Under the current regime at the Australian Securities and Investments Commission, insider trading, ripping off investors and breaching director’s duties can be a highly profitable activity. The risk of getting caught is low and the penalties if you do get caught minimal.

Part of the reason is ineptitude and indifference. Michael West in the Fairfax press on Saturday revealed he had warned ASIC of the looming disasters of Storm Financial, Allco, Babcock & Brown, ABC Learning and others. The regulator, though, wasn’t interested. Six months before Storm collapsed, ASIC gave it a “clean bill of health”.

But even when ASIC does prosecute, other agencies let it down, the rare but successful conviction of former Gunns CEO John Gay being a case in point. Seeing a management report warning of poor sales, Gay sold 3.4 million shares before that information became public, saving himself about $750,000 in potential losses.

It was as strong a case of insider trading as ASIC could wish for, carrying a maximum sentence of five years in jail and a maximum fine of $220,000. Gay pleaded guilty and was fined $50,000. But as Crikey has pointed out, Gay kept the bulk of the proceeds of his crime and avoided a jail sentence. Although the Australian Federal Police could have launched crime recovery action, it chose not to.

During sentencing Justice David Porter described Gay as “an exemplary character”, declaring the crime to be “not in the serious category of insider trading”.

In the month of Gay’s conviction in the same Launceston court, Fairfax’s Patrick Durkin reported that a 48-year-old was sentenced to 10 months in jail for stealing $71,000 in shipping containers. This is ASIC boss Greg Medcraft’s first problem. The institutions he needs to support ASIC in upholding current laws see white-collar crime as a lesser kind of offence. His second problem is that many of Medcraft’s employees agree with that view.

ASIC chose not to appeal Gay’s sentence, nor did it pursue directors of Reserve Bank of Australia subsidiaries Securency and Note Printing Australia for breaches of directors’ duties, despite the AFP bringing bribery charges against them. ASIC also recently dropped criminal proceedings against two former AWB directors in connection with the Iraq oil-for-food scandal. Instead, it pursued a prearranged settlement, with Judge Mark Weinberg saying his court had been reduced to “rubber stamping” secret deals between ASIC and the accused.

Medcraft also defended ASIC’s decision not to pursue David Jones directors for insider trading, saying they had already indicated their intention to buy shares before they came into possession of market-sensitive information so the law did not apply. Directors looking to make a few bob on the side now have their riding instructions: show intent to purchase stock in every trading window, get advance approval and then act as you see fit between receiving market-sensitive information and it becoming public.

“Until ASIC solves these problems the tendency to throw the book at the tiddlers and let the big fish swim free will continue.”

ASIC moaning about pitiful fines when it appears so reluctant to prosecute apparently strong cases — and failing to fine Australia’s billionaires and some of its biggest business for late filing of returns — isn’t a good look for a regulator that wants to be taken seriously.

Medcraft’s third problem explains why. The public believes ASIC is about corporate law enforcement, which is only partly true. Its other task is to raise huge sums of money — over $300 million in the last financial year — for the federal government. Those two roles sit uneasily with each other. And when ASIC is faced with a long legal battle with a well-funded opponent, they’re in direct conflict.

ASIC’s legal costs are truly horrendous. Securing the 2009 convictions against James Hardie directors — for which they were each fined the princely sum of $25,000 — is believed to have cost ASIC $35 million, a little more than the $30 million estimate of its recent and unsuccessful Fortescue case. At the recent committee hearings, Medcraft said the case against Storm Financial had cost $50 million.

The corporate regulator simply cannot afford to run many cases of this ilk. So when a whistleblower calls up with information of wrongdoing at Commonwealth Bank’s financial planning arm, for example, you can see why it might go weak at the knees.

The suspicion grows after a trawl through the names of ASIC’s prosecutions for insider trading, of which there have been 32 since 2009, resulting in 23 prosecutions and a handful still pending. The names of the guilty don’t exactly leap out at you, the fines less so. Why? The little guys are cheap to prosecute.

ASIC’s most recent six-monthly enforcement report reveals that, excluding small business, there were 27 criminal actions but 46 “administrative remedies” and 27 “enforceable undertakings/negotiated outcomes”.

This hardly dispels the notion that ASIC is reluctant to use the courts, and with expenses like those incurred against Storm and James Hardie, who can blame it?

Medcraft is in a tricky position. He has to convince police, judges and his own staff that white-collar crime must be taken more seriously. Then he has to lobby politicians to increase punishments and raise penalties, knowing that corporate Australia is a big funder of the main political parties. Finally, he either needs a bigger budget or find a way of prosecuting cases that don’t cost tens of millions of dollars.

Until ASIC solves these problems the tendency to throw the book at the tiddlers and let the big fish swim free will continue.

*John Addis is a director of Private Media (publisher of Crikey) and of Intelligent Investor Share Advisor