading, of which the fifth subparagraph is "a person who has received information from the person listed in the preceding four subparagraphs." The non-public information sometimes comes from insiders like directors but rarely is it from eavesdropping since people involved in M&A are often vigilant for work-related matters and be cautious with their own actions so that news seldom leaks out and thus non-insider has little chance to hear. As a result, there are only few cases about eavesdropping insider trading, let alone cases that could be used as instructional material like the one mentioned above which involves a huge sum of money. It’s conceivable that many scholars are expressing interest now.
To stock investors, insider trading often means any director, supervisor, managers, or shareholder holding more than ten percent of the shares of a company makes money by material information, which is the scope of the first two subparagraphs of Article 157-1. And then are those regulated in the third subparagraph that has learned the information by reason of occupational or controlling relationship such as accountants, lawyers or actuaries. Insiders are more likely to ignore the fourth subparagraph: those who, though no longer among those listed in the preceding three subparagraphs, has only lost such status within the last six months. Several years ago, a financial institution chairman was sued because he sold shares only three months after leaving office. And the situations regulated in the fifth subparagraph, just as mentioned above, seldom happened, especially cases in which people overhear the information by chance, trade the stocks while unaware of the consequences and at last find themselves breaking the law.
In digital times, eavesdropping no longer requires hanging down from the eaves. On the other hand, insiders of public companies should be more careful dealing with material information that may have a substantial effect on the stock price. Showing off is not welcome and discussing material information in the wrong place is not so appropriate either. The result may be not only hurting others but even the whole capital market.