The AFR yesterday produced a front page scoop noting that the ASX has “stepped up surveillance of share trading activity” and that the monopoly exchange has “referred several recent matters involving unusual share price movement to the Australian Securities and Investments Commission”. The latest moves come after the share price of Rinker, currently subject of a takeover bid from Mexican giant, Cemex, increased by 33% in the five days prior to the takeover announcement.
That means many of those trading Rinker last week were either very lucky, or were trading on the basis of inside information. The AFR’s Neil Chenoweth noted that by 3.59pm last Friday (prior to the Wall Street Journal leaking the Cemex bid), Rinker shares had increased during the day on “double the average” turnover (this was despite Boral reporting a downturn in US construction, the market responsible for 80% of Rinker’s sales). Clearly, a lot of people knew a bid was coming and were buying Rinker shares on that basis.
Those insider traders can rest assured though, ASIC will almost certainly not be prosecuting anyone for insider trading in relation to Rinker. Same as they didn’t bring charges against anyone for insider trading Coles Myer in August, or Burns Philp in July or Pacifica or Promina last month. Heavens, ASIC didn’t even bring criminal charges against Steve Vizard or Greg Lay, despite them being dobbed in cold by Vizard’s bookkeeper.
Quite simply, ASIC is not up to the task when it comes to insider trading, which, in ASIC’s defence, is inherently difficult to detect and prosecute. First, the investigator needs to analyse the trading that has occurred for irregularities. Second, the investigation team needs to prove that the trader actually possessed “inside information” and that they knew (or “ought to have known”) that the information is “inside information”.
Given that ASIC doesn’t have the time or resources to go after insider trading, perhaps Peter Costello should create a separate body which can – perhaps called the Insider Trading Commission. The Commission would be solely focused on detecting and prosecuting insider trading (unlike ASIC, which is responsible for regulation and enforcement).
Every time a share spikes just before a critical announcement (like Rinker did), the Insider Trading Commission could review every single trade and cross check the trader (or the owner of the company undertaking the trade) against bankers and lawyers working on the deal, as well as every single employee working at the companies involved in the deal (such tactics aren’t new: ASIC itself used diagnostic software to catch Macquarie Bank’s Simon Hannes for an offence that occurred way back in 1996). Special attention should be given to trusts, and nominee holders should also be traced where suspicious. The Commission would probably only need ten or 15 forensic accountants and lawyers – given the recent spate of shares spiking just before announcements, the Commission would possibly pay for itself.
Even if the Commission wasn’t able to catch insider traders itself, the deterrent effect would be significant. At the moment, potential insider traders are comforted by the fact that only Hannes and Rene Rivkin have ever been jailed for insider trading in this country.
Finally, it is interesting to compare ASIC’s feeble efforts with regard to insider trading to that of its US big brother, the SEC, which has shown far more determination in its pursuit of insider trading. As reported by Fortune, the SEC is currently prosecuting a Goldman Sachs investment banker and two forklift operators after they netted more than $7 million in a brazen insider trading ring. Meanwhile, Steve Vizard is still able to appear on Channel Nine specials.