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By CPA Dr. Asenath Maobe

Until now, insider trading remains a topic many investors struggle to fully comprehend. They are uncertain of what it is, how it works, why it is such a big deal and how it is punished. In the USA, insider trading made headlines in 2003 following the infamous scandal involving Martha Stewart /Imclone, which sent her to federal prison. In Kenya, with recent news headlines, articles, and documentaries, one would be forgiven to think that people truly understand that insider trading is illegal. For the love of money, and the desire to make more of it, some investors throw away any ounce of consciousness and ignore the rules and regulations ordinarily designed to protect and ensure fair market play for all investors.

Indeed, insider trading, bring about negative effects on the debt market, and investor confidence. It hurts economic development because it reduces returns for the investors who do not have access to the capital market’ inside information. Quite unbelievably, insider trading was
not considered a crime at the advent of the 20th century. Around that time, the supreme court in the USA called it a ‘perk’ for being an executive. However, after the excesses of the 1920s, and a general public demand, insider trading was considered a punishable crime.

Insider Trading Defined

Insider trading is a punishable crime. It occurs when someone who has a fiduciary duty to others; persons, corporations and institutions makes an investment decision that is based on the inside information they have owing to their fiduciary role. The information that is uniquely available to them allows them to make financial gains or avoid losses. In the case of Martha Stewart, she avoided losses.

In other instances, insider trading can arise and is purely based on crime. This is where, for example an organized team of criminals can infiltrate an organization’ server and gain access to inside information of the enterprise. This information is then used for financial exploitation. This scenario
is not necessarily based on fiduciary relationships.

What merits as punishable insider trading and what does not?

Getting all criminal activities that qualify as insider trading is rather a tricky affair. There are aspects to be considered by the Capital Markets Authority before persecuting for insider trading. One of the main issues to consider is proving that the defendant had a fiduciary duty to the company or they did intend to make personal gains from buying or selling shares based upon insider information. Here are a few of the case laws involving insider trading:

The Test of Fiduciary Duty/Case Laws

Case 1. Supreme Courts USA Vs. O’ Hagan Ruling 1988 James O’ Hagan was a partner in the law firm Dorsey & Whitney which had retained by Grand Metropolitan a corporation headquartered in London, which was planning on taking over Pillsbury Company in Minneapolis. O’ Hagan was not part of the takeover transaction deal but overheard the takeover plans over a discussion at lunch. He began purchasing stocks of Pillsbury Company at around $39 per share in August, 1988, by the end of September he owned approximately 5,000 shares of Pillsbury and 2500 options far exceeding any other individual investor. When Grand Metropolitan announced the takeover in October, same year. O’ Hagan sold his stocks at a profit of more than $ 4.3 million, when the share rose to $60.

Opinion of the Court

The courts found out O’Hagan was liable under Rule 10 (b) for misappropriating insider information. The court remanded the case at the court of Appeal for further proceedings. The court did not find O’Hagan in direct violation of SEC Rules, given that he was not directly involved in the transaction in line with the classical doctrines theory, the Supreme Court adopted an additional doctrine known as the misappropriation theory, set out by Warren Burger the Chief Justice of the USA then, which found him guilty.

Case 2.

In this case, Barry Switzer, a then famous football coach in 1981 was prosecuted by SEC. At a track, Barry overheard executives discuss liquidating Phoenix Resources and Oil Company. He and his friends purchased the stocks of Phoenix at $42 and later sold them at $59 making around $98,000 in that process. The charges labelled against Barry were later dismissed by a federal judge for lack of evidence. In this case, it seemed that when it comes to insider trading, the distinction between criminal and lucky, remains largely blurred.

Kenyan Cases

Case 3.

Kenol Insider Trading

CMA reveals phone chats in Kenol insider trading probe. CMA suspects that an investment market trader recommended to Kestrel clients to buy Kenol Kobil shares ahead of the takeover by the French firm Rubis Energy. The authority reveals that this incidence is likely to yield Kshs. 500,000 as profits arising from the inside information shared among the executives. The CMA body used mobile forensic technology to acquire the data shared, the use of this technology to access the private chats relating to insider trading is one of the firsts. It is normally used in the fight against drug trafficking and to counter terrorism activities. Its use therefore signals a smart move on the war against insider trading.

Case 4.

In 2005, KCB and Uchumi

Terrence Davidson the KCB CEO was accused of insider trading. KCB were the bankers of Uchumi, the KCB CEO acquired 664,899 shares on December, 2, 2005 and sold 300,000 on May, 9th 2006 based on insider information obtained from his connections with Uchumi’s management. The courts found him not guilty, given that there was a memo already in the public, concerning Uchumi’s deteriorating financial woes.

In 2006, the head of buying and merchandise of Uchumi attended a board meeting by invite whose agenda was to reengineer Uchumi to profitability. The Head, who held 111,400 shares of Uchumi sold them off, he was not found guilty given that the retail chains supermarket’ ill financial performance was public information by then.

Case 5

In 2016/2017, a Commercial Bank of Africa executive was fined by CMA Kshs 166.9 Million for engaging in insider trading during the periods 2016/17. The CMA also referred the officer for criminal investigations by the Director of Public Prosecution. The officer was also disqualified from holding office of any public company for 10 years. This is because the officer, had private information that he used to front run the market and made dual trades thus profiting ahead of the other investors. The penalty he was accorded was twice the profits he made while trading as a broker in
clients’ accounts in bond transactions.

companies should put in place ‘hold periods’ when an officer cannot purchase or sell securities especially around earning times of the corporation. those corporation officers buying securities can clear with the company secretary/ compliance officers or the internal auditor to clear their purchases.

Penalties for Insider Trading

In the CMA Act 485A Section 32E of the Act (GoK, 2000) proposes fines for first and second time offenders of insider trading the penalties and disgorgement is as follows:

A fine not exceeding Kshs. 2.5 million or 2 years in jail and payment of the amounts gained or losses avoided by the first time individuals involved.

To the first time company offenders, a fine of up to Kshs. 5 million and payment of monies gained or losses avoided. For subsequent individual offenders, a fine not exceeding Kshs. 5 million or imprisonment of 7 years and payment of double the gains made or losses avoided. For a subsequent company offender, a fine not exceeding Kshs. 10 million and payment of double the gains made or losses avoided.

In a case where an individual has inside information that is likely to influence the
securities prices, the individual is debarred from dealing with those securities or causing another person to deal in those securities for the next 6 months according to Section 33 of CMA. These rules and regulations are aimed at stream lining the anomalies that affect the financial markets as a result of insider trading.

Protection from Insider Trading

Individual, corporations and institutional investors are supposed to be on the look out to protect themselves against the problems of insider trading. Some of the ways of safeguard include:

Understanding what entails insider trading and identifying the information one is receiving that is likely to be a breach of fiduciary duty.

• Companies should put in place ‘hold periods’ when an officer cannot purchase or sell securities especially around earning times of the corporation.

• Those Corporation officers buying securities can clear with the company secretary/ compliance officers or the internal auditor to clear their purchases.

• Initiation of education programs to create awareness and learning about insider trading

• Internal organizational policies and guidelines on insider trading

• Individuals/companies to report to the right authorities if they are in possession of information they consider to be insider information.


The journey towards understanding insider trading remains on course. In as much as successful prosecution of such cases remain few and spread out, the spirit to fight this vice in Kenya is evident especially in the recent past. The fight against insider trading is likely to yield greater benefits to our emerging capital market, as a result of increased investor confidence. We want to keep explaining and re-examining this conundrum of insider trading until the vice is completely vanquished and the capital market in Kenya can experience a higher level of operational efficiency.


Government of Kenya (2000). The Capital

Markets Act, Laws of Kenya. Chapter 485,

Government Printers.

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