LAST month, the Supreme Court reserved its judgement on petitions seeking disqualification of Pakistan Tehreek-i-Insaf chief Imran Khan and secretary general Jahangir Tareen.

During one of the hearings, the court was informed that shares of United Sugar Mills Ltd — an entity up for sale — were bought by Mr Tareen’s employees before the information was accessible to the public, which eventually led to the PTI leader facing allegations of insider trading.

The employees later sold the shares, making Rs70.8 million in the process. But Mr Tareen had to pay a penalty of Rs70m later on when the Securities and Exchange Commission of Pakistan (SECP) slapped a fine on him over allegations of insider trading in 2005.

Mr Tareen, as a director of the JDW Sugar Mills, allegedly had specialised information about the acquisition of USML, one of JDW’s subsidiaries.

So what exactly is insider trading? And does it differ from market manipulation?

There’s a difference between the two, an SECP official said.

“Market manipulation involves transactions which give false information through media, the Internet or by other means about demand, supply or price of financial instruments to misguide the masses,” said the official, who did not want to be named.

“Insider trading, on the other hand, occurs when someone makes an investment decision after receiving information from an employee (insider) of a company which is not yet available to the general public,” he said. “This information could be about anything from a possible takeover of a company, its merger or discovery of oil in a gas field.”

Similarly, an insider could be a sponsor, executive officer or director of an issuer of listed securities who has information and a fiduciary duty.

According to the Securities Act of 2015, which prohibits insider trading, insider information includes any information which has not been made public relating to listed securities, and which if made public, would likely to affect the prices of those securities is inside information.

“Since last year, the SECP has filed 11 cases of insider trading in courts,” the official said.

Explaining the legal side, solicitor Mansoor Ghangro said insider trading is a white-collar crime.

A violator can be jailed for up to three years, or face a fine of up to Rs200 million or three times the amount of gain made or loss avoided by him/her.

And if the violator is a company, it can face a fine of up to Rs300m or three times the amount of gain made or loss avoided.

In developed economies, regulators keep a close eye on the movement of shares before a significant event that takes place in a company, such as an expansion or takeover, and before the information is released to the public.

Insider trading is considered a crime in some countries, and a civil offence in others.

Last year, the US Supreme Court delivered a judgement in an insider trading case, which was presented before it in nearly two decades.

Bassam Yacoub Salman, the defendant, placed profitable stock trades based on confidential information. The information was leaked by Maher Kara, Mr Salman’s future brother-in-law, who had advance knowledge of corporate mergers as he worked at Citigroup’s health care investment banking group.

It was said that Mr Kara did not receive any financial benefit but arguably leaked the information as a gift. The court finally held that gifts of confidential information without any compensation to relatives for the purposes of insider trading are also a violation of securities laws.

Published in Dawn, The Business and Finance Weekly, December 4th, 2017