“Insider trading” of stocks: Set a Sprat to catch a Mackerel

To date, there are rumors saying that the price of securities in the market shall not be controlled by the market rules and the business outcome of enterprises, but by the manipulation of the rich of the stock market. Manipulating stock price for seeking profit and “insider trading” (trading and selling stocks without disclosing information required by laws) is very common. The stock price manipulation is hard to be unveiled, while insider trading can be figured out quite easily. Recently, Ho Chi Minh Stock Exchange (HOSE) has taken an unprecedented measure to help prevent these acts, which is to cancel a stock transaction by a company’s insider for selling a huge amount of stocks without disclosing information in accordance with the laws. Within this article, the author just analyses the legal aspects of the transaction, the consequences of the violation, and the entailing cancelation.

Insider trading according to the provisions of laws

Under the prevailing laws, an insider is the person who stands an important position in the management and administration of an enterprise, fund, or a public securities investment company, such as the Chairman of the Board of Directors, Chairman of the Members’ Council, President of the company, a member of the Board of Directors or a member of the Members’ Council, the legal representative, etc. They are usually the holders of a large number of corporate shares and able to access to information related to the operation and business strategy of that enterprise.

Making a transaction involving a large number of stocks by insider will affect the market price of that stock and could greatly influence the whole market. The reason is because that insider knows important inner information of the enterprise, they take an advantage over other outside investors. Their purchasing decision will make investors believe in the potential long-term growth of the enterprise and in contrary when they decide to sell, retail investors will question whether this business are facing an upcoming struggle.

Hence, the laws request the insider to disclose the information, inform HOSE and State Securities Commission of Vietnam (“SSC”) before and after making a transaction with the stocks of enterprises where they are an insider. For disclosure of information before a transaction, the minimum time limit is 03 working days before the expected date of transaction. Buying or selling stocks by the insider without complying with the obligations to disclose information is illegal..

What are the sanctions for non-disclosure of information and manipulation of the securities market?

• With respect to the legal perspective on handling administrative violations
• Those who violate the obligation to disclose information may be imposed a monetary fine of 5% of the registered transaction value but not exceed VND 1.5 billion if they register for stock trading, rights to buy stocks, etc. valued at VND 10 billion dong or more. In addition, violators may be imposeds an additional sanction, be ofsuspension from stocks trading for a period of 3 to 5 months if the transaction is valued at VND 10 billion or more. Thus, no matter how great the transaction value is, the fine is still limited to VND 1.5 billion. Following opinion of many people it is nothing compared to the benefit gained from the huge transactions of “the wealthy stock trader”.
• For stocks market manipulation violation, the fine is 10 times of the illegal profits.[1].
• With respect to the criminal law perspective, an act of not disclosing information required by laws, although it can cause very serious consequences, is not considered a crime by the criminal law. Only stocks market manipulation is considered a crime.

Regarding the crime of “manipulating the stocks market”, anyone who commits one of the following acts to gain illegal profits from VND 500 million or causes damage to investors from VND 1 billion: (i) use one or more of their trading account, etc. to continuously trade stocks in order to create artificial supply and demand; or (ii) collude with others to place buy and sell orders of the same stocks on the same trading day, or collude with each other in stocks trading transactions, etc., in order to create false stocks prices, supply and demand; (iii) continuously trade stocks in a dominant volume at the opening or closing of the market in order to create a new closing or opening price for the target stocks in the market; (iv) use other trading methods or practices to create artificial supply and demand, manipulate stocks prices.[2]

Practically, many “sharks” have blew up stocks prices to seize the opportunity to sell in large quantities and earn huge profits. For example, the well-known stocks sale transaction canceled by HOSE recently because the seller is an insider and he did not disclose information required by the law. Through the chart of stock prices published on the website finance.vietstock.vn, it can be seen that the growth of this stock’ price prior to the enormous transaction without disclosing information is very unusual. Particularly, the price increased more than double in the last 2 months and increased up to the ceiling on the exact cancellation day of the transaction, while the price in the previous 4 months was very stable nevertheless. Therefore, the competent State authorities have conduct an investigation on these unusual signs to consider whether there is a criminal act or not and to prosecute the offender for criminal liability.

Are those sanctions strict enough?

People view that the administrative fine for the act of not disclosing information is too low, especially, the fine is still limited at VND 1.5 billion, despite how large the transaction value is. As for criminal prosecution, according to our research, very few cases are criminally prosecuted for manipulating the stocks market (although this behavior is quite common recently).

In fact, there are quite a few “shark” in the stocks market choose to ” Set a Sprat to catch a Mackerel “, accept to pay fines to get the huge profit that insider trading brings to them. Many of them have also been sanctioned by the SSC for this behavior. At the end of 2020, Mr. Pham Hoanh Son – Chairman of the Board of Directors of Sao Vang Rubber also executed an order to buy millions of securities but did not report this transaction to the SSC. The estimated profit of this transaction is up to 10 billion dongs, but the amount of imposed administrative fine is just over 100 million dongs. Thus, these “big hands” characters are not afraid to “take risk to gain big” because this penalty fee is only enough to “scratch” them compared to the profit they can pocketed.

However, “take risking” is not always “gain big”, such as the case mentioned herein. Not only to be cancelled the transaction, the violator can be blocked his stocks accounts, seriously affected his reputation and the company’s stocks price will be reduced, etc. If exchanges platform apply the similar measures to transactions violated regulations on information disclosure obligations, we have grounds to hope that this illegal trading will be reduced, and big companies will also restrain themselves or even never commit insider trading ever again in fear of the same consequences that may fall upon them. However, is the cancellation of such transaction compliant with the law?

The legal basis for the transaction cancelation?

Different from previous times, it can be seen that the SSC took stronger measures in this second violation by the chairman of the Board of Directors when making a decision to request HOSE to cancel all transactions, and at the same time freeze his stocks trading account. After HOSE’s evaluation, up to now, some investors who have reciprocally bought stocks from the account of this Chairman of the Board of Directors have been refunded.

According to the leader of the SSC, the decision to cancel the transaction of the Chairman of the Board of Directors is unprecedented in the Vietnamese stocks market. This measure partly demonstrates the timely intervention of competent State authorities to ensure the fairness and transparency of the market. From a practical perspective, this emergency measure is very effective because it can partially overcome the consequence of an illegal act in a timely manner. The right to cancel transactions related to the insider trading is stipulated in Article 22 of the Policy on Securities Transaction of HOSE issued under Decision No. 352/QD-SGDHCM of the General Director of HOSE. Is this Regulation compliant with law?

This Regulation issued on 30/06/2021 and up to now, HOSE is still allowed to continue to organise and operate in accordance with the provisions of the Law on Securities 2006 (which expired on 01/01/2021) until the Vietnam Stock Exchange operates under the provisions of the Securities Law 2019. According to Clause 3, Article 37 of the Securities Law 2006, HOSE has the right to “postpone, suspend or cancel stock trading under the Securities Trading Regulations of the Stock Exchange and the Securities Trading Center in case it is necessary to protect investors”, that is, the Policy on Securities Transaction of HOSE is compliant with the provisions of the Law on Securities Trading at the time of promulgation. However, at present, the Vietnam Stock Exchange has officially operated since11 December 2021 and HOSE has become a subsidiary of the Vietnam Stock Exchange. HOSE’s operations will now comply with the provisions of the Securities Law 2019. Nevertheless, we have not found any supporting legal documents of the Securities Law 2019 that allow HOSE to cancel securities transaction. We also have not found a basis to determine whether the above regulations on stocks trading at HOSE are still valid or not.

Thus, at the time of transaction cancellation in January 2022, it can be said that a clear legal basis has not been found to assert that HOSE’s cancellation of stocks trading in violation of regulations on information disclosure is compliant with the laws or not, and the persons who have their transaction canceled has the right to sue for compensation for damage caused by the cancellation of this transaction or not. Equally speaking, this is a transaction concluded by the person violating the information disclosure obligation and the investors, established on a voluntary basis. Failure to disclose information is not among the prohibited acts under Article 12 of the Securities Law 2019. Even if it is a prohibited act, transactions between this Chairman of the Board of Directors and investors can only be considered void upon the judgment of the court.

Conclusion

Along with the boom and spectacular growth of Vietnam’s stocks market in recent years, it is thought that legislators need to update current regulations to protect small investors and ensure the safety and openness as well as the transparency in the market. Firstly, the penalty for insider trading needs to be increased sharply and not limited to VND 1.5 billion, and there should also be an aggravating penalty frame if the act is committed many times. In addition, legislators should also consider other forms of punishment besides monetary fines to strongly deter the above subjects. Secondly, urgent measures such as transaction cancellation should also be more clearly specified. In addition, the law enforcement authorities also need to take measures to ensure that the provisions of the laws are effectively applied in practice, especially the criminal prosecution of criminal acts in the stocks trading sector and strengthen supervision to ensure the strictness and discipline of the stock market. Only then, will the stock market become healthier and more transparent, and investors will feel more secure to put their assets into this investment channel.

[1] Điều 36.5 Nghị định 156/2020/NĐ-CP, được sửa đổi, bổ sung theo Nghị định 128/2021/NĐ-CP

[2] Điều 211 Bộ luật Hình sự 2015, được sửa đổi bổ sung năm 2017