Criminal Regime - CJA

Question 1

Flowchart

Answer 1

1. S52 offences
2. Individual?
3. Insider?
4. Inside information?
5. Inside source?
6. Have they committed one of the offences? Deals/ encourages/ discloses?
7. Defences
8. Penalties for breach

N.B. consider other liabilities - FSA and Fraud Act

Question 2

Exam tip

Answer 2

Exam tip – defences unlikely to apply.

Question 3

1. S52 offences

Answer 3

• S. 52(1) CJA – A person who has information as an insider is guilty of insider dealing if, in the circumstances mentioned in subsection (3), he deals in securities that are price-affected securities in relation to the information.
  • s. 54(1) – price affected securities = anything defined in Schedule 2 (includes shares).
• S. 52(2) CJA – An individual who has information as an insider is also guilty of insider dealing if –
  i) He encourages another person to deal in price-affected securities, knowing or having reasonable cause to believe dealing would take place in circumstances; OR
  ii) He discloses information, otherwise in proper performance of employment functions, to another person.

Question 4

2.. Individual?

Answer 4

• Note that under s. 52 CJA, the offender must be an individual (a natural person) – it cannot be a legal person/corporation (as in market abuse)

Question 5

3. Insider? Subjective Test

Answer 5

• S. 57(1) CJA – A person has information an insider if and only if:
  i) It is, and he knows that it is, inside information; and
  ii) He has it, and knows that he has it, from an inside source.

Question 6

4. Inside information

Answer 6

• S. 56(1) CJA – definition of inside information – means information which:
  • Relates to particular securities
• Is specific or precise
• Has not been made public; and

• Price sensitive information – see s.56(2) CJA. If it were made public would be likely to have a significant effect on the price of any securities
- Not Public - s. 58 CJA: Anything which is not an RIS announcement or in public records.

Question 7

5. Inside Source?

Answer 7

• S. 57(2) CJA – A person has information from an inside source if he has it through:
  • Being a D, employee or SH of an issuer of securities
  • Having access to the information by virtue of his employment, office or profession; or
  • The direct or indirect source of his information is a person who is an insider

Question 8

6. Have they committed one of the offences?

Answer 8

• Liability under s. 52 CJA arises for:
  i) dealing in securities (acquiring, disposing or otherwise procuring of securities): s. 55(1) CJA
  ii) encouraging another person to deal; s. 52(2) CJA; or
  iii) disclosing information: s. 52(2) CJA

Question 9

7. Defences

Answer 9

• S. 53(1) CJA – An individual is not guilty of insider trading by virtue of dealing if he shows:
  • Did not expect to profit - That he did not at the time expect the dealing to result in a profit attributable to the fact that the information was price-sensitive information; or
  • That at the time he believed on reasonable grounds the information had been disclosed widely enough; or
  • Would have done it anyway - That he would have done what he did even if he had not had the information.
• See also any Sch. 1 CJA defences
• S. 53(2) CJA – No liability for dealing by virtue of encouraging if…:
  • Same conditions as above
• S. 53(3) CJA – No liability for dealing by virtue of disclosure of information if…:
  • He did not at the time expect any person, because of the disclosure, to deal in securities; or
  • Although he had an expectation at the time, he did not expect the dealing to result in a profit attributable to the fact the information was price-sensitive.

Question 10

8. Penalties for breach

Answer 10

• S. 61 CJA – An individual is liable to a fine, imprisonment of up to 7 years, or both.

Question 11

Territorial scope?

Answer 11

• More limited in territorial scope than MAR
• S. 62(1) CJA provides that a person is not guilty of the dealing offence unless:
  a) he was within the UK at the time of the alleged dealing;
  b) the market is a UK regulated market (note that this is defined with reference to the Insider Dealing (Securities and Regulated Markets) Order 1994 and includes the Main Market of the London Stock Exchange and AIM); or
  c) the professional intermediary was within the UK at the time he is alleged to have committed the offence.
• S. 62(2) CJA also provides that a person is not guilty of the encouraging or disclosing offences unless:
  a) he was within the UK at the time when he is alleged to have disclosed the information or encouraged the dealing; or
  b) the recipient of the information or encouragement was within the UK when he received that information or encouragement.

Question 12

Other criminal liability

Answer 12

• Fraud Act 2006 - Could also be criminally liable under the Fraud Act 2006 (not contained in butterworths, so not expected to cite) e.g. dishonestly abusing a position
• Part 7 FS Act
  Under Part 7 FS Act, it is a criminal offence for a person to:
  • make misleading statements (s.89 FS Act) or
  • engage in market manipulation (s.90 FS Act).
  • S. 92 FSA – penalties include imprisonment not exceeding 7 years, fine, or both