When does information become "inside information"?

For conduct which even on a conservative view probably occurs frequently, the offence of insider dealing contrary to 52(1) of the Criminal Justice Act 1993 is not regularly prosecuted. It is an infamously technical offence, with no fewer than eight further sections setting out the detailed definitions and matters to be proved (sections 53 to 60 inclusive). When a prosecution is brought for the offence, it is invariably brought by the Financial Conduct Authority, a prosecuting authority which is well known for its attention to technical detail and caution.  The FCA’s approach may be an indication of the complexity of the offence.

Having said that, the principal core conduct which the insider dealing offence criminalises is relatively easy to capture in everyday language: dealing in stocks and shares when you have inside information. This article focuses on the key ingredient of inside information and does not discuss the other requirements such as the nature of the dealing or the security dealt, nor the concept of “price sensitive information” (or, in the language of section 52, “securities which that are price-affected securities in relation to the information”). The issue under consideration is : can information which is not “inside information” become “inside information” in the hands of an insider?  The paradigm example for the purposes of this discussion is a series of pieces of information, some of which may be in the public domain, but none of which meet the definition of “inside information” individually.  Can they collectively amount to inside information for the purposes of the insider dealing offence?

Section 52 requires the prosecution to prove that a hypothetical defendant “has information as an insider”. Section 57 CJA 1993 (titled “Insiders”) provides as follows:

(1) For the purposes of this Part [of the CJA 1993], a person has information as an insider if and only if—

(a) it is, and he knows that it is, inside information, and

(b) he has it, and knows that he has it, from an inside source.

It is axiomatic that the prosecution must particularise the information which it says the defendant “has as an insider”; in most cases this tends to be some information about a future event such as an acquisition by or of a particular company, or the announcement of financial results (whether they be good or bad) or some other significant event in the life of the company. For the purposes of discussion it is assumed that the information particularised by the prosecution, comes to the hypothetical defendant from an inside source, thus satisfying the further requirements that s/he has it through (i) being a director, employee or shareholder of an issuer of securities, (ii) having access to the information by virtue of his/her employment, office or profession, or (iii) the direct or indirect source of his information is a person within one or other of those categories (section 57(2)).

The focus of whether the hypothetical defendant “has information as an insider” then becomes the nature of the information itself: is it “inside information” per section 57(1)(a)?  Again, for the purposes of this discussion the issue of the hypothetical defendant’s state of mind as to (i) the nature of the information, and (ii) its source, is put to one side, although it is worthwhile observing that the focus of the offence is dealing in securities whilst in possession of inside information: the prosecution does not have to prove a state of mind beyond the section 57(1) elements.  This is for good reason, namely, to prevent unfair advantage in the market: if you knowingly have inside information concerning a security then you cannot deal in any security the price of which is likely to be effected by that information.  Although the state of mind of the insider is relevant in that sense, it is irrelevant to the issue of whether the information itself amounts to inside information.

Section 56 CJA 1993 “Inside information” provides the following definition:

(1) For the purposes of this section and section 57, “inside information” means information which—

(a) relates to particular securities or to a particular issuer of securities or to particular issuers of securities and not to securities generally or to issuers of securities generally;

(b) is specific or precise;

(c) has not been made public; and

(d) if it were made public would be likely to have a significant effect on the price of any securities.

It follows that the four qualities of the information which the hypothetical defendant must be proved to have had as an insider can be paraphrased as being (a) it must relate to a specific security or issuer i.e. it is not general information in relation to a market or sector, (b) it must be specific or precise, (c) it has not been made public, and (d) it must be price sensitive.

There is no need for the prosecution to prove how the hypothetical defendant acquired the information, whether by source, time or quantity.  Those may all be questions of fact which go to the issue of whether s/he did have inside information as the prosecution alleges, but they are not ingredients of the offence.  Further, the prosecution does not have to prove in exactly what circumstances the hypothetical defendant came to have inside information, whether it came in one ‘packet’.  Nor does the prosecution have to prove that the alleged dealing was caused by the inside information; the embargo is on dealing when in possession of inside information, whether the dealing is triggered by it or not (subject to the section 53 defences not discussed here).

The question posed is this: does the prosecution have to prove that each single piece of information (which the hypothetical defendant “has”) satisfies the section 56 definition, or is it sufficient to say that the collection of information the hypothetical defendant has satisfied the definition?

Take a scenario in which the prosecution cannot prove a specific communication of the particularised inside information to the hypothetical defendant; can it prove that s/he did have inside information by way of a combination or amalgamation of non-“inside information”?

For example, the prosecution does not have in the hands of the hypothetical defendant an email, message or other document which discloses the fact that company A is about to acquire company B, but it can prove that s/he had a number of other pieces of information, none of which in isolation are sufficiently “specific or precise” to amount to inside information.  This situation is sometimes referred to as “jigsaw information”: the individual pieces of information do not reveal the overall picture (that company A is about to acquire company B) but put them together and the picture becomes clear.

There is no direct authority on the point.

In R v Staines v Morrissey [1997] 2 Cr.App.R. 426, a case decided in relation to section 1(7) of the Company Securities Insider Dealing) Act 1985 (the Act which pre-ceded the CJA 1993, and as was repealed by it),  dealt with the question of how far information had to go before it became ‘unpublished price sensitive information’, the equivalent of inside information under the CJA 1993.  The connected person told the appellants that he was working on an acquisition for one of his accounting clients and gave clues as to the identity of the acquisition target company without naming it.  This allowed the appellants to ‘piece together’ the jigsaw of information.  The appellants argued that the trial Judge ought to have acceded to a submission of no case to answer on the basis that the information provided was not ‘unpublished price sensitive information’.  Rejecting that submission, Lord Bingham CJ said (at 436E-F):

“The most obvious case of insider dealing plainly occurs where a connected person tells a friend that he is advising a client who is prepared to make a bid for the share capital of named Company B.  But there will doubtless occur less obvious cases where a connected person supplies a friend with information which enables the friend to identify Company B.  It all depends upon what is said and to whom.  Material which may be meaningless to a hearer ignorant of the operation of the securities market may be of great significance to a sophisticated city analyst.  Provided there is material fit for a jury to consider, it is very much a matter for the jury.”

The question is one of fact: what information did the defendant have, and does it satisfy the test of section 56 CJA 1993?  Whether the information can be sub-divided into individual “non-inside” components, the origin of which can be identified as being separate, does not mean the hypothetical defendant does not have inside information.

It would be perverse for a hypothetical defendant to be able to argue that s/he did not have inside information because although s/he had information that company A was about to acquire company B, s/he put together two distinct and separate pieces of information she had as insider, that (a) the Board Chairmen of both companies had had a confidential meeting, and (b) the she had overhead the head of the acquisitions department say that he was ‘working night and day on a big deal’.  Individually, pieces of information (a) and (b) may not satisfy the section 56 test: the meeting of the two Chairmen could be about anything and although activity in the acquisitions department may indicate a take-over, but it is not sufficiently “specific or precise” to identify the target.  Put together however, the information as a whole does satisfy the section 56 test.  It is a paradigm example of the unlawful use of information which the employee has come by only as a result of his / her employment.  The legislation is deliberately designed to capture such conduct and make it unlawful.

Similarly, the fact that the inside information is given context non-inside information is immaterial: it does not change the nature of the inside information. For example, if in addition to the two pieces of information (a) and (b) given in the example above, the hypothetical defendant knew from publicly available information that company A had a stated intention to grow its business through acquisitions, it may make the inside information more reliable / credible, but it does not enable him / her to argue that absent this context the information did not satisfy the requirements of section 56.

The question ultimately is one of fact, based on an assessment of the information the tribunal of fact is satisfied the hypothetical defendant had: does it satisfy the section 56 test? It is the wrong question to ask whether the individual elements of the information do or do not satisfy the test.  Information may be a single piece of data or it may be many hundreds of pieces of data; it is for the tribunal of fact to assess its nature as a whole, not item by item.

Similarly, information should not be confused with knowledge. Information is not a state of mind; the only issue concerning the hypothetical defendant’s state of mind is his / her knowledge that the information s/he had was inside information (s57(1)(a)), regardless of whether that inside information is an aggregation of individual pieces of information. Whether the hypothetical defendant reached conclusions based on the information or made deductions from it, is irrelevant to the question whether the information s/he had was inside information. It is however relevant to the question of whether s/he knew the information was inside information.  It is, for example, possible to conclude that the hypothetical defendant had inside information, but that s/he did not know that the information s/he had was inside information.

It follows that information which is not inside information in itself, may become inside information if, when combined with other non-inside information, it satisfies the requirements of section 56. Put another way, piece of information A may not be inside information, but pieces of information A + B + C are, together, inside information. Beware insiders who are good at jigsaws!