Andy (not real name) is the Chief Financial Officer (CFO) of Company X, which is listed on the Singapore Exchange.
An hour ago, at a senior management meeting, he found out that one of Company X’s largest customers was facing financial difficulties and it had recently submitted its winding up application to the Court. In addition, it would not be making any purchases from Company X anytime soon. This was followed by updates from the Regional Sales Director that other major customers might also be reducing their purchases for various reasons.
Given the developments, Company X’s sales over the next few quarters would be adversely affected. The share price of Company X would also be expected to take a dip.
As Andy owned a large number of Company X’s shares (from prior employee stock option schemes), he was painfully aware of the heavy losses he would incur once the news hit the streets. He started to contemplate selling his shares early to avoid the potential loss.
On the other hand, Andy was aware that being the CFO, he had been the privileged recipient of confidential information that would likely have a material effect on the share prices of Company X, if it was to be made public. He was well aware that under such circumstances, he was prohibited from trading in Company X’s shares by the Securities and Futures Act (SFA).
As Andy scrolled over his mobile phone directory for his broker’s number, Andy considered the two options available to him:
1) Should he call his broker to give the instruction to sell his shares; or
2) Should he put down his phone and let things run their own course?
The first option would benefit him more financially than the second option. Besides, he self-rationalised that he would unlikely be discovered, since this is just a phone call between himself and his broker who would not ask questions on why he was making the trade. However, he would be breaching the SFA and this would jeopardise his long term career.
Eventually, Andy decided on the first option and was subsequently caught for insider trading. Besides being imposed a civil penalty by the Monetary Authority of Singapore, his employment was also terminated by Company X. Further, his membership as a Chartered Accountant of Singapore was terminated by the Institute.
The fundamental ethical principle of integrity in paragraph 110.1 of the ISCA Code of Professional Conduct and Ethics (ISCA Code) imposes an obligation on all professional accountants to be straightforward and honest in all professional and business relationships.
In addition, the principle of confidentiality in paragraph 140.1 of the ISCA Code prohibits ISCA Members from using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties.
The principle of professional behaviour in paragraph 150.1 of the ISCA Code also requires ISCA Members to comply with relevant laws and regulations and not perform any action that would discredit the accounting profession.
It is clear that Andy had breached the fundamental ethical principles of integrity, confidentiality and professional behaviour.
ISCA Members should also take note that section 218(2) of the SFA prohibits a connected person (e.g. a senior officer like Andy) from trading in the securities of the company, when he/she possesses not generally available information concerning the company that would have a material effect on price or value of those securities in the company if it were available to the general public.
We also wish to highlight that as a connected person, Andy is prohibited by section 218(3) of the SFA from communicating the said information to another person if he knows or ought reasonably to know that the other person would trade directly or indirectly in the securities of the company.
The fundamental ethical principle of confidentiality in the ISCA Code similarly prohibits unauthorised disclosure of such information to persons outside the employing organisation unless there is a legal or professional right or duty to disclose.