Last month former ABC Learning Centres CEO and BRW Rich List member Eddy Groves appeared before a court to face criminal charges resulting from a breach of directors’ duties. The charges represent a rare show of aggression by Australia’s corporate watchdog, ASIC, which has tended to take civil action against executives and directors in recent years.
But while the action could result in a maximum of five years jail for Groves (although that would be highly unlikely), he should consider himself lucky that ASIC didn’t take any further action, despite it appearing that Groves may also have breached the “insider trading” provisions from the Corporations Act.
The alleged insider trading occurred in 2007, when ABC was still, apparently a profitable company and the world’s largest publicly listed child-care business.
The facts are clear and all public, which makes ASIC’s failure to take any action in regard to the trading all the more perplexing.
According to ASX filings, on July 6, 2007, Eddie Groves purchased 300,000 ordinary shares in ABC for $6.84 per share (increasing his stake in the company to 19.6 million shares). On July 10, Groves purchased 200,000 more ABC shares and a further 200,000 shares on 16 July for $6.71 each. All these purchases were made after the end of the financial year — at which time ABC executives (such as Groves) would have presumably been aware of the company’s most recent performance.
Shareholders would have to wait until more than a month later, on August 27 2007, when ABC announced that net profit grew by 76% and earnings per share rose by 30%. While it would later be shown that ABC’s results were an elaborate piece of fiction, the apparently stellar results, coupled with a UK acquisition, had a very positive impact on ABC’s share price, rising to $7.10 per share.
Based on Groves’ purchases the prior month, when he would almost certainly have been aware of the information released (as well as the takeover of British child-care group, Busy Bees, on August 13, 2007), Groves would made a windfall gain of about $210,000 on those purchases in just over a month — not an especially substantial amount of money, especially compared with Groves’ apparent wealth at the time, but the quantum of any gain (or loss) is not a relevant ingredient of proving insider trading.
There is no doubt Groves was an insider, and the trading certainly occurred — the only question is whether Groves possessed “inside information” at the time of the trades. Given his extraordinarily level of power at ABC (Groves was the founder, CEO, was at one time on the company’s audit committee and effectively appointed all executives and directors) it would seem unthinkable that Groves was not aware of ABC’s upcoming profit results, or the acquisition of Busy Bees.
(There was a later instance where Groves and fellow director Martin Kemp sold $35 million shares in ABC shortly before concerns arose about the company’s debt levels, however, those sales are somewhat more defensible on the basis that they appeared to be forced sales to meet margin calls).
So while ASIC is prosecuting Groves for breach of directors’ duties (in relation to the relatively minor acquisition of $3 million worth of child-care centres from Kemp), given it’s inauspicious record in recent times, ASIC might want to also consider laying charges for what appears to be at least a better than arguable case of insider trading against the man who was once Australia’s richest person under the age of 40.