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WHO ARE INSIDERS?WHO ARE INSIDERS?Not just corporate directors, officers or major Not just corporate directors, officers or major shareholdersshareholdersA broader range of individuals;A broader range of individuals;

A partner in a law firmA p

artner in a law firmrepresenting the acquiring company in arepresenting the acquiring company in ahostile takeover bid who traded in target company stock.hostile takeover bid who traded in target company stock.A Wall Street Journal columnistA Wall Street Journal columnistwho traded prior to publication of who traded prior to publication of his column in the stock of companies he wrote about.his column in the stock of companies he wrote about.A psychiatristA p

sychiatrist who traded on the basis of information learnedwho traded on the basis of information learnedfrom a patient.from a patient.

A financial printer A financial p

rinter who traded in the stock of companies aboutwho traded in the stock of companies aboutwhich he was preparing disclosure documents.which he was preparing disclosure documents.


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WHY US REGULATIONS?WHY US REGULATIONS?Insider trading has started to crossInsider trading has started to crossbordersborders

EC Directive provides that members mayEC Directive provides that members mayenact laws more stringent than set out inenact laws more stringent than set out inthe Directivethe DirectiveU.S. has the most comprehensive andU.S. has the most comprehensive anddetailed regulations against insider tradingdetailed regulations against insider trading


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REASONS FOR REGULATINGREASONS FOR REGULATINGINSIDER TRADINGINSIDER TRADING

Unfair practice to public investorsUnfair practice to public investorsProhibiting it promotes efficiency of Prohibiting it promotes efficiency of

marketsmarketsProperty of material information belongs toProperty of material information belongs tothe corporation for business purposes.the corporation for business purposes.


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Section 16 of the 1934 ActSection 16 of the 1934 Act

Designed to watch more closely the trading of Designed to watch more closely the trading of corporate insiders on their corporations stock.corporate insiders on their corporations stock.

Covers officer, directors, and 10% equity holdersCovers officer, directors, and 10% equity holders16(a) ->16(a) -> Disclosure ProvisionDisclosure Provision ->Every corporate->Every corporateinsider should report holdings and transactions.insider should report holdings and transactions.Facilitates 16(b)Facilitates 16(b)16(b) ->16(b) -> Recovery of Short-swing ProfitsRecovery of Short-swing Profits ->These->Theseinsiders must disgorge profits from selling stock heldinsiders must disgorge profits from selling stock heldless than six monthsless than six months


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Rule 10b-5Rule 10b-5 Promulgated in 1942 under 10(b) of thePromulgated in 1942 under 10(b) of theSecurities Exchange Act of 1934Securities Exchange Act of 1934CoversCovers

material corporate misstatements or nonmaterial corporate misstatements or nondiclosures,diclosures,insider trading, andinsider trading, andcorporate mismanagement casescorporate mismanagement cases

regarding transactions in shares or other regarding transactions in shares or other securitiessecuritiesToday a major weapon to curb insider Today a major weapon to curb insider trading, as a catch-all anti-fraud provisiontrading, as a catch-all anti-fraud provision


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Rule 10b-5Rule 10b-5 It shall be unlawful for any person, directly or indirectly, by It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstatethe use of any means or instrumentality of interstate

commerce, or of mails, or of any facility of any national commerce, or of mails, or of any facility of any national securities exchange,securities exchange,

to employ any device, scheme, or artifice to defraud,to employ any device, scheme, or artifice to defraud, to make any untrue statement of a material fact or toto make any untrue statement of a material fact or to

omit to state a material fact necessary in order toomit to state a material fact necessary in order tomake the statements made, in the light of themake the statements made, in the light of thecircumstances under which they were made, not circumstances under which they were made, not

misleading, or misleading, or to engage in any act, practice, or course of businessto engage in any act, practice, or course of businesswhich operates or would operate as a fraud or deceit which operates or would operate as a fraud or deceit upon any person,upon any person,

in connection with the purchase or sale of any security.in connection with the purchase or sale of any security.


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Rule 10b-5Rule 10b-5 Legal Theories of Rule 10b-5Legal Theories of Rule 10b-5

Traditional TheoryTraditional TheoryMisappropriation TheoryMisappropriation Theory


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Traditional Theory of Insider Traditional Theory of Insider TradingTrading

Also known as disclose or abstain ruleAlso known as disclose or abstain ruleInsiders, acting on behalf of their company or on their Insiders, acting on behalf of their company or on their own behalf, have aown behalf, have a fiduciary dutyfiduciaryduty to the companysto the companysshareholders either toshareholders either to

disclose material, nonpublic information before tradingdisclose material, nonpublic information before tradingor or to abstain from trading.to abstain from trading.

Developed through major cases of Developed through major cases of In re Cady, Roberts & Co (1961)In re Cady, Roberts & Co (1961)SEC v. Texas Gulf Sulphur Co. (1968)SEC v. Texas Gulf Sulphur Co. (1968)

Chiarella v. United States (1980) -> Rule 14e-3Chiarella v. United States (1980) -> Rule 14e-3Dirks v. SEC 1984 -> Re ulation FDDirks v. SEC 1984 -> Re ulation FD


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Traditional Theory of Insider Traditional Theory of Insider TradingTrading

A person violates Rule 10b-5 by buying or sellingA person violates Rule 10b-5 by buying or sellingsecurities on the basis of securities on the basis of material nonpublicmaterial nonpublic information if information if

she owes a fiduciary or similar duty to the other partyshe owes a fiduciary or similar duty to the other partyto the transactionto the transactionshe is an insider of the corporation in whose sharesshe is an insider of the corporation in whose sharesshe trades, and thus owes a fiduciary duty to theshe trades, and thus owes a fiduciary duty to the

corporations shareholderscorporations shareholdersshe is a tippee who received her information from anshe is a tippee who received her information from aninsider of the corporation and knows or should know,insider of the corporation and knows or should know,that the insider breached a fiduciary duty in disclosingthat the insider breached a fiduciary duty in disclosing

the information to her the information to her


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Misappropriation Theory of Insider Misappropriation Theory of Insider TradingTrading

First mentioned in Chiarella caseFirst mentioned in Chiarella caseIn Carpenter v. United StatesIn Carpenter v. United States (1986) case(1986) case

Supreme Court split 4 to 4Supreme Court split 4 to 4Clearly accepted by the Supreme Court in 1997,Clearly accepted by the Supreme Court in 1997,United States v. OHaganUnited States v. OHagan casecase


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A person violates Rule 10b-5 if A person violates Rule 10b-5 if MisappropriatesMisappropriatesmaterial nonpublicmaterial nonpublic informationinformationby breaching a duty arising out of aby breaching a duty arising out of arelationship of trust or confidence to therelationship of trust or confidence to thesource of informationsource of information

and uses that information in a securitiesand uses that information in a securitiestransactiontransactionregardless of whether he owed any duty toregardless of whether he owed any duty to

the shareholders of the traded stockthe shareholders of the traded stock


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Misappropriating information is :Misappropriating information is :obtaining by improper means or obtaining by improper means or converting it to his/her own benefit even if properlyconverting it to his/her own benefit even if properly

obtainedobtainedAccording to Rule 10b5-2 a duty of trust or confidenceAccording to Rule 10b5-2 a duty of trust or confidenceexists when:exists when:

a person expressly agrees to maintain information in confidence;a person expressly agrees to maintain information in confidence;

the facts and circumstances of the relationship as a whole showthe facts and circumstances of the relationship as a whole showa history, pattern or practice of mutual sharing of confidences; or a history, pattern or practice of mutual sharing of confidences; or a person receives information from a spouse, parent, child or a person receives information from a spouse, parent, child or sibling, unless the person receiving the information can showsibling, unless the person receiving the information can showthat, under the facts and circumstances of the familythat, under the facts and circumstances of the family

relationship, no reasonable expectation of confidence existed.relationship, no reasonable expectation of confidence existed.


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Scope of Rule 10b-5Scope of Rule 10b-5 Applies to any purchase or sale by any person of Applies to any purchase or sale by any person of

any any securitysecurityFall within the jurisdictional reachFall within the jurisdictional reachIn connection with the purchase or sale of a securityIn connection with the purchase or sale of a security

To recover damages reliance (transaction causation)To recover damages reliance (transaction causation)must be established (not for SEC)must be established (not for SEC)The plaintiff must also be able to prove loss causationThe plaintiff must also be able to prove loss causationRule 10b5-1 presumes that someone who trades while inRule 10b5-1 presumes that someone who trades while in

possession of material non public information has in factpossession of material non public information has in factused the information in making the trade.used the information in making the trade.Statute of limitations is one year after discovery andStatute of limitations is one year after discovery andthree years after violation.three years after violation.

Tipper &Tippee liability applies to both theories. ContactTipper &Tippee liability applies to both theories. Contactbetween them should be established.


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Rule 14e-3Rule 14e-3 Prohibits insider trading during a tender offer and thusProhibits insider trading during a tender offer and thussupplements Rule 10b-5.supplements Rule 10b-5. Rule 14e-3(a) prohibits anyone, except the bidder, whoRule 14e-3(a) prohibits anyone, except the bidder, whopossesses material, nonpublic information of a tender possesses material, nonpublic information of a tender offer, from trading the targets securitiesoffer, from trading the targets securitiesRule 14e-3(d) is a preventive provision complementingRule 14e-3(d) is a preventive provision complementingRule 14e-3(aRule 14e-3(a).). Prohibits anyone with any form or Prohibits anyone with any form or connection to a tender offer from tipping material,connection to a tender offer from tipping material,nonpublic information.nonpublic information. Is not premised on breach of a fiduciary dutyIs not premised on breach of a fiduciary duty


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SEC Enforcement of the RuleSEC Enforcement of the Rule10b-5 and Rule 14e-310b-5 and Rule 14e-3

Permanent or a temporary injunctionPermanent or a temporary injunction Disgorgement of profits (most commonly used)Disgorgement of profits (most commonly used)Correction of misleading statementsCorrection of misleading statements

Disclosure of material informationDisclosure of material information Cease and desist ordersCease and desist ordersDisciplinary sanctions and civil penalties for securitiesDisciplinary sanctions and civil penalties for securities

market professionalsmarket professionalsBounty provisions by the 20A of ITSFEABounty provisions by the 20A of ITSFEA21A -> civil monetary penalty of up to three times the21A -> civil monetary penalty of up to three times theprofit gained or loss avoided by a person who violatesprofit gained or loss avoided by a person who violates

Rules 10b-5 and 14e-3Rules 10b-5 and 14e-3


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Private Enforcement of the RulePrivate Enforcement of the Rule10b-5 and Rule 14e-310b-5 and Rule 14e-3

Under 20As express remedy, contemporaneousUnder 20As express remedy, contemporaneoustraders are permitted to sue for a disgorgement of thetraders are permitted to sue for a disgorgement of theimproper profits (or loss avoided).improper profits (or loss avoided). SECs power increased with private actions.SECs power increased with private actions.A plaintiff in a private damage action must have beenA plaintiff in a private damage action must have beenpurchaser or seller of the security forming the basis of purchaser or seller of the security forming the basis of the complaint and transaction causation usuallythe complaint and transaction causation usuallypresumed but loss causation is required.presumed but loss causation is required.


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FRONT RUNNINGFRONT RUNNING A broker trades on a security while in possession of A broker trades on a security while in possession of material non-public information concerning the imminentmaterial non-public information concerning the imminentblock transaction of one of his customersblock transaction of one of his customersThe SEC has suggested that the exchanges designateThe SEC has suggested that the exchanges designatefront-running as a practice inconsistent with just andfront-running as a practice inconsistent with just andequitable principles of tradeequitable principles of tradeSECs current regulation is through its oversight authoritySECs current regulation is through its oversight authorityover the self-regulatory organizations (SROs); NYSE,over the self-regulatory organizations (SROs); NYSE,AMEX, NASDAQ.AMEX, NASDAQ.


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INVESTIGATION, REGULATION,INVESTIGATION, REGULATION,ENFORCEMENT COMPAREDENFORCEMENT COMPARED

Comprise at least about 10% of the enforcement actionsComprise at least about 10% of the enforcement actionsof SEC.of SEC.As of 24.02.2003 only 10 out 820 suits of CapitalAs of 24.02.2003 only 10 out 820 suits of CapitalMarkets Board of Turkey were related to insider trading.Markets Board of Turkey were related to insider trading.Development of capital markets is usually matched withDevelopment of capital markets is usually matched withnew insider trading schemesnew insider trading schemes

Transnational insider trading casesTransnational insider trading cases United States has the most extensive insider tradingUnited States has the most extensive insider tradingregulationsregulations


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INVESTIGATIONSINVESTIGATIONSCOMPAREDCOMPARED

The same for both companiesThe same for both companiesSources of casesSources of casesInformantsInformants

Anonymous CallsAnonymous Calls Market professionalsMarket professionals

Disgruntled employeesDisgruntled employees CompetitorsCompetitorsMarket SurveillanceMarket Surveillance

Investigative StepsInvestigative StepsAnalyze market trading recordsAnalyze market trading recordsObtain chronologiesObtain chronologiesConduct InterviewsConduct InterviewsAnalyze Monthly Account StatementsAnalyze Monthly Account StatementsAnalyze Telephone RecordsAnalyze Telephone RecordsChart Out Connection b/w Insiders & TradersChart Out Connection b/w Insiders & TradersTake TestimonyTake Testimony

Follow the MoneyFollow the MoneyCreate and Update Names and Phones DatabasesCreate and Update Names and Phones Databases


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REGULATION ANDREGULATION ANDENFORCEMENT IN TURKEYENFORCEMENT IN TURKEY

Only specific regulation against insider trading is ArticleOnly specific regulation against insider trading is Article47/A-1 of CML:47/A-1 of CML: To benefit to his/her self-owned property or to eliminate a loss soTo benefit to his/her self-owned property or to eliminate a loss soas to damage equal opportunity among the participants in capital as to damage equal opportunity among the participants in capital markets with the aim of gaining benefit for himself/herself or for third markets with the aim of gaining benefit for himself/herself or for third

parties by making use of non-public information which will be able to parties by making use of non-public information which will be able toaffect the values of capital market instruments in insider trading. Theaffect the values of capital market instruments in insider trading. Thechairman and members of the Board of Directors, directors, internal chairman and members of the Board of Directors, directors, internal

auditors and other staff of the issuers within the scope of Article 11,auditors and other staff of the issuers within the scope of Article 11,capital market institutions or of the subsidiary or dominant capital market institutions or of the subsidiary or dominant establishment, and apart from these the persons who are in aestablishment, and apart from these the persons who are in a

position to be have information while carrying out their professions position to be have information while carrying out their professionsor duties, and the persons who are in a position to have informationor duties, and the persons who are in a position to have information

because of their direct and indirect relations with these. because of their direct and indirect relations with these.


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REGULATION ANDREGULATION ANDENFORCEMENT IN TURKEYENFORCEMENT IN TURKEY

In summary according to the CML;In summary according to the CML;Scienter is required,Scienter is required,The scope of possible defendants is very broad,The scope of possible defendants is very broad,

A gain of profit or avoidance of loss is required,A gain of profit or avoidance of loss is required,Materiality depends on the ability of the non-public information to affectMateriality depends on the ability of the non-public information to affectthethe valuevalue of the capital market instruments,of the capital market instruments,CMB may request a legal prosecution and/or may prohibit the violatorsCMB may request a legal prosecution and/or may prohibit the violatorstemporarily or permanently from transactions on exchanges and other temporarily or permanently from transactions on exchanges and other organized markets (According to Article 46/i of the CML).organized markets (According to Article 46/i of the CML).The criminal penalty for the violation of this Article is a prison sentenceThe criminal penalty for the violation of this Article is a prison sentencefrom two to five years and a heavy pecuniary fine from 10 billion TL upfrom two to five years and a heavy pecuniary fine from 10 billion TL upto 25 billion; If 2 or more cases are combined then min 3 max 6 years of to 25 billion; If 2 or more cases are combined then min 3 max 6 years of prison.prison.No upper limit for pecuniary punishment, but not less than threefold of No upper limit for pecuniary punishment, but not less than threefold of

the benefitsthe benefits


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WHAT IF FAMOUS CASESWHAT IF FAMOUS CASESHAPPENED IN TURKEY?HAPPENED IN TURKEY?

Turkey Conviction in

Case Subject Materiality Gain/Loss Turkey?

Cady Roberts Co. A registered broker-dealer directed his customers to liquidatetheir holdings in Curtis-Wright stock because he had advanceknowledge of a dividend cut.

Texas Gulf Sulphur Insiders of a mine company purchased company stock on the

open market with knowledge of a valuable mineral find thathad not been publicly announced and made a considerable profit after the announcement.

Chiarella A financial printer deduced the names of the target companiesin takeover bids from the documents he printed. He purchasedthe target companys securities before the announcement of

bids and sold them after the bids, thus making a profit.

? ?

Dirks A companys former officials selective disclosure of insider information to an analyst giving an unfair advantage to theanalyst and the analysts clients over the public generally

Carpenter A columnist of the Wall Street Journal traded the securities hewrote about and in turn gained a profit.

In Turkey this case would beinterpreted as manipulation.

O'Hagan The attorney, after having learned of the law firms clients planned tender offer, purchased call options in the target

company prior to the announcement of the tender offer.

? ?


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A PROPOSAL FOR TURKEYA PROPOSAL FOR TURKEY

The word value in Article 47/A-1 can be changed asThe word value in Article 47/A-1 can be changed asvalue and/or pricevalue and/or priceThe requirement for a profit gain or avoidance of a lossThe requirement for a profit gain or avoidance of a losscan be eliminatedcan be eliminated

An addition may be made to Article 47/A of the CML, inAn addition may be made to Article 47/A of the CML, inorder to provide CMB with pecuniary punishments for order to provide CMB with pecuniary punishments for violations of insider tradingviolations of insider tradingAdding bounty provisionsAdding bounty provisions

Under CMBs oversight, Association of the CapitalUnder CMBs oversight, Association of the CapitalMarket Intermediary Institutions of Turkey may prohibitMarket Intermediary Institutions of Turkey may prohibitfront-running by enacting a uniform rule to be applied infront-running by enacting a uniform rule to be applied inall exchanges and organized markets.all exchanges and organized markets.

CMB may promulgate a regulation similar to RegulationCMB may promulgate a regulation similar to RegulationFDFD


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