Australia’s insider trading laws ban directors and senior management from trading in stock when they are aware of market-sensitive information – and there is no specific carve-out for shares that are secured by margin loans.

This situation has been highlighted twice in recent weeks with MFS director Michael Hiscock having 500,000 shares sold from under him by Commsec when he was specifically banned from trading due to market-sensitive merger negotiations.

It happened again last week with outgoing Centro CEO Andrew Scott being forced to dump 782,866 units in Centro Retail Trust at 58c a pop on January 10 – the day before the extended trading halt.

Commsec was again the lender and it did well to recover $454,062 from this forced sale because the same parcel is this morning worth only $219,202 – after Centro Retail slumped another 1.5c to 28c.

It would be very interesting to know where Scott’s $1.5 million sign-off fee has gone. The ATO presumably gets a slice and I wouldn’t be at all surprised if the Commonwealth Bank has snaffled a decent whack of the rest.

Scott has also transferred half of his house to his wife – doing the lot would have been obvious – and some enterprising hack should do a title search. Don’t be surprised if you find a Commonwealth Bank mortgage.

The Australian’s John Durie had the best commentary on this situation today and it certainly raises some key ethical questions.

CBA’s Colonial funds management arm has dropped about $600 million in Centro, the biggest single destruction of equity by a fund manager in an investment that we’ve seen as Australia’s $1 trillion super pile has been built.

This should be affecting the Commonwealth Bank share price because Colonial’s performance will tumble down the performance tables as a result of Centro and funds management is a winner-takes-all game based on your recent record.

Colonial’s Centro disaster will be the equivalent of BT’s relatively minor $150 million-plus One-tel blunder – from which it never really recovered before finally being sold to Westpac.

All the while, the hard men in the Commonwealth Bank’s credit department have been pulling the rug on Centro to protect their $1.2 billion exposure – $160 million of which is reportedly unsecured.

It really is a problem to have the one institution directly offering its own money as loans to executives and various corporate structure and then, through a separate division, investing other people’s money in the byzantine structure.

If one long term reform comes from this mess it should be institutionally separating the allocation of debt and equity in our economy – because in a work out situation like Centro they are fundamentally opposed.

It’s the same issue with Big Four audit firms doing insolvency work. A liquidator will never sue his own firm for dodgy auditing – just like Colonial will not sue the Commonwealth Bank for precipitously pulling the rub on Centro.