The Dinner Conversation and the Hedge Fund's Sell Order
You are a Type 2 sales representative covering hedge funds. On Tuesday evening a former colleague now in your firm's corporate finance team, who is working on a rights issue for a listed issuer, tells you over dinner: 'Don't touch Hing Wat Holdings - the interim numbers coming Monday are 35% below consensus and the profit warning goes out Friday night.' Your firm is not on the Hing Wat announcement, but your corporate finance colleague is.
On Wednesday morning your client, Ms Chan, a portfolio manager at a hedge fund, calls and instructs you to sell her fund's entire 8 million shares of Hing Wat 'at best, before the market turns'. She gives no reason and does not mention any news. You personally hold 20,000 Hing Wat shares in your staff account. Your brother-in-law also holds the stock and asks you at lunch how it looks.
1. Classify the information and explain your obligations.
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Classification. The information is specific (interim numbers 35% below consensus), concerns an identified issuer, is not generally available, and would be likely to materially affect the price when announced. It is inside information under Part XIII of the SFO. You received it from a person connected with the corporation - your firm's corporate finance team is advising on the rights issue - and you know the source. You are an insider from the moment you heard it.
Obligations:
- Do not deal in Hing Wat securities, for any account, including your own.
- Do not counsel or procure anyone else to deal.
- Do not disclose the information to anyone - clients, colleagues outside the deal team, family. Tipping is itself insider dealing under the SFO.
- Report immediately to Compliance. The firm should place Hing Wat on the restricted list and consider a staff-account blackout.
- Do not confront the corporate finance colleague yourself and do not discuss it further with anyone. The report goes to Compliance, who will handle the wall-crossing and any notification.
Why it matters. Insider dealing carries criminal and civil exposure under the SFO, and the SFC also pursues firms for inadequate Chinese walls and supervision. Your firm's own policies almost certainly prohibit exactly this conversation.
2. Can you execute Ms Chan's sell order? Explain how the firm should handle it.
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No - you cannot execute it yourself.
- Executing a sell order is dealing in securities. Doing so while in possession of inside information is insider dealing, even if the client is the one who decided to sell and even if her reasons are entirely her own. Your knowledge taints the execution.
- She has said nothing to suggest she knows the information, so there is no reason to suspect her. The problem is your side of the trade, not hers.
What to do:
- Do not tell her why, and do not hint. You cannot disclose the information to her - that would be tipping.
- Escalate to Compliance immediately, before the order is worked. The firm may be able to have the order handled by a desk walled off from the information, under documented Chinese wall procedures, provided the information is not passed across and that desk would have executed the order anyway. That is a Compliance decision, not yours.
- Do not simply refuse and leave the instruction in limbo; the firm must respond to her promptly, even if the response is that it cannot execute at present.
- Record the call, your escalation and the timeline.
- If the firm cannot execute, tell her only that it is unable to handle the order at present, without explaining why, and refer her to Compliance for any explanation they are able to give.
Do not: route it to a colleague with a wink, execute it in small pieces, or 'just this once' treat it as a pure agency order. Those are the facts that appear in enforcement notices.
3. What must you do about your own holding and about your brother-in-law's question?
Read the worked answer
- Your 20,000 shares. You are an insider. You must not sell and you must not buy. Report the holding to Compliance and ask for it to be placed under a dealing restriction or blackout. Selling now would be a straightforward insider dealing case, and the SFC looks closely at staff accounts.
- Your brother-in-law. His question is an invitation to tip. You must not tell him, hint, or advise him to sell or hold. Tipping is a separate offence from dealing and covers passing information to another person knowing, or having reasonable cause to believe, that they will deal. Even 'I'd stay away' is a tip.
- Deflect and move on. 'I can't discuss individual stocks' is sufficient. Do not repeat the dinner conversation to anyone except Compliance.
- The colleague. His disclosure may itself be a tip; report it. Compliance will decide whether to restrict him too. Do not warn him - a warning can itself be a leak.
- After the announcement. Once the information is public the restriction lifts, subject to the firm's policies and any lock-up.
The governing idea: the prohibition attaches to the information, not to the account or the relationship. It follows you into your personal account, your family, and every order you touch.