Twelve days before MFS collapsed, former director, Michael Hiscock, was forced to sell 500,000 shares subject to a margin call, at $3.61 each. Eight days later, fellow director, Paul Manka, had almost 5 million MFS shares sold by his lender. On 22 February, 2008, ABC executive director, Martin Kemp’s margin lender sold 2 million shares at $3.57 per share.

Three days later, ABC announced a terrible financial result for the period ending 31 December, 2007, causing its share to slump to as low as $1.15 per share. Finally, late last year, former Oxiana CEO (and then OZ Minerals non-executive director), Owen Hegarty, had to sell 10 million OZ Minerals shares pursuant to a margin call, two weeks before the company was suspended from trading on financing concerns.

The Corporations Act states that a person with ‘inside information’ must not acquire or dispose of relevant financial products. Typical insider trading cases involve the purchase of shares in a company prior to a takeover announcement. Another example of insider trading occurs when a person with knowledge bad news, such as poor profit result or impending discounted rights issue, sells shares in a company before that information is publicly announced.

There is no indication that any of the above have breached the insider trading provisions, but the question arises — if an executive or director who possesses ‘inside information’ is subject to a ‘margin call’ from their lender, and that person declines to top-up their margin account, will such an action trigger the insider trading provisions?

An obvious argument, the seller’s defense is that the acquisition or disposal of shares was not committed by themselves, but rather by a third party seeking to enforce a contractual undertaking. While this may be true in a technical sense, in reality, a margin lender will generally allow their client a period of time (usually, around 24 hours) to ‘top-up’ their account with cash in order to prevent the forced sale of shares. If the borrower elects not to top up their account upon receiving a margin-call, they do so with the knowledge that their shares will almost certainly be sold the following day.

In many cases, those on the receiving end of a margin call have no liquid assets upon which they can use to top-up their account. For example, someone wouldn’t be expected to sell their principal residence in the space of 24 hours. In such an instance, the executive has no choice and the insider trading provisions are of no relevance. However, in other instances, executives or directors may very well have liquid funds available but elect not to use them to top-up their account, effectively compelling the margin lender to sell their shares.

Between 18 and 20 November, 2008, the former CEO of Oxiana (and later, a non-executive director of OZ Minerals), Owen Hegarty, was subject to a margin call from his lender. According to this announcement by the company, Hegarty sold 10,000,000 OZ Minerals shares “as a result of margin calls.” The alleged share sales amounted to $6.2 million (or 62 cents per share). The following week, OZ Minerals shares fell further to $0.55 and two weeks later, the shares were suspended as the company sought refinancing of loan facilities.

Hegarty was a non-executive director at the time, so he may or may not have possessed inside information at the time of the share sales. (Until Minmetals launched a surprise takeover bid earlier this week, many market watchers believed that OZ Minerals equity holders would receive nothing for their equity stakes in the company).

Leaving aside the issue of whether Hegarty actually possessed inside information at the time of the share sales (in Hegarty’s defense, as a non-executive director, he may not have been fully aware of OZ Minerals’ dire plight) there is the question of whether the former Oxiana chief had the means to top-up his margin account.

In this respect, it is noted that only four months prior, Hegarty received an $8.35 million ex gratia payment from OZ Minerals. Further, it was reported in yesterday’s Financial Review that “Hegarty… is understood to be leading a consortium that is in exclusive talks to buy the Martabe gold and silver project in Indonesia from OZ.” The Martabe project was valued by Grant Samuel last year at between $707 and $815 million.

Crikey contacted ASIC to seek their views on the issue of margin-calls and potential insider trading offences, but an ASIC spokesperson declined to comment on the matter.

Peter Fray

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