The Family Dinner Leak
A Karachi-listed pharmaceutical company, Hilal Pharma Limited, held a board meeting on 12 March. The CFO presented draft annual results showing profit after tax down 68% year on year because the company's largest institutional tender, worth PKR 1.1 billion, had been cancelled. The board agreed to disclose the results on 25 March after auditor sign-off. On 14 March, the director of operations mentioned the results at a family dinner. On 15–17 March, his brother-in-law, who had never traded equities before, sold 120,000 Hilal Pharma shares through a Lahore brokerage, avoiding a loss of about PKR 4.8 million after the announcement. The brokerage's compliance officer noticed the new account, the concentrated sale and the family link during routine surveillance. The director says he did not tell his brother-in-law to trade.
1. Was the information inside information, and who may have breached the Securities Act 2015 prohibition? Set out the elements you would test.
Read the worked answer
The information is likely inside information because it was specific, material and not generally available. A 68% profit decline and the loss of a PKR 1.1 billion tender would plainly affect an investor's decision, and the board had deliberately delayed disclosure until 25 March. The fact that the figures were still draft does not make them immaterial if they were sufficiently precise.
The prohibition catches dealing, procuring dealing and communicating inside information. The director possessed the information by virtue of his board role. His disclosure at a family dinner may be tipping even without an explicit instruction to trade; the test is whether he communicated the information knowing, or having reasonable cause to believe, that the recipient would deal. The brother-in-law's sale is the dealing. His lack of trading history, the timing and the size are circumstantial evidence of knowledge, not proof on their own. Investigators would test call records, messages, meeting notes and the account-opening file.
Intent is not the only issue. The question is whether the information was used, or whether dealing was procured or information communicated improperly. The broker's own duties are separate: it must not facilitate suspicious dealing and must escalate.
2. What should the compliance officer do, and what should the broker avoid doing?
Read the worked answer
The compliance officer should immediately escalate this as a potential market-abuse case to the firm's compliance committee and money-laundering reporting officer. The broker should preserve all records: account-opening documents, order tickets, bank statements, call recordings, emails, IP logs and the identity of the person who placed the orders. It should verify whether the brother-in-law is a politically exposed person or a connected person and whether the account was introduced by the director.
The broker should report to the SECP and PSX as required by the applicable reporting framework, and should cooperate with any investigation. It should not tip off the director or the client, and it should not quietly close the account or reverse the trades to avoid scrutiny. It should consider whether to restrict further dealing pending instructions, but it should not destroy or alter records.
The compliance officer should also review whether the firm's controls failed: was the family relationship disclosed at account opening? Did surveillance flag the timing against the issuer's restricted list? The answer should separate the client's conduct from the firm's supervisory failure.
3. If you advised the board, what disclosure and control changes would you recommend?
Read the worked answer
The board should disclose the information to PSX without delay if it is no longer able to keep it confidential. Selective disclosure at a family dinner undermines the basis for delaying the announcement. The board should also review the 12–25 March trading window and consider whether other connected persons dealt.
Control changes should include a formal insider list for sensitive announcements, pre-clearance for directors and connected persons, a closed trading window before results, and a restricted list maintained by compliance. The board should require directors to disclose family shareholdings and outside brokerage accounts, and should train directors on tipping liability. The company secretary should keep a record of who knew what and when.
The reasoning is that timely disclosure and trading restrictions reduce the opportunity for leakage, but they do not cure a leak already suspected. The board should cooperate with SECP and PSX rather than conduct a purely internal inquiry.