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Insider trading

The Supreme Court of the Philippines promulgated (en banc, on October 6 2008) its decision in Securities and Exchange Commission v Interport Resources Corporation concerning insider trading. As stated in a concurring opinion of one of the justices, the decision is the "farthest yet this court has explored the matter".

What was involved was the acquisition by Interport Resources Corporation (IRC) from Ganda Holdings Berhad (GHB) of the latter's entire shareholding in Ganda Energy Holdings Inc, which was to own and operate a 102MW power generating barge, the output of which was to be purchased by National Power Corporation for five years. Furthermore, IRC was to acquire 67% of the entire capital stock of Philippine Racing Club Inc, which owned some 26 hectares of real estate in Makati, the financial centre of the country.

According to the SEC, IRC failed to make timely public disclosures of its negotiations with GHB, and some of IRC's directors "heavily traded IRC shares utilizing material inside information". However, IRC and these directors were able to obtain a permanent injunction from the Court of Appeals prohibiting the SEC from proceeding with the investigation.

The injunction was issued by the Court of Appeals because, among other things, the SEC failed to promulgate the rules implementing Section 30 of the Revised Securities Act, which was then in force. The Supreme Court reversed the Court of Appeals and ordered the resumption of the investigation, noting that the mere absence of implementing rules cannot invalidate a statute, for otherwise an administrative body (such as the SEC) could defeat the legislative will by refusing to issue such rules or delaying their issuance.

It was observed by the Supreme Court that Section 30 of the Revised Securities Act was sufficiently clear to leave no doubt that "the insider's misuse of nonpublic and undisclosed information is the gravamen of illegal conduct". Insiders are obliged to "disclose material information to the other party or abstain from trading the shares of his corporation".

As the Revised Securities Act was already superseded by the Securities Regulation Code (SRC) at the time the case was decided, the Supreme Court ruled that the investigation against the respondents for insider trading should be undertaken by the proper authorities in accordance with the SRC.

Insider trading is now regulated under Sections 23 and 27 of the SRC. It is state policy, provided in the SRC, to "minimize, if not totally eliminate, insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market".

The SRC retains the traditional division between: (i) insiders in the strict sense (those that are connected with or related to the issuer); and (ii) tippees, but adds another category that covers government employees, as well as directors or officers of exchanges, clearing agencies or self-regulatory organisations who are in possession of material nonpublic information. Furthermore, an insider's spouse and relatives by affinity or consanguinity within the second degree, legitimate or common-law, are treated as insiders.

Apart from criminal prosecution, the SRC authorises a civil action by an investor against an insider. However, the civil suit would not prosper if it could be proven that the investor knew the material nonpublic information or would have, in any case, purchased or sold the securities at the same price whether or not the information was disclosed to him.

It remains to be seen whether the Supreme Court decision will, as expressed in the concurring opinion, "embolden our securities regulators to investigate and prosecute insider trading cases, thereby ensuring a more stable, mature and investor-friendly stock market".

Rafael A Morales

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