Valley of Decisions: Biography and Essays in Honour of Hon. Justice Iorhemen Hwande

Chapter Eight - Insider Dealing by Company Directors and the Nigerian Capital Market Issues and Perspectives

Chapter Eight Insider Dealing by Company Directors and the Nigerian Capital Market Issues and Perspectives Ioron, Nicholas Iorember Esq.* Introduction The Securitiesmarket occupies a very important position in every free market economy. It is a place where securities (shares, in this context), are offered for sale and therefore, a goodsourceofcorporatefinance. However, dealingsinserurities are often fraught with manipulations and market abuses. Frequent occurrence of cases of flagrant misuse of insider informationbydirectors and/orofficers ofcompaniesabouncL and there has been a continuing series of cases in which specificallegations ofimproper conductbyinsiders andtheir confederatesexploit their privileged position andhave easy access to price sensitive confidential information to the disadvantage of the entire market or the individuals with whom they transact. * LL.B (Hons); BL; LL.M. Lecturer Department of Commercial and Property Law, Faculty of Law, Benue State University, Makurdi. 69 70 Valley ofDecisions Itis possible for the price ofshares in a bid - for company to rise sharplybefore the announcementofa takeoverbidwhich is initselfevidence of 'inside' buying.! Market transactions in Enron Corporation in August 2001 present a good example of directors' contravention of their sacred duty (fiduciary duty) through insider dealings. The Chairman of Enron Corporation sold 93,000 ofhis shares in the company netting $2m. In the same period, the Chief Executive Officer also made $15.5 million from the sale ofhis shareswhile encouragingthe company's employees to invest more in Enron's stock.2 InNigeria,theSecuritiesandExchangeCommissionsuspended NovaFinanceSecuritiesonMarch26, 2009 afterinvestigations uncoveredunethicalpracticesofinsiderdealings. Thistriggered a probe intoAfribank Registrars as it was accused of aiding and abettingtheunethicalpracticesinNovaFinance Securities. TheallegationwasthatDangotePlcandNovaFinanceSecurities with the assistance ofAfribank Registrars were involved in AfricanPetroleum(AP's) pricemanipulationsagaastheywere said to have swapped a total volume of 500,000 units of irredeemablenon-cumulative convertiblepreferencesharesin ten(10) differenttransactionswhichwere admittedtothedaily official loss of the Nigerian Stock Exchange. This according to the managementofAfricanPetroleum (AP) caused a panic and loss ofshare values.3 1 The Economist, 13 May. 1967 . 2 Agom., A.R., "Lessons from the Burst of Enron and the Challenges of Securities Regulation" in Ahmadu Bello University Journal of Commercial Law (ABUJCL) Volume 2, No. I, 2003-2005, p.15!. 3 Vanguard Newspaper, September 26, 2009. Insider Dealing by Company Directors 71 Similarly, aninterimreportofthe ForensicAuditCommission bytheSecuritiesand Exchange Commissionallegedthat N1.6 billionwas spent on dubious Coralproperty.' The Nigerian Stock Exchange itselfwas accused of engaging in insider dealings through NSE Consult, one of its whollyowned subsidiaries. The report confirmed thatthe Exchange transferred money to the Consultfor the purpose oftrading and investing.5 The founding directors ofthe company were theerstwhileDirector-GeneraloftheNigerianStockExchange who at the time of its incorporation in 1984 held 250,000 of the 4.4 million shares in the company." Knowledge ofa company's state ofbusiness and theboard's intention, totheexclusionofthepublic, maythereforeprompt either a hasty acquisition or disposal of its shares by an insider in order to gain or avoid loss. This is illegitimate informational advantage. Itis, however, axiomatic thatmarket confidence exists onlyif tradersbelieve thatmarketpricesreflectthetruevalue ofwhat isboughtand sold. Correctpricingismorelikelyifbothbuyers andsellershaveallthere1evantinformationtohand.andpublic confidenceinthe marketis easily damagedifpeople close to the company use inside information about the company to revalue the shares ahead of the market, and trade on that privileged basis? Public confidence is also damagediffalse 4 Kingsley, R. "Fraud at the Nigeria Stock Exchange", Guardian Newspaper, Wednesday August 18, 2010. 5 Aluko and Olabode, "SEC Probes Culpability of Nigeria Stock Exchange Consult in Insider Trading" http://www.alukoolabode Nigeria stock exchange 9 articles authors! Nigeria stock exchange investigates stock.com (downloaded 23/12/2010). 6 Ibid. 7 Sealy, L. et aI., Cases and Materials in Company Law, 8th edition (New York.: Oxford University Press, 2008) pp.S93-S94. 72 Valley ofDecisions information about the value of shares is spread, creating a false market (this is known as marketmanipulation).8 No doubt, insider dealings can adversely affectthe securities market and decrease the company's reputation and adversely affect its economicbase with a spill-over effect on the entire economy. The pertinent question is whether it is good for directors or persons whohave a fiduciary duty to the company and have privileged knowledge ofits share performance inthe capital marketto take advantage ofthatposition. This article examines the menace of market abuse by company directors and their control. In doing so, the paper discusses theories ofinsider dealing, bringingoutclearly the arguments for and against its prohibition. Regulation of the practiceand its conceptualbasis is also considered. Fromthe arguments and the basis of regulation, legal and economic imperatives ofinsider dealing are distilled. Finally, the scope ofthelawregu1atinginsiderdealinginNigeriawithareflection on the state of the law in other jurisdictionsis examined...