The deadly cost of insider trading

It’s not quite as vivid as the gory crimes we see on the streets, including an assassination attempt using a rocket-propelled grenade. But insider trading is just as bad and dangerous. In fact, sometimes, it’s even worse.

The responsibility of going after insider traders rests with corporate regulators, in our case, the Securities and Exchange Commission, currently led by corporate lawyer Francis Lim.

Now, the Lim-led SEC has taken on a tough battle against insider trading, filing a complaint against Forbes-listed billionaire Manuel B. Villar Jr. and his family, an allegation that the tycoon vehemently denied.

The courts will decide on this. For me, however, this is really so much more than just being about one businessman or one company.

The way I look at this is that the SEC – at last, one hopes – is finally taking insider trading seriously. Of course, only the courts can decide on what really happened in the case of Villar Land Holdings Corp.

But it is a big and bold step when our regulators start looking into possible insider trading cases. This sends a strong signal to listed companies and their shareholders, some of whom have been getting away with stealing people’s money.

We all know that in the history of the Philippine stock market, only a handful of insider trading incidents have actually been flagged and investigated.

And yet, for many years now, the grapevine has been abuzz with all sorts of talks of these rule breakers and secret traders.

One does not have to be a market kibitzer to see that the share prices of many listed companies move up unusually high before a big event or major development, without them disclosing any information. But insiders know, and they use such knowledge to either make more profits or cut their losses.

Even a highly regarded sprawling conglomerate, supposedly one that practices high standards of good corporate governance, is rumored to have found itself at the center of insider trading.

This was allegedly committed by a C-level executive some years back, leading to the executive’s resignation.

There are many other wild talks about insider trading in the Philippines but we rarely see the SEC actually go after stock market manipulators, leaving small investors, who end up losing their hard-earned money, on the losing end.

The biggest stock market scandal

So far, at least in post-EDSA Philippines, there’s only one insider trading scandal that led to a conviction – and only of a stock broker, not even the supposed mastermind.

This was the Philippines’ biggest stock market scandal, and among the reasons for Joseph Estrada’s downfall, which involved his crony Dante Tan and gaming company BW Resources. The chaos erupted in 1999 and nearly caused the collapse of the market.

BW’s stock price shot up more than 5,200 percent, from P2 to P107 per share over an eight-month period, with no public explanation, before eventually crashing.

Based on reports, only a local stockbroker was convicted for illegal trades linked to the scandal and sentenced to 14 years in prison. According to an SEC source, the case against Tan is pending with the Court of Appeals after a local court earlier granted his demurrer to evidence – basically a challenge to the evidence presented.

Against this backdrop, the SEC must strengthen the fight against insider trading.

I hope the Lim-led SEC will pursue more cases against this age-old shady practice because it does not only give unfair advantage to a few shareholders. It also kills trust in markets.

When investors believe the game is rigged, they naturally pull out and liquidity dries up. Perhaps, this is what’s missing in our capital markets – trust and confidence that the playing field is level.

Long history

Insider trading is as old as time. It didn’t used to be illegal. It was just a trade secret of sorts. In 17th-century Amsterdam, for instance, traders profited from advance knowledge of ship arrivals and took advantage of commodity shortages. These people who knew such privileged information made fortunes. This is according to online publication Insider-Trading.org.

The 1929 Great Depression-era stock market crash, however, exposed a corrupt system. It turned out that bankers and executives quietly dumped their shares before the collapse, while clueless retail investors were left with huge losses, the publication also said. This led to the Securities Exchange Act of 1934, the first law prohibiting insider trading.

In the Philippines, there’s no lack of laws against insider trading.

The post-BW stock market scandal led to the passage of the Securities Regulation Code, which tightened the rules on stock market transactions.

Unfortunately, our SEC of decades past didn’t aggressively pursue such violations of the SRC. With Lim at the helm now, we hope to see an SEC that would really crack the whip on erring stock market players.

Lim, who previously served as president of the Shareholders Association of the Philippines, knows that insider trading hasn’t disappeared.

Players just learned to adapt. The mechanics now are actually subtle, making it difficult to prove and prosecute. Most of the time, there’s no paper trail – just whispers in bed, at the family dinner table or over a game of golf among buddies, and quiet acquisitions.

Sometimes, though, it isn’t quiet at all. The share prices just skyrocket without any explanation or warning.

But all too often, regulators just look the other way.

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