Insider Trading — Concepts, Prohibitions and the Defense Strategy
The charge of insider trading concerns one of the most detailed institutions of securities market legislation: the law defines the concept of inside information, the prohibited actions and the circle of persons to whom the prohibition extends. The defense is built precisely on the accuracy of these definitions: it is often questionable whether the information was inside information at all, whether the person held it, and whether the prohibition applied.
This page explains four blocks of the law: what inside information is; what insider trading is and to whom it is prohibited; what counts as unlawful disclosure; and what sanctions the National Bank may apply. Each block is a point where the elements of the charge demand careful scrutiny.
What Is Inside Information
Inside information is information of a precise nature which has not been made public and which relates, directly or indirectly, to one or more securities or their issuers and which, if made public, would be likely to have a significant effect on the price of those securities or related financial instruments. Two points of the definition must be determined immediately: precise nature and significant effect.
The law defines both. Information is of a precise nature if it relates to a circumstance that exists or may exist in the future, or to an event that has occurred or may occur, and is sufficiently defined for a conclusion to be drawn about its effect; in the case of a gradual process, even intermediate steps may be deemed precise information. The criterion of significant effect is the reasonable investor test: information is significant if a reasonable investor would use it when taking an investment decision. For brokers and intermediaries the concept is broader — information about a client's current orders is also inside information if it is precise and not public.
Insider Trading and the Circle of Persons Covered
Insider trading is the acquisition or disposal, for one's own or a third person's benefit, of securities to which inside information relates, by a person holding that information, using that information. The cancellation or amendment of a trading order on the basis of inside information is also deemed insider trading, where the order was given before the person held the information. Also prohibited is giving a third person a recommendation, or inducing a third person, to trade on inside information — and an act performed by a third person on such a recommendation is itself deemed insider trading if that person knew or should have known that the recommendation rested on inside information.
The circle of persons covered is broad: holding inside information matters where the person is a member of the issuer's management body; holds shares or a share in the issuer's capital; has access to the information in the performance of employment, professional or other duties; or obtained the information by criminal means. The law also extends to a person in any other situation who knows or should know that they hold inside information. For the defense this means that both the status of the information and the moment of the person's possession are separate evidentiary elements.
Unlawful Disclosure of Information
A separate prohibition concerns disclosure: unlawful disclosure is the disclosure of inside information by a person holding it to a third person, except where that person disclosed it to the third person within the framework of the ordinary performance of employment, professional or other duties. This exception is central to the defense: information transferred within a professional function does not constitute unlawful disclosure. Further disclosure of information connected with a recommendation is also prohibited where the discloser knew or should have known of its insider basis.
Sanctions and the Accents of the Defense
On a violation the National Bank applies the same spectrum of sanctions as for other market violations: a written warning, measures and instructions, a monetary fine in the established manner and amount, suspension of signing authority, suspension of operations, cancellation of control or revocation of license — under the proportionality rule. The defense in insider cases rests on three pillars: the unproven insider quality of the information, the contestable moment of possession or knowledge, and the placement of the conduct outside the scope of the prohibition.
Frequently Asked Questions
What is the test for inside information?
Information of a precise nature, not public, relating to a security or issuer, which on disclosure would significantly affect the price — by the criterion of the reasonable investor.
To whom is insider trading prohibited?
To every holder of inside information: members of the management body, holders of shares or a share, persons with access through professional duties and persons who obtained it by criminal means — and to any person who knows they hold such information.
Can cancelling an order be charged?
Yes — cancelling or amending a previously given trading order on the basis of inside information is deemed insider trading.
Is every disclosure prohibited?
No — disclosure within the ordinary performance of employment, professional or other duties is not unlawful.
How We Help on Legal.ge
The Legal.ge team unpacks an insider trading charge with precise analysis of the definitions: we assess the elements of insider quality — precision, non-public character and significance; analyze the chronology of possession and knowledge; and defend your position in the National Bank's administrative proceedings and in court. Contact us on Legal.ge — the defense of an insider case stands on the accuracy of the definitions.