Proof of insider trading

Insofar as the Philippine Stock Exchange (PSE) is concerned, PLDT Inc. is for now off the hook for insider trading in connection with the heavy selling of its stocks shortly before it officially disclosed its P48-billion budget overrun.

Although PSE president Ramon Monzon had said that its market surveillance unit found no evidence of insider trading, it asked PLDT to clarify a subsequent statement that it did not uncover any fraud or irregularities in the overspending.

It is unlawful for an “insider” to communicate material nonpublic information about a company and its stocks to any person whom the passer of the information knows or has reason to believe will likely buy or sell those stocks based on that information.

An insider is defined as a company that issues securities, or a director or officer of that company, or a person whose relationship or former relationship to the issuer gives or gave him or her access to material information about the company and its stocks that is not generally available to the public.

The ban on insider trading rests on the principle that all stockholders, regardless of the number of shares they own or their degree of proximity to people who have access to significant company facts and figures, are entitled to equal and fair treatment.

Since the PSE’s establishment in 1992, only one case of insider trading has been successfully prosecuted. In 2021, a stockbroker was convicted of that offense in relation to the 1999 stock price manipulation of the stocks of BW Resources Corp., a gaming company.

The inordinate delay in the prosecution of that case does not come as a surprise because, aside from the slow pace of the country’s judicial system, this white-collar crime is not easy to prove.

The toughest hurdle in insider trading cases is proving that the information shared is material, i.e., it would have a significant effect on the price of the subject stocks, and that it cannot be sourced from the usual means of information about the issuer company.

To a savvy stockholder, that tip would induce him or her to sell his or her stocks to avoid holding lower-priced stocks or to buy more stocks in the expectation that its price would go up once that information becomes public.

The sudden uptick in the sale or purchase of stocks cannot, by itself, be construed as proof that their sellers or buyers acted on the basis of insider information.

The stockholder’s acts before, during and after the transaction, the movement of the stock price during any of those periods and other incidents that may be attributed to such fluctuation have to be reviewed and analyzed before any substantive allegation of insider trading can be made.

There are several defenses available on insider trading. For one, the stockholder can claim that he or she sold or bought the stocks based on his or her analysis of the company’s future performance or the pattern of the fluctuation of its stock price over the years.

Or he or she can claim that his or her action was influenced by what he or she has read in social media or the chat groups of people engaged in various financial activities.

Note also that in this age of widespread internet-based communications, the sources of information on stock trading are limitless in the web. Strictly speaking, any such information can be characterized as public in character because anybody who has Wi-Fi connection can access it.

In the United States, numerous insider trading cases have been successfully pursued through the use of wiretaps, seizure of email messages, plea bargaining arrangements and offer of financial rewards to whistleblowers.

Sadly, those investigation and prosecution techniques are not available to the local corporate regulators for supposedly reasons of privacy or confidentiality of personal data.

With its reputation on the line, the work is cut out for PLDT to prove that it had nothing to do, much less had a hand, in the massive sell-off of its stocks before it announced the budget overrun.

What a way to end an otherwise good performance this year!

For comments, please send your email to rpalabrica@inquirer.com.ph.

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