tip off

Why ASIC chases the tiddlers and lets the big fish go

Being a corporate watchdog is only part of ASIC’s remit. The other task is to raise money for the federal government — as John Addis argues, these two demands are often at odds with each other.

Under the current regime at the Australian Securities and Investments Commission, insider trading, ripping off investors and breaching director’s duties can be a highly profitable activity. The risk of getting caught is low and the penalties if you do get caught minimal.

Part of the reason is ineptitude and indifference. Michael West in the Fairfax press on Saturday revealed he had warned ASIC of the looming disasters of Storm Financial, Allco, Babcock & Brown, ABC Learning and others. The regulator, though, wasn’t interested. Six months before Storm collapsed, ASIC gave it a “clean bill of health”.

But even when ASIC does prosecute, other agencies let it down, the rare but successful conviction of former Gunns CEO John Gay being a case in point. Seeing a management report warning of poor sales, Gay sold 3.4 million shares before that information became public, saving himself about $750,000 in potential losses.

It was as strong a case of insider trading as ASIC could wish for, carrying a maximum sentence of five years in jail and a maximum fine of $220,000. Gay pleaded guilty and was fined $50,000. But as Crikey has pointed out, Gay kept the bulk of the proceeds of his crime and avoided a jail sentence. Although the Australian Federal Police could have launched crime recovery action, it chose not to.

During sentencing Justice David Porter described Gay as “an exemplary character”, declaring the crime to be “not in the serious category of insider trading”.

In the month of Gay’s conviction in the same Launceston court, Fairfax’s Patrick Durkin reported that a 48-year-old was sentenced to 10 months in jail for stealing $71,000 in shipping containers. This is ASIC boss Greg Medcraft’s first problem. The institutions he needs to support ASIC in upholding current laws see white-collar crime as a lesser kind of offence. His second problem is that many of Medcraft’s employees agree with that view.

ASIC chose not to appeal Gay’s sentence, nor did it pursue directors of Reserve Bank of Australia subsidiaries Securency and Note Printing Australia for breaches of directors’ duties, despite the AFP bringing bribery charges against them. ASIC also recently dropped criminal proceedings against two former AWB directors in connection with the Iraq oil-for-food scandal. Instead, it pursued a prearranged settlement, with Judge Mark Weinberg saying his court had been reduced to “rubber stamping” secret deals between ASIC and the accused.

Medcraft also defended ASIC’s decision not to pursue David Jones directors for insider trading, saying they had already indicated their intention to buy shares before they came into possession of market-sensitive information so the law did not apply. Directors looking to make a few bob on the side now have their riding instructions: show intent to purchase stock in every trading window, get advance approval and then act as you see fit between receiving market-sensitive information and it becoming public.

Until ASIC solves these problems the tendency to throw the book at the tiddlers and let the big fish swim free will continue.”

ASIC moaning about pitiful fines when it appears so reluctant to prosecute apparently strong cases — and failing to fine Australia’s billionaires and some of its biggest business for late filing of returns — isn’t a good look for a regulator that wants to be taken seriously.

Medcraft’s third problem explains why. The public believes ASIC is about corporate law enforcement, which is only partly true. Its other task is to raise huge sums of money — over $300 million in the last financial year — for the federal government. Those two roles sit uneasily with each other. And when ASIC is faced with a long legal battle with a well-funded opponent, they’re in direct conflict.

ASIC’s legal costs are truly horrendous. Securing the 2009 convictions against James Hardie directors — for which they were each fined the princely sum of $25,000 — is believed to have cost ASIC $35 million, a little more than the $30 million estimate of its recent and unsuccessful Fortescue case. At the recent committee hearings, Medcraft said the case against Storm Financial had cost $50 million.

The corporate regulator simply cannot afford to run many cases of this ilk. So when a whistleblower calls up with information of wrongdoing at Commonwealth Bank’s financial planning arm, for example, you can see why it might go weak at the knees.

The suspicion grows after a trawl through the names of ASIC’s prosecutions for insider trading, of which there have been 32 since 2009, resulting in 23 prosecutions and a handful still pending. The names of the guilty don’t exactly leap out at you, the fines less so. Why? The little guys are cheap to prosecute.

ASIC’s most recent six-monthly enforcement report reveals that, excluding small business, there were 27 criminal actions but 46 “administrative remedies” and 27 “enforceable undertakings/negotiated outcomes”.

This hardly dispels the notion that ASIC is reluctant to use the courts, and with expenses like those incurred against Storm and James Hardie, who can blame it?

Medcraft is in a tricky position. He has to convince police, judges and his own staff that white-collar crime must be taken more seriously. Then he has to lobby politicians to increase punishments and raise penalties, knowing that corporate Australia is a big funder of the main political parties. Finally, he either needs a bigger budget or find a way of prosecuting cases that don’t cost tens of millions of dollars.

Until ASIC solves these problems the tendency to throw the book at the tiddlers and let the big fish swim free will continue.

*John Addis is a director of Private Media (publisher of Crikey) and of Intelligent Investor Share Advisor

7
  • 1
    stephen Matthews
    Posted Monday, 3 March 2014 at 2:25 pm | Permalink

    The handing over of money by ASIC in million dollar licks to barristers and the securities/corporations law practices of the big law firms is clearly a broken model. It is egregious failure when devoid of any sense of justice or service to community the practitioners simply view their payer client as another dopey client.
    ASIC could fund their own litigation team - populated by recent law graduates with a sense of mission and vocation - and achieve better results for a fraction of the cost.
    Soon enough those green ASIC solicitor recruits will be showing the complacent law firms how it’s done and will proudly declare ” sure I’m an ASIC litigation solicitor”.

  • 2
    Chris Seage
    Posted Monday, 3 March 2014 at 2:45 pm | Permalink

    I don’t like the chances of the government making ASIC more accountable for their actions. Just look at the current inquiry into the performance of ASIC by the Economics References Committee as an example. Lawyer Stewart Levitt (who is leading a class action for many Storm Financial investors) had his submission substantially redacted before being placed on the parliamentary website. The reason? Because there were issues raised about former Chairman of ASIC Tony D’Aloisio, ASIC generally and PPB Advisory, being CBA’s favourite Receivers and Managers. Pathetic.

  • 3
    The diving swan
    Posted Monday, 3 March 2014 at 3:11 pm | Permalink

    Is not a partial answer that ASIC be awarded costs on successful prosecutions? At least part of the cost may be defrayed.

    I also suspect that trying to do the prosecutions in house will simply lead to the better prosecutors being cherry picked by the very firms who are being sought to be sacked.

  • 4
    klewso
    Posted Monday, 3 March 2014 at 4:07 pm | Permalink

    Whitehaven - Moylan - and letting the lazy media go?

    Glenn Stevens makes a statement, stocks drop - nothing?

  • 5
    AR
    Posted Monday, 3 March 2014 at 9:41 pm | Permalink

    Wouldn’t it be strange if the big buck$ barri$ter$ ASIC briefs to run their cases had partners who’d acted for the defendants? Nahhh, that couldn’t happen.

  • 6
    Rpinglis
    Posted Monday, 3 March 2014 at 11:48 pm | Permalink

    Relative to the sums raised here, the Royal Commission into Unions is small beer. However I cannot envisage the current government doing anything about the ASIC performance and internal contradictions and conflicts. I hope to be proven wrong and soon, but from its few actions contrasting to its robust rhetoric to date, the current government has worrying echoes of the Fraser government. A government that was if not rort friendly, certainly rort complacent and/or coward by the rorters in its support base into costly inaction.

  • 7
    Brendan Jones
    Posted Tuesday, 4 March 2014 at 2:11 pm | Permalink

    I looked at ASIC’s information on whistleblowing recently. There are many loopholes:

    There are restrictions on who a whistleblower they can make a report to, and of course the press is a no-go zone. ASIC also restricts who can make whistleblower reports; For example, a customer or bystander who learns of corruption isn’t protected. And if corrupt management suspects an employee or supplier is about to blow the whistle, all they need do is terminate them before they file a formal complaint. They can terminate them after the fact by “doing a CSIRO” and claim the reasons for terminating them (e.g. cutbacks) are unrelated to their whistleblowing.

    Also the whistleblower must identify themselves to people they barely know; This is beyond stupid. There are also loopholes which allow the whistleblowers protection to be nixed, exposing them to civil and criminal penalties. And if they are dragged into court, ASIC won’t do anything to help them. The whistleblower is supposed to fund their own defence.

    Then look at ASIC themselves. Their treatment of the CBA whistleblowers was shameful; I wouldn’t trust them. And Will Matthew’s FOI request is now in its 10th year. Nothing to hide much?

    And for all this the whistleblower gets nothing. Why do it?

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