THE EFFICACY OF LEGISLATION AND INSTITUTIONS AIMED AT REGULATING INSIDER TRADING IN SOUTH AFRICA Moruthanyane Vincent Kgagudi A dissertation submitted to the Faculty of Commerce, Law and Management, University of the Witwatersrand, in complete fulfilment of the requirements for the degree of Masters of Law in corporate Finance and Investment. Johannesburg, 2023 ABSTRACT Insider trading should be regulated and prohibited to ensure the effective operation of securities market. South Africa has witnessed several amendments of law intended to strengthen the insider dealing prohibitions, however these changes have resulted in few civil settlements, low administrative sanctions and insignificant criminal convictions. The main research objectives of this study are to investigate the efficacy of the legislation, institutions and strategies aimed at regulating insider trading in South Africa. The study used the textual analysis method and the desktop research approach, whilst drawing on the unified misappropriation theory. The findings of the study indicates that both the legislative shortcomings and the proposed solutions pointed to the importance of ensuring that offences are easier to prove and the need of the ability of the authourities to discern the nature of insider trading contraventions. The research also argues for contemporary, prudent, business and ethically informed alternative insider trading enforcement strategies. The argumentation for a pragmatic position for the enforcement of insider trading revealed the importance of the three-pronged utilisation of insider trading remedies, with the urgent need to enhance successful criminal prosecutions. Strengthening criminal sanctioning methods would help set national legal precedence and enhance the deterrence of insider trading offences. Whilst insider trading establishments’ challenges entail staffing, apparatus, operational and structural restrictions, the proposed strategies to these limitations strengthens the institutional capacity of establishments that enforce insider trading sanctions in South Africa. The envisaged legislative, institutional and enforcement solutions would enhance the potential for successful criminal convictions, strengthen insider trading legislation and help maintain the integrity and stability of local financial markets. Overally, the study’s challenges and the suggested solutions shows that the current legislative, institutional and enforcement limitations hinders-, whilst the envisaged resolutions improves the efficacy of the legislation and institutions aimed at regulating insider trading. KEY WORDS: Insider trading legislation; institution regulating insider trading; South Africa DECLARATION 1. I understand what plagiarism is and am aware of the University’s policy in this regard. 2. I declare that this proposal is my own original work. Where other people’s work has been used (either from a printed source, Internet or any other source), this has been properly acknowledged and referenced in accordance with departmental requirements. 3. I have not used work previously produced by another student or any other person to hand in as my own. 4. I have not allowed, and will not allow, anyone to copy my work with the intention of passing it off as his or her own work. 5. I declare that the work I am submitting contains no section copied in whole or in part from any other source unless explicitly identified in quotation marks and/or with detailed, complete and accurate referencing. ......... ......10 March 2023........... (SIGNATURE) DEDICATION To my sister and my mother -Trecia and Mankopodi Ginnet Mashupye for their sacrifice, inspiration and support throughout the time I spent doing my Masters in Law. ACKNOWLEDGEMENTS Acknowledgement and gratitude is extended to Associate Professor Hebert Kawadza, for his outstanding and excellent supervision, guidance, support, kindness, patience, constructive criticism and insights which helped shape the writing of this thesis. I am also greatly indebted to the library staff at the University of the Witwatersrand for all their assistance in sourcing critical academic sources that was used in formulating arguments that informed this study. TABLE OF CONTENTS ABSTRACT............................................................................................................... 2 DECLARATION ........................................................................................................ 3 DEDICATION ............................................................................................................ 4 ACKNOWLEDGEMENTS ......................................................................................... 5 CHAPTER 1: INTRODUCTION................................................................................. 9 1.1. Purpose of the study .......................................................................................................... 9 1.2. Context of the study ............................................................................................................... 9 1.3. Problem statement ............................................................................................................... 12 1.4. Research objectives and research questions ................................................................... 16 1.5. Significance of the study ...................................................................................................... 17 1.6. Research methodology ........................................................................................................ 18 1.7. Delimitation of the study ...................................................................................................... 20 CHAPTER 2: THEORETICAL FRAMEWORK OF THE STUDY .............................. 23 2.1. Introduction ............................................................................................................................ 23 2.2. Definition of the insider trading concept ............................................................................ 23 2.3. Reasons for and against insider trading legislation ......................................................... 25 2.3.1. Reasons for insider trading legislation........................................................................ 26 2.3.2. Reasons against insider trading legislation ............................................................... 29 2.3.3. The neutral ethical view regarding insider trading .................................................... 31 2.4. The unified misappropriation theory ................................................................................... 33 2.4.1. The classical theory ...................................................................................................... 34 2.4.2. The misappropriation theory ........................................................................................ 35 2.5. The application of the unified misappropriation theory .................................................... 37 2.6. Conclusion ............................................................................................................................. 38 CHAPTER 3: THE STATUTORY FRAMEWORK OF INSIDER TRADING IN SOUTH AFRICA .................................................................................................................. 39 3.1. Introduction ............................................................................................................................ 39 3.2. The historical development of insider trading legislation in South Africa .................. 39 3.2.1. The Companies Act 61 of 1973 .............................................................................. 40 3.2.2. Insider Trading Act 135 of 1998 ............................................................................. 42 3.2.3. Securities Services Act 36 of 2004 ........................................................................ 43 3.2.4. Financial Markets Act 19 of 2012 ........................................................................... 45 3.2.5. Financial Sector Regulation Act 9 of 2017 ............................................................ 47 3.3. The South African mechanisms for enforcing insider trading regulations................. 48 3.3.1. Criminal penalties ..................................................................................................... 48 3.3.2. Civil tools ................................................................................................................... 49 3.3.3. Administrative sanctions .......................................................................................... 50 3.3.4. Pragmatic position regarding the enforcement of insider trading ....................... 51 3.4. How can legislation that enforces insider trading be strengthened ........................... 52 3.5. The main institutions mandated to enforce insider trading legislation ....................... 54 3.5.1. The Financial Sector Conduct Authourity .............................................................. 54 3.5.2. The Directorate of Market Abuse ........................................................................... 55 3.5.3. The Enforcement Committee .................................................................................. 56 3.5.4. Prudential Authourity ................................................................................................ 57 3.5.5. Market Regulation Division...................................................................................... 57 3.5.6. National Prosecuting Authourity ............................................................................. 58 3.6. Institutional limitations in enforcing insider trading legislation .................................... 58 3.7. Enhancing institutional capacity for enforcing insider trading legislation .................. 60 3.7.1. Recruiting knowledgeable and adequately remunerated personnel ...................... 61 3.7.2. Progressive and a localised national mandate for the FSCA ............................. 61 3.7.3. Coordination of institutions enforcing insider trading prohibition ........................ 62 3.7.4. Empowering FSCA with comprehensive insider trading prohibition powers .... 62 3.8. Conclusion ......................................................................................................................... 63 CHAPTER 4: DISCUSSION .................................................................................... 64 4.1. Introduction ............................................................................................................................ 64 4.2. The limitations in the legislation enforcing insider trading........................................... 64 4.2.1. The high and insurmountable evidentiary requirements .......................................... 65 4.2.2. Insider trading concepts definitional challenges ........................................................ 65 4.2.3. The challenge of the defendant’s state of knowledge .............................................. 67 4.2.4. The lack of distinction of penalties between primary and secondary insiders ...... 68 4.3. Strengthening legislation that enforces insider trading................................................ 69 4.3.1. Less stringent evidentiary requirements that admits circumstantial evidence . 69 4.3.2. Clear definition and illustration of insider trading concepts and cases .............. 70 4.3.3. The need for regulatory proof of the defendant’s inside information knowledge 71 4.3.4. Distinguishing between the different insider trading offenders ........................... 71 4.4. The limitations to and solutions on the legislation enforcing insider trading ............. 72 4.5. Alternative insider trading enforcement strategies ....................................................... 74 4.5.1. Sentencing guidelines .............................................................................................. 74 4.5.2. Specialised commercial courts ............................................................................... 75 4.5.3. The banning order .................................................................................................... 76 4.5.4. Whistle-blowing ......................................................................................................... 76 4.5.5. The Chinese wall ...................................................................................................... 77 4.5.6. Corporate governance ............................................................................................. 77 4.6. The pragmatic position for the enforcement of insider trading sanctions ................. 79 4.6.1. Critiquing the methods used for the enforcement of insider trading sanctions 79 4.6.2. Towards a pragmatic position regarding the enforcement of insider trading .... 82 4.7. Institutional limitations in enforcing insider trading legislation .................................... 84 4.7.1. Incapable staff that lacks the necessary specialised expertise ............................... 84 4.7.2. The FSCA costly and overwhelming extra-territorial responsibility ........................ 85 4.7.3. The operational challenges in insider trading prosecuting courts ........................... 85 4.7.4. The poor allocation of resources that detect market-abuse irregularities in institutions mandated with sanctioning insider trading ........................................................ 86 4.7.5. The lack of collaboration within establishments mandated to regulate insider trading ........................................................................................................................................ 87 4.7.6. Disintegrated FSCA roles ............................................................................................. 87 4.8. Strengthening institutional capacity for enforcing insider trading legislation ............ 88 4.8.1. Recruiting and retaining specialised knowledgeable personnel ............................. 88 4.8.2. Localised national mandate for the FSCA ............................................................. 89 4.8.3. The collaboration and coordination of institutions enforcing insider trading prohibition .................................................................................................................................. 90 4.8.4. Integrated and harmonised FSCA roles ................................................................ 90 4.8.5. Procuring surveillance equipment .......................................................................... 91 4.8.6. Capacitation of criminal courts that prosecute insider trading offenders .......... 92 4.9. The institutional limitations and strengthening institutional capacity ......................... 93 4.10. Conclusion ..................................................................................................................... 94 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS .................................... 95 5.1. Conclusions of the study ..................................................................................................... 95 5.2. Recommendations ............................................................................................................... 96 5.3. Suggestions for further study .............................................................................................. 98 CHAPTER 1: INTRODUCTION 1.1. Purpose of the study The overarching and main purpose of this study is to investigate the efficacy or the extent of the efficiency of legislation and institutions aimed at regulating insider trading in South Africa. The research examines the limitations in the legislation enforcing insider trading, and it relatedly also analyses the institutional limitations in the core establishments that enforces insider trading? The context of the limitations provides the study with the impetus to explore both how legislation that enforce insider trading can be strengthened as well as the strategies that can be used to strengthen institutions that enforce insider trading sanctions. The South African insider trading regulations foregrounds, three enforcement mechanisms of sanctioning insider trading offences through criminal penalties, civil settlements and administrative remedies. Given these regulatory enforcement tools, the study seeks to explore the most pragmatic position for the enforcement of insider trading sanctions. 1.2. Context of the study In a comprehensive survey of 103 countries with stock markets, Bhattacharya and Daouk noted that the existence and enforcement of insider trading are characteristic features of global securities markets.1 Insider trading regulations were originally formulated in the United States of America in 1934 – with the Securities and Exchange Commission (SEC) having the main responsibility of enforcing insider trading regulations.2 The European Union community through the Insider Dealing Directive implemented insider trading prohibiting legislation in 1989, with France having initiated similar legislation, earlier, in 1970.3 The UK followed comparable 1 U Bhattacharya & H Daouk ‘The World Price of Insider Trading’ (2002) 57/1 Journal of Finance 75 at 78. 2 I Clacher, D Hillier and S Lhaopadchan ‘Corporate insider trading: a literature review’ (2009) 38/143 Revista Española de Financiación y Contabilidad 373 at 387; K Opoku What is really wrong with insider trading? (unpublished Master of Law minor dissertation, University of Cape Town, 2007) 9. 3 R C Alexander ‘Insider dealing and money laundering’ (2007) xv; Opoku 2007 op cit 11. initiatives two years later. A year later South Africa introduced its first overt insider trading laws under the Companies Act 61 of 1973.4 For the last half century South Africa has experienced several amendments and introduction of different pieces of legislations aimed at combating insider trading practices. Similar insider trading enforcement trends have been noted in Australia during the same period.5 The global prevalence of insider trading prohibitions has been noted as critical for effective and efficient securities markets.6 Thus insider trading laws have become a central feature of global financial markets, that are recognised as a means for fighting financial market abuse practices.7 Despite the numerous legislative changes, which started with Companies Act 61 of 1973, subsequent amendments in 1989 and 1990, the Insider Trading and Securities Services legislations to the Financial Markets Act 19 of 2012 and the recently enacted Financial Sector Regulation Act 9 of 2017, insider dealing activities are still prevalent in South Africa.8 Such kinds of market abuse practices are also prominent and rife across global financial markets.9 In spite of the strengthening of insider trading legislation enforcement, what is disturbing is the recurring and worrisome sentiment in the literature concerning the unsuccessful or relatively low prosecution rates.10 Even after subsequent re-enactments scholars have been puzzled by the 4 Bhattacharya & Daouk 2002 op cit 88; provide a global historical genesis of insider trading legislation which is acknowledged in South Africa by K Ojah, S Muhanji & O Kodongo 'Insider trading laws and price informativeness in emerging stock markets: The South African case’ (2020) 43 Emerging Markets Review 1 at 2; H Chitimira ‘A historical overview of the regulation of market abuse in South Africa (2014a) 17/3 PER/PELJ 937 at 937. 5 P F Hanrahan ‘Deterring white-collar crime: Insights from Australia’s insider trading penalties regime’ (2017) 11/2-3 Law and Financial Markets Review 60 at 63. 6 This perspective is shared in the work of Ojah, Muhanji & Kodongo 2020 op cit 2; Chitimira 2014a op cit 962; H Kawadza ‘A step towards the harmonization of the regulation of financial misconduct in BRICS: A comparison of the Chinese and South African regimes for the prohibition of insider trading’ (2018) 62/3 Journal of African Law 357; Nothemba Lugaju The effectiveness of insider trading regulation in South Africa (unpublished LLM Research report, University of Pretoria, 2018) 27. 7 Chitimira 2014a op cit 937; Lugaju 2018 op cit 27. 8 A chronology of the local insider trading legislations and its ineffectiveness is provided by Lugaju 2018 op cit 15-16. 9 T Morojane ‘What constitutes inside information for purposes of insider trading: Zietsman V Directorate of Market Abuse’ (2017) 80/3. THRHR-Journal of Contemporary Roman-Dutch Law 507. 10 This viewpoint is frequently recurring in the earliest published scholarly work up to date; N Bhana ‘Take-over announcements and insider trading activity on the Johannesburg Stock Exchange’ (1987) 18/4 South African Journal of Business Management 201. Johannesburg Stock Exchange ‘Insider trading and other market abuses (Including the effective management of price sensitive information) ’. (2015) 4; Lugaju 2018 op cit 15; U Bhattacharya & H Daouk 'When no law is better than a good law' (2009) 13 Review of Finance 578. seemingly ‘few civil settlements and criminal convictions being successfully obtained’.11 The prevalence of such challenges in South Africa and even in some of the most advanced states with progressive insider trading prohibition legislation such as the United States of America, United Kingdom and New Zealand is a cause for concern.12 Given the fact that South Africa has criminal, administrative and civil sanctions that can be effected by different state authorities and establishments this research is interested in understanding the effectiveness of legislations, institutions and enforcement approaches aimed at regulating insider trading. This research focus emanates from the diverging local business law scholarly views that regard local insider trading legislation as being ‘amongst the progressive and equitable in the World13’ and is regarded as ‘salutary’.14 Yet other academics claim that the statutes have ‘remained insufficient and less dissuasive for deterrence purposes’.15 Relatedly other scholars have firmly asserted that ‘regulation prohibiting insider trading [in South Africa] has failed’.16 Because of such argumentation digression the study intends to explore insider trading legislation, feasible positions for the enforcement of insider trading sanctions and the institutional limitations of establishments mandated with sanctioning this proscribed practice. Even in the United States ‘there is still much work to be done, particularly on enforcement and regulation’.17 A slightly similar position is also noted by New Zealand scholars who argue that ‘enforceability is key’ for insider trading laws to be 11 Chitimira 2014a op cit 959. 12 N Reamer and J Downing ‘Fraud, market manipulation and insider trading’ In Norton Reamer, & Jesse Downing, Investment: A history (2016) 147-147; B Frijns, A Gibert & A Tourani-Rad, A. ‘Do criminal sanctions deter insider trading?’ (2013) 48 The Financial Review 206; Bhana 1987 op cit 198. J N van der Walt The definitions of 'inside information' and 'insider' in the Financial Markets Act 19 of 2012 (unpublished PhD thesis, Stellenbosch University, 2019) 17; JSE 2015 op cit 4. 13 JSE 2015 op cit 4; PC Osode ‘The new South African Insider Trading Act: Sound law reform or legislative overkill?’ (2000) 44/2 J.A.L. 262. 14 Osode 2000 op cit 262. 15 T T Mabina & H Chitimira ‘A comparative synopsis of the statutory prohibition of insider trading in Namibia and South Africa’ (2019) 9/2 Juridical Tribune 495. 16 H Kawadza ‘A discussion of some aspects of the regimes for the regulations of insider dealing in South Africa and the United States of America’ (2015a) 59/2 Journal of African Law 369; See Lugaju 2018 LLM Research report 16 who similarly argues that several local insider dealing legislation amendments have ‘remained defective’ and with ‘new deficiencies’. 17 Reamer & Downing 2016 op cit 147. effective.18 Relatedly Du and Wei’s empirical study of global markets also indicates that amongst other factors ‘... enforcement of existing laws and regulations’ helps deter insider trading prevalence.19 The challenge of securities law enforceability is also claimed to be higher in emerging markets.20 As stated earlier this research focuses on South African legal framework aspects as well as the institutions mandated with enforcement to examine the legislation and institution enforcing insider trading, their limitations, strategies and approaches that can be utilised for effective insider trading sanctioning. Such a legal prognosis will draw from both local and international literature perspectives, prominent insider trading cases as well as the unified misappropriation theory. Given this mandate the research will engage pertinent financial law literature and local and international legislations and prominent insider trading cases in discussing the key insider trading debates as well as illustrating the four research objectives framing this study. The unified misappropriation theory will enable the study to explore approaches for strengthening local insider trading legislation and institutional capacity as well examine the most prudent approach for the enforcement of insider trading sanctions. A qualitative textual analysis and desktop research of pertinent business law texts and documents will be used to investigate the efficacy of insider trading legislation and institutional capacity in South Africa, 1.3. Problem statement Whilst the business law debates about insider trading have been ‘long standing and inconclusive’,21 most scholars alongside a large number of modern states and their legislations argue for the integrity, fairness and effectiveness of prohibiting insider trading. On the other hand the line of arguments in Manne’s writing encourages insider trading as a harmless crime that promotes free, efficient markets and 18 Frijns, Gibert & Tourani-Rad 2013 op cit 208; See Bhattacharya & Daouk 2002 Journal of Finance 90, who also admit that the global enforcement of law is a challenge. 19 J Du & S Wei ‘Does insider trading raise market volatility’ (2004) The Economic Journal 114/498 916 at 921. 20 Bhattacharya & Daouk 2009 op cit 578. 21 L N Beny ‘Do insider trading laws matter? Some preliminary comparative evidence’ (2005) 7/1 American Law and Economics Review, Special issue on Comparative law 145. executives’ entrepreneurial initiatives typical of liberal economies.22 Regardless of the scholarly reasoning in Manne’s propositions and intentions, progressive states enforce insider trading practices and so does South Africa. In fact, there are more benefits and advantages of the latter than the former perspective, with recent scholarly views portraying insider trading to be a ‘cancer that erodes public confidence in the capital markets ... one of the most serious diseases our capital markets face’.23 It is the general consensus across the globe that insider trading is wrongful and harmful that motivates the need for this study to examine the efficiency of the South African legislation and institutions in regulating this practice. South Africa has had several insider trading legislation enactments, re-enactment and reformulations aimed at sanctioning this unethical business practice. The same can be said of the European Community, the United States, Hong Kong, Australia, the United Kingdom and New Zealand where insider trading is proscribed.24 However, a historical overview of the development of local insider trading acts, and of interest and motivating this study since the enactment of the 1973 insider trading legislation is the lack of prosecution under this provision.25 This status quo has not changed even today – almost half a century later – with most of the current literature maintaining that monitoring and controlling or enforcing insider trading is a difficult mandate.26 Even Osode alluded to the fact that the local market professionals, financial press officials and regulatory policy-makers once described South African securities markets as an “insider haven”.27 Such sentiments stimulate the need for a study that investigates the extent of the effectiveness of legislations and institutions aimed at regulating insider trading in South Africa. The low prosecution rates and unsuccessful sanctioning of insider trading through criminal, civil and administrative mechanisms inspires this study to examine the legislation and the institutions that 22 A strong and in-depth critique of insider trading regulation is contained in Manne’s work; H G Manne ‘In defense of insider trading’ 1966 Harvard Business Review 116; H G Manne ‘Insider trading: Hayek, virtual markets and the dog that did not bark’ 2005 The Journal of Corporation Law 169. 23 T Morajane 2017 op cit 507. 24 Du & Wei 2004 op cit 919; Bhana 1987 op cit 198. 25 See Bhana 1987 op cit 201; Osode 2000 op cit 247. 26 H Kawadza ‘A discussion of some aspects of the regimes for the regulations of insider dealing in South Africa and the United States of America’ (2015a) 59/2 Journal of African Law 384; Mabina & Chitimira 2019 op cit 499; Bhattacharya & Daouk 2009 op cit 578. 27 Osode 2000 op cit 247. enforce insider trading, their limitations and suggests approaches that can be used to effectively enforce and strengthen insider trading prohibition. Earliest financial law studies undertaken in South Africa have described the challenges facing the local stock exchange market within the national insider trading framework.28 Relatedly, Osode and Jooste provided a critique of the then insider trading legislation at the beginning of the 21st century.29 There have been comparative analysis studies of local insider trading legislation with other regional nations,30 strategically related economic bloc nations31 and other progressive foreign nations.32 Insights from such studies have differently informed the limitation in local insider trading legislations and how it can be strengthened. Some recent studies have focused on the effectiveness of insider trading laws33 in local emerging markets34 as well as provide a historical overview of market abuse regulations in South Africa.35 Other current longitudinal studies and commercial attorneys’ publications have provided the definitional limitations in key insider trading legislation concepts.36 On the other hand international scholarly work has described legislation challenges in Australia, the USA and New Zealand.37 However there have been no known studies that comprehensively focus on the local legislation shortcomings as well as strategies and approaches that can be employed to strengthen local insider trading provisions. Most of the local and international literature has also implicitly discussed the institutional limitations and approaches that can be used to overcome state 28 Bhana 1987 SAJBM 198. 29 Osode 2000 op cit 239; Richard Jooste ‘A critique of the insider trading provisions of the 2004 Securities Services Act’ 2006 The South African Journal of Law 437 at 460. 30 Mabina & Chitimira 2019 op cit 492. 31 H Kawadza ‘A step towards the harmonization of the regulation of financial misconduct in BRICS: A comparison of the Chinese and South African regimes for the prohibition of insider trading’ (2018) 62/3 Journal of African Law 351. 32 Kawadza 2015a JAL 380. 33 Lugaju 2018 op cit 1-59. 34 Ojah, Muhanji & Kodongo 2020 op cit 1. 35 Chitimira 2014a op cit 937. 36 Van der Walt 2019 PhD thesis 130-262; Yaniv Kleitman ‘Coorporate and commercial alert’. Cliffe Dekker & Hofmeyr 16 September 2015 at 2, available at :https://www.cliffedekkerhofmeyr.com/export/sites/cdh/en/news/publications/2015/corporate/download s/Corporate-and-Commercial-Alert-16-September-2015.pdf, accessed on 17 April 2020. 37 P F Hanrahan 2017 op cit 61; Thomas L Hazen 'Defining illegal insider trading: lessons from the European Community directive on insider trading' (1992) 55/4 Law and Contemporary Problems 231 at 231; Frijns, Gibert & Tourani-Rad 2013 op cit 208. authorities in enforcing insider trading legislation. Most of these studies have partly discussed the above raised issues, and explained some of the local institutional limitations in enforcing insider trading.38 Reamer and Downing have also explicated such a related challenge in the United States’ securities establishment context.39 Some other scholars have suggested how local institutions can be strengthened40 as well as the strategies that can be deployed to enhance insider trading enforcement.41 The latter issue has also surfaced in the Australian securities market environment.42 However, the motivation for this study emanates from the fact that there has been a dearth of studies that have investigated institutional challenges and how all the South African insider trading regulatory establishments’ can be strengthened to enhance the prohibition of this practice. Criminal penalties, civil settlements and the administrative mechanisms of sanctioning insider dealing activities have been used in the South African financial markets. Both local and international literature has postulated the numerous advantages and disadvantages inherent in using the criminal tools in sanctioning insider trading prohibitions.43 Relatedly economic law scholars have explored the merits and demerits of civil penalties in the enforcement of insider dealing activities.44 Furthermore studies have examined the benefits and limitations of employing administrative tools in enforcing insider trading practices.45 Both local and international studies have implicitly and explicitly elucidated the need for a model of regulating insider trading, however the framework developed by Seredynska and Alexander draws from examples in the European Union 38 H Chitimira & V Lawack ‘Overview of the role-players in the investigation, prevention and enforcement of market abuse provisions in South Africa’ 2013 Obiter 200; Kawadza 2015a op cit 392- 393; Lugaju 2018 op cit 22-53; JSE 2015 op cit 3-6; Osode 2000 op cit 260-263. 39 Reamer & Downing 2016 op cit 194-195. 40 H Chitimira & M Ncube ‘The role of regulatory bodies and other role-players in the promotion of financial inclusion in South Africa’ 2020 16/1 Juridica 7; Mabina and Chitimira 2019 op cit 507-512. 41 Kawadza 2018 op cit 361-363. 42 Hanrahan 2017 op cit 63. 43 Chitimira 2014b op cit 269; H Kawadza. ‘Extra-judicial enforcement of securities regulation and the public interest theory: a South African perspective’ (2015c) 29/1 Speculum Juris 57; H Kawadza. ‘The liability regime for insider dealing violations in South Africa: Where we have been, where we are’ (2015b) 3 South African Mercantile Law Journal 388. 44 Seredynska 2012 op cit 228 & 240; Kawadza 2015c op cit 55; Alexander 2007 op cit 246; Luiz 2011 op cit 155. 45 Seredynska 2012 op cit 237; Kawadza 2015c op cit 57; Kawadza 2015b op cit 397; Chitimira 2014b op cit 270. jurisdictions.46 The local work by Luiz provides the chronological changes in the South African sanctioning approaches, without critically envisaging for the development of an enforcement model.47 Whilst one of Kawadza’s article has a similar objective, it however narrowly focuses on discussing only the insider trading enforcement responsibilities of the then FSB.48 Relatedly his other work also discusses the enforcement of insider trading regulation in South Africa, without drawing from any theoretical perspective.49 Thus informed by the unified misappropriation theory and exploring the regulating responsibilities of numerous key government establishments, this study critically argues and discusses the need for the development of a position or a framework for the enforcement of insider trading sanctions in South Africa. The knowledge gaps identified herein justifies the need for a study that investigates these core insider trading legislative issues within the South African financial market context. 1.4. Research objectives and research questions The main objective of this research is to investigate the efficacy of the legislation and institutions aimed at regulating insider trading in South Africa. The motivation to partake such a study has been the poor enforcement against insider trading offenders. Given such a scenario the study intends to examine the local legislation that enforces insider trading, its limitations and how it can be strengthened to enforce insider trading sanctions. The study will also analyse the different state institutions that enforce insider trading sanctions, the limitations in such establishments and the approaches that can be used by the institutions to overcome limitations in enforcing insider trading legislations. Given the prevalence of the three insider trading sanctioning mechanisms, the study also explores the most pragmatic position that can be used for the enforcement of insider trading sanctions in South Africa. Given these aims of the research, the study is guided by the following research questions. 46 Alexander 2007 op cit 229; Seredynska 2012 op cit 227. 47 Luiz 2011 op cit 151. 48 Kawadza 2015c op cit 49. 49 Kawadza 2015b op cit 385. • What are the limitations in the legislations enforcing insider trading? • How can legislation that enforce insider trading be strengthened. • What is the most pragmatic position for the enforcement of insider trading sanctions • What are the institutional limitations in the establishments that enforces insider trading? • Which strategies can be used to strengthen institutions that enforce insider trading sanctions 1.5. Significance of the study The significance of the study will be discussed in relation to the five research questions that inform and frame this study. The importance of this research relates to discussing the key limitations in the South African legislation enforcing insider trading. Through interpreting the legislative limitations, the study explores the several inadequacies and shortcomings that perpetuate the on-going and elusive challenge of not achieving successful insider trading criminal convictions. Relating to the emerging enforcement limitations, the study also explores different approaches and strategies that can be used to enhance and strengthen South African insider trading enactments. These proposed legislative solutions would also be critical in improving on the need to achieve the successful conviction of insider trading contraventions. Thus both the interpretation and analyses of the limitations and envisaged legislative suggestions can inform future prospective South African insider trading legislation re-enactments, reformulations and amendments that can be effected with the intention of strengthening the enforcement of insider trading activities. The research is also relevant for it proposes alternative and contemporary insider trading sanctioning strategies that are on the intersection of legal statutes and corporate informed approaches. The distinctively envisaged mechanisms are prudent, relevant; resonate with extra-judicial sanctioning tools, modern business issues and considers business ethical dimensions. The study is also important as it explore the several challenges that constrain insider trading institutional capacity in enforcing insider dealing regulations. It is critical to highlight the nature of the institutional limitations that have led to few civil and administrative settlements and the unsuccessful criminal prosecutions being attained by the authourities.50 Through highlighting such limitations the study will ultimately make several recommendations and suggestions that improve and strengthen the institutional capacity of establishments that enforce insider trading sanctions in South Africa. Given the utilisation of the criminal, civil and administrative sanctions in the South African financial markets, the study offers a pragmatic position for the enforcement of insider trading sanctions. Encapsulated in the envisaged standpoint is the research focus of the equal importance of the three insider trading remedies and the suggested need to improve successful criminal prosecutions? Such an insider trading regulatory perspective enhances the efficacy of legislation aimed at regulating insider trading in South Africa. The theoretical significance of the study lies in uniquely drawing from the unified misappropriation theory in illustrating the approaches and strategies of strengthening local insider trading legislation, institutional capacity as well proposing the most prudent approach for the enforcement of insider trading sanctions in South Africa. These theoretical insights help strengthen and validate the study’s findings. In addition to the theoretical importance of the research the study also has insider trading enforcement legislative and corporate significances. 1.6. Research methodology This research will use the qualitative textual analysis method and the desktop research approach. Books and pertinent corporate booklets that explain local and international insider trading legislation will be scrutinised to evaluate the 50 JSE 2015 op cit 4; Lugaju 2018 op cit 53; Chitimira 2014a op cit 959. effectiveness, strategies and limitation of insider trading legislations. These sources will also be examined to determine state institutions mandated with enforcing insider trading legislation, their challenges and approaches to overcoming institutional sanctioning impediments. Prudent insider trading proscription practices and principles worth drawing from and informing the local legislation will be analysed and reviewed, with their insights and precepts being discussed and considered for local insider trading acts. The perspectives of the commercial law books and corporate booklets will also be critical in examining the most prudent approach for the enforcement of insider trading sanctions. Local and international journals from countries with progressive insider trading legislation proscriptions such as the United States, the United Kingdom, Australia New Zealand and the European Union will be essential in informing the study on the legislation and institutions that have improved the effectiveness of insider trading enactments within these states and regions. These countries and regions have well developed institutions and improved legislative frameworks that have effectively sanctioned insider trading practices. Both the prominent South African, regional and international peer reviewed publications will also provide insights in assessing the most prudent insider dealing enforcement approaches. The study will also analyse legislation that has dealt with insider trading prohibition in South Africa. Thus the study will examine insider trading legislation and their key informing tenets from the enactment of the Companies Act 61 of 1973 up to the recently enacted Financial Sector Regulation Act 9 of 2017. Prominent local and international court cases concerning insider trading will also be examined. A desktop research of internet sources that cover issues relating to insider trading in South Africa and other jurisdictions will also be made use of. In examining the contents of these pieces of legislation, internet sources and court cases the study will consider the enforcement tools, the limitations and strategies that can be used to enforce insider trading sanctions as well as the institutions, their limitations and approaches that can be used to overcome organisational challenges in enforcing insider trading enactments. Drawing from these sources the study will also analyse the most practical and sensible framework of enforcing insider trading regulatory sanctions. Thus key documentary content analysis will focus - on the research objectives and research questions foregrounded in this study - and zoom in on the overarching aim of the research relating to the efficacy of legislation and institutions used to enforce insider trading in South Africa while borrowing and drawing from comparative jurisdictions to inform local enactments. 1.7. Delimitation of the study In delineating the academic boundaries of the study, the research reflects both on the main aim and the five research questions underpinning the study. Thus in exploring the limitations and strategies that can be used in enforcing insider trading enactments the research discusses the South African insider trading legislation. It primarily focuses on the key legal informing tenets that are in the Financial Market Act 19 of 2012. Relatedly the research also surveys the former insider trading enactments in the South African context such as the Companies Act 61 of 1973 - subsequent amendments, and successive statutes such as the Insider Trading Act 135 of 198, the Securities Service Act 36 of 2004 as well as the recently enacted Financial Sector Regulation Act 9 of 2017. The interpretation and analyses of these legislations helps illustrate the limitations as well as the envisaged solutions of strengthening the enforcement of insider trading activities. In relation to the focus and the nature of market abuse practices, the study will delimitate its primary research foci. Literature indicates that there are three kinds of market abuse practices prohibited in the South African financial markets and these entail insider trading, market manipulation and false reporting relating to the affairs of a public company.51 The study will not focus on the market abuse practices relating to disclosure-based market manipulation and trade-based market manipulation.52 However the focal point of the study will be the market abuse form pertaining to insider trading. The study’s working definition of insider trading is that it involves dealing in market regulated securities by corporate officers, agents or individuals on the basis of classified, specific, material, price–sensitive information. Providing this focal point of the study will enable the research to delineate the boundaries of the study as well as the key tenets of the concept under review. 51 FSCA 2018 op cit 3; Chitimira 2014b op cit 254. 52 FSCA 2018 op cit 3; Chitimira 2014b op cit 256. As the study focuses on the insider trading of financial markets, the research will relate with South African corporate insider dealing activities as well as equity market securities. The examination of corporate insider dealing activities will involve analysing corporate dealing conducts between listed or unlisted companies and government institution that offer business loans such as the Industrial Development Corporation. However the study is partially foregrounded within the Johannesburg Stock Exchange equity market insider trading activities.53 Given the fact, that most of the insider trading violation relate to the JSE equity market, the study will not consider the other four additional and recently licensed stock exchange markets, such as – ZARX (2016), 4AX (2016), A2X (2017) and Equity Express Securities Exchange (2017).54 Furthermore in relation to this delineation, the research will mainly focus on stock exchange equities, and will hardly consider other financial market instruments such as commodity markets, government bonds, foreign currency exchange and money markets.55 It is important to delineate the context of the study in relation to the South African institutions that supervise and monitor financial market compliance especially adherence to insider trading. Thus the study will explore the responsibilities and roles of the following key establishments that regulate insider trading activities such as the Financial Sector Conduct Authority (FSCA), Directorate of Market Abuse (DMA), the Enforcement Committee, the JSE Market regulation division, National Prosecuting Authourity and the Prudential Authourity. However the study will not interrogate institutions that have oversight functions such as the South African Reserve Bank (SARB), the National Treasury and other related institutions who don’t have insider regulating responsibilities such as the Finance Intelligence Centre (FIC).56 Lastly in relation to the research methodology the study’s interpretation and discussion of the effectiveness of legislation and institutions regulating insider trading will draw on the desktop research approach. The study’s analysis will be mainly 53 Goodspeed op cit 2019 1019. 54 Goodspeed 2019 op cit 1019; FSCA 2020-2021 op cit 86. 55 National Treasury 2021 op cit 37-38; K van Wyk 2019 op cit 366. 56 Chitimira & Ncube 2020 op cit 9. informed by South African insider trading enactments, related cases, prudent international statutes and case laws, local economic law scholarly publications as well as pertinent international literature. Thus the study won’t collect data using any other research tools except the documentary analysis strategy. CHAPTER 2: THEORETICAL FRAMEWORK OF THE STUDY 2.1. Introduction The theoretical review provides a critique and a working definition of the insider trading concept. The study motivates the reasons for and against insider trading, with the research questions framing the research, presupposing and supporting the prohibition of the practice. Though they are several theoretical orientations that can be used to inform local perspectives on insider trading, this study will be conceptually informed by the unified misappropriation theory. The unified misappropriation theory will help the research to illustrate the research questions related with strengthening South African insider trading legislation and institutional capacity as well as illuminate the most feasible approach for the enforcement of insider trading sanctions. The ensuing theoretical discussion draws on and reflects on a few selected prominent classical global cases of insider trading. 2.2. Definition of the insider trading concept Legal scholars acknowledge that insider trading is a very difficult concept to delineate.57 Because of such challenges some national legislation prefers not to define the phenomenon, even though they list and describe its elements. For instance the Namibian and the USA insider trading regulations have never sought to define what constitutes this proscribed practice.58 Relatedly the South African Financial Markets Act 19 of 2012 and its predecessor, the Securities Services Act (2004),59 do not have an explicit definition of the construct. Chitimira similarly postulates that the concept of insider trading is not expressly defined in the Financial Markets Act.60 But however a conflation of the notion of ‘inside information’61 and the concept of an ‘insider’62 within these two enactments implies that insider trading entails dealing directly or indirectly in securities listed on a regulated market through 57 Mabina & Chitimira 2019 op cit 492. 58 Mabina & Chitimira 2019 op cit 492; Kawadza 2015 op cit 385. 59 Security Services Act, 2004, s.72 (ab); Financial Markets Act 19 of 2012, s. 72 (ab). 60 H Chitimira ‘Overview of problems associated with Ineffective enforcement of market abuse provisions in South Africa’ (2014c) 5/4 Mediterranean Journal of Social Sciences 53. 61 Financial Markets Act, 2012 s 77-77 (b); Security Services Act, 2004 s 72-72 (b). 62 Financial Markets Act, 2012 s 78 (1) (a); Security Services Act, 2004 s 73 (1) (a). specific, material, precise, non-public information which affects the price or value of listed security. Local business law scholars have attempted to provide definitions of this concept. Ojah and colleagues defined insider trading as the ‘means by which information- privileged few attempt to expropriate the wealth of the many that lack access to the same kind of information’.63 Borrowing from different commercial law literature Kawadza, Mabina and Chitimira defined insider trading as entailing the practice of concluding a transaction in securities or financial instruments on the basis of material, price-sensitive, confidential, privileged or non-public corporate information.64 International business law literature has also defined the phenomenon as referring to ‘trading by people who possess some non-public material information ... which is relevant for the price of stock or stocks’.65 Relatedly Bhattacharya, described insider trading as referring to the ‘buying or selling of securities ... while in possession of material non-public information’.66 Beny has also explained the concept as implying ‘trading by corporate insiders or their associates on the basis of price-sensitive, private information’.67 In a more explicit manner the work of Clacher, Hillier and Lhaopadchan delineates insider dealing as involving ‘trading on private, specific, and precise information that is likely to have a material impact on prices’.68 Scholarly insights elucidates that such information can be accessed through someone’s special position, accidently or through criminal conduct.69 What can be gleaned from these local and international business law scholars’ definitions as well as the key national insider trading legislations is that insider trading involves conducting securities dealings on the basis of corporate classified price-responsive information. Such information is privy to corporate officers and 63 Ojah, Muhanji & Kodongo 2020 op cit 2. 64 Kawadza 2015a op cit 383; Mabina & Chitimira 2019 op cit 492-493. 65 Du & Wei 2004 op cit 498. 66 Bhattacharya ‘Insider trading controversies: a literature review’ (2014) 6 The Annual Review of Financial Economics 386. 67 Beny 2005 op cit 145. 68 Clacher, Hillier & Lhaopadchan 2009 op cit 388. 69 Seredynska 2012 op cit 12; Christopher P Montagano ‘The global crackdown on insider trading: a silver lining to the “Great Recession” ’ (2012) 19/2 Indiana Journal of Global Legal Studies 595. agents or can be accessed fortuitously and is unintended for the general members of the public. In the purview of economic law scholarly perspectives, the study will provide a working definition of insider trading as involving the dealing in market regulated securities by corporate officers, agents or individuals on the basis of classified, specific, material, price–sensitive information. Providing a provisional definition of insider trading will allow the research to delineate its framework of study as well as having insights of the concept under review. 2.3. Reasons for and against insider trading legislation It is important for this study to critically discuss the scholarly theoretical views’ pertaining to the need for and against insider dealing, as it justifies and motivates the exploration of the underpinning research question relating to the efficacy of insider trading legislation in South Africa. This question has a presumption that insider trading regularisation is generally favoured in local and international economic law circles. However, this might not be the case, as some scholars argue that the pros and cons for insider trading are both valid and correct.70 Conversely literature indicates that the debate for and against insider dealing71 is favouring the argument for the prohibition of the practices.72 In fact such contestations, according to Alexander are now consigned to history, as there is a consensus that insider trading is wrong and should be prohibited.73 Thus the generally accepted scholarly view is that insider trading is wrong and it should be regulated.74 It logically follows that this article is written from this standpoint, which out rightly condemns insider trading practices. In the global economy it is always the norm for economists to revisit and strengthen insider trading legislation after economic recessions or financial crises – which points to the importance of enhancing insider dealing proscriptions so as to avoid related 70 Hayne E Leland ‘Insider trading: should it be prohibited’ (1992) 100/4 Journal of Political Economy 859. 71 Leland 1992 op cit 862; Matlida, Gillis 'A symbolic legislative gesture? An argument for active enforcement of the insider trading prohibition in Myanmar' (2020) 14/1 Law and Financial Markets Review 59 reports of such debates even in smaller South-East Asia states such as Myanmar. 72 Stephen Bainbridge ‘Insider trading: an overview’ in Encyclopedia of law and economics vol 3 (2000) 1-1. 73 Alexander 2007 op cit 229; See also Bruce W Klaw & D Meyer ‘Ethics, markets, and the legalization of insider trading’ (2019) 168 Journal of Business Ethics 55 at 57. 74 Opoku 2007 op cit 2; Jooste 2000 op cit 285. previous national economic predicaments.75 Montagano, Schotland and Opoku recapitulate the benefits of enforcing insider trading, through the economic goals of increasing the fairness, just rewards and integrity of the market, which makes capital more affordable, secures stock market investments and stimulates national economic growth.76 2.3.1. Reasons for insider trading legislation There are several reasons why insider trading laws are becoming a central feature of global financial markets. Insider trading legislation is recognised and recommended as a channel and means for fighting financial market abuse practices.77 Similarly and in the light of the global financial crisis insider dealing regulations are needed to remove unethical market behaviour practices, protecting the average investor and members of the public from abusive financial conduct in regulated markets thereby promoting inclusive, stable and financial markets integrity.78 A similar line of reasoning permeated the American investment law discourse where Reamer and Downing claimed that insider dealing enforcement advances the fair market principle and promotes an orderly market - which ensures that investors do not enrich themselves at the expense of law-abiding citizens.79 Insider trading opponents mention the inherent unfairness and harmfulness of the practice as the reason for outlawing it.80 Such unfairness is prominent, when individuals or investors are differently informed, which consequently disincentives people or small investors to invest in financial markets.81 Literary, informed investors have superior knowledge advantage when compared to other market participants, which enables them to make huge abnormal profits in a short period of time, in an unethical, unjustly and manipulative manner, similar to theft.82 The proscription of insider dealing permits 75 Montagano 2012 op cit 595; Kawadza 2015b op cit 54. 76 Montagano 2012 op cit 595; Roy Schotland 'Unsafe at any price: a reply to Manne, insider trading and the stock market' (1967) Virginia Law Review 53/7, 1439; Opoku 2007 op cit 69. 77 Chitimira 2014a op cit 937; Lugaju 2018 op cit 27. 78 Kawadza 2015a op cit 380; Bhana 1987 op cit 200; Lugaju 2018 op cit 27; Marius C Milos & Laura R Milos ‘Regulation, insider trading and stock market reaction’ (2017) 1 Annals of the economy series, Special issue 174; Montagano 2012 op cit 595. 79 Reamer & Downing 2016 op cit 190; Gillis 2020, op cit, 60; Schotland 1967 op cit 1438. 80 Jooste 2000, op cit, 286; Seredynska 2012 op cit 51. 81 Leland 1992 op cit, 859; Montagano 2012 op cit 595; Seredynska 2012 op cit 52. 82 Seredynska 2012 op cit 52, 58 & 73; Bhattacharya 2014 op cit 396; Clacher, Hillier & Lhaopadchan 2009 op cit 377. the benefits of securities trading to accrue to both minor and established shareholders.83 Such compliance subsequently improves the welfare of the corporation and corporate governance as organisational employees effectively manage company portfolios in line with their contractual duties, what they are compensated for and through which they expect reasonable returns.84 Insider trading also ensures international investors’ capital safety, fair investment returns, effective pricing of shares and improves market discipline.85 Schotland elucidate that stock markets are key national economy’s commercial and financial structures, whose operations are sustained through ensuring that the bourse is a safe places for investments.86 For emerging and transforming markets such as South Africa effective insider trading regulations minimise abnormal profiteering, restores and increases public investor confidence, helps maintain stable market environments, guarantees capital market corporate governance initiatives which enhances the efficiency of capital markets.87 Relating to the last point, prominent economic law scholars also allude that insider trading enforcement improves market efficiency as it significantly decreases the cost of equities, enhances return on investment, making capital more affordable, which ultimately leads to economic growth.88 Improved market efficiency is encapsulated through a liquid market under which all types of investors from established to small, can conveniently acquire and dispose-off their investments.89 Long-term investors regard insider trading legislation as critical to their investment decisions as are the security's fundamental soundness, dividends and growth potential.90 There is thus broader acknowledgement in economic circles that insider trading laws are good for society and improves liquidity in the market.91 83 Bhattacharya 2014 op cit, 392. 84 Schotland 1967 op cit 1452; Seredynska 2012 op cit 10 & 57. 85 Ojah, Muhanji & Kodongo 2020 op cit 2; Schotland 1967 op cit 1440. 86 Schotland 1967 op cit 1440. 87 Ibid; Chitimira 2014a op cit 962; Kawadza 2018 J.A.L 357; Lugaju op cit 27; Bainbridge 2000 op cit; K Ojah, S Muhanji & O Myburg 2008 ‘Market reaction and equity market efficiency: a survey of the insider trading law in South Africa - Part 2’ 10 The African Finance Journal 1 at 24. 88 Hanrahan 2017 op cit 62; Bhattacharya & Daouk 2002 op cit 78; Gillis 2020, op cit, 60; Leland 1992 op cit 862; Schotland 1967 op cit 1441. 89 Seredynska 2012 op cit 71. 90 Schotland 1967 op cit 1451. 91 Hanrahan 2017 op cit 62; Schotland 1967 op cit 1441. Ojah and others relatedly argue that curbing insider trading improves ‘stock price informativeness’ thus ensuring more accurate stock prices.92 Inhibiting insider dealing enhances stock market price performance as it instigates the equity prices to accurately reflect underlying values causing gradual price movements.93 Bhattacharya and Daouk, and Beny also concur that insider trading enforcement improves liquidity in the stock markets.94 Furthermore Beny, explains that curbing insider trading diffuses or disperses equity ownership which fosters concentrated widespread shareholder ownership rather than larger shareholding in the hands of the elite as characterised in legalised insider trading contexts.95 All these positive attributes of prohibiting insider trading improve stock market development which ultimately leads to market efficiency.96 Relatedly, countries with strict insider trading prohibitions and dedicated securities law enforcements have resulted in stronger and efficient markets.97 Osode and Lugaju concur that local insider trading regulations were essentially aimed at reintegrating the South African economy into the international financial markets.98 This intention involved realigning and transforming local insider dealing regulations with prudent international standards.99 Such a need was highly motivated for, at the end of the apartheid era and at the dawn of democracy in 1994. Local insider trading legislation reformulations were also aimed at ensuring that perpetrators of illicit trading met the strong arm of the law as well as compensate victims thus enhance the South African financial markets as important ‘socio- economic instruments of capital formation and accumulation’.100 Whilst such insider trading legislative transformation advantages, where captured in the changing South African market they have also been acknowledged in other markets as protecting 92 Ojah, Muhanji & Kodongo 2020 op cit 1; L N Beny ‘Do insider trading laws matter? Some preliminary comparative evidence’ (2005) 7/1 American Law and Economics Review, Special issue on Comparative law 166. 93 Schotland 1967 op cit 1443. 94 Bhattacharya & Daouk 2002 op cit 92; Beny 2005 op cit 146; Leland 1992 op cit 862. 95 Beny 2005 op cit 147. 96 Bhattacharya & Daouk 2002 77; Beny 2005 op cit 174; Milos & Milos 2017 op cit 174. 97 Gillis 2020, op cit 60. 98 Osode 2000 op cit 240; Lugaju 2018 op cit 16. 99 Lugaju 2018 op cit 16. 100 Ibid. investors, which increases the integrity of the market and stimulates investment in equities.101 Thus, there are numerous advantages of enforcing insider trading which broadly aim at normalising trading in securities market. There is general consensus amongst progressive law economic scholars and across the globe that insider trading is wrongful and harmful as they are more legal and economic benefits than limitations in prohibiting the practice. The benefits of inhibiting insider dealing and the presumption of this assertion motivate the need for this study to examine the efficiency of the South African legislation and institutions in regulating this practice. 2.3.2. Reasons against insider trading legislation Whilst scholarly views support the enforcement of insider trading legislation, it is the argumentation in the classical work of Manne which initially encouraged and supported insider trading practices.102 Other notable finance law scholars, such as Easterbrook, Fischer, Dye and Friedman have of late followed the same position by arguing that insider prohibitions should be reconsidered.103 This position accentuates that insider trading is highly profitable and systematically outperforms the market.104 Renowned economist, Milton Friedman was courageous enough in a 2002 television interview, to aver that “You want more insider trading, not less”.105 Manne argues that insider trading enhances and promotes ‘free capital markets and entrepreneurial capitalism’.106 Scholars, who favour this position, concur that insider trading returns fairly, sufficiently and effectively rewards and provides compensation for insiders and practising executives’ entrepreneurial initiatives in large corporates.107 Thus they argue that insider trading is a mechanism that may be used by owners to improve 101 Montagano 2012 op cit 595. 102 A strong and in-depth critique of insider trading regulation is contained in Manne’s work; Manne 1966 op cit 113; Manne 2005 op cit 167. 103 A. A. Durnev & A. S. Nain ‘The effectiveness of insider regulation: International evidence’ (2007) 1 Forum CESifo DICE Report 10; D. Carlton & D. Fischer ‘The regulation of insider trading’ (1983) 35/5 Stanford Law Review 861; Ronald Dye ‘Insider trading and incentives’ (1984) 57/3 Journal of Business 295; F. H. Easterbrook ‘Insider trading, secret agents, evidentiary privileges and the production of information’ (1981) 1981 The Supreme Court Review 309 at 313. 104 Carton & Fischer 1983 op cit 859. 105 Durnev & Nain 2007 op cit 10. 106 Manne 1966 op cit 133. 107 ibid; Dye 1984 op cit 297; Carlton & Fischer 1983 op cit 861 & 867; Bhattacharya 2014 op cit 391. the earning-contingent arrangement.108 Such entrepreneurial roles would be an accurate gauge of individual innovative worthiness within a company.109 Insider trading incentives manipulative practices, permits managers to trade on inside information which stabilises stock prices and ensures that equities move in a positive direction.110 Thus insiders trading recompensate managers who explore potential valuable investment opportunities for the organisation. Plausible as the argumentation might be, Schotland is cautious of the entrepreneur’s ability to profit from insider information, as this is highly circumstantial. Thus according to Schotland the entrepreneur’s ability to profit from confidential information is sharply restricted by amongst other factors: (a) his limited capital and credit; (b) his limited knowledge of the overall picture of the corporation; (c) his limited knowledge of the stock market, and possible fears of the risks he must take upon entering it; (d) the infrequency of events significant enough to trade upon and (e) the need to act quickly.111 Furthermore the company has adequate forms of compensation that stimulate and sufficiently rewards the entrepreneurial inventiveness of managers, rather than allowing investors to engage in insider trading practices.112 This convincing and justifiable critique of the entrepreneurial benefits makes the arguments for permitting insider trading practices to hang in the balance. Both Manne and Easterbrook assent that insider securities trading and dealings do not harm any investors, in fact no one suffers as result of such practices.113 They allege that the only stock exchange traders likely to be disadvantaged by insider trading are short term speculators and not long-term securities investors who are regularly subjected to the vagaries and uncertainties of probabilities in the market.114 Similar scholarly argumentation postulates that insider trading is a highly profitable practice that allows insiders to pursue valuable investments opportunities for the 108 Dye 1984 op cit 307. 109 Manne 2005 op cit 172. 110 Bainbridge 2000 op cit 16. 111 Schotland 1967 op cit 1455. 112 Schotland 1967 op cit 1457. 113 Manne 2005 op cit 172; Easterbrook 1981 op cit 322; Bhattacharya, 2014 op cit 391. 114 ibid. firm.115 Thus insider trading promotes and encourages long term investment as opposed to short-term speculators and opportunists. Such long term orientation investment that reflects on market information increases stock market efficiency.116 The argument for a positive relationship between insider trading and market efficiency were explained in 2005 by Manne, who posited that market efficiency results from insider traders who convey free, open, fast, accurate and extremely valuable stock price information.117 Relatedly the availability of information as a public good on the market through insider trading improves the efficiency of the stock market as trading profits are not sacrificed to insiders.118 Through permeating information to be used freely, knowledge development is incentivised, which maximise the wealth of both users and society.119 Insider trading stimulates market efficiency as securities prices reflect the publicly and privately held information which improves the liquidity and viability of stock markets.120 Put differently, Bhattacharya argues that insider trading enhances stock price informativeness, which benefits society.121 Such market scenarios are critical in improving management efficiency.122 Insiders enhance market efficiency as they possess superior information which gets imparted into prices, allowing traders to buy when prices rise, and sell, when prices fall.123 2.3.3. The neutral ethical view regarding insider trading Whilst most of the theoretical literature provides opposing views on insider trading, it is McGee’s and to a limited extent, Statman’s line of reasoning that provides a uniquely ethical informed perspective regarding this practice. Informed by utilitarian and rights-based philosophical ethical foundations McGee reasons that there are instance and circumstances when insider trading is ethical. McGee argues that insider trading is moral when ‘the result is the greatest good for the greatest 115 Carlton & Fischer 1983 op cit 859 & 871. 116 See Bhana 1987 op cit 200 for re-explanation of Manne’s, 1966 defense of insider trading as well as Manne 2005 op cit 168. 117 See Manne 2005 op cit169. 118 Dye 1984 op cit 295. 119 Easterbrook 1981 op cit 313 & 338. 120 Ako Doffou ‘Insider trading: a review of theory and empirical work’ (2003) 11/1 Journal of Accounting and Finance Research 5 & 11. 121 Bhattacharya 2014 op cit 391. 122 Manne 2005 op cit 185. 123 Bhattacharya 2014 op cit 398. number’.124 Following this philosophical assertion, insider trading results show that they are more winners than losers in this proscribed practice, thus from an utilitarian perspective insider trading is justified. Secondly and from a right-based approach which is key in informing public policy positions, if insider trading does not violate anyone’s rights, then there is nothing wrong with the practice.125 This argumentation is similar to Manne’s earlier assertion that insider trading is but a ‘victimless crime’. Furthermore this position is akin to Statman’s reasoning that one’s fairness perception and view of insider trading depends on one’s culture and ethical reasoning which are strongly different between United States citizens and the Chinese.126 Emerging from McGee and Statman’s analysis is the interpretation that insider trading is but a circumstantial practice, which must be subjected to factual inferences. Regardless of the plausibility of this ethical position and Manne and related scholars argumentations to encourage, support and reconsider insider trading practices, the most pragmatic and progressive economic law perception is to regard insider trading as a wrongful and harmful practices that wantonly destroy and manipulates stock market trading fundamentals.127 The prohibition of insider trading basically promotes the integrity, fairness, inclusivity and liquidity of the market which improves equity investment returns, market efficiency, investor confidence and stimulates national economic growth.128 It is these benefits and the plethora of advantages that motivates this study to examine the effectiveness of legislation and institutions aimed at regulating insider trading in South Africa. Thus there is resonance between the objectives of this study and the assumed benefits arising from proscribing insider trading. 124 R W McGee ‘Analysing insider trading from the perspectives of utilitarian ethics and right theory’ (2010) 91/1 Journal of Business Ethics 66. 125 McGee 2010 op cit, 67 & 78. 126 M Statman ‘The cultures of insider trading’ (2009) 89 Journal of Business Ethics 51-58. 127 Ojah, Muhanji & Kodongo 2020 op cit 2; Schotland 1967 op cit 1440; Schotland 1967 op cit 1440 128 Kawadza 2015a op cit 380; Bhana 1987 op cit 200; Lugaju 2018 op cit 27; Milos and Milos 2017 op cit. 174; Montagano 2012 op cit 595; Seredynska 2012 op cit 52; Bhattacharya 2014 op cit, 396; Clacher, Hillier & Lhaopadchan 2009 op cit 377; Ojah, Muhanji & Myburg 2008 op cit, 24. Hanrahan 2017 op cit 62; Bhattacharya and Daouk 2002 op cit 78; Gillis 2020, op cit, 60; Leland 1992 op cit 862; Schotland 1967 op cit 1441. 2.4. The unified misappropriation theory The emergence of this theory was invoked by the weaknesses and flaws in the classical and misappropriation theories and has been used in the United States to regulate and curb insider trading activities.129 The unified misappropriation theory combines the positive features and attributes of both the classical and misappropriation theories.130 The combination of such features makes the theory to be all-encompassing.131 Through this endeavour, the unified theory dually elucidates why classical insider trading and misappropriation are wrongful activities.132 The unified theory provides a shared means of distinguishing between activities that are wrongful and those that are not.133 The study is motivated to use a unified theory for it is claimed that the interpretation and the understanding of a country’s insider trading legislation is pre-eminently suited to the use of multiple legal theoretical perspectives.134 Furthermore the thrust of the classical and the misappropriation theories are based on the fundamental notion, that the misuse of information by corporate insiders having a fiduciary relationship within a company undermines the management of the corporation and is harmful to the business.135 These theories make it a liability to trade on inside information both in South Africa and in the global markets.136 This theoretical standpoint resonates with the position adopted by the study regarding the importance of the regularisation of insider trading. Both the classical and the misappropriation theory complement each other, with the classical concept holding primary insiders liable for insider trading whilst the misappropriation theory outlaws secondary insiders from dealing on material information.137 Such complementarity resonates with the Financial Markets Act 19 of 2012 positions that regard either secondary or primary insiders as both liable for 129 Chitimira 2021 op cit 7. 130 Chitimira 2021 op cit 7; Klaw & Meyer 2019 op cit 65. 131 Walter 2012 op cit 522. 132 Klaw & Meyer 2019 op cit 65. 133 ibid 134 Opoku 2007 op cit 70. 135 Opoku 2007 op cit 69. 136 Van der Walt 2019 op cit 41-126; Kawadza 2015a op cit 388. 137 Kawadza 2015a op cit 388. insider trading.138 The insider dealing liability of tippes and primary insiders will enable the study to critically examine insider trading violations and South African cases that involve both types of insiders. In the American insider trading authourities context, the unified misappropriation theory has been argued to be inclusive of both the classical and the misappropriation theoretical perspectives with its enforcement of insider trading being mandatory.139 Through the lens of the unified misappropriation theory, there is the compulsory enforcement of insider trading violation, which permits the SEC to pursue individuals who violates the enactment through criminal, civil or administrative penalties.140 In relation to the focus of this study and in the South African context this theory encourages and illustrates the combined utilisation of the three insider trading enforcement approaches. 2.4.1. The classical theory The classical theory of insider trading liability is violated when a corporate insider, who has obtained confidential information, trades in the securities of his corporation on the basis of material, non-public information.141 The classical theory elucidates that it is “illegal for corporate insider to use confidential corporate information gleaned from their position to trade in the securities of their company for their own benefit”.142 This traditional theory explicates that there is a fiduciary relationship and a position of trust between the directors and a company, in which they have a duty to use reasonable diligence to protect inside information and safeguard corporate property.143 The theory has been used in the American insider trading violations of the case between the SEC v. Texas Gulf Sulphur (1968), in which corporate insiders had illegally traded when they bought more stock in their mining company after learning 138 Financial Markets Act 19 of 2012 s 78 (1) (a). 139 Walter 2012 op cit 522. 140 Ibid. 141 Richard, A. Epstein ‘Returning to common-law principles of insider trading after "United States v. Newman"’ (2016) 125/5 The Yale Law Journal 1482 at 1495; Walter 2012 op cit 522. 142 Klaw & Meyer 2019 op cit 57. 143 Opoku 2007 op cit 6-8. of the discovery of substantial mineral deposits.144 This case illustrates that insiders owe the firm and its shareholders fiduciary duties of loyalty that require full candour and a subordination of personal interests, with the violation of such corporate obligations being wrongful - for material non-public information must be used with corporate authorisation.145 To curb insider trading, the classical theory highlights that it is the mandate of the corporation to provide policy and guidelines on how investors and corporate insiders should respond in the marketplace.146 Such organisational standpoints insinuate the use of internal mechanism and approaches, such as encouraging corporate governance147 and the use of the Chinese wall 148 to inhibit insider trading practices. The former position is acknowledged by the classical theory position in which the corporate governance fiduciary duty highlights that directors owe fiduciary duty to the company and through it have an obligation to enhance the interest of the company and its members or shareholders.149 Thus the classical theory which is part of the unified misappropriation theory will illustrate, in the discussion chapter, how internal corporates’ mechanisms or codes of conduct enhance the inhibition of insider dealing activities. 2.4.2. The misappropriation theory The misappropriation theory, arguments that it’s awfully wrong and fraudulent to use confidential inside information in conducting securities transactions without the approval of the owner.150 The theory is used to prohibit trading by an individual who misappropriates inside information in breach of the duty owed to the source of information.151 The misappropriation theory holds that a person commits fraud when he misappropriates material non-public confidential inside information they acquired 144 SEC v Texas Gulf Sulphur Co (1968) 401 F. 2d 833 – Court of Appeals, 2nd Circuit. 145 Klaw & Meyer 2019 op cit 57. 146 Epstein 2016 op cit 1530. 147 Van Wyk 2019 op cit 10; Seredynska 2012 op cit 245. 148 Cassim 2008 op cit 190b; Chitimira 2014c op cit 53 & 55. 149 Opoku 2007 op cit 35. 150 Opoku 2007 op cit 42. 151 Walter 2012 op cit 522. during the course of their corporate duties for securities trading purposes, in breach of a duty of trust and confidence owed to the principal of the source of information.152 The rationale and scope of the application of the theory involves instances where the offenders breach their fiduciary duty to their companies.153 Thus is it possible to interpret the misappropriation theory as a continued defence of the fiduciary-type duties of loyalty, in which corporates are obligated to remain loyal to his firm and its clients.154 Insiders take advantage of the inside information when they trade against the interest of the principals that he works for and the clients who has retained the firm.155 Scholars concur that the misappropriation theory’s original goal was the preservation and protection of the market integrity.156 The misappropriation theory originated in the United States in the 1980s, in the case between the Chief Justice Burger and Chiarella’s misappropriation of confidential, material non-public information in his duties as a financial printer.157 Three years later the same theoretical tenets were applied in the case between Dirks and SEC, where Raymond Dirks was alleged to have received inside corporate information which he disclosed to investors, who relied on it on trading shares of the corporation, thus violating his fiduciary duties and misappropriating corporate non-public information.158 The theory initially related to the Chiarella v U.S. case in which a Pandick Press’ printer employee obtained confidential information and fraudulently used it to purchase stock in a target company and immediately sold the shares after the takeover announcements.159 The doctrine that evolved from the Chiarella case was subsequently labelled the misappropriation theory because the duty to disclose was triggered only if the trade could be regarded as theft from an entity, which the trader owed fiduciary duty.160 152 Epstein 2016 op cit 1495; van der Walt 2019 op cit 42-43; McGee 2010 op cit 76; Klaw & Meyer 2019 op cit 57; Montagano 2021 op cit 590; Steven Salbu 'The misappropriation theory of insider trading: A legal, economic, and ethical analysis' (1992) 15/1, Harvard Journal of Law and Public Policy 223. 153 Chitimira 2021 op cit 7; Clacher, Hillier & Lhaopadchan 2009 op cit 389. 154 Klaw and Meyer 2019 op cit 58. 155 Epstein 2016 op cit 1496. 156 Salbu 1992 op cit 223; Bhattacharya 2014 op cit 387. 157 Bainbridge 2000 op cit 3; Chiarella v. United States 1980 (445) US 222 - Supreme Court of United States; van der Walt 2019 op cit 42-43; McGee 2010 op cit 76. 158 Dirks v. SEC (1983) 463 U.S. 646 159 Montagano 2012 op cit 585; Chiarella v United States (1980) 445 U.S. 222 No. 78-1202 160 Salbu 1992 op cit 224; Botha 1991 op cit 9. https://supreme.justia.com/cases/federal/us/463/646/ To curb the misappropriation of inside information the corporation is mostly encouraged to formulate sufficient and explicit contractual principles and restrictions and also permit the use of securities law in sanction insider trading and limiting the use of information by the recipient and his ability to share it with other individuals. 161 In other word besides securities regulation, private ordering imposes additional insider trading proscription.162 The theory’s claims that besides the tools at the state’s discretion, corporate governance protects the interest of investors and shareholders.163 Furthermore the legislative attributes of the theory, makes it one of the most effective tools in the enforcement of inside law, in fact insider trading involves unauthorised use of information, which basically violates the misappropriation doctrine.164 Thus the misappropriation theory suggests the use of both internal corporate mechanisms as well as the application of insider trading legislation in prohibiting insider trading activities. 2.5. The application of the unified misappropriation theory The unified misappropriation theory will be used in the study to illustrate some of the research questions relating to strengthening insider trading legislation and institutional capacity as well as examining the most prudent insider dealing enforcement approaches. Theoretical insights have indicated that the unified misappropriation theory will enable the study to examine South African insider trading violations that involve both primary and secondary insiders. Secondly this theory will motivate for the utilisation of the three combined enforcement of insider trading sanctions in curbing insider dealing activities. Thirdly through the lens of the classical theory which is part of the unified misappropriation theory, the study will illustrate how internal corporates’ mechanisms enhance the inhibition of insider dealing activities. Relating to the latter, the misappropriation theory also suggests the use of both internal organisational mechanisms as well as the application of insider trading legislation in proscribing insider trading activities. It is these four uses of the theory under which it will be applied in this study in the discussion chapter. 161 Epstein 2016 op cit 1530. 162 ibid 163 Seredynska 2012 op cit 245. 164 Opoku 2007 op cit 45. 2.6. Conclusion This theoretical chapter provided a working definition of the insider trading concept. The section also provided a critique for and against insider trading, with the study’s research questions presupposing and supporting the prohibition of the practice. In the light of these tensions, the neutral ethical view provides a theoretically plausible viewpoint. Of the several theoretical orientations that can be used to inform local perspectives on insider trading, this study will be conceptually informed by the unified misappropriation theory. The study motivated for the theoretical use of the unified misappropriation theory, which combines the insights of the classical and the misappropriation theories. Reflecting on a few selected classical global insider trading cases, the unified misappropriation theory will be used to illustrate the research questions relating to the strengthening of local insider trading legislation and institutional capacity as well in examining the most prudent approach for the enforcement of insider trading sanctions. Thus through the theoretical lens provided herein, the discussion on chapter five will help overally illustrate the efficacy of legislation and institutions aimed at regulating insider trading in South Africa. CHAPTER 3: THE STATUTORY FRAMEWORK OF INSIDER TRADING IN SOUTH AFRICA 3.1. Introduction The ensuing review, overarchingly discusses the statutory framework of insider trading in South Africa. It begins with the historical development of insider trading legislation reflecting on the informing tenets, weaknesses and the types of sanctions highlighted through each enactment. The statutory analysis will also explicate the limitations in the South African insider trading legislation and the range of strategies for enforcing insider trading sanctions. Relatedly the study also explores the institutional limitations and proposes approaches for enhancing institutional capacity for enforcing insider trading legislation. Engaging with these key issues will enable the study to respond to all the research questions informing this study. 3.2. The historical development of insider trading legislation in South Africa Since the introduction of insider trading legislation in 1973, South Africa has witnessed numerous amendments and re-enactments intended to strengthen insider trading prohibitions and create a fair, safe, transparent and efficient securities market for investors that are realigned with international regulatory practices.165 Whilst the initial laws prohibited insider dealing and criminally sanctioned the practice, recent developments have widened to include civil and administrative penalties. The discussion on the historical development of insider trading legislation will reflect on the types of remedies highlighted through each enactment. The South African legislation improvements, of introducing criminal, civil and administrative penalties, places local insider trading at par with most progressive economies in the World.166 However the major flaws and weaknesses of local insider trading legislation have been the insignificant criminal prosecutions and fewer civil and administrative sanction rates which suggest weak institutional 165 P Redman ‘2nd South African International Financial Markets Regulatory Summit market abuse’ South African Institute of Financial Markets 2014 October at 4, available at http://www.saifm.co.za/summit/slides2015/10.pdf, accessed on 17 April 2020; Financial Markets Act 19 of 2012. 166 JSE 2015 op cit 4. http://www.saifm.co.za/summit/slides2015/10.pdf capacity, poor enforcement tools and inadequate legislation transgression mechanisms.167 3.2.1. The Companies Act 61 of 1973 Local business law scholars generally agree that insider trading legislation was explicitly introduced in South Africa under the Companies Act 61 of 1973.168 The act was an initial attempt to regulate the activities of insider trading.169 The South African insider trading provisions were borrowed from two different legal regimes of the United States and the United Kingdom’s policies.170 The 1973 Companies Act highlighted that the sole response to insider trading violations were criminal penalties. The enforcement of insider trading criminal sanctions was the combined responsibility of the Johannesburg Stock Exchange, the Registrar of Companies and the Attorney-General's Office.171 Section 233 of the Act made insider trading by primary insiders such as directors, employees, shareholders or officers an offence and its contravention constituted a criminal offence liable for imprisonment or fine or both.172 The major weakness of this Act was its non-prohibition of secondary insiders, tippees and fortuitous person as well as various people involved in take-over situations from trading on privileged information.173 According to Bhana, the other flaws of this Act pertained to allowing directors of an acquiring company in dealing in the shares of a targeted company as well as having no stipulations on the digestion period of publicly announced information.174 The criminal penalties of two years imprisonment or a fine not exceeding R8 000, as well as the lack of a civil monetary compensatory clause, where not sufficient to deter insiders in engaging in these 167 See Bhana 1987 op cit 201; Chitimira 2014a op cit 947,952, 959, 960; Mabina & Chitimira 2019 op cit 495; JSE 2015 4; Kawadza 2018 J.A.L. 368. 168 For a historical overview and the beginning of insider trading legislation as discussed in the local literature see Kawadza 2018 op cit 363; Bhana 1987 op cit 201; Mabina & Chitimira 2019 op cit 494; Osode 2000 op cit 241. An exhaustive background is provided for by Chitimira 2014a op cit 937. 169 Derick Botha ‘Control of Insider Trading in South Africa: a comparative analysis’ 1991 3/1 South African Merchant Law Journal 1. 170 Botha 1991 op cit 1. 171 Botha 1991 op cit 5. 172 Companies Act 61 of 1973, sec 441. 173 See Mabina & Chitimira 2019 op cit 494; Bhana 1987 op cit 202; Jooste 2000 op cit 284. 174 Bhana 1987 op cit 202. profit-bearing commercial transactions.175 Because of these deficiencies, flaws and shortcomings’ the Act was amended in 1989 and this gave way to the Companies Amendment Act 78 of 1989. However, of interest in the 1973 piece of legislation and motivating this study was the lack of prosecution under this Act with enforcement, detection and investigation being practically impossible.176 These limitations forced the legislature to enact strict legislation through amending the act in 1989. 3.2.1.1. Companies Amendment Act 78 of 1989 The Act inserted a new chapter177 whose main provisions established the Securities Regulation Panel which supervised dealings in securities and aimed at regulating insider trading through criminal liability.178 Changes in the Companies Amendment Act 78 of 1989 introduced a secondary insider trading prohibition clause179 and further stipulated the digestion period of publicly announced information to 24 hours under section 404f.180 By contrast the United States prescribed a digestive period of 48 hours before insiders may trade on publicly announced information.181 The insider trading criminal sanctions were increased from a paltry R8 000 to a maximum of R500 000 or imprisonment not exceeding 10 years or both fine and imprisonment.182 However the amendments replicated some earlier flaws in the previous legislation and was criticised for prohibiting insider trading too broadly183 and borrowing from American insider legislation without considering the South African securities market context.184 Furthermore like its predecessor the re-enactment failed to provide operational definitions of key insider trading concepts.185 Mabina, Chitimira and Kawadza also concurred that provisions of the Act were ineffective, inconsistent and awkward and made it difficult to monitor, apprehend and penalise the proscribed 175 See Chitimira 2014 op cit 946. 176 See Bhana 1987 op cit 201; Chitimira 2014 op cit 947; Botha 1991 op cit 5 & 6. 177 The Act inserted Chapter XVA and sections 440A, 440B, 440C, 440D, 440E, 440F, 440G, 440H, 440I and 440J, whose main thrust was the Regulation of Securities. 178 Botha 1991 op cit 6. 179 Kawadza 2018 op cit 364. 180 Companies Amendment Act 78 of 1989 sec 404. 181 See Bhana 1987 SAJBM 202. 182 Companies Amendment Act 78 of 1989 s 440j. 183 Mabina and Chitimira 2019 495. 184 Chitimira 2014 op cit 948; Botha 1991 op cit 9. 185 Botha 1991 op cit 7. practise.186 Like its American legislative source and counterpart, the amendment did not attain a successful prosecution because of the high standard of proof in the criminal penalty, which requires authourities to prove their case beyond reasonable doubt.187 3.2.1.2. Second Companies Amendment Act 69 of 1990 Like the preceding provisions where flaws were evident, the legislation was revised and this culminated into the Second Companies Amendment Act in 1990.188 A positive development of this amended legislation was its explicit proscription of insider trading by insiders and tippees on the basis of ‘unpublished price-sensitive information’.189 The amendment also retained the insider dealing criminal sanctions with similar amount of fine or imprisonment term or both as was in the former legislation. However the amendment had some of the flaws that were contained in the previous insider legislations. Firstly, there was poor surveillance detection and preventative measures by the Securities Regulation Panel.190 Secondly, the panel lacked authority to impose civil penalties which could have increased outside court settlements.191 Thirdly, it is argued that there was lack of cooperation and coordination between the different state institutions which were tasked with enforcing insider trading proscriptions.192 Fourthly, was the problem of enforcement which resulted in no individual being convicted for insider dealing under this Act?193 3.2.2. Insider Trading Act 135 of 1998 These flaws and the report and the recommendations of the King Task Group in October 1997 resu