20 September 2021
In Suruhanjaya Sekuriti Malaysia v Sreesanthan Eliathamby [2021] 7 CLJ 913, the High Court clarified that the insider trading prohibitions under section 89E of the Securities Industry Act 1983 (which have been re-enacted in substantially similar form in the Capital Markets and Services Act 2007) do not create strict liability offences. Mens rea still must be proven and is established when the accused or defendant knew or ought reasonably to have known that the information in his possession was not generally available. However, intent to use the inside information need not be proven.
The case involved a civil action brought by the plaintiff, Suruhanjaya Sekuriti Malaysia, for civil remedies for insider trading against the defendant, Sreesanthan Eliathamby (“Sreesanthan”) — a lawyer.
The High Court found that Sreesanthan had breached section 89E(2)(a) by acquiring 600,000 shares in Worldwide Holdings Berhad (“WHB”), a listed subsidiary of Perbadanan Kemajuan Negeri Selangor (“PKNS”), in June and July 2006 while in possession of material non-public information.
The information in question was the proposed privatisation of WHB by PKNS (“Information”), which only became public knowledge in August 2006. Sreesanthan sold his WHB shares in September 2006 and recorded a gain.
The High Court Judge held, among others, as follows:
1. Sreesanthan came into possession of the Information during his interaction with personnel from CIMB Investment Bank Berhad (“CIMB”) in May and June 2006, when they sought advice from Sreesanthan on legal aspects of the proposed privatisation. While CIMB’s personnel testified that they had told Sreesanthan the identity of PKNS but could not recall whether the identity of WHB was revealed to him, the identity of WHB could have been easily deduced by Sreesanthan as PKNS only had one listed subsidiary. Further, Sreesanthan’s law firm (where he headed the corporate department) was subsequently engaged to prepare the documentation for the proposed privatisation, and lawyers in the firm (including Sreesanthan) knew that the target company was WHB. Therefore, at the time Sreesanthan acquired the WHB shares, he possessed the Information.
2. The Information was not generally available at the time Sreesanthan acquired the WHB shares. The earliest the Information became generally available was in August 2006 through an article in The Star, and further details only became generally available thereafter when the proposed privatisation was announced to Bursa Malaysia. Sreesanthan’s reliance on an investment research report published by CIMB Securities Sdn Bhd to argue that the Information had entered the public domain since April 2006 was rejected, since the report did not mention the proposed privatisation and in any event would typically have restricted circulation.
3. Any reasonable person in the position of Sreesanthan ought to have known that the Information communicated to him in contemplation of a corporate proposal that had not yet been announced would be information that was not generally available
4. The Information was material because if it was generally available, a reasonable person would expect it to have a material effect on the price or value of WHB shares. This was evidenced by the sharp increase in the price of WHB shares following the publication of article in The Star and thereafter the announcement to Bursa Malaysia. The applicable test is an objective test, and therefore Sreesanthan’s state of knowledge or belief regarding the materiality of the Information is irrelevant.
Sreesanthan was ordered to pay RM1,989,402 (being three times the difference between the price at which he acquired the shares and at which the shares would likely have been acquired had the Information been generally available), and a civil penalty of RM1,000,000. Sreesanthan was also barred from becoming a director of any public listed company for a period of 10 years. The High Court felt that the orders were justified as they were:
“necessary, in the interest of justice and in order to preserve and maintain confidence in the fairness and integrity of the securities markets, for financial services professionals (like the defendant) to be held to the highest standards of good conduct.”
The High Court’s interpretation of the mens rea requirement seeks to strike a balance, in that the accused or defendant must know or ought reasonably to have known that the information in his possession was not generally available but need not intend to use the inside information.
That said, the case underscores the need for caution when dealing with non-public material information, a message that should not go unheeded.
For further information, please contact:
Rabindra S. Nathan, Partner, Shearn Delamore & Co
rabindra@shearndelamore.com
