The Capital Markets Authority (the CMA) is the regulatory body mandated to supervise, license and monitor the activities of market intermediaries, including the Nairobi Securities Exchange (NSE) and the Central Depository and Settlement System and all the other persons licensed under the Capital Markets Act, Chapter 485A of the Laws of Kenya (the CMA Act).

The CMA plays a critical role in the economy by facilitating mobilization and allocation of capital resources to finance long term productive investments.

Recently, the CMA has carried out robust enforcement and regulatory action against companies and individuals who are suspected of engaging in insider trading. For instance, on 12^th March 2019, the CMA reported that it had secured the surrender of alleged illegal gains amounting to Kenya Shillings four hundred and fifty-eight million (KES. 458,000,000/=) in the context of some investigations after freezing several bank accounts.

What is Insider Trading? 

The Black’s Law Dictionary defines ‘Insider Trading’ as the use of non-public information in trading shares of a company by someone who owes a fiduciary duty to the company. Insider trading is also described as an unfair and unconscionable practice that discourages a free market economy.

Key considerations under the CMA Act in relation to Insider Trading 

• Securities are price-affected securities in relation to inside information if the information is likely to, if made public, materially affect the price of the securities.
• Information shall be treated as relating to an issuer of securities where it may affect the business prospects of the company.
• Insider information means information which relates to particular securities or to a particular issuer of securities, information which has not been made public or information if it were made public is likely to have a material effect on the price of securities.
• Insider means a person in possession of inside information.

Insider Trading under the CMA Act 

In the context of listed securities, their derivatives and derivatives traded on any market regulated by the CMA, it is an offence under the CMA Act to commit insider trading and other market abuses.

Under Section 32B (1) of the CMA Act, a person who deals in listed securities or their derivatives that are price-affected in relation to the information in his possession commits an offence of insider trading if that person:

• encourages another person, whether or not that other person knows it, to deal in securities or their derivatives which are price-affected securities in relation to the information in the possession of the insider, knowing or having reasonable cause to believe that the trading would take place; or
• discloses the information, otherwise than in the proper performance of the functions of his employment, office or profession, to another person

Pursuant to Section 32B (3) of the CMA Act, a person deals in securities or their derivatives if, whether as principal or agent, sells, purchases, exchanges or subscribes for any listed securities or their derivatives or acquires or disposes of, or agrees to acquire or dispose of the right to sell, purchase, exchange or subscribe for any listed securities or their derivatives. However, it must be noted that a contract shall not be void or unenforceable by reason only of the commission of insider trading.

A person would also be committing insider trading if the said person whether as a principal or agent, sells, purchases, exchanges or subscribes for any listed securities or their derivatives or acquires or disposes of, or agrees to acquire or dispose of the right to sell, purchase, exchange or subscribe for any listed securities or their derivatives.

Insider trading may also occur in the following situations:

• members of an organization purchasing a security – this occurs when key members of an organisation buy or sell securities or stocks relying on information that is not available to the general public;
• professionals who do business with the corporation – this occurs when bankers, lawyers, paralegals and brokers and other consultants have access to confidential documents and information belonging to their corporate clients and use that information to make a profit from the sale or purchase of shares;
• friends, family, and acquaintances of corporate employees – this occurs when corporate employees share information in their own social circles through issuing tips on securities with a view to making a profit;
• government officials – government officials in execution of their duties may come across confidential information which they may elect to utilise to conduct insider trading; and
• hackers, corporate spies, and other thieves – due to increasing cases of cyber-crime, hackers and other cybercriminals may gain access to confidential information and use the information to carry out securities fraud.

Investigations & Regulatory Action 

Section 11 of the CMA Act gives the CMA mandate to inquire into the affairs of any person which the Authority has approved, or to which it has granted a licence and any public company the securities of which are publicly offered or traded on an approved securities exchange or on an over the counter market. The CMA therefore may make the finding that a person or a company has committed insider trading and charge them before a court of law.

An accused persons’ rights have been protected by Article 50 of the Constitution of Kenya 2010. The accused has a right to a fair and public hearing before a court or an impartial tribunal or body. Article 50 provides a comprehensive list of an accused persons rights including but not limited to, the right;

• to be presumed innocent until proven guilty;
• to be informed of the charge with sufficient detail;
• to have adequate time to prepare a defence;
• to a public trial before a court established under the Constitution;
• to choose, and be represented by an advocate, or to have an advocate assigned to the accused by the State and at State expense;
• not to testify during the proceedings or to refuse to give any self-incriminating evidence;
• to be informed in advance of the evidence the prosecution intends to rely on, to have reasonable access to this evidence and to challenge such evidence;
• to adduce their own evidence;
• not to be convicted for an act that at the time it was committed was not an offence in Kenya or a crime under international law;
• not to be tried for an offence in respect of an act or omission for which the accused person has previously been either acquitted or convicted;
• to benefit from the least severe of the prescribed punishments for an offence; and
• if convicted, to appeal to, or apply for review by, a higher court as prescribed by law.

In accordance with the Constitution 2010, Section 35 of the CMA Act provides that a person or company who is convicted for committing insider trading can appeal before the CMA Tribunal, which has the same powers as the High Court.

Penalties for Insider Trading

The CMA Act sets out severe penalties for persons and companies found liable for insider trading. Insider trading is an offence through Section 32E of the Act which proposes:

• for a first time individual offender, a fine not exceeding Kenya Shillings two million five hundred thousand (KES 2,500,000/=); or a jail-term of two (2) years, and a payment of the amount of the gain made or loss avoided;
• for a first time company offender, a fine of up to Kenya Shillings five million (KES 5,000,000/=) and a payment of the amount of the gain made or loss avoided;
• for a subsequent individual offender, a fine not exceeding Kenya Shillings five million (KES 5,000,000/=); or an imprisonment for seven (7) years, and a payment of twice the amount of the gain made or loss avoided; and
• for a subsequent company offender, a fine not exceeding Kenya Shillings ten million (KES 10,000,000/=), and a payment of twice the amount of the gain made or loss avoided.

Repayment of the illegal gain is referred to as Disgorgement in other jurisdictions.

Any individual who has been in connection with a body corporate and is in possession of information which would materially affect the price of the securities in the preceding six (6) months, is prohibited by Section 33 of the CMA Act from dealing with any securities of that body corporate, or an associated body corporate, and from causing another person to deal in such securities. This is referred to as Debarment in other jurisdictions.

Case law on Insider Trading

We have not come across any reported decisions in Kenya where the court has found individuals/ companies guilty of insider trading. However, we wish to highlight the following decisions that are worth considering to understand insider trading:

In the case of Republic vs. Terrence Davidson, Nairobi CMCC 1338 of 2008, Mr. Terrence Davidson, the then CEO of Kenya Commercial Bank (Uchumi’s bankers) was accused of being privy to information on the financial status of Uchumi Limited when he instructed his stockbroker to sell Uchumi Limited’s shares a few days before the retail supermarket chain collapsed. 

The court ruled in favour of Davidson, highlighting that the company’s information memorandum clearly showed that the company was making losses and was technically insolvent and the losses were a fact known to the public. The court further noted Uchumi’s poor performance and the pulling out of its major shareholders was a matter that had been publicized in the newspapers and was therefore, not unavailable to others. Davidson was subsequently acquitted on all charges.

In the US case of Securities and Exchange Commission v. Brett Kennedy, et al. (No. 17-cv-01344) (W.D. Wash., filed Sept. 7, 2017) the Securities and Exchange Commission alleged that Brett Kennedy, an Amazon financial analyst, accessed non- public 2015 first quarter earnings information without authorization while working at Amazon and shared it with Maziar Rezakhani, who illegally traded on the financial results before their public release to make more than United States Dollars one hundred and sixteen ($116,000/=) in illicit profits.

According to the SEC’s complaint, Rezakhani paid Kennedy United States Dollars ten thousand ($10,000/=) in cash for the information and also shared the trading profits with Sam Sadeghi, who was advising him on his brokerage account trades.

Without admitting or denying the allegations, both Sadeghi and Kennedy agreed to pay a disgorgement, an interest and a penalty totaling to more than United States Dollars thirty-five thousand ($35,000/=).  In a parallel action, the U.S. Attorney’s Office for the Western District of Washington then announced criminal charges against Kennedy.

In the South African case of Zeitsman and Another v the Directorate of Market Abuse and Another 2016 (1) SA 218 (GP), the brief facts were that Mr. Gavin Lyonel Zeitsman for and on behalf of Harrison and White Investments (Pty) Ltd purchased shares in Africa Cellular Towers Ltd in pursuance of acquiring the controlling share in AC Towers. Zeitsman started to purchase shares from the 30^th of August 2010 to 14^th March 2011.

The Industrial Development Corporation (IDC) sent a letter to AC Towers where it agreed to make funding in the amount of South African Rand ninety-nine million (R99,000,000/=) available. This fact was communicated to Zeitsman however no substantiating information such as interest rates were disclosed.

Subsequently a SENS announcement was made in which shareholders were informed that AC Towers was successful in obtaining a debt facility.

Zietsman continued to acquire shares and became aware of the debt funding before the 9^th of February 2011. The detail of the loan funding was made public during a SENS announcement on 28^th January 2011 and thereafter on the 11^th of March 2011, the share price increased by 54%.

The High Court of Pretoria held that the information need not be in a final form to be deemed ‘specific or precise’ information. Therefore, even though the insiders might genuinely believe that the information at their disposal is not ‘inside information’ as nothing was signed, it will not suffice as a defence. The court was also of the opinion that the administrative penalty against Gavin Zeitsman as well as Harrison and White Investments (Pty) Ltd must be upheld even if they did not make an actual profit from it.

How Can You Protect Yourself or your Company from Insider Trading? 

It is important for one to protect himself or herself from unintentionally committing insider trading.

Corporate insiders should refrain from disclosing any information that they have gained in their professional capacity and any information that is not public knowledge. The following measures can prevent an individual or company from insider trading:

• identify when someone providing information to you is violating or breach his/her duty;
• implement blackout periods when officers, directors and other designated people are barred from purchasing the company\’s securities, usually around earnings announcements;
• A company may also require officers, directors and others to clear their purchases or sales of the company\’s securities with its compliance officer or internal auditor to avoid any conflicts of interest or violations of securities laws;
• companies should implement an education program for their employees in which they learn how to avoid partaking in insider trading or sharing material nonpublic information;
• companies should come up with internal policies for the prevention of insider trading; and
• individuals and companies should, after taking legal advice, report to the proper authorities when you receive information relevant to your portfolio that you are unsure is public or not.

If you have any queries regarding insider trading and other related information, please do not hesitate to contact James Wairoto at jwairoto@mwc.legal or Bernard Musyoka at bmusyoka@mwc.legal. Please note that this e-alert is meant for general information only and should not be relied upon without seeking specific subject matter legal advice.