Flutterwave Everything you need to know about insider trading
Illegal. We could stop there and tell you “that’s the definition”, and since we are an authority on the subject, you may want to use the concept of acceptability instead of denial. But, we won’t do that. It would also be illegal. So take this tour with us.
Simply put, insider trading occurs when trading in a company’s securities is done by people who, by virtue of their position, have access to nonpublic information critical to making investment decisions.
In simpler terms, insider trading (or insider trading) is the practice of using strategic information to trade in a company’s stock or securities. This is usually undertaken by key employees or managers.
For example, an executive who works in a company knows that the company intends to make an acquisition, but it is not common knowledge. This would count as inside information. It becomes a crime if that executive tells someone – and that person then buys or sells a financial asset using that information – or if the executive conducts a transaction himself.
For insider trading, shareholders are at a significant disadvantage because there is a lack of material non-public insider information. However, in some cases, if the information has been made public so that all relevant investors have access to it, it will not be insider trading.
Insider trading violations may also include the “tipping” of such information, trading in securities by the “informed” person, and trading in securities by those misappropriating such information.
United States SEC
Insider trading generally involves exchanging shares of individual companies for information about them. It can also be any type of information that could move the markets – most likely news about the economy.
Read also: Can we solve workplace irregularities in the Nigerian tech industry?
For example, the National Bureau of Statistics collects consumer price index data that can impact financial markets due to concerns about inflation. These data will eventually be public knowledge, but statisticians use these data, before their official publication, to enrich themselves; because it is valuable.
Research has shown that insider trading is common and profitable, but notoriously difficult to prove and prevent.
Insider trading is not a new concept, as taking advantage of information for personal gain is as old as the beginning of time, or more concretely, civilization. In fact, personal interests usually come before the interests of others because that’s natural. Thus, the misuse of information obtained by virtue of a privileged relationship with a initiated is not new.
Who are the insiders?
There are four categories of initiates:
- Any director or officer of a public company.
- Any person who holds, directly or indirectly, more than 10% of the public company’s voting rights, or exercises control or direction over more than 10% of the public company’s voting rights, or a combination of both.
- A subsidiary of the public company is considered an insider of the public company.
- If a company is considered an insider of the public company, the directors and senior officers of the company insider are also considered insiders of the public company.
Meanwhile, there is legal insider trading.
Legal insider trading occurs when insiders trade in the company’s securities (stocks, bonds, etc.) and report the transactions to authorities such as the Securities Exchange Commission (SEC).
Insider trading can be legal as long as it complies with rules set by the SEC.
Insider trading is legal when it involves “company insiders” – directors, officers, employees, beneficial owners, and people affiliated with the company in other material ways – who are not in possession of information important non-public ones.
Insider Trading in Nigeria
The Investment & Securities Act (ISA 2007) prohibits insider trading.
In Section 111(I), the law states that:
A person who is an insider of a public company must not buy, sell or deal in the securities of the company which are offered to the public for sale or subscription if he possesses information which he knows to be material and unpublished, price-sensitive information in relation to such securities.
An article in the Vanguard Newspapers states that “insiders are not limited to corporate officers, major shareholders, public officials, professional advisers and related parties, when it comes to insider trading. These include anyone who trades in securities based on material, non-public, price-sensitive information in breach of a duty of confidence. This right can be imputed.
Several economists and financial analysts have called the harmful effects of insider trading, arguing that it is harmful and weakens the confidence of foreign and local investors in the capital markets.
Herbert Wigwe of Access Bank Plc, caused a stir in January 2020 when he sold a further 2.33% of his stake in the bank by selling shares worth ₦297 million.
The bank, in a notice filed on the Nigerian Stock Exchange, said its CEO, through Trust Capital Limited, sold 28.86 million shares worth ₦297.82 million.
Wigwe had sold 4.48% of its stake in the bank.
The bank said in an insider trading report, which was filed with the NSE, that its CEO sold 55.6 million ordinary shares, which he held indirectly.
Access Bank said Wigwe held a total of 1.24 billion indirect shares and directly held 201.23 million shares in April 2019.
The indirect shares consisted of 537.73 million shares held by United Alliance Company of Nigeria Limited and 702.56 million shares held by Trust and Capital Limited.
He said the number of shares sold was an aggregation of sales made in four different instances – 3.61 million shares on January 10, 20.14 million shares on January 13, 9.24 million shares on January 14 and 22.63 million shares on January 15.
Wigwe sold the shares at a price of ₦10.80 on January 10, ₦10.70 on January 13, ₦10.56 on January 14 and ₦10.22 on January 15.
the problem was that the shares were pledged at a time when the bank had declared a closed period for trading in the bank’s shares on December 30, 2019, when the bank’s share price closed at ₦9.75 – also the time between the preparation of the bank’s balance sheet and the announcement to the public.
In 2021, the Group Managing Director and Chief Executive of Zenith Bank, Ebenezer Onyeagwuincreased its stake in the lender, six months after previous acquisitions.
Onyeagwu engaged in insider trading on Nov. 22, 2021, according to an NGX company filing. He paid ₦41.03 million to acquire 1.70 million shares at an average price of ₦24.10 kobo per share.
The investment banker acquired the shares in two tranches; 1.30 million shares at a cost of ₦24 per share, while the second was 402,762 shares worth ₦24.20 kobo per share.
In 2022, according to freelance journalist David Hundeyin, Flutterwave employees were “pushed” to sell their stock at ridiculously low rates of an expected $20 valuation.
They were offered a put option at $3.4999, which they rounded to $3.5 and accepted.
the problem with the prominent example is that Flutterwave started raising its Series C and filed its first sale on February 26, 2021, two days before the employee sold its shares at $3.5. Flutterwave closed Series C and filed with the SEC on March 12, 2021, and the stock price reportedly rose.
Ogheneruemu Oneyibo explains well whether there is a big flaw or not.
There are many other case studies, including testimonials from business leaders attending ESN. In August 2021, the Exchange averaged two admin trades per business day over a one-month period.
Flutterwave’s story brought this into focus again, and it’s important that we know what it is.
So while illegal insider trading harms shareholders and should be reversed, legal insider trading can actually reveal valuable information to investors and analysts.
All you need to do is review the details of the reported insider trading before jumping to conclusions.
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