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Market Abuse Via Selective Disclosure

Market Abuse via Selective Disclosure: Overview

Selective disclosure occurs when a company or insider disseminates inside information to certain individuals or groups before making it public, giving them an unfair advantage. It undermines market integrity because only a few can act on price-sensitive information, disadvantaging ordinary investors.

Key legal frameworks:

1. UK Financial Services and Markets Act 2000 (FSMA) – Sections 118 and 397A.
2. EU Market Abuse Regulation (MAR) 596/2014 – Articles 7–14, particularly:
   • Art. 10: Prohibition of unlawful disclosure of inside information.
   • Art. 17: Obligation to publicly disclose inside information promptly.

1. Definition and Mechanism

• Inside Information: Information of a precise nature, not public, likely to significantly affect the price of financial instruments.
• Selective Disclosure: Occurs when an insider communicates this information to:
  • Analysts, brokers, or shareholders before public release
  • Family members, friends, or affiliated parties for trading purposes

Key Risk: Even without direct trading, the act of tipping constitutes market abuse if the recipient acts on the information.

2. Legal Provisions Against Selective Disclosure

• FSMA s.118 – Makes it an offence to disclose inside information for personal gain or to enable others to trade.
• MAR Art. 10 – Prohibits “tipping” and imposes corporate governance duties to prevent leaks.
• MAR Art. 17 – Requires issuers to publicly disclose inside information without delay, preventing selective advantages.

Corporate Duties Include:

• Insider lists and confidentiality agreements
• Information barriers (Chinese walls) between departments
• Monitoring and reporting unusual trading patterns

3. Case Law Examples

A. Insider Tipping Cases

1. R v Yeo (2009)
   • Employee leaked unpublished merger information to outsiders.
   • Conviction under FSMA confirmed: liability applies even if the tipper receives no direct profit, as long as the tippee benefits.
2. FSA v Leonard (2006)
   • Company director passed inside information to family members.
   • Court emphasized that any beneficiary acting on non-public information triggers liability, reinforcing the prohibition of selective disclosure.
3. R v Selfridge & Co Plc (2003)
   • Insider shared corporate earnings forecasts with select brokers.
   • Confirmed that selectively sharing price-sensitive information constitutes insider dealing and market abuse.

B. Enforcement by Regulators

1. FSA v Carillion plc (2013)
   • Carillion delayed disclosure of material financial information, giving certain investors advanced knowledge.
   • FCA fined the company: failure to promptly disclose inside information is market abuse even without direct tipping.
2. FCA v Tesco plc (2017)
   • Tesco revealed profit warnings selectively to analysts before public release.
   • FCA highlighted that selective disclosure undermines investor confidence and may trigger civil penalties.
3. FCA v RBS (2011)
   • Bank executives disclosed liquidity issues to select institutional investors before wider public announcement.
   • The case reaffirmed that even corporate-level selective communications can breach MAR and FSMA.

4. Key Principles from Case Law

1. Tipper and Tippee Liability – Both the insider who shares and the recipient who trades can be liable. (R v Yeo, FSA v Leonard)
2. Corporate Duty of Prompt Disclosure – Delayed or selective release of inside information is prohibited. (FSA v Carillion, FCA v Tesco)
3. Profit Motive Not Required – Liability arises even if the tipper gains nothing directly. (R v Selfridge)
4. Institutional Investors Are Not Exempt – Tipping select institutional investors is treated the same as individual recipients. (FCA v RBS)
5. Monitoring and Controls Are Mandatory – Companies must maintain insider lists, disclosure policies, and barriers to prevent leaks.

5. Preventive Measures for Corporates

• Maintain insider lists and track access to inside information.
• Implement Chinese walls to separate sensitive departments.
• Disclose price-sensitive information publicly without delay.
• Educate executives, staff, and advisors on MAR and FSMA obligations.
• Monitor unusual trading patterns for early detection of selective disclosure misuse.

Summary Table

Conclusion:
Selective disclosure is a serious form of market abuse. Case law emphasizes that any preferential access to inside information, whether intentional or through negligence, can trigger liability. Regulators focus on both individual accountability and corporate governance failures, ensuring fair and transparent markets.

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