Insider Trading and the Legal Framework in Kenya: Reflections on the Capital Markets Tribunal’s Recent Decision

Did you know that insider trading can land you in prison and cost you millions of shillings? Consider the Martha Stewart case, one of the most high-profile insider trading scandals of the early 2000s in the United States. Stewart, a renowned businesswoman, sold her shares in ImClone Systems, a pharmaceutical company, after receiving a tip from her broker. The broker revealed that the company’s CEO had sold his shares ahead of a negative decision from the Food and Drug Administration regarding the company’s main drug. Stewart and her broker were convicted of insider trading, obstruction of justice, and making false statements, serving five months in prison and paying significant fines.

In Kenya, the law takes insider trading seriously, with strict penalties outlined in the Capital Markets Act (the “Act”) and enforced by the Capital Markets Authority (CMA). In a recent decision by the Capital Markets Tribunal (the “Tribunal”), the Tribunal ruled that secondary insiders bear a lesser degree of responsibility in a case of insider trading compared to primary insiders.  This article explores the concept of insider trading, its legal basis in Kenya, and the implications of the Tribunal’s decision for the regulation of capital markets.

What is Insider Trading?

Insider trading occurs when an individual with access to inside information about a company uses that information to gain an unfair advantage in the securities market. This can happen when such individuals buy or sell securities based on the undisclosed information or when they encourage or tip off another person to do so, even if that person is unaware that the information is confidential. Inside information means non-public information relating to securities or the issuer that would have a material effect on the price of the securities if it was made public. This includes details such as mergers, acquisitions, financial performance, or changes in leadership. Where the affected securities experience price fluctuations directly linked to the undisclosed information, such trades are illegal under section 32B of the Act.

While insider trading laws aim to prevent unfair market advantages, some trades do not qualify as insider trading. Transactions based on publicly available information, such as press releases or financial reports, do not violate the Act. Similarly, coincidental trades made without knowledge of inside information and pre-arranged trading plans established in good faith are also exempt. Financial professionals providing general advice or executing trades without using inside information also do not engage in insider trading.

While the Act does not explicitly differentiate between primary and secondary insiders, court rulings have provided clarity on these classifications. Primary insiders refer to individuals such as company executives, directors, lawyers, consultants, auditors and any key employees who have direct access to inside information. In contrast, secondary insiders include individuals such as friends, business partners, and family members of primary insiders who may receive this privileged information indirectly and attempt to use it for trading the respective securities.

Legal Framework on Insider Trading in Kenya

Kenya’s legal framework governing insider trading is primarily contained in the Act and the accompanying regulations. Key provisions of the Act include:

1. Section 32B– Creates the offence of insider trading.
2. Section 32C –Outlines what inside information is.
3. Section 32E– Outlines the penalties for insider trading. A first-time offender may be fined Kshs 2,500,000, sentenced to up to two years in prison, and required to pay an amount equivalent to the gains made or losses avoided through the trade. Companies are fined up to Kshs 5,000,000. For subsequent offences, the fine goes up to Kshs 5,000,000 for individuals and Kshs 10,000,000 for companies.
4. Section 11 (3) – Establishes the mandate of the CMA to investigate and trace any assets of individuals suspected of engaging in insider trading.
5. Section 13B– Grants the CMA power to impose administrative sanctions for breaches of the Act.

The Kenolkobil Case: A Landmark Tribunal Decision

In 2018, Kunal Bid received inside information from Mr. Andre Desimone, who was then the Chief Executive Officer of Kestrel Capital East Africa, a stockbroker on the Nairobi Stock Exchange. Mr. Desimone disclosed to Kunal, the Managing Director of Bid Securities and Bid Management Consultancy, also a stockbroking agency, that he was at the time involved in a “big KenolKobil deal”.

Mr Kunal then bought a total of 2, 895,100 Kenol Kobil shares on behalf of 4 related and associated persons between 15^th October 2018 and 23^rd October 2018. On the latter date, Rubis purchased 24.9% of shareholding of Kenol Kobil PLC from one major shareholder called Wells Petroleum Ltd then issued a notice a day later of the intention to bid for takeover of the remaining shares of Kenol Kobil PLC at Ksh. 23 /- per share. Mr Kunal’s trades made a profit from the increase in share value following the takeover.

On 20^th May 2019 the CMA issued a Notice to Show Cause against Mr. Kunal on alleged insider trading in relation to the 2018 takeover of Kenol Kobil by Rubis which was said to have been in violation of section 32B of the Act. At the close of the proceedings, the CMA found Mr Kunal to be liable for insider trading and issued sanctions ordering for the disgorgement of Kshs. 23,413,700.00 being gains earned by the trading accounts of the Mr Kunal’s related and associated persons during the takeover.

Mr. Kunal appealed to the Tribunal citing among others, lack of factual evidence against him and that the sanctions imposed by the CMA were in excess of its jurisdiction. The Tribunal ruled that the CMA was justified in imposing sanctions on the Appellant. In its decision, the Tribunal acknowledged that circumstantial evidence is allowed in law especially in cases where direct evidence is difficult to obtain as in cases such as insider trading.  The telephone call between Mr. Kunal and Mr Desimone disclosing Mr Desimone’s involvement in a Kenol Kobil deal was deemed to be sufficient evidence given Kestrel Capital’s close affinity to Kenol Kobil.

While relying on the landmark case of United States Securities and Exchange vs Ginsburg (2004), the Tribunal determined that the Appellant was a secondary insider and as such, had a lower level of responsibility in handling inside information compared to the primary insider Mr. Desimone. Similar to the Kunal case, Ginsburg had shared inside information with his family members who then traded on that information. The Tribunal held that penalties for insider trading should be proportionate to the degree of involvement, ensuring that secondary insiders face less severe sanctions than primary insiders who have direct access to and control over inside information. The Tribunal ordered that the sanctions of the CMA be varied to limit the disgorged amount to 50% of the gains made by the Appellant and the CMA to refund 50% of the disgorged amount to the Appellant.

Implications for Kenya’s Capital Markets

The Tribunal’s decision carries significant implications for the regulation of insider trading in Kenya. It reaffirms the CMA’s authority to impose sanctions on individuals who violate the provisions of the Act. Moreover, the ruling strengthens the use of circumstantial evidence in market abuse cases, including insider trading. Key factors such as the relationships between the parties involved and trading patterns observed before major corporate developments that could impact securities, may also be considered as evidence.

On the other hand, the leniency granted to secondary insiders raises concerns about potential misuse. The ruling could inadvertently encourage more cases of insider trading involving secondary insiders, given that they would receive reduced sanctions given their lack of direct access to or control over the inside information. While Mr. Kunal acted independently in executing trades for his related entities and associates, the prospect of lighter penalties for secondary insiders may create opportunities for collusion with primary insiders, further complicating efforts of the CMA to curb insider trading. The Tribunal’s decision to refund an individual found liable for insider trading further undermines investor confidence in the CMA’s regulatory enforcement powers.

Legal reforms to the Act could help address this issue by establishing clearer definitions of insiders, distinguishing between primary and secondary insiders, and outlining their respective responsibilities and penalties. In our considered view, the penalties for both categories should be nearly equal, if not the same, to prevent potential loopholes that could be exploited.

Conclusion.

The Tribunal’s ruling highlights both the strengths and gaps in Kenya’s insider trading laws. While it reinforces the CMA’s authority and the role of circumstantial evidence in enforcement, it also raises concerns about potential loopholes, particularly for sanctions against secondary insiders. To maintain market integrity, legal reforms should provide clearer definitions and balanced penalties. Ultimately, effective enforcement by the Tribunal is key to deterring insider trading and preserving investor confidence in Kenya’s capital markets.

Visit our LinkedIn page for more insights! https://www.linkedin.com/pulse/insider-trading-legal-framework-kenya-uyrlf