Citation: 18 Statute L. Rev. 150 1997

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Statute Law Review, Volume 18, Number 2, pp. 150-159, 1997

Zambia's Securities Act 1993 on

Trial: The Case of Insider Dealing

KENNETH K. MWENDA*

I. Introduction

There is a contemporary shift in the world political economy from state parti-cipation in major aspects of the national economy to attracting private capital.More particularly:

'Over the past few years, investor interest in the world's emerging marketshas expanded significantly. This interest has been fuelled by relatively highreturns recorded by emerging markets and by their perceived potential forlarge returns in the future."

As a corollary of this, where developing countries adopt IMF and World Bankproposals with respect to their economic reform this has led to the introductionof stock markets in those countries.2 In most of them, stock markets areexpected to facilitate privatization of state enterprises? It is against this back-ground that this article evaluates the efficacy of the provisions of the SecuritiesAct 1993 of Zambia which deal with the control of insider dealing on the LusakaStock Exchange.

II. The Law On Insider Dealing in Zambia

Between 1985 and 1994 the United Kingdom law governing insider dealing wasmainly found in the Company Securities (Insider Dealing) Act 1985.' On 1March 1994, this Act was repealed and replaced by Part V of the Criminal

LLB, BCL, Gr Dip, DM$, MBA, DBA, FCI, FRSA; Advocate of the High Court for Zambia; Lecturerin Law, University of Warwick; formerly Visiting Professor of Law University of Miskolc, Hungaryand Rhodes Scholar, University of Oxford.

'See M.T. Porter and S. Barney, 'Closed-end Emerging Country Funds Review,' in K.H. Park,A.W. Van Agtmael, The World's Emerging Stock Markets (Probus Publication, Chicago: 1993) p. 459.For example, in Zambia and in Kenya.

3 Ibid.' See also EEC Directive 88/627 OJ L 348/62 (1988).

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Justice Act 1994.5 By comparison, in Zambia the Securities Act 1993 purportsto address the law on insider dealing in a single statutory provision, s. 52. Thissection reads:

'(1) A person to whom this section applies who deals, or counsels or pro-cures another to deal, in securities of a company concerning which he hasany knowledge that-

(a) is not publicly available; and

(b) would, if it were publicly available, materially affect the price of thesecurities.

(2) This section applies to-(a) any director, officer or employee of thecompany concerned;

(b) any person associated in a professional capacity with that company;and

(c) any person who obtains such information from any of the persons men-tioned in paragraph (a) or (b).

(3) No dealing shall be void or voidable by reason only that it was enteredinto in contravention of this section.'

This provision covers two types of insider dealers: (1) primary insider dealers(paragraph 2(a) and (b)); and (2) secondary insider dealers (paragraph 2(c)).However, although the section fails to address the liability of third parties whoobtain and use information from secondary insider dealers, Example 1 illus-trates the point.

Example 1:X is a director of a company, James Brown Ltd. The company intends tofloat some of its securities on the Lusaka Stock Exchange. X secretlyinforms his wife that it would be a good idea were his wife's parents tobuy shares in James Brown Ltd because the company is in the process ofacquiring majority shareholding interests in a prosperous company, Subsi-diary Ltd X's wife communicates this secret information to her parents whobuy the shares in James Brown Ltd After James Brown Ltd's acquisition ofa majority shareholding in Subsidiary Ltd group profits go up and thevalue of the shares in James Brown Ltd rises. X's in-laws then decide tosell their shares in James Brown Ltd to Y, making a profit of 30 times thevalue of the price at which they bought the shares.

Under the Securities Act 1993, X will be liable as a primary insider dealer

See further The Law on Insider Dealing, Memorandum No. 213. 1990 (Law Society; London); T.M.Ashe, 'Insider Dealing' 11 Company Lawyer (1990) 127; J.M. Naylor, 'The Use of Criminal Sanctionsfor Insider Trading' 11 Company Lawyer (1990) 53; DTI (UK) The Law on Insider Dealing-ConsultativeDocument (1989); Companies Act 1989 of UK, ss. 82-84; Financial Services Act 1986 of K, ss. 47(2),177-178.

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and X's wife will be liable as a secondary insider dealer. X's in-laws willnot be liable as insider dealers because the Securities Act 1993 does notcover the liability of third parties who obtain and use inside informationfrom secondary insider dealers.

A further weakness is that whereas government securities can be traded on asecurities market in Zambia,6 s. 52 applies only to company securities. Neitherthe draftsman, in drafting the Securities Bill 1993, nor the Members of Parlia-ment when enacting it, took these shortcomings into account. This may beattributed to the fact that there were (there still are) not many corporate financelawyers in Zambia involved in the development of such legislation. This is incontrast with the Financial Services Act 1986 of the United Kingdom whichsprang mainly from the recommendations of Professor Gower's report oninvestor protection.'

III. Insider Dealing Law and Civil Remedies

The law on insider dealing may be intended to protect investors from marketabuses or to punish persons convicted of insider dealing, or to achieve boththese objectives. If the law on insider dealing in Zambia is meant to protectinvestors from market abuses, then investor protection and investor confidencein the market must be primary considerations. If, on the other hand, insiderdealing law in Zambia addresses only criminal sanctions against convictedinsider dealers, then investor protection has not been fully addressed.

Section 52 of the 1993 Act provides for criminal sanctions against convictedinsiders, but does not provide for civil remedies to parties prejudiced by insiderdealing. Although s. 54 of the Act provides for civil action to be brought againstany person convicted of an offence relating to improper trading-offences suchas insider dealing-the section does not provide for the type of civil remediesthat could be made available to prejudiced parties. Under s. 54, the burden ison the plaintiff to prove, on a balance of probabilities, that the defendant com-mitted a civil wrong against the plaintiff and that the latter is entitled to civilremedies. Section 54 reads as follows:

'(1) A person who is convicted of an offence under this Part shall, in addi-tion to any criminal liability for the offence, be liable, at the suit of anyperson who has sustained pecuniary loss as a result of having purchasedor sold securities at a price affected by the act or transaction which com-prises or is the subject of the offence, to an action of damages in respectof the loss concerned.

6 See generally Part I of the Securities Act 1993 and, in particular, s. 2.

See Review of Investor Protection, Report: Part I (Cmnd 9125, 1984) ch.9; see further Financial Servicesin the U.K: A New Framework For Investor Protection (Cmnd 9432, 1985) ch.13.

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(2) Nothing in this section limits or diminishes any civil liability which anyperson may incur under any other law.'

There are, however, important reasons for providing more express civil remed-ies. First, the burden of proof in criminal law lies on the prosecution (and noton the party suffering loss). The party suffering loss is a complainant or awitness. Although a fine could be imposed on the offender, the party sufferingloss does not recover. Secondly, the burden of proof in civil law cases lies onthe plaintiff (the party suffering loss); here, the prejudiced party can recoverhis loss. Thirdly, the standard of proof in criminal cases is that of beyond reas-onable doubt; here, the standard of proof is higher than that in civil cases.Fourthly, the standard of proof in civil cases is that of a balance of probabilities;in these cases, the standard of proof is lower than that in criminal cases. Fifthly,in criminal law punishment of the offender is a fundamental feature; compensa-tion is thus not the main objective of criminal sanctions. Sixthly, in civil casescompensation of the prejudiced party is an important consideration; this mayinclude the possibility of administering restitutionary measures to restore par-ties to their original positions.

We now turn to look at further shortcomings and problems relating to thelaw of insider dealing in Zambia. To do so, we will focus on the different legalpositions affecting persons such as company directors, journalists, stockbrokers,trustees of collective investment schemes and shareholders who are not com-pany directors.

IV. Liability of Companies and De facto Directors

Zambia's Companies Act 1994, s. 203(4) provides that:

'A person not being duly appointed director of a company, on whose direc-tions or instructions the duly'appointed directors are accustomed to actshall be deemed to be a director for the purposes of all duties and liabilitiesimposed on directors ... '

The above provision has made improvements to the law on directors' liabilityand directors' duties in Zambia. The provision introduces the concept of ashadow director in Zambian company law. Under the repealed Companies Act1921 and under the Securities Act 1993, the concept of shadow directors wasnot (and is not) covered to the same extent as it is covered under English law.'As Goode argues, a shadow director in contrast to a de facto director, normallyacts through a de jure (legally appointed director),9 whereas a de facto directoracts as director although he has not been (or not validly) appointed as such.Indeed, a de facto director acts himself as if he were a director.

See the English Companies Act 1985, s. 741(2) on shadow directors.See R.M. Goode, Principles of Corporate Insolvency Law (Sweet and Maxwell, London: 1990) pp.196-7.

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It is, however, dear that before the enactment of the Zambian CompaniesAct 1994, no person materially influencing decisions of a company's board ofdirectors (from outside the company) could be made liable as a shadow dir-ector. This meant that under corporate law in Zambia, in contrast to Englishlaw, no person acting as a shadow director and releasing inside information toinvestors could be made liable as an insider dealer. However, the coming intoforce of the Companies Act 1994 corrected this. Indeed, the concept of shadowdirector in Zambian company law can now be applied to insider dealing lawwhen determining who is and who is not a company director in Zambia.

In Zambia, bodies corporate are excluded from the two categories ofinsider dealer in the Securities Act 1994.10 The Act does not, however, excludemembers of unincorporated associations, for example, partners in a partner-ship, from these categories." That said, there is need to show that partnersor their delegates either procured parties to deal in securities, counseledthem on these dealings or dealt in securities using inside informationobtained from primary insider dealers. In Zambia, the partnership positionmainly affects lawyers and accountants who normally organize their businessin the form of partnerships. Where lawyers or accountants are not acting asfinancial intermediaries on the stock market, they will usually be acting ina professional capacity with allotting companies, as advisers or auditors,respectively. This further brings them within provisions of the Securities Act1993 as potential insider dealers. Under the Securities Act 1993, there is noneed to prove that recipients of inside information requested that informa-tion. Insider dealing liability covers use of unsolicited inside information.12

This is illustrated by Example 2.

Example 2Assume the facts as they appear in Example 1. Under the Securities Act1993, X's wife will still be liable as a secondary insider despite the fact thatX volunteered the information to his wife and that she did not solicit thatinformation.

As indicated above, companies seized with inside information are not subjectto insider dealing law in Zambia. Thus, bodies corporate such as merchantbanks and those acting as underwriters, promoters and operators of collectiveinvestment schemes benefit from this weakness in the law. The general positionis that, unlike partnerships, neither companies nor their directors can be madecriminally liable where other employees acting in the course of business engagein insider dealing. Only the individual wrongdoers will be criminally liable.This is the case regardless of whether the company dealt in, counselled partiesor procured them to deal in securities. Indeed, it is not even clear whetherinsider dealing provisions in the Securities Act 1993 are restricted to stock

10 In s. 52(1) of the Securities Act 1993, the pronoun 'he' obviously refers to individuals.

"In Zambia, the English Partnership Act 1890 and common law govern partnership law. There areno partnerships with limited liability of partners.

1 See Attorney General's Reference No.1 of 1988 [1989] 2 All ER. 1; [1988] BCLC 765.

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market and securities market dealings or whether they extend to dealings offthese markets.' Again, these weaknesses in the law may be attributed to a lackof corporate finance lawyers in Zambia.

It would be too great an extension of the law on insider dealing to suggestthat company directors attracted liability under s. 77 of the Securities Act 1993.This section provides that:

'If a body corporate is convicted of an offence against this Act or the rulesor regulation made under this Act, every person:

(a) who is a director of the corporation; or

(b) who is concerned in the management of the corporation, shall bedeemed to have committed the same offence if the person knowinglyauthorized or permitted the act or omission constituting the offence.'

Section 77 of the Act identifies the categories of persons which could be deemedcriminally liable when a body corporate is convicted of an offence against theAct or against rules or regulations made under the Act. It is important to reiter-ate here that s. 52(1) of the Act does not cover bodies corporate in its definitionof persons that can be convicted of the offence of insider dealing in Zambia.Therefore, under s. 77 of the Act, as in the case of s. 52, bodies corporate donot attract liability as potential insiders. Thus, it would be inappropriate tobring proceedings for insider dealing on directors of bodies corporate that con-travene s. 77 of the Act. Under s. 77, two elements must be shown. First, theremust have been the conviction of a body corporate and not that of an indi-vidual. Secondly, the standard of proof in criminal law must be satisfied toshow that the culpable director 'knowingly' authorized or permitted the act oromission in question. The Securities Act 1993 does not define what constitutes'knowingly'. We shall examine the term 'knowingly' later in this work.

V. Liability of Journalists as Insider Dealers 4

As demonstrated in Example 1 above, newspaper proprietors, publishers andnon-employees of companies (for example, shareholders who are not directors)cannot be held liable where they use inside information obtained from second-ary insiders. Thus, the Securities Act 1993 does not prohibit journalists frompublishing inside information and obtaining tips from parties interested in suchinformation. Also, receiving inside information from journalists and acting onit is not an offence under the Securities Act 1993. The reason for this is that the

" For example, some of the dealings made pursuant to provisions of the Privatization Act 1992.

14 See generally Re Company Securities (Insider Dealing) [1988] BCLC 76. In that case, it is likely that

the journalist would have been held liable for insider dealing had the case been decided afterPart V of the Criminal Justice Act 1994 had come into force. See also Re Insider Dealing Inquiry[19881 BCLC 153.

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information is not obtained from primary insider dealers. However, use ofinside information obtained from a primary insider would attract liability underthe Act.

In Zambia, to avoid the weaknesses in the law that have been identifiedabove, the Securities Act 1993 should be amended to provide that any personwho knowingly transmits or receives and acts on inside information, irrespect-ive of the mode in which the information was acquired, should be made liableunder civil law and criminal law. The Act should also be amended to definewhat constitutes 'knowingly'.

VI. Are Financial Intermediaries Professionals for thePurposes of Insider Dealing Law?

Generally, financial intermediaries per se are neither professionals nor personsacting in a professional capacity with companies which are buying and sellingsecurities.' s If this view is accepted, it would be incorrect to argue that financialintermediaries are covered by the provision on primary insider dealers in theSecurities Act 1993. The view that financial intermediaries do not carry out aprofessional task is supported by the English case of Christopher Barker & Sonsv. IRC16. In that case, the appellants carried on business of stockbrokers, buyingand selling stocks and shares on the market for clients, being remunerated bycommission. They were also consulted professionally on the promotion of andthe alterations and adjustments of capital in commercial undertakings, and theyalso made valuation of stocks and shares forming part of the estates of deceasedpersons, being remunerated for such advice and valuations by fees. It was heldthat stockbrokers in buying stocks and shares do not carry on a profession andthat the work of advice and valuation for which the appellants were remuner-ated by fees was done as part of and in connection with their business as stock-brokers and not in the exercise of a profession, and that therefore the appellantswere liable to excess profits duty.

The consequences of the Christopher case are that intermediaries per se arenot professionals and do not act in a professional capacity when acting in theirordinary course of business; this has been reversed by legislation in other juris-dictions. 7 In Zambia, although financial intermediaries per se cannot beregarded as professionals or acting in professional capacities, rule 28 of the

See Christopher Barker & Sons v. IRC [1919] 2 KB. 222. It is the author's contention that professionalsand persons acting in a professional capacity have an exclusive right to exercise their trade orskill, for example, as a surgeon, lawyer, accountant etc. On the other hand, upon authorization,any person can practice as a broker. The contrary view that financial intermediaries act as profes-sionals or in a professional capacity is sustained in the UK where the Criminal Justice Act 1994,s. 59 refers to 'professional intermediary'. In Zambia, there is no such reference in the SecuritiesAct 1993 and thus the Christopher case still applies.

16 Ibid.17 See, for example,. Criminal Justice Act 1994 s. 59, in the UK

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Securities (Conduct of Business) Rules 1993 prohibits financial intermediariesfrom using inside information obtained from their employees, officers oragents. We now turn to look at what constitutes 'materially affecting the priceof securities' and what constitutes 'knowingly' in insider dealing law inZambia.

VII. What Constitutes 'Materiality' and 'Knowledge' inInsider Dealing Law?

Under s. 52 of the Securities Act 1993, one of the essential characteristics ofinside information is that it must not be available to the public and that it'materially' affects the price of the securities. The criteria for determining whatis materiality is not set out in the Securities Act 1993. It is doubtful whetherfraudulent omissions 8 that create inflated prices of securities could amount toinsider dealing. Moreover, the weakness of the local currency entails that themore the currency depreciates the greater the difficulty of establishing suchmateriality. Determining the material effect is notoriously difficult. Forexample, in Cady Roberts & Company,'9 the principle in American securities lawthat a fact is material if it would, were it known, affect the investment judgmentof those with whom the insider is dealing was criticized by Commissioner Cary.He argued that the principle produced uncertainty and confusion, and sug-gested the direct effect on the market value of securities as a test in additionto the 'investment judgment' principle. This dual test, however, does not neces-sarily create legal certainty. For example, how is market value to be determinedin Zambia given its weak and fluctuating currency?

The Securities Act 1993 also fails to define what constitutes 'knowledge'. Dis-tinctions can be drawn between various forms of knowledge." In Selanghor v.Craddock (No.3), Ungoed-Thomas J was of the view that 'knowledge' meant'circumstances which would indicate to an honest reasonable man that suchdesign was being committed, or would put him on inquiry'.2 In Re Montagu'sSettlements, it was held that 'knowledge' is not confined to actual knowledge,but includes actual knowledge that would have been acquired but for shuttingone's eye to the obvious, or wilfully and reckless failing to make such inquiriesas a reasonable man would make.' Similarly, in Baden Delvaux and Lecuit v.Societe Generale, it was judicially observed that:

'R For example, where company directors with inside information make omissions in listing particu-lars or prospectuses.40 SEC 907 at 911. See also SEC v. Texas Gulf Sulphur Co. 401 F 2d 833.

2 For example, see the distinction between 'knowing receipt and dealing' and 'knowing assistance'under trust law in G. Moffat, Trusts Law: Text and Materials (Butterworths, London: 1994) pp. 578-90, although such distinctions will not be pursued here.

21[1968] 2 All ER 1073 at 1104; [19681 1 WLR 1555 at 1590.2 [1987] Ch 264 at 285; [19871 2 WLR 1192 at 1211 per Sir Robert Megarry V-C.

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"... knowledge can comprise any one of five different mental states ... : (i)actual knowledge; (ii) wilfully shutting one's eye to the obvious; (iii)wilfully and recklessly failing to make such inquiries as an honest andreasonable man would make; (iv) knowledge of circumstances whichwould indicate the facts to an honest and reasonable man; (v) knowledgeof circumstances which would put an honest and reasonable man oninquiry."

In contrast to the civil law position, it was held in Nelson v. Larholt24 that in acriminal law context 'knowledge' meant more than constructive knowledge inthe sense of shutting one's eyes to the obvious. In Warner v. DPP,2 Lord Reidheld that knowledge could include 'wilfully shutting one's eyes to the truth'.Wilful, on the other hand, could mean deliberate or reckless acts or omissions.26

It is dear, however, that since s. 52 of the Securities Act 1993 of Zambia pro-vides only for criminal liability for the offence of insider dealing, the contextin which the term 'knowledge' must be understood is the criminal law context.

VIII. Does Insider Dealing Vitiate the Contract?

As a general rule, under Zambian law, insider dealing cannot vitiate an invest-ment contract.27 Similarly, in the England and Wales the Criminal Justice Act1994, s. 63(2) provides that no contract shall be void by reason only of beingtainted with insider dealing.28

Since the Zambian Securities Act 1993, like the English Criminal Justice Act1994, provides that insider dealing cannot vitiate an investment contract, theequitable remedy of rescission is generally not available to a party prejudicedby insider dealing.29 A party prejudiced by insider dealing can bring an actionfor damages where he has suffered loss resulting from the defendant's negli-gence. At common law, the burden of proof lies on the prejudiced party toprove that the defendant (who is the insider) owed the prejudiced party a duty

[ 119931 1 WLR 509 at 576, 11992] 4 All ER 161 at 235; [19921 4 All ER 279, 11985] BCLC 258 at 325per Peter Gibson J. See also El Ajou v. Dollar Land Holdings plc [1993] 3 All ER 717 at 739; PollyPeck International plc v. Nadir (No.2) [1992] 4 All ER 769 at 777; Karak Rubber Co Ltd v. Burden(No.2) [1972] 1 WLR 602 at 632; Agip (Africa) Ltd v. Jackson [1992] 4 All ER 385 at 258; Eagle Trustplc v. SBC Securities Ltd [1992] 4 All ER 488 at 499; cf. Belmont Finance Corporation v. WilliamsFurniture Limited [1979] Ch 250; P. Birks 11989] Lloyd's MCLQ 296; P. Birks (1989) 105 LQR 352at 355; C.E.F. Ricket (1991) 11 OJLS 598 at 602; Powell v. Thompson [1991] 1 NZLR 597.

24 [1948] 1 KB. 339 at 344 per Denning J.5 (1968) Cr App 373 at 398.

2 R v. Moys (1984) 79 Cr App 72. See also R v. Sinclair 11986] 1 WLR 1246.2 Securities Act 1993, s. 52(3).s For the previous UK position see Chase Manhattan Equities v. Goodman 11991] BCLC 897 at 934,

per Knox J; '... the sale agreement is therefore ... unenforceable ... because it was tainted in itscreation by an infringement.'See B. Rider and L. Ffrench The Regulation of Insider Trading (Macmillan Press, London: 1979) p.92, for a discussion of insider dealing and the equitable remedy of recession.

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of care and that the defendant breached that duty. The defendant's breach ofduty must result in the plaintiff's loss.

XI. Trustees as Insider Dealers and Conflict of theirFiduciary Duties"

The issue is illustrated by Example 3.

Example 3.X is the managing director of Intelligence Co. Ltd, a company which hasrecently acquired a profitable enterprise called Nshima Food Supplies Ltd.As managing director of Intelligence Co. Ltd, X has price-sensitive informa-tion which would materially affect the price of securities in IntelligenceCo. Ltd if X communicates that information to investors. X, who is also atrustee of a trust which holds shares in Intelligence Co. Ltd, is now in aposition that could lead to conflict of interests. At common law, there isan implied duty on the trustee to invest trust funds so that the capital ofthe trust fund grows. This would then lead to increased income for thebeneficiaries, if there are any beneficiaries entitled to income. On the basisof this common law duty to invest trust funds, can X subtly use the price-sensitive information he has acquired as managing director of IntelligenceCo. Ltd to advise his co-trustees that on behalf of the trust they should allacquire more shares in Intelligence Co. Ltd?

The Securities Act 1993 is silent -on this. However, it is important to observethat where a person is a director of a company and he acquires inside informa-tion whilst at the same time acting as a trustee of a trust which holds sharesin that company, he has a conflict of duties. The prudent thing might be forthe trustee to resign his trusteeship since seeking independent advice wouldentail communicating information.

X. Conclusion

In the commercially sophisticated world in which developing countries increas-ingly find themselves, their financial legislation may demonstrate weaknesseswhich result in part from a limited number of indigenous professional special-ists, in particular lawyers, and in part from paying insufficient attention toparallel legislation in other jurisdictions. The critical analysis of the legislativecontrols over insider dealing in Zambia perhaps illusfrates this.

For a detailed discussion see D. Parker and A. Mellows, The Modern Law of Trusts (Sweet andMaxwell, London: 1983) pp. 327-8.