How to tell if you're insider dealing

Insider trading is straightforward, surely? As defined by the FSA, it amounts to -

...when an insider deals, or tries to deal, on the basis of inside information. Improper

disclosure and misuse of information are kinds of insider dealing.

But if it's so simple, how come even old hands like Philippe Jabre have been fined for it? And why do senior City figureslike Martyn Dodgson, a managing director in Deutsche Bank, Clive Roberts, the head of European equities sales and trading at brokerage Exane SA, now stand accused of insider dealing too?

Deliberate or accidental?

It's too early to say precisely what lies behind today's arrests, but the fact that the FSA has been investigating those involved for two years and that they're allegedly part of a 'sophisticated and long-running insider dealing ring,' suggests the regulator thinks this is more than a mere error of judgement.

However, regulatory lawyers say errors of judgement do happen, simply because the broader charge of 'market abuse' (which includes passing on inside information to someone else) is fairly complex.

"There are lots of different kinds of market abuse," says Philip Morgan at law firm K&L Gates. "The real issue is often what inside information amounts to - people think in terms of 'market colour', or 'rumour', but there's a point at which it becomes apparent that the rumour is sourced from a reliable inside source. In that case, it becomes inside information."

Beware imprisonment

As Malcolm Calvert found out to his cost, a conviction of insider dealing can lead to a jail term of up to seven years.

Lawyers say claiming that you didn't know that you were insider dealing is usually no excuse, but that the FSA has shown leniency in the past.

Last year, for example, it simply 'censured' two Dresdner traders for abuse of privileged information, while noting that, 'Future offenders will be likely to face significantly more severe sanctions.'

The FSA's new ferociousness means banks are now likely to police employees' own account activities even more stringently than in the past. In the meantime, the regulator's Code of Conduct outlines what to avoid at all costs:

(1) dealing on the basis of inside information which is not trading information;

(2) front running/pre-positioning - that is, a transaction for a person's own benefit, on the basis of and ahead of an order which he is to carry out with or for another (in respect of which information concerning the order is inside information), which takes advantage of the anticipated impact of the order on the market price;

(3) in the context of a takeover, an offeror or potential offeror entering into a transaction in a qualifying investment, on the basis of inside information concerning the proposed bid, that provides merely an economic exposure to movements in the price of the target company's shares (for example, a spread bet on the target company's share price); and

(4) in the context of a takeover, a person who acts for the offeror or potential offeror dealing for his own benefit in a qualifying investment or related investments on the basis of information concerning the proposed bid which is inside information.