The trading floor of the Philippine Stock Exchange
SPECIAL REPORT: Insider trading still prevalent in Philippines
Iris Gonzales (The Philippine Star) - January 21, 2019 - 12:00am

(Part 1)

MANILA, Philippines — Behind every great fortune, lies a great crime, so said the French novelist Honore de Balzac. 

Could this be more pronounced in stock markets around the world where the most brilliant minds perpetrate the most sophisticated financial crimes?

Billions, the edge-of-your-seat show on Netflix which Wall Street is so obsessed about, says so. Billions exposes viewers to the genius and dirty tricks of hedge fund managers in trading their billions worth of portfolio as they skirt around financial regulators. 

It’s an accurate portrayal of financial crimes, but more importantly it provides a glimpse of how regulators are fighting insider trading.

The drama series is about the cat-and-mouse game between US Attorney Chuck Rhoades and hedge fund manager Bobby “Axe” Axelrod. Rhoades is after Axelrod who uses insider trading to grow his wealth. 

There was a part in the show when three different hedge funds that spun out of “Axe Capital” all made the same trade at the same time and made huge money. 
The funds illegally obtained information and the information may have come from Axe Capital. They traded because they had that information. The US Attorney tries to get to the bottom of the financial transaction. 

Now is this happening in real life? Are regulators really that capable in going after the crooks in the stock market? 

Spotlight on the Philippines?

Here at home, it’s worth taking a look at the fight against insider trading.

Not one person in the country has ever been convicted of insider trading.

Are Philippine corporate regulators falling behind the fight or is the justice system preventing them from winning against perpetrators of financial crimes?

Is the cat able to catch the mouse or is it a continuing cat and mouse game for the Securities and Exchange Commission (SEC) and insider traders in the Philippines?

Is it enough that listed companies are simply disclosing the acquisition of shares of their directors and officers? Could it be possible that they are actually getting away with insider trading? 

Such questions are in the minds of many.

Every day insider trading 

Recently, market observers have been talking about how some executives of a company accumulated shares last year ahead of a major deal involving a listed firm. Even the parent firm of the listed firm had started to accumulate shares prior to the deal. The company’s share price went up.

The appropriate disclosures have been made, but were those enough even if there was no prior disclosure of the deal?

“If they knew something, isn’t that insider trading?” said one investment banker. 

The banker pointed out Section 27.1 of the Securities Regulation Code: “Insider’s Duty to Disclose When Trading. It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public.”

In the drama series Billions, traders should be able to justify their transactions or play by providing details on the information they possess prior to acquiring or disposing a security.

What is insider trading?

In the simplest sense, insider trading is defined as the illegal practice of trading on the stock exchange to one’s own advantage while having access to confidential information. 

According to former SEC commissioner Raul Palabrica, the first time “insider trading” caught the public eye was in 1999.

In an article titled Insider Trading 101 published on Oct. 14, 2011, Palabrica said that in 1998, BW Gaming and Entertainment Corp., headed by businessman Dante Tan won the exclusive contract to operate a nationwide online bingo franchise and the Quick Pick-2 gambling game, which is similar to the illegal numbers game called jueteng

Palabrica said that when news came out that Philippine National Bank, then government-owned, lent P600 million to BW and that Macau gambling magnate Stanley Ho would reportedly invest in the company, BW’s stock price rose to P145 from P0.80 or a whopping 18,025 percent increase.

But the hyped-up entry of Ho into BW did not materialize and BW’s stock price plummeted and scores of stockbrokers lost money.

“The meltdown that almost caused the collapse of the Philippine stock market spawned charges of insider trading and stock manipulation against BW officials and stockbrokers,” Palabrica said.

Thus, he said, the Senate probe into the scandal resulted in the enactment of the Securities Regulation Code (Republic Act 8799), which tightened the rules on capital market operation, including the prohibition of, among others, insider trading.

However, after 18 years since the law was enacted in 2000, not a single person has been convicted on insider trading.

In contrast, in the US, many have been convicted for charges related to insider trading — from world famous homemaker Martha Stewart to Enron Corp CEO Jeff Skilling. 

According to CNN, Stewart was convicted in 2004 of conspiracy and obstruction of justice related to an investigation into her selling of shares of drugmaker ImClone Systems. She was investigated for using inside information of an FDA ruling against a key ImClone drug to sell shares ahead of the negative news and made false statements about it when asked. She served a five-month prison sentence.

Skilling, meanwhile, was charged with insider trading, among other issues because he sold his shares in the company despite knowing that it was in a far different shape than the public was led to believe, according to CNN.

He was also found guilty of securities fraud and conspiracy, and in 2006 was sentenced to 24 years in prison.

Palabrica said the SRC of 2000 makes it unlawful for an “insider” to communicate material nonpublic information about a company and its securities to any person whom the passer of the information knows or has reason to believe will likely buy or sell those stocks on the basis of such information.

Furthermore, he said, the law requires that material information should be disclosed or made available to all investors at the same time, and not just to a select few who happen to have good relations with the bearer of the information.

They can all then make an informed judgment on their investments depending on their appreciation of the situation, Palabrica said.

How to do insider trading

Palabrica said there are different ways of doing insider trading.

These include creating dummy corporations under whose names stocks will be sold or purchased, making arrangements with preferred stockbrokers to buy or sell stocks on pre-determined days at different prices and volumes, and engaging in media manipulation to put the company in play in a good light to make its stock price go up, or to denigrate it to depress its stock price.

“The idea is to give the impression that the stock transactions involved in the insider trading activity are normal or regular so as not to invite the regulators’ attention to the behind-the-scenes manipulations and to lull investors into becoming unwitting victims of the scheme,” Palabrica said.


But despite the law, detecting insider trading is challenging.

Palabrica said it is like solving a jigsaw puzzle. 

“Unless a co-conspirator spills the beans or the footprints left behind are too clear to be ignored, proving insider trading is like solving a jigsaw puzzle. Separate acts performed by different parties in various periods have to be reconstructed and evaluated to establish the commission of the prohibited act,” he said.

Palabrica said that if caught, the usual alibi given by the insider trader is that he made the transactions not on the basis of material nonpublic information, but on the basis of information available in official company filings, the media, and other public records.

For now, indeed, Palabrica said insider trading is a white-collar crime that remains untested in Philippine courts.

(PART II: What the SEC and the PSE are doing to fight insider trading)

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