¹ Gaillard, E. (ed.), Insider Trading—The Laws of Europe, the United States and Japan, Deventer, 1992;Google Scholar and Botha, D., “Control of insider trading in South Africa: a comparative analysis”, (1991) SA Merc L.J. 1 at 7.Google Scholar

² Dale, R., Risk and Regulation in Global Securities Markets, Chichester: 1996, 1ff.Google Scholar

³ Cox, J.D., “Insider trading and contracting: a critical response to the ‘Chicago School’”, (1986) Duke L.J. 628.Google Scholar

⁴ Act No. 135 of 1998 (hereafter the “new Act”). Unless otherwise indicated, all references to statutory provisions are to this Act.

⁵ It is well known that as far as investment options and fora are concerned, economies in the emerging markets' category are generally not the first choice of international fund/asset managers responsible for the profitable investment of huge amounts of institutional investor funds.

⁶ The validity of the three reasons oudined above may be seriously questioned by scholars who have a basic distrust of government regulation and, therefore, prefer that government intervention in the market place should be absolutely minimal, if at all necessary. See Osode, P.C., “Insider trading regulation in South Africa: a public choice perspective”. (1999) 11 R.A.D.I.C. 418.Google Scholar

⁷ The group was popularly referred to as the “King Task Group” after its chairperson, former Judge and Advocate, Mervyn King.

⁸ Hereafter the King Report.

⁹ See ss. 229–233 of the Companies Act No. 61 of 1973 repealed by the Companies Amendment Act No. 78 of 1989.

¹⁰ It is immaterial under both sections whether such an individual was dealing for his/her own account or for any other person.

¹¹ Hereafter the “UK”.

¹² Such a broad exclusionary trading ban would be both incredible and probably constitutionally invalid in most jurisdictions. Incredible, because it would serve none of the purposes intended to be achieved by legislatures in enacting insider trading legislation: and constitutionally invalid, because it would constitute an unjustifiable limitation on the insiders' freedom of economic activity as well as their entitlement as citizens to equal treatment under the law.

¹³ The bond market is known as the Bond Exchange of South Africa (BESA), while the futures market is the South African Futures Exchange (SAFEX). Both markets operate under licences issued by the Registrar of Financial Markets under the Financial Markets Control Act No. 55 of 1989.

¹⁴ See, e.g., F.H. Van Zyl, “Control over takeovers and insider trading in Namibia”, FSB Bulletin, Second Quarter, 1997, at 7–8.

¹⁵ King Report, above n. 8, at para. 3.3.1.

¹⁶ This implication of the scope of the new trading ban is the subject of a critical analysis in Part 3, below.

¹⁷ King Report, above n. 8, at para. 3.4.

¹⁸ Luiz, S.M., “Insider trading regulation—if at first you don't succeed …”, (1999) 11 SA Merc L.J. 139.Google Scholar

¹⁹ This submission is supported by the King Task Group which, on the provisions of s. 3, took the view that the court has a discretion in the matter. Implicit in that view is that the court may, in the exercise of that discretion, properly conclude that information which under s. 3 “may be” regarded as having been made public was not in fact “public information” at the time of the alleged infringement. See King Report, above, n. 8, para. 3.2.3.

²⁰ See Standen, D.J., “Insider trading reforms sweep across Germany: bracing for the cold winds of change”, (1995) 36 Harvard Int'l L.J. 186 (commenting on an identical requirement contained in the German Securities Trading Act).Google Scholar

²¹ Excellent examples here would be commissioners and staff members of the Competition Commission. These would usually be the first to know whether a prospective takeover, merger or acquisition for which regulatory approval has been sought will be going ahead or would have to be aborted.

²² The example that readily comes to mind here are the staff members of the Companies Registry and the Securities Regulation Panel. These staff members would regularly come into possession of valuable non-public information in the normal course of discharging their duties as employees.

²³ This group of primary insiders has sometimes been referred to as “government insiders”. See Krimmel, H.T., “The government insider and rule 10b–5: a new application for an expanding doctrine”, (1974) 47 S.Calif L.Rev. 1491.Google Scholar

²⁴ These are sometimes referred to as “market insiders”. The president and staffof the Johannesburg Stock Exchange (JSE) also fall into this category.

²⁵ The classic example of this kind of traders comes from the American case of SEC v. Sweitzer 590 F.Supp. 756 (W.D.Okla. 1984). See Osode, P.C., “The regulation of insider trading in Canada: a critical appraisal”, (1999) Anglo-Am.L.Rev. 166 at 176 (presenting a brief summary of the pertinent facts of the case).Google Scholar

²⁶ King Report, above, n. 8, para. 3.2.2.

²⁷ S. 5 of the new Act.

²⁸ Krause, H., “The German Securities Trading Act (1994): a ban on insider trading and an issuer's affirmative duty to disclose material nonpublic information”. (1996) The International Lawyer 576. The European Community Insider Trading Directive of 1989 is hereafter referred to as the “EC Directive”.Google Scholar

²⁹ This is the “model Act” on which the Securities Acts of the other Canadian provinces are tailored. See Osode, above, n. 25, 168.

³⁰ Gillen, M.R., Securities Regulation in Canada, Toronto, 1992, 272–76.Google Scholar

³¹ S. 61, Criminal Justice Act, 1993, (hereafter, “CJA”).

³² Davies, P.L., Gower's Principles of Modern Company Law, London, 1997, 473.Google Scholar

³³ Ibid.

³⁴ See King Report, above, n. 8, para. 1.1.

³⁵ It is only recently that some key figures in the relevant regulatory agencies have begun to acknowledge that the perception is not a reflection of the reality of insider trading in South Africa. See Deventer, G. van, “New watchdog for insider trading”, (1999) FSB Bulletin, First Quarter, 2 at 3.Google Scholar

³⁶ Section 6(1)–(4). It will be recalled that the new Act proscribes five kinds of conduct, namely: trading for one's own account based on inside information; encouraging another person to deal; discouraging another person to deal; disclosure of inside information; and insider trading for the account of another.

³⁷ The Financial Services Board (hereafter, the “FSB” or the “Board”) is an independent regulatory institution established under s. 2 of the Financial Services Board Act No. 97, 1990, for the purpose of overseeing the South African Financial Services Industry in the public interest.

³⁸ Determination of the precise amount to which the FSB would be entitled under this head of claim is in the court's discretion. However, it may not in any case exceed three times the amount of the profit gained or loss avoided as a result of the impugned transaction.

³⁹ The costs are to be assessed on a scale determined by the court. See s. 6(4)(a)(iv).

⁴⁰ S. 6(4)(b).

⁴¹ See s. 440F(4) of the Companies Act No. 61, 1973, as amended repealed by s. 17 of the new Act.

⁴² Ss. 2(1), 6(1) and 6(2).

⁴³ See King Report, above, n. 8, para. 3.5.2.

⁴⁴ See Krause, above, n. 28, at 576; and Spiro, G.W., The Legal Environment of Business—Principles and Cases, Englewood Cliffs, N.J., 1993, 289.Google Scholar

⁴⁵ Such a mandatory requirement was part of the regulatory regime of insider trading in the Canadian province of Ontario until its repeal in 1980 in response to calls by regulators and academics alike, who persuasively argued that the repeal was indispensable to the creation of an effective insider trading prohibition. Cf. s. 113, Ontario Securities Act, Revised Statutes of Ontario, 1970, c. 426 and s. 134(1), Ontario Securities Act, Revised Statutes of Ontario, 1980. c. S.6; and Buckley, F.H., “How to do things with inside information”, (1977) 2 Canadian Bus.L.J. 343. All the other Canadian provinces have generally followed Ontario in eliminating the said requirement from their law on insider trading. See Gillen, above, n. 30, 273–74.Google Scholar

⁴⁶ S. 6(5)(a).

⁴⁷ According to section 1, the “claims officer” means the person appointed by the FSB to take responsibility for considering and determining claims as well as making the fund distributions contemplated in ss. 6(5)–(7) of the Act.

⁴⁸ Unless the claims officer determines otherwise, a successful claimant shall receive the lesser of (a) an amount equal to the difference between the price at which the claimant dealt and the profit gained or loss avoided as determined by the court in accordance with the discretion conferred on it by s. 6(4)(b); or (b) an amount equal to the pro rata portion of the balance of the distributable funds calculated according to the relationship which the amount contemplated in (a) above bears to all the amounts proved by claimants. S. 6(7). It should be noted that any person aggrieved by a decision of the claims officer is entitled to written reasons for the decision and may appeal the decision to the board of appeal established by s. 26 of the Financial Services Board Act, s. 6(9).

⁴⁹ It is not necessary that the investor specifically demonstrates that he/she was affected by the illicit insider trading separate and apart from showing that he/she falls into either one of the two categories. The wording of section 6(6) suggests that an investor falling into either category is irrevocably presumed to have been affected by the illicit transaction. It is submitted that, in this context, the claims officer plays a quasi-judicial function in the discharge of which he/she is conferred with significant discretion. This is implicit in the provision of the said subsection which specifically requires that proof by any claimant must, in order to succeed, be to the satisfaction of the said officer.

⁵⁰ S. 6(6)(a).

⁵¹ S. 6(6)(b).

⁵² This has especially been the Canadian experience. It is also one of two compelling reasons why the United Kingdom and its European Union counterparts have only criminalized insider trading; the other reason is that the insider trading ban and related penalties are intended only for the defence of the financial markets' integrity, not for the protection of investors. See Osode, above, n. 25, 188–90; Krause, above, n. 28, 576–77; and McVea, H., “Fashioning a system of civil penalties for insider dealing: sections 61 and 62 of the Financial Services Act, 1986”, (1996) Journal of Business Law 344; and Davies, above, n. 32, 459.Google Scholar

⁵³ See B. Anderson, “FSB pays out compensation”, Business Day, 1 November, 1999 (reporting the pay out of more than R240,000 to “shareholders who have been prejudiced” by transactions contravening the new Act).

⁵⁴ Ibid.

⁵⁵ It must be carefully noted that these defences are not intended to be the only defences available in any proceedings under the new Act. S. 4(3). A defendant is, therefore, free to raise any legal defence that could as a matter of law be relevant in the particular circumstances of his/her case.

⁵⁶ It is worth noting that the new Act does not in this regard impose a duty on the intermediary to blow the whistle on his/her client. Accordingly, even though he/she is aware that a criminal and civil wrong is about to be committed, all that the law requires from him/her in the circumstances is to decline the client's instructions. However, where the intermediary declines the instruction, but then subsequently proceeds to trade on the inside information for the account of his/her other clients, he/she will be subject to criminal liability under s. 2(1) and to civil liability under s. 6(2)(c) of the new Act.

⁵⁷ S. 4(1 )(b).

⁵⁸ See Osode, P.C., “Defending insider trading regulation on ethical and scientific grounds: the inequality of legal access theory”, (1999) 62 THRHR—Journal of Contemporary Roman-Dutch Law 21.Google Scholar

⁵⁹ No. 61 of 1973, as amended.

⁶⁰ Cilliers, H.S. et al. ., Corporate Law, Durban, 1992, 459.Google Scholar

⁶¹ S. 4(2).

⁶² S. 4(2)(a).

⁶³ Where, for example, a member of the senior management of an issuer went to play golf and thereafter settled down to drinks with his fellow golf club members, if in the excitement of the “party atmosphere”, he/she discloses inside information, the defence will not be available.

⁶⁴ Ibid.

⁶⁵ S. 11(2)(a)–(I) and subss. 11(3)–(11) of the new Act.

⁶⁶ This power conferred by s. 11 (f) specifically requires the FSB to seek and obtain a warrant before taking any of the actions authorized thereunder. The only exception is where the person in control of the premises consents to the actions contemplated in the paragraph. The warrant may be issued on the Board's application by any judge or magistrate having jurisdiction in the area where the premises are situated. Further, it may only be issued if there is information under oath grounding a credible belief that a document relevant to an ongoing insider trading investigation is present on the premises in question. See subss. 11(3)(a) and (b) of the new Act.

⁶⁷ It was the firm conviction of the King Task Group that the body charged with the responsibility of regulating insider trading must be vested with adequate powers to enable it to fulfil that statutory function. In particular, the Task Group felt that the body must be endowed with powers that would enable it effectively to investigate insider trading allegations and institute civil proceedings where necessary. S. 11 is again Parliament's attempt to give substance and effect to the Task Group's recommendations in this regard. See King Report, above, n. 8, para. 3.9.1.

⁶⁸ As presently constituted, the Directorate consists of 21 members. See www.fsb.co.za/insider.htm.

⁶⁹ Ten of these persons must be nominees of South Africa's three regulated markets. See s. 12(2)(b).

⁷⁰ S. 12(3) and (4). Seven of the minimum 17 members are expected to be appointed as alternates. However, the new Act contemplates the participation of the alternate members at the Directorate's meetings alongside the members for whom they are “alternate”. The only prescribed limitation in their participatory rights is that they would only have a vote in the absence from a meeting of the member whom the alternate is representing. See s. 12(7).

⁷¹ See discussion of the civil liability provisions, above, nn. 36–41 and accompanying text.

⁷² S. 12(13).

⁷³ S. 12(14).

⁷⁴ New Zealand is another example of jurisdictions where the corporate issuer has a statutory right to enforce violations of the insider trading ban. See Mulholland, C.A., “Insider trading in New Zealand: the procedural debacle”, (1994) 12 Company and Securities L.J. 118.Google Scholar

⁷⁵ See Osode, above, n. 25, 167, 185–88.

⁷⁶ As was the scenario that came before the English courts in the case of Regal (Hastings) Ltd. v. Gulliver [1967] 2 A.C.134.

⁷⁷ S. 1002G, Corporations Law.

⁷⁸ It is exciting to note that Australian law is in this respect founded on the reasoning that the financial benefit obtained by the defendant rightfully belongs to the company which therefore does not have to demonstrate any real or actual loss in order to persuade a court to order a disgorgement of the “ill-gotten” benefit by the defendant insider.

⁷⁹ S. 1317HA, Corporations Law.

⁸⁰ See, e.g., Kitch, E., “The law and economics of rights in valuable information”, (1980) 9 Journal of Legal Studies 683;CrossRefGoogle ScholarLevmore, S., “Securities and secrets: insider trading and the law of contracts”, (1982) 68 Virginia L.Rev. 117;CrossRefGoogle Scholar and Cox, J.D., “Insider trading regulation and the production of information”, (1986) 64 Washington Univ.L.Q. 475.Google Scholar

⁸¹ Rider, B.A.K. and Ffrench, L., “Should insider trading be regulated? Some initial considerations”, (1978) South African L.J. 80.Google Scholar

⁸² See, e.g., Manove, M., “The harm from insider trading and informed speculation”, (1989) 104 Quarterly Journal of Economics 823CrossRefGoogle Scholar (finding that insider trading results in an appropriation of corporate investments); and Masson, R.T. and Madhavan, A., “Insider trading and the value of the firm”, (1991) 39 Journal of Industrial Economics 30 (finding that the active use of inside information in stock trading by executives lowers firm value).CrossRefGoogle Scholar

⁸³ This refers to takeovers, mergers and other substantial investment asset acquisitions.

⁸⁴ In Canada, the mandatory trade reporting requirement was one of the cornerstones of the very first insider trading regulatory regime introduced into the country in 1966 via the Ontario Securities Act of the same year. Buckley, F.H. et al. ., Corporations—Principles and Policies, Toronto, 1995, at 797–98; and Gillen, above, n. 30, at 162–63. It is most interesting to note that Germany has recently adopted a trade reporting provision that is significantly broader than its Canadian and American counterparts in that it mandates the disclosure of “all transactions” in securities and derivatives to the German Federal Securities Office, being the regulatory authority charged with the responsibility of policing the country's insider trading prohibitions. See the 1994 German Securities Trading Act discussed in Krause, above, n. 28, 556.Google Scholar

⁸⁵ See generally, Osode, above, n. 25, 169–70.

⁸⁶ The study was published in Finance Week, 20–26 February, 1992.

⁸⁷ The study results also showed significant changes in insider trading patterns during the six-month period preceding dividend resumption or omission announcements.

⁸⁸ Professor Bhana, based on his study, furnished three reasons for that conclusion. Firstly, because the publication of insider trades will enable outsiders to observe and mimic insider trading behaviour, and because such publication will enable the market to promptly revise the relevant companies' prospects subsequent to the publication, the capacity of insiders and tippees to earn large abnormal returns, as well as the period during which insiders themselves can earn such returns, will be significantly diminished. Secondly, the mandatory disclosure and widespread publication of insider trading activity will significantly expand the market's capacity to rapidly process and reflect the information content of such trading activity. The logical result will be a significandy more efficient financial market. Thirdly, where publication of insiders' trades is made mandatory (along with prompt reporting of the trades by the insiders themselves), insiders will be careful in ensuring that they do not engage in illegal trading, thus promoting the regulatory goal of deterrence.

⁸⁹ See, e.g., Gillen, above, n. 30, 163–64 (arguing that the intent behind the enactment of such statutory provision is to equalize access to up-to-date information as between investors and insiders); and Krause, above, n. 28, 581 (suggesting that the rationale behind this form of ad hoc disclosure is the reduction of the frequency of insider trading by eliminating one of the factors facilitating the achievement of personal gain from trading on new data).

⁹⁰ Ibid., at 164. The achievement or effective pursuit of pricing efficiency through the incorporation and enforcement of a mandatory timely or ad hoc disclosure obligation as a critical part of a statutory regime designed to control insider trading should indirecdy promote another critically important policy goal, namely, that of preserving the fairness and integrity of the financial market place. This would be the logical result of the increased conviction of investors that the playing field has, as much as possible, been levelled by a parliamentary enactment directed at eliminating the otherwise unerodeable informational advantage of insiders.

⁹¹ A “material change” is a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer. What is most interesting about the statutory definitions of the phrase is that they expressly encapsulate a decision to implement such a change made by the issuer's board of directors, or by senior management of the issuer who believe that confirmation of the decision by the board is probable.

⁹² “Material fact” refers to any new development which significantly affects, or would reasonably be expected to have a significant effect on, the market price or value of an issuer's securities.

⁹³ Gillen, above, n. 30, at 164–65; and Buckley et at, above, n. 84, 320.

⁹⁴ Where the management of an issuer is of the opinion that immediate disclosure of material non-public information would be unduly detrimental to the issuer's interests, the obligation to disclose is automatically suspended; instead, the issuer is only obliged to immediately file a confidential report with the appropriate regulatory authority. In other words, no press release is required in such cases. However, the confidential report must disclose the reasons which formed the basis of the management's opinion. Thereafter, the issuer must in every ten-day period deliver a written advice to the authority indicating its desire that the change remains confidential and the reasons thereof. Gillen, above, n. 30, 168–69.

⁹⁵ Ibid., at 167.

⁹⁶ The inclusion of a rule creating the affirmative duty of issuers to make ad hoc disclosure is actually mandated by art. 7 of the EC Directive. It should be noted here that the enactment of the Act, which is the first of its kind in German history, was also in compliance with the said Directive. Krause, above, n. 28, 555, 581.

⁹⁷ Examples of data falling into this category would be information relating to: disposal of core parts of an issuer's business; merger agreements, corporate integrations; control agreements; acquisitions and sales of a substantial participation; tender offers; over-indebtedness; and material extraordinary expenditures or revenues. Krause, above, n. 28, 583 (citing a guide prepared and issued by the holding company of the German Stock Exchanges).

⁹⁸ Information that must be disclosed under this category includes: significant inventions or patents; conclusion or termination of particularly significant contractual relationships; serious product liability or environmental damage cases; legal disputes of particular significance; and withdrawal or entry into new core business areas. Krause, above, n. 28, 583–84.

⁹⁹ In the case of bonds, it should be information that is likely to affect the issuer's capacity to fulfil its obligations. Krause, above, n. 28, 583.

¹⁰⁰ Where disclosure of new information may be detrimental to the issuer, the German Securities Trading Act allows it to apply to the German Securities Office for a “waiver”, which when granted effectively operates as an exemption from the duty to disclose. The only requirement here is for the issuer to satisfy the Securities Office that disclosure would damage its “legitimate business interests”. It is thought that the onus on the issuer would be more easily discharged where disclosure would result in the issuer surrendering a competitive advantage. See Krause, above, n. 28, 585.

¹⁰¹ To give teeth to the relevant statutory provision, substantial criminal penalties are prescribed for intentional or reckless violations of the provision. Such criminal liability is additional to liability for compensatory damages to which the offender may be subject under the relevant German principles of tort/delictual liability. Krause, above, n. 28, 586.

¹⁰² Macey, J. R., Insider Trading—Economics, Politics, and Polity, Washington, D.C., 1991, 7–12.Google Scholar

¹⁰³ S. 1.

¹⁰⁴ Dale, above, n. 2, 9; and G.W. Spiro, above, n. 44, 287.

¹⁰⁵ Davies, above, n. 32, 457.

¹⁰⁶ This conclusion is accurate given that the transaction is one that has taken place on a foreign market for securities/financial instruments, which qualifies as a “regulated market” under the new Act.

¹⁰⁷ Where the FSB embarks upon the pursuit of investigations and sanction of an “off-shore” (foreign) trader, significant financial resources will have to be incurred in conducting the investigations and obtaining documents/other relevant information, securing the extradition of the offender(s), and then prosecuting them here in South Africa.

¹⁰⁸ Krause, above, n. 28, 576. If such limited extra-territorial application of the German Act were not allowed, German citizens would be effectively shielded from any sanctions for their violations of foreign insider trading laws.

¹⁰⁹ Art. 5 of the “EC Directive”.

¹¹⁰ Davies, above, n. 32, 457–58; and Wood, P.R., International Loans, Bonds and Securities Regulation, London, 1995, 360.Google Scholar

¹¹¹ For example, ss. 82–91 of the English Companies Act, 1989.

¹¹² See generally, Davies, above, n. 32, 474–78.

¹¹³ Ibid.

¹¹⁴ See Gillen, above, n. 30, 272ft; and Osode, above, n. 25, 174ff.

¹¹⁵ See the International Securities Enforcement Cooperation Act, 1990.

¹¹⁶ Spiro, above, n. 44, at 287.

¹¹⁷ It also appears that American courts will be more inclined to assert jurisdiction over such violations if it is shown that the securities fraud has had a negative impact on the US securities markets. See Wood, above, n. 110, 267–68, 360.