According to both Corporate Law Minister Chris Bowen and ASIC Chairman Tony D’Aloisio, insider trading is rife on the Australian Stock Exchange. At least this is the only conclusion which can be drawn from yesterday’s announcement that:
(a) as an offence insider trading potentially will be elevated to the same level as murder, kidnapping and terrorism;
(b) the maximum penalties for the heinous offence are now up ten years’ jail and a fine of $500,000 or three times the profit made – whichever is greater; and
(c) ASIC can now tap phones, email accounts, texts, etc.
Both Bowen and Aloisio have correctly noted that stocks subject to a price changing event (such as a takeover) often move materially in advance of the event’s announcement. This, it is alleged, means that insider trading is rife and should be dealt with in order to maintain market integrity.
Unfortunately, this allegation is neither necessarily true, and nor will ASIC’s new powers and punishments prevent insider trading from going on. Share prices don’t always move because of specific insider knowledge, but because in most corporate deals participants close to the action cannot keep their mouths shut. As a result, while the genuine insiders rarely try and trade stocks to their advantage, those who pick up on leaked information (the content of which is usually imperfect and unverifiable) are often happy to take a punt before informing other traders of their special insights – in an effort to move further the price in question.
If any evidence of this rumour mongering is needed, have a look at any internet share chat sight such as Hotcopper during rumours of a takeover, capital raising, resource upgrade, or anything else that frequently moves share prices. Such websites, like stockbrokers’ dealing rooms, are literally filled to overflowing with rumours – the problem for traders, of course, is knowing which ones to back. The plethora of high risk tolerant punters out there means that many rumours, both true and untrue, will result in substantial shareprice moves.
Another reason ASIC’s new powers will do little to curb genuine insider trading is that like most criminals, those who do it act on the assumption they won’t get caught. Unless the conviction rate for this offence increases markedly (something I doubt will occur), then the deterrent impact of the upgraded penalties will be muted at best.
The final and most important issue with which yesterday’s announcement on insider trading fails to deal is the legal definition of the offence itself. As a number of judges involved in such cases over the past decade have noted, successful convictions rest on proving each and all of the following:
– the defendant possessed the information in question;
– the information was not generally available;
– the information was material in nature; and
– its significance was known to the defendant at the time of the alleged offence.
Proving these four points to a criminal court’s ‘beyond reasonable doubt’ threshold is extremely difficult. As a result, it remains likely that the bulk of future insider trading cases will continue to be played out in the civil courts where both the penalties, and the deterrent effect, are considerably lower.