6 Insider Trading Examples to Help You Spot Misconduct

The Market Abuse Regulation (MAR) was introduced to improve transparency and trust in the capital markets across the European Union. The use and management of inside information forms an integral part of the regulation and, within that, the prohibition of insider trading is key to maintaining a level playing field for investors.

Insider trading, or insider dealing, is the unlawful use of specific, non-public information that, if made public, would affect the price of a financial instrument, to inform their investment decisions. Reflecting this, Article 14 of MAR states that: “A person shall not engage or attempt to engage in insider dealing.”

However, for the year 2023, there were 299 administrative measures and sanctions issued for contraventions of MAR, with fines totalling €45.9 million. More of these measures were brought for prohibitions of Article 14 than any other element of the regulation.

Insider trading can be costly to an organisation, both financially and reputationally, which is why it is important for teams to be alert to the signs of misconduct. These insider trading examples will help you understand how and why it can occur within a company. You will also find best practices for preventing insider trading.

1. Insider trading examples with case studies

1.1 €14M penalty for insider trading duo

In this case, a trader in an EU country was fined €14 million for insider dealing. The trader, referred to as Person A, received material non-public information from his cousin, Person B, who held a senior position at a bank – Company A. Person A then acquired approximately €8 million worth of shares in Company B, knowing that a state-run organisation, Company C, was about to acquire it. Company A had been involved in the process, providing Person B with this non-public knowledge.

Following the public announcement of the takeover, Company B’s share price rose significantly, resulting in a profit of over €6 million for Person A. Authorities were alerted by the suspicious timing and nature of these trades, concluding that Person A had engaged in insider dealing. Person A was fined €14 million for insider trading, and Person B received a €400,000 fine for unlawfully distributing inside information.

1.2 Executives sentenced to prison for insider dealing

Two European corporate executives were convicted of insider dealing after an extensive investigation by their country’s financial regulator. Person A, an investment banker, accessed confidential information about upcoming transactions through his senior roles at major investment banks. He shared this information with his close friend, Person B, a finance director and chartered accountant. Person B then made trading recommendations to two other individuals, who executed the trades on behalf of the group.

The scheme involved the use of unregistered ‘burner’ phones, safety deposit boxes and encrypted files to conceal the participants’ activities. They profited by approximately €8.5 million as a result of these trades. Following the discovery of the scheme, Person A and Person B were sentenced to four-and-a-half and three-and-a-half years in prison, respectively. They were ordered to pay confiscation orders totalling around €2 million. The other two individuals were acquitted due to insufficient evidence of their awareness of the insider nature of the information.

1.3 Guilty plea in pharma merger insider case

A man admitted in court that he made trades in the shares of a pharmaceutical company (Company A) based on protected information. In the late 2010s, a clinical trial service business (Company B) performed a reverse takeover of Company A, taking Company A’s name. Later the same year, the resultant business announced it was merging with a pharmaceutical company in another European country (Company C).

A year later, the police force confirmed that it was investigating suspicious trading in Company A’s shares surrounding the merger announcement. Although not directly connected to Company A, this person had previously been the CEO of a healthcare company (Company D), which was partly owned by Company B. Although it was not clear how the person had gained the inside information on the merger, he pleaded guilty to one count of insider trading.

1.4 Fund manager penalised €45m for front-running

A senior fund manager at a European asset management firm engaged in front-running by using non-public information about his company’s upcoming trades to inform his personal trading activities. Over five months, he executed at least 55 such transactions, amassing profits exceeding €8 million.

The suspicious trading activity was reported by derivative issuers and the bank through which he made his trades, prompting an investigation by the national regulator. As a result, he was dismissed from his position, prosecuted and sentenced to three and a half years in prison. He was also fined €45 million, representing the total trading volume of the transactions.

1.5 Regulatory employee implicated in €2b fraud

A European country’s financial regulator – Company A – was privy to inside information about suspicious financial reporting at an apparently successful financial services provider (Company B) based within its jurisdiction. Eventually, the news was announced that Company B could not account for €2 billion it claimed to possess. As a result, its stock price fell by more than 70%.

Months later, Company A revealed that an investigation had found one of its employees had sold shares in Company B the day before the public announcement that there was no trace of the €2 billion. The employee was suspended and Company A started an internal disciplinary process, as well as filing a criminal complaint against them.

1.6 Consultant and CEO sanctioned for insider trading

A European-based management consultancy firm (Company A) decided to sell its stake in Company B, a real estate company, with a third organisation, Company C, in discussions to buy the shares. However, a number of individuals and another business, Company D, were aware of the non-public interest from Company C and bought shares in Company B, knowing that its shares would increase when the information was revealed to the stock market.

A subcontractor for Company B was found to have encouraged family members to commit insider dealing. He was fined hundreds of thousands of Euros, with the CEO of Company D and the business itself also receiving sanctions worth more than €1 million combined.

2. Best practices for companies to prevent illegal insider trading

2.1 Implement comprehensive insider trading policies

Your insider trading policies should be clear and easily accessible to all employees. You must inform them of their responsibilities relating to inside information and the internal and external sanctions that they could face for non-compliance. Make it clear that contravening MAR has serious repercussions for both natural and legal persons.

Set out your process for:

Disclosing inside information

Choosing to delay disclosure

Creating, populating and maintaining insider lists

This will help employees understand when the knowledge they acquire is deemed to be inside information and their obligations once they become insiders.

2.2 Conduct regular training for employees

As well as informing employees of their duties regarding insider dealing, training sessions provide a chance to work through your policies in a practical and collaborative manner. Work with groups to identify situations that do or do not amount to inside information within the scope of MAR to broaden their understanding of the topic.

Provide examples of insider trading cases and the consequences of them. Run through the process of populating an insider list and allow them to ask any questions that they have about insider trading, giving full and frank answers that fill any gaps in their knowledge.

2.3 Establish pre-clearance and monitoring procedures for personal trades

Requiring employees to request pre-clearance to make trades on their personal accounts is an effective way to ensure they do not carry out transactions that amount to market abuse. Implement a pre-clearance process that sets the parameters in such a way that they cannot gain approval to trade in the shares that would constitute insider trading.

For example, if your company was involved in advising a client over whether to acquire one of its rivals and discussions were confidential, anyone involved in the case would hold inside information, as this non-public information could affect the price of its shares were it to be widely known. In this case, you restrict trading in the client’s stock as well as that of the company the client was attempting to buy out. This prevents them profiting from an unfair advantage over the financial markets.

Use monitoring tools to maintain oversight on employee trades on an ongoing basis, too. This acts as a safety net for the company.

2.4 Limit access to sensitive information

The more people have access to inside information, the bigger the risk that someone will use it to inform their trades and carry out insider dealing. This is why it is advisable to restrict who can access sensitive information about both your business and that of your clients. Implement access restrictions on your internal IT systems and consider how many employees you really need to work on certain projects.

Keeping the number of corporate insiders to a minimum reduces the chances of market abuse and, in the event that someone does attempt to unlawfully disclose the inside information to other parties, there is a smaller pool of individuals to investigate.

2.5 Enforce strict consequences for violations

Insider trading is a serious form of misconduct and, as such, you should impose strict sanctions for anyone caught carrying it out. Decide on suitable disciplinary consequences that meet the magnitude of the violations. Disclose them in your policies and at your training sessions. Ensure all employees understand how seriously the company takes insider trading compliance.

2.6 Encourage anonymous reporting of suspicious activity

Your employees are the eyes and ears of the organisation when it comes to illegal activity in the workplace. This means that they might be able to spot insider dealing occurring before it is picked up by other means. The earlier you uncover and manage market abuse cases, the less damage they can do, which is why you should have in place a confidential or anonymous reporting channel for your internal stakeholders.

Allow your employees to file reports about non-compliant behaviour such as insider trading. Provide a platform that they can access from anywhere and that does not involve them having to make it known they made the complaint. An online whistleblowing software solution allows them to interact privately with your investigations team. The whistleblower can upload evidence and help you stop insider trading without the risk of facing retaliation for making their report.

3. Consequences of illegal insider trading

Consequence	Explanation
Fines	With fines for individuals of up to €5 million and for businesses of up to €15 million or 15% of total annual turnover, it is clear that the EU takes contraventions of Article 14 seriously. Receiving a sanction of this sort would be damaging to the organisation.
Reputation loss	Businesses are often trusted by clients with inside information. If insider trading happens with this information, it damages trust in the brand and its ability to work in the best interests of its partners.
Regulatory scrutiny	Any company found to have allowed insider training to occur could face more stringent oversight by regulators to ensure it does not happen again. This could include more time-consuming and costly audits.
Stock value impact	As a result of the other consequences, the value of the company‘s shares could decrease. If the market has no confidence in the brand and is concerned that it has become a compliance risk, this can dissuade investors.
Legal costs	If the actions result in litigation and settlements, it can mean that the business has to bear substantial legal costs.
Leadership disruption	In some cases, the level of misconduct can be such that executives are removed or resign as a result. This can cause disruption to the board and the company in general.
Operational impact	Cases of insider trading, the fallout from their investigation and the potential sanctions can cause a distraction to the business and impact operations within the company.

4. FAQ

4.1 Is insider trading always illegal?

MAR is explicit in its assertion that persons should not commit insider trading. Where someone aims to benefit from the use of insider information, it is a contravention of insider trading laws.

4.2 What is an example of insider trading violation?

An example of insider trading would be if an employee working with a client from the medical industry finds out that the client is about to receive permission to market a medicine for another purpose. This is currently material non-public information and, when it is made public, will increase the share price of the client based on the likelihood of increased revenue in the future. The employee buys a number of shares in the client company, knowing that he will make a capital gain when the news is revealed.

4.3 How does media coverage influence public perception of insider trading and its consequences?

Media coverage shapes public perception of insider trading rules by highlighting cases and penalties, which raises awareness of its unethical nature and reinforces the seriousness of legal consequences for those involved.

4.4 What are pre-clearance procedures, and how do they work?

Pre-clearance requires employees to gain permission to make trades on their personal accounts beforehand. Companies use pre-clearance software to restrict certain stocks that cause a conflict of interest or could facilitate insider trading, for example.

5. Conclusion

These insider trading examples show you how individuals and companies can break the law by using material non-public information to inform their investment decisions, gaining an unfair advantage over other investors. This is strictly forbidden under the Market Abuse Regulation and should be avoided.

Creating an insider list for each piece of inside information ensures that you meet the requirements of the law and reinforce the obligations of your corporate insiders not to use the inside information for gain. InsiderLog ensures you create compliant insider lists in the correct format and with an audit trail of updates. It also automates alerts to your insiders, saving you precious time. Request a demo of InsiderLog today.