The legal basis of insider liability for exploiting inside information in joint-stock companies can be characterized under more than one legal foundation within criminal or civil responsibility.

Legal doctrine typically relies on two main foundations that justify holding an insider accountable when trading securities based on confidential inside information.

Breach of a Legal Obligation (Violation of a Legislative Provision)

This basis relies on the existence of an explicit rule that prohibits the insider from engaging in such conduct. The 2011 Instructions clearly established this obligation (the prohibition), and the 2019 Draft Securities Law also reflects the same direction. Accordingly, an insider’s sale or purchase before the information is announced constitutes a breach of a binding legal rule.

• A regulatory provision in force prohibits trading before public disclosure

• Buying or selling prior to disclosure is treated as a direct violation of the prohibition

• Liability follows according to the nature of the rule and the applicable sanctions

Breach of the Duty of Trust and Good Faith

The second foundation is based on the nature of the relationship between the insider and the company (or other investors), as the insider occupies a fiduciary position that requires honesty and integrity. Board members and senior executives owe fiduciary duties to the company and shareholders, most importantly the duty to avoid conflicts of interest and to safeguard the company’s secrets.

When they exploit inside information for their personal benefit, they place their private interest above the interests of other shareholders and betray the trust expected of them. Likewise, an employee or adviser who becomes aware of a company secret is contractually and ethically required to keep it confidential and not use it in a way that harms the company or other investors.

On this basis, insider trading is viewed as a breach of loyalty and transparency. Breaching this duty triggers civil liability toward the injured party (such as the company or investors) and may lead to an order requiring the insider to disgorge the profits gained through the violation.

Inside Information as an Intangible Company Asset and the Role of Good Faith

This approach is common in Anglo-American systems, where inside information is treated as an “intangible property” of the company, and benefiting from it without authorization is considered a misappropriation of that property. In Iraq, general good faith principles in transactions—set out in the Iraqi Civil Code No. 40 of 1951—may also support characterizing insider conduct as an unlawful act that undermines fairness and equality among market participants.

How the Two Foundations Work Together

In practice, the two foundations are complementary. When an insider trades on undisclosed information, they violate an enforceable regulatory rule and simultaneously breach the trust inherent in their position. This supports imposing appropriate sanctions and removes any claim of legitimacy, because the conduct undermines market trust and fairness.

Legal and Civil Liability for Insider Trading

Once it is established that an insider traded based on confidential inside information, liability may arise on more than one level. In addition to criminal or disciplinary liability under applicable rules (such as investigation by the securities authority, fines, or referral to criminal courts), civil liability also arises toward anyone who suffered harm as a result of the conduct.

Elements of Tort (Civil) Liability for Exploiting Inside Information

To claim compensation, the injured party must prove the three elements of civil liability under general rules: fault, damage, and causation.

Element One: Fault

Fault consists of the insider committing a prohibited act, meaning a breach of a legal obligation or a professional duty not to trade on confidential information.

The fault may be intentional (deliberate exploitation with certain knowledge that the information was not disclosed) or may take the form of gross negligence that amounts to unlawful exploitation. In any event, it is sufficient to prove that the insider acted contrary to what a careful and prudent person would do in a similar position.

• For primary insiders, fault is often presumed once they trade during the confidentiality period, because they are presumed to know the information and that trading is prohibited

• For a secondary insider, it must be proven that they knew the information was non-public and material and still exploited it before publication

• Breaching confidentiality and using a personal secret is itself a tortious fault deserving blame

Element Two: Damage

Damage is the financial loss suffered by others as a result of the insider’s unlawful conduct. The damage may be direct to a specific individual, such as a shareholder who sold shares to the insider at a lower price than they would have received if the positive news had been disclosed, or a person who purchased from the insider at a high price before a decline following negative news.

Damage can also be broader, affecting the market as a whole by undermining investor confidence and price integrity. However, for a civil claim, the claimant must show that they personally suffered an actual loss.

• The loss must be certain (already occurred or will occur inevitably), not merely theoretical

• In insider trading, the loss is often measured as the price difference caused by the counterparty’s lack of knowledge at the time of the trade

• While there may be general or moral harm to market fairness, compensation usually focuses on direct, quantifiable financial harm

Element Three: Causation

The claimant must prove that the insider’s wrongful act caused the damage—meaning that, but for the insider’s conduct, the loss would not have occurred. This can be somewhat complex in securities markets because trading decisions may be influenced by multiple factors.

However, in a direct transaction between an insider and an investor, causation can often be shown clearly: the investor would not have bought or sold at that price had they known the information the insider concealed and exploited. In response, the insider may argue that the loss was caused by independent factors beyond their control, such as a general market crash or force majeure occurring during the same period. Under general principles, if the insider proves an independent external cause or the injured party’s own fault contributed to the loss, liability may be reduced or excluded. Where no other factors exist, causation is often inferred once fault and temporally consistent damage are established.

Consequences When Civil Liability Is Proven

If the elements of liability are established, the insider may be ordered to compensate the injured party fully for their loss. Courts commonly assess compensation based on the price difference or the lost opportunity that the insider gained at the claimant’s expense. The insider may also be ordered to disgorge profits obtained through the violation back to the company.

Conclusion

The legal basis of insider liability for exploiting inside information rests on violating regulatory rules that prohibit trading before disclosure and on breaching the duty of trust and good faith inherent in an insider’s fiduciary position.

Civil liability for insider trading in Iraq requires proving fault, damage, and causation, and may result in compensation based on price differences and the disgorgement of profits.

Iraqi regulation reflects a clear trend toward protecting investors and market fairness through mandatory disclosure and early-use prohibitions, alongside continued emphasis on awareness and oversight.

If you are a listed company, board member, executive, auditor, broker, or investor and you need a legal assessment of insider liability for exploiting inside information, help drafting internal compliance and disclosure policies, or support in investigating a leak or pre-disclosure trading, contact Osama Tuma for Legal Services and Advisory, a law firm in Iraq providing specialized legal support in securities, corporate governance, insider trading investigations, and protecting affected parties’ rights.