Tang is the business manager of the medical materials department of Hua Fu , a listing company (“Hua Fu”). He recently felt that the quality of the company's medical materials is well recognized by customers and expected that Hua Fu may have a promising future, so he told his broker Zhu to buy 5,000 shares of Hua Fu every day in the next month as long as Hua Fu’s share price is below $25.

One week later, the Chairman of Hua Fu informed Tang, Xiang Xiang (Hua Fu’s manager in the finance manager) and Qiu (Hua Fu’s HR manager) that NingFu company (“NingFu”) intends to acquire Hua Fu. The Chairman therefore asked the managers to provide relevant materials and sign a Non-Disclosure Agreement to promise that they would not disclose any information regarding the Merger to the public and shall not trade the shares of companies related to the Merger. After a busy month, Hua Fu and Ningfu entered in to a merger agreement. After announcing such news to the public, Hua Fu's stock price soared to NT$50 in just two weeks. The Stock Exchange Surveillance Department noticed that Hua Fu had unusual trading activities before the merger news was announced, which upon further investigation, involves the trading accounts of Hua Fu's managers, their relatives and friends. They were immediately handed over to the prosecutor for investigation.

Xiang and Qiu quickly confessed to the crime and felt regret, thinking that they were wrong that their activities would not be discovered due to the small volume of purchases. Tang denied the wrongdoing, saying that he had planned to invest in Hua Fu shares a week before he was informed to prepare for the merger. The prosecutor subpoenaed Zhu and reviewed Tang's previous trading records, confirming that Tang's statement was true. If what Tang said is true, is he guilty of insider trading?

With respect to the criminal liability of insider trading, there are different views on whether the defendant must have the subjective intent to "take advantage" of insider information to make profits. From an opposing viewpoint, the meaning of Article 157-1 of the Securities and Exchange Act is very clear in that as long as the defendant has knowledge of the material information and trades in the stock before or within 18 hours after the information is made public, it should constitute "take advantage". Whether the defendant intends to make use of the inside information to make profit or gain profits from such information does not lead to a different conclusion. (Supreme Court 103 Tai-Shang-Zi-2093, 91 Tai-Shang-Zi-3037)

From an affirmative perspective, the legislative reason for adding Article 157-1 of the Securities and Exchange Act on January 29, 1988 explicitly indicates: "This Act only imposes civil and criminal liability on the insiders of an issuing company for participating in the trading of the company's stock within six months under Article 157, or for trading with the public that constitutes fraud. The use of undisclosed material information to trade in the company's stock for profit is not explicitly prohibited, which has hindered the development of the securities market and constitutes a loophole of securities regulation. The prohibition of using insider information to trade company stocks for profit has become a worldwide trend. The U.S., U.K., Australia, Canada, the Philippines, Singapore, etc., have explicitly prohibited such trading in their corporate or securities laws and regulations, and violators are subject to civil and criminal liability. In order to improve the development of our securities market, this article is added. Apparently, the penalty is imposed on those who "use" insider information for making profits.

The following court judgments adopted the similar position:

• Taiwan High Court 99-Zin-Shang-Su-Zi-47 criminal judgment: "If the defendant does not ’use’ the information, i.e., regardless whether the defendant is informed of the information, if the defendant conducts stock trading in accordance with the pre-determined investment plan or in accordance with established investment habits, and does not trade stocks because he or she is informed of the information, then there is no inequality of information between the person who is informed and other investors.”
• Taiwan Taipei District Court 94 Su-Zi-1152 criminal judgment: "a person who learned of non-public material information is not required to have the subjective intent to profit or avoid loss through stock trading, but it cannot be ruled out that there is a substantial connection between his or her intention to buy or sell stocks and the knowledge of the material information; otherwise, it is tantamount to putting the trader at risk of criminal liability due to general investment habits or pre-determined investment plans.”

In this example, whether Tang will be prosecuted and convicted depends on the legal position adopted by the prosecutor and judge handling the case. If they adhere to the literal interpretation of the law, he or she may still think that Tang has violated the law by continuing to buy shares after knowing the material information. After all, with the benefit of inside information, one would believe that the stock is worth investing in. It is possible that "use inside information to buy stocks" and "buy stocks because the defendant believes the stocks worth investing in" co-exist. However, in the author's view, insider trading is a felony punishable by more than three years of imprisonment. If there is objective evidence to prove that the defendant did not subjectively trade the stock with knowledge of the insider information, he or she should not be punished, which is in line with the original intent of the legislation to impose penalties.

(The article is originally in Chinese which can be found here)