11-Fraudulent Behaviour

Fraudulent Behaviour

Learning Outcomes

  • Recognize legal controls over insider trading as per Company Act and Security Industry Act.

  • Understand legal control over money laundering.

  • Identify potential criminal activities in the operation, management, and winding up of companies.

  • Distinguish between fraudulent and wrongful trading.

Introduction

  • Prohibited market practices are governed by CA65, CMSA2007, and common law.

  • Securities Commission (SC) regulates the market to protect investors from fraudulent behavior ensuring market efficiency, fairness, and transparency.

  • Enforcement by SC deters misuse of confidential information by insiders (e.g., directors, officers).

  • Common market malpractices include insider trading, fraudulent trading, wrongful trading, and money laundering.

Insider Trading

Definition

  • Insider trading occurs when an insider uses non-public information to gain an advantage in trading securities.

Legal Provisions

  • Section 2 CMSA2007 defines ‘securities’ including shares, debentures, and bonds.

  • Insiders can also include individuals related to company officers, such as friends or family.

Insider Definition

  • Section 188 CMSA2007 identifies an insider as anyone possessing non-public information with knowledge of its confidentiality.

  • Material inside information can potentially influence the price of securities.

Committing Insider Trading

  • Offenses include:

    • Acquiring or disposing of securities based on inside information.

    • Communicating inside information to third parties.

    • Encouraging dealings based on inside information.

Prohibition of Insider Trading

Reasons

  • Fairness: Ensures equal access to information for all market participants.

  • Economic Efficiency: Protects market integrity and confidence.

  • Corporate Injury: Insider trading harms shareholders and market trust.

  • Fiduciary Duty: Obligation for insiders to refrain from profiting from privileged information.

Legal Consequences of Insider Trading

  • Criminal liability: Up to 5 years imprisonment and RM30,000 fine.

  • Civil liability: Victims can pursue litigation against insiders.

  • SC can also initiate civil actions with penalties up to RM1 million.

Fraudulent Trading

Definition

  • Fraudulent trading occurs when a company engages in business with intent to defraud creditors, as defined under Section 540(1) CA16.

Legal Accountability

  • Individuals knowingly participating in fraudulent trading may incur personal liability for debts with penalties of up to 10 years imprisonment.

Evidence Requirement

  • Must prove intent; dishonest intention is essential for proving fraudulent trading.

Wrongful Trading

Definition and Legal Framework

  • Addressed in Section 536(1) CA16; officers can be guilty if they show negligence in assessing the company’s ability to pay debts.

Penalties

  • Offenders may incur up to 5 years imprisonment or RM3 million fine.

  • Section 540(2) allows courts to hold individuals personally liable for debts under specific conditions.

Money Laundering

Definition

  • The process of making illicit money appear legitimate by disguising its source.

Related Crimes

  • Often linked to serious criminal activities such as drug trafficking and corruption.

Corruption & Bribery

Definition

  • Involves exchanging rewards for favorable treatment related to one's job.

Regulatory Body

  • The Malaysian Anti-Corruption Commission (MACC) established in January 2009 to combat corruption.

Functions of MACC

  • Investigates corruption offenses, examines public body practices, advises on reducing corruption, educates the public, and fosters support against corruption.

Types of Corruption Offenses

  • Soliciting/Receiving Gratification: Engaging in bribery through financial inducements.

  • Offering/Giving Gratification: Agents accepting or offering bribes related to duties.

  • Misleading Principal: Deceiving principals or using false documents.

  • Using Office for Gratification: Public officers abusing their position for personal gain.

Penalties for Corruption

  • Maximum imprisonment of 20 years and fines exceeding five times the value of the gratification involved.

Case Study Example

  • Aminah (cleaner) overheard information about Quikrise Bhd's business plans and informed her son, Ali.

    • Questions:a) Did Aminah or Ali commit insider trading?b) Did Jessie (personal secretary) commit any offences?