Private individuals fined for insider trading in Hungary in 2020

2020 brought a real surge in the fines imposed for insider trading,

with MNB having imposed 120 million forints in fines in half a dozen cases, mostly against private individuals.

The papers most frequently affected were Ott1 and SET, but there was also a case with Est Media (now Delta Technologies) and an unnamed premium category paper, too.

There has also been a change in the communication practice of MNB, as earlier they disclosed the initials of the offenders, while now they are only referred to as ‘clients’.

Different perspectives

There are few more exciting, more film-friendly elements of capital markets than insider dealing. Everyone can picture a huge limousine driving up to a pub in a suburb, a typical guy from Wall Street getting out of the car in his 10,000 dollar suit, going into the pub, then taking a slip of paper with some important information from a shabby-looking bloke, paying him a thousand dollars and then making a million with the information. It may seem unrealistic, but whoever follows the actions of Gordon Gekko in Wall Street or Bobby Axelrod in Billions may easily think that this is what the stock market is all about.

However, before we look at these illicit transactions through the rose-coloured glasses of mafia romance fans, let’s briefly define what insider trading really means.

It is a transaction in which someone uses specific information about a financial instrument before it becomes publicly available to other investors.

Is it worth trying to get access to such information at all? There are so many wise thoughts and studies about this that they would be enough to fill long textbooks.

Some people not only avoid insider trading because they are law-abiding citizens, but they really object to it or think it’s pointless, like Warren Buffett or André Kostolany who believe you can’t make money with it; it is all rubbish.

Or there is another well-known theory that says: “buy the rumour, sell the fact”.

That is, as long as the market is waiting for some major announcement, you can really earn big money with these tips, but you have to sell the papers by the time the announcement itself is made because the inflated expectations may end up bursting.

There are tips that are dead certain

Let’s not be hypocritical. If someone finds out about a secret acquisition, if it leaks out that a company’s profits will be above expectations, or an investor finds out ahead of time that a drug company’s licensing process will be successful, they can precede the market and earn a fortune.

But let us not forget for a minute that insider trading is prohibited.

In 2020, the Hungarian National Bank itself seemed to have placed more emphasis on this fact, and compared to previous years, it uncovered many more insider cases,

although 2020 did not break the record in terms of the nominal amount of fines, in terms of the number of cases we may still say it was a record-breaking year.

A little nostalgia

If we look back a couple of decades, the first memorable insider case was related to Novotrade shares in late 1993, when the share price had risen well before the good news about the company (capital increase, stock market launch in Germany) was published.

When it turned out that it was the neighbour of the company manager (Gábor Rényi) who had bought the paper in large quantities, the supervisory authority struck.

Then came the slightly crappy cases involving smaller papers, such as the suspicious and sometimes uncovered stories of Synergon, Humet or BIF.

After that, the stakes were raised in 2006, when Megdet Rahimkulov, one of the richest businessmen in Hungary received a 250 million forint fine because, according to the supervisory authority, he had increased his stake in BorsodChem on insider information before his public bid to buy the company’s shares on July 7, 2006.

What are the facts?

An insider, that is someone who knows more about a particular company, can still buy or sell the company’s papers, but only according to certain rules.

However, no one is allowed to act on the basis of any decisive information that is not yet publicly available to other shareholders.

In the United States, the moral judgement of insider trading is more negative than that of embezzlement.

MNB's list of cases for 2020 is very long and the cases are very different.

In some cases it is the company that is fined, in other cases it is the private individual, but sometimes both the company and the private individual receive a fine.

There are minor cases, for example, at the beginning of the year 4iG received a 5 million forint fine for violating insider information regulations (in connection with the planned acquisition of T-Systems); which is a case related to insider information, but in fact not a case of insider trading.

Real cases

But later in the year cases kept emerging, with cases being uncovered in May and June, as well as in October and December. In connection with the trading of Ott1 shares, 10 million forint fines were imposed by MNB several times for violating insider trading regulations.

Interestingly, there was a case in December when both the individual who provided the information and the person who used it were fined for a total of 25 million forints (15 and 25 million respectively). The shares in question were Est Media (now Delta Technologies) and Ott1 again.

Such cases are usually disclosed after MNB’s market supervision inspection, but if there is suspected malpractice, MNB usually also files a criminal report for suspected insider trading and unauthorized disclosure of insider information.

Listed company SET Group was also involved in several cases last year; a private person received a 15 million forint fine from MNB, but there was also a bigger, 40 million forint fine imposed in connection with the company's securities.

Keep going

Confidence in the market is based on the fact that investors can make decisions based on the same amount of information. Hungary is a small country where everyone is well informed, gossipy, everyone knows someone, and there are plenty of rumours.

Larger companies such as OTP, Mol or Richter have been successful in preventing information leakage about acquisitions or other major announcements. There are special techniques to do this: strict insider information policies, code language used among those involved, or for example a practice that when they need to print documents, one colleague is already waiting at the printer to collect the document when another colleague presses the print button on the computer.

Fighting against insider dealing is an important issue, which is shown by the fact that it carries a maximum 3 year prison sentence, although it has never been imposed in Hungary.

Insider trading can be punishable even if we do not install a bug in the boss’s office, bribe a secretary to forward us the boss’s emails, or search the rubbish bins of the management.

In Hungary, for example, there was a case of malpractice when a small shareholder gave a purchase order for the company’s shares in the corridor at the general meeting of the company, already in possession of the officially announced plans.

It was a controversial decision (since all shareholders had the opportunity to attend the general meeting), but the market supervision board concluded that the shareholder should have waited until the official disclosure of the plans.

Sometimes it doesn't turn out

Many times, of course, although everyone knows that a case of insider trading is taking place, as prices go crazy seemingly without any reason, yet there is no punishment as it is impossible to find out what the buyers knew.

Therefore, it is no coincidence that the punishments mostly affect low-volume securities. If a thousand people buy a particular paper on one day, who could tell which buyer had insider information and who just ‘followed the herd’?

It is certainly good news for the market that inspections have become stricter, as it may actually reduce the number of obvious insider trading cases, but it is a race against real professionals.

Today’s insiders have already become more sophisticated; instead of buying the selected shares with the help of a neighbour, relative or colleague, they do it in a way that the connection remains by all means undetectable.

Insiders might as well be wrong

Finally, we shouldn’t forget that insiders often get burned already by the market itself. Sometimes they overestimate a piece of information that sounds exciting to them but may be insignificant to other investors.

In other cases, insiders are too slow to react: they hear a certain tip and do not realize that the market already built the information into the share price half a year earlier.

Moreover, it may also happen that an insider completely misinterprets a situation. Let us give a foreign example rather than a Hungarian one: travelling in a taxi someone overhears the head of the market leader airline calling a taxi to the headquarters of the number two airline company. He jumps to the conclusion that the two companies must be negotiating a merger, and he is very proud of this revelation. In the end, it turns out that the two CEOs only had a meeting about some totally insignificant matter, like the “pilot of the year” award ceremony, for example.

But it is also possible that his logic will prove to be correct, with the official announcement arriving a week later. He may still lose a lot of money with insider trading, if the market does not welcome the news of the merger; i.e. even though he interpreted the events well, he came to the wrong conclusion. So, even insiders can go through tough times, but we still should not feel sorry for them.