Unpublished price sensitive information and proof of trade motivation defeated insider-trading penalty claims

Trial balances and related financial data not in the public domain were treated as unpublished price sensitive information because they related directly to the company's financial performance and were known to the executive chairman before disclosure. However, insider-trading liability also required cogent proof that the chairman communicated that information to the wife and brother and that their trades were based on it; such direct or circumstantial evidence was absent, and their small purchases were found inconsistent with the allegation. Non-supply of the full investigation report did not breach natural justice where the findings were communicated, and the later date finding for UPSI was based on the record. The penalty order was not sustained.

---

---

Issues: (i) Whether the trial balances and related financial information available within the company constituted unpublished price sensitive information and whether the executive chairman was in possession of it; (ii) Whether there was sufficient evidence to prove that the executive chairman had communicated such information to the wife and brother, and that their trades were based on it; (iii) Whether non-supply of the investigation report and the alleged shift in the date of UPSI amounted to violation of natural justice.

Issue (i): Whether the trial balances and related financial information available within the company constituted unpublished price sensitive information and whether the executive chairman was in possession of it.

Analysis: The definition of price sensitive information under the insider trading regulations is wide and includes periodical financial results. Trial balances received from various units and under consolidation within the company were not in the public domain and related directly to the financial performance of the company. The closure of the trading window was a relevant circumstance, but the conclusion rested on the material showing that the financial information had reached the company and was known to the executive chairman before final disclosure.

Conclusion: The information constituted unpublished price sensitive information and the executive chairman was in possession of it.

Issue (ii): Whether there was sufficient evidence to prove that the executive chairman had communicated such information to the wife and brother, and that their trades were based on it.

Analysis: A charge of insider trading requires proof, on a higher degree of preponderance of probabilities, that the trades were motivated by the unpublished price sensitive information. The record did not contain direct or circumstantial evidence showing communication of the information to the other two appellants or showing that their purchases were based on it. Their trading pattern and the small quantities purchased were treated as inconsistent with the alleged misuse of insider information.

Conclusion: The communication of unpublished price sensitive information and the alleged insider-trading basis for their trades were not proved.

Issue (iii): Whether non-supply of the investigation report and the alleged shift in the date of UPSI amounted to violation of natural justice.

Analysis: The regulations required communication of the findings of the investigation report, not the entire report, and the findings were supplied. The later finding on the date from which UPSI existed was based on the record and did not amount to making out a new case. No procedural prejudice was shown.

Conclusion: No violation of natural justice was made out.

Final Conclusion: The penalty order could not be sustained against any of the appellants, and the appeals succeeded.

Ratio Decidendi: For insider-trading liability, the price-sensitive information must be shown to be unpublished and in the insider's possession, and the burden remains to establish, on cogent material, that the impugned trades were actually made on the basis of that information; absent such proof, penalty cannot be sustained.

---