Many stock exchanges in the region are becoming more sensitive to the issue

You have to buy some of our shares on the Beirut Stock Exchange tomorrow,” a budding Lebanese stock market investor was urged by a close buddy when they met one evening a few days after New Year’s Eve. The advice was sound; the shares jumped by 10% the following day. But there was a problem. This buddy just happened to be a manager in the international division of the same company in which he had told his friend to buy share. Furthermore this manager also bought some more shares for himself the following morning. The manager’s tip, given on the basis of advance information on a capital increase announcement, was insider trading. In a more regulated market he could have gone to jail.

Accusations of insider trading have been hanging over the BSE since the bourse reopened a decade ago. While the market was comatose between the 1998-2003, any trading activity, insider or not, was positive news. Eyebrows only began to arch in earnest when trading activity started to improve around two years ago.

Did unexpected demand power the first gains of Solidere shares when they pulled out of the $4 cellar? Or were some of the buyers prematurely aware of the fact that Solidere had decided to launch a program to provide investors with opportunities to part pay for land with shares and benefit from a healthy discount?

Top managers in the real estate company told EXECUTIVE at the time that Solidere had internal procedures in place to stop information from leaking out and assure that the firm played by global investment rules – but conceded that there was no way to prove the functionality of these mechanisms apart from hoping that they worked.

Intimate affair


It is hard to imagine that the recent unprecedented boom in Lebanese shares was not accompanied by friendly “tips” from analysts and brokers or even more shady incidents of abuse of privileged information.

While limited legal provisions against abuse of privileged information exist on paper, brokers and stock market experts in Beirut widely agree that insider trading is a reality in Lebanon. For one thing, the Lebanese capital markets are an intimate affair, a tiny segment of economic activity in a small market where the important players and intermediaries know each other well, often exceedingly well.

Secondly, most who know the markets would argue that merely benefiting from privileged information is small beer in a post-war Lebanon where the financial markets have witnessed epic self-enrichment schemes: skimming cash and cheating on business partners, improper preferential treatment, deception of investors, and outright market manipulation have all been recorded in the scrapbooks of Beirut’s recent business annals, along with the names of some highly accomplished crooks (many of whom have never even stood before a judge let alone do time).

But the excuse that graver crimes than insider trading have happened in Lebanese finance is not good enough. It certainly is not a line of thought that would install confidence in investors and companies wanting to play the BSE.

Regional stock exchanges are becoming sensitive to the issue. Qatar and Saudi Arabia last year set examples in prosecuting insider trading, while Saudi Arabia’s Tadawul Exchange will this year start to take relatively severe measures in penalizing rogue brokers.

The crux of the matter for Lebanon, as for many other markets, is enforcement of regulations. According to the results of recent research, insider trading is not only a question of ethics and equality but also has direct negative bearing on the price that companies have to pay in obtaining equity in stock markets.

Enforcement – rather than mere adoption of the law – of insider trading prohibitions has been shown to increase liquidity, support better sovereign ratings and reduce cost of equity in stock markets where these rules are applied in context of the global trend towards democratization of stock markets.

As popular financial handbooks are quick to point out, not all insider trading is illegal, and if executives in a company purchase shares of this firm under compliance with disclosure requirements and in adherence to time restrictions on their trading activities, such purchases are some of the best indicators for the long-term upside potential of a stock.

If the opposite were to happen – if shareholders holding privileged information would use it to unload shares ahead of a negative event for a company while the unknowing public gets hit by the price drop – the real pain and outrage over insider trading would come.

However, a Martha Stewart scenario is unlikely to happen in Lebanon in the near future, and the discussion about the creation of a financial markets watchdog is progressing nicely in the meantime. But it is clear to local companies and responsible brokers that the risk of insider trading and an absence of enforcement on democratic financial market rules is a major threat to the reputation and growth of both the Lebanese stock market and its listed companies.