Legal Eye: The price for playing with inside information

Inside information
Publicly-listed companies tend to generate a considerable amount of news-worthy information. Just take a quick look at the business information side-columns of the WBJ.

Insider trading rules do not apply to these side-columns or other public information. Rather, they refer to that moment before information about a public company, its financial instruments (such as stock) or the sale or purchase of these instruments is publicized. Inside information is non-public information that could have a significant effect on the price of financial instruments by influencing your investment decisions and relates to a specific incident that has happened or is likely to happen.

For example, if a publicly-listed company earns a record profit, this news could cause its stock price to increase. Until this information is publicized, those in the know are holding inside information.

Insiders
The Act on Trading in Financial Instruments casts a wide net when describing persons who could be holding inside information. Company insiders, including officers and directors, stockholders, officers of parent companies or subsidiaries, certified public accountants and expert consultants, are all potential holders of public information. As many could qualify as potential insiders, companies must maintain a list of persons with access to inside information.

In addition, brokers and dealers and anyone who, illegally or legally, learns of inside information, are also classified as potential insiders.

If you possess inside information, you cannot use it, disclose it to others, or make recommendations about the purchase or sale of stock.

Improper disclosure
Disclosure is more than an exchange of briefcases in a dark alley by shady characters. Disclosures may also occur by allowing or facilitating access to inside information. Of course, required reporting to public authorities is permissible. Further, a "doing my job" exemption applies: You may disclose inside information if normal corporate procedures so require and the recipient has been instructed about the proper precautions.

Illegal use
Beyond the loose-lips ban is the more serious issue of using inside information to buy, sell or take other actions with respect to financial instruments. Again, several exceptions exist. Most importantly, you are allowed to continue with an existing transaction (evidenced by a contract with an earlier date certified by a notary public).

During the preparation of a company's financial reports, company insiders may not buy or sell stock. These black-out periods range from up to two months (before filing the annual financial report) to two weeks (quarterly financial report).

Reporting
As an extra measure of caution, officers and directors must file reports about any transactions involving their company's financial instruments if they, their family or a closely-held business or business in which they are an officer or director conducted those transactions.

Penalties
Given the enormous potential for profiting from inside information, the penalties are severe. Illegal disclosure is punishable by a fine of up to zł.2 million or three years imprisonment. For illegal use, a fine of up to zł.5 million and/or three months to five years imprisonment may be imposed. The length of the prison term increases to six months to eight years if a company insider makes illegal use of inside information.