• Insiders can also trade on the market
• Monitoring of the ban on insider trading by BaFin
Insider trading is a stock exchange transaction that was made on the basis of non-public, stock exchange-relevant information. This insider trading is prohibited and will be prosecuted.
In principle, a company is obliged to immediately publish all information that could affect the company’s stock market price. This is the so-called ad hoc publicity obligation: Company information that could affect the stock market price must be made available to all market participants as quickly as possible.
Because: “Investors can only make well-founded decisions and are not disadvantaged compared to insiders if listed companies quickly and comprehensively inform all market participants about insider information” (MAR Art.17). According to the Market Abuse Regulation MAR, every issuer in Germany is obliged to do this. Because only a basic obligation to provide information creates the same conditions for every market participant. Missing information about the company in question can distort the course.
Routine control of all transactions by BaFin
The securities regulator BaFin monitors the ban on insider trading and regularly analyzes trading activities. To this end, all data on reported securities transactions is evaluated and all ad hoc notifications from listed companies are checked.
The price and sales development is compared with the information on the share. Of course, information on insider activities received by BaFin is also taken into account. If this results in indications of insider trading, the securities supervisory authority will initiate a formal investigation and, if necessary, file a criminal complaint with the responsible public prosecutor’s office.
BaFin applies the Market Abuse Regulation of the European Securities and Markets Authority (ESMA) without restriction. It contains three relevant regulations on insider trading: the above-mentioned obligation to make ad hoc publicity; second, the obligatory creation of insider lists, i.e. the reporting of those persons in a listed company who have insider knowledge; and third, the reporting of proprietary transactions, the so-called notification of directors’ dealings.
market manipulation
The dissemination of false or deliberately misleading information about listed companies is known as market manipulation because it affects the share price accordingly. For example, when companies inflate sales or profits to drive the share price up.
Other violations of market manipulation that are being prosecuted by BaFin are so-called scalping, i.e. apparently profitable stock tips that the tipster only uses to sell his own stocks profitably, or so-called wash trades (simultaneous, multiple sales of the same financial instrument), which can be used, among other things, to artificially inflate the trading volume or to generate illegal payments to a broker.
The Limits of the Legal
Employees of a company, including board members, supervisory board members or executives, can trade shares in their own company under certain conditions. Trading by insiders, also known as insider deals or insider transactions, is therefore not fundamentally illegal, although this group of people has access to confidential information and can assess the company’s development differently than outsiders. However, as long as the company’s ad hoc obligations are met and no unpublished company decisions are the basis for the insider’s investment, buying or selling shares in one’s own company is legal. These transactions must also be made public accordingly.
Legal or illegal always depends on when the securities are traded. Trading blocks or blackout periods exist, for example, in a period around the publication of quarterly figures or around an IPO. Long-term share buyback programs by companies are also suspended before quarterly figures are announced.
Penalties for Insider Trading Violations
According to the Securities Trading Act, violations of insider trading can result in a prison sentence of up to five years or a fine.
In February 2022, the Frankfurt Regional Court imposed the highest prison sentence to date in connection with insider trading. Overall, one defendant was sentenced to three years in prison for multiple insider trading. He had traded shares and derivatives of various companies, mainly before takeover bids, investing around 8.5 million euros in the process. The dealer obtained the information from a former employee of an investment bank who was directly involved in the takeover negotiations. The informant received an 18-month suspended prison sentence.
Equality of information is the be-all and end-all
For any stock purchase, the information underlying the investment is critical. If these are publicly accessible, insiders can also trade shares in their own company. Conversely, private investors can also be prosecuted if they use internal, unpublished information about a company.
Editorial office finanzen.net
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