Insider Trading and Circumstantial Evidence

29 October 2019

An impeccable operation of insider trading can be highly profitable and it is almost impossible to prove, as it often leaves no trace of direct evidence in proving who was the tipper, how was the inside information obtained, and/or what was the precise communication, but is it the actual case?

Insider trading is statutorily governed by Section 188 of the Capital Markets and Services Act 2007, where an insider who possesses inside information is prohibited to acquire or dispose of the securities before such inside information becomes generally available to the public.

Regardless of different jurisdictions, the activity of insider trading is commonly considered as illegal, where the court explains such activity ‘not only is unfair to other investors but it can seriously undermine the stock market. It borders on making unlawful gains or avoiding losses unfairly… Insider trading erodes public confidence not only among local investors but internationally. A stock market tarnished by insider trading promotes no public confidence.’

It is admittedly true that it is challenging to gather direct evidence in proving insider trading because ‘generally only persons who have direct knowledge of the relevant communications are the wrongdoers themselves’, the court explains.

To overcome the challenge as aforementioned, the Malaysian court establishes that circumstantial evidence is sufficient to prove insider trading. Circumstantial evidence may be defined as ‘when you look at all the surrounding circumstances, you find a series of undesigned, unexpected coincidences that, as a reasonable person, you find your judgment is compelled to one conclusion.’

‘There is no need for direct evidence. In this regard, there is no need to show the exact information conveyed to the insider or whether it is proven who had conveyed the information to the insider,’ says the court.

Therefore, even in the absence of direct evidence, the court may consider circumstantial evidence by taking a list of non-exhaustive factors into account to establish a case for insider trading, inter alia, the timing of the trades, the pattern of the trades, the relationship between the tipper and the tippee, and the attempts to conceal the trades or relationship between the tipper and the tippee.

1. Public Prosecutor v Lee Kim Seng [2013] 7 MLJ 844 | 2. Capital Markets and Services Act 2007 | 3. Suruhanjaya Sekuriti Malaysia v Chan Soon Huat [2018] 9 MLJ 782