Insider trading made easy
The ASX's success in identifying what it believes to be 'significant breaches of the Corporations Act' is not being matched by the prosecution of the culprits.
Latest market surveillance statistics from the ASX have provided a timely reminder of how hard it is to remove the black stain of insider trading from the Australian stock market.
Insider trading is as rampant at it has ever been with suspected breaches of the law being picked up by the ASX markets surveillance division at the rate of about one every fortnight for the past year. It spiked to about double that rate in the past three months.
But the ASX's success in finding what it believes are "significant breaches of the Corporations Act” is not being matched by the prosecution of those behind the insider trading.
The Australian Securities and Investments Commission and the Director of Public Prosecutions are failing to convert the strong leads from the ASX into court cases.
You only need look at the latest ASX insider trading referrals to ASIC and compare them with ASIC advisories on court actions and successful prosecutions to see how far behind ASIC and the DDP are lagging.
ASX yesterday published its first quarterly activity report by the markets surveillance division. It is part of efforts to provide greater transparency about what the ASX is doing in the area of policing market behaviour.
The quarterly report provides data on referrals to ASIC going back to the March quarter of 2008. It includes data on breaches of continuous disclosure, market manipulation and insider trading.
In that 15 month period, there were 38 referrals to ASIC for suspected insider trading. The ASX has a number of ways of spotting insider trading including the routine analysis of all share trading leading up to a major merger or corporate transaction.
In that same 15 month period, there was only one successful prosecution for an insider trading referral from the ASX during that period. It involved former Queensland Gas company secretary Mukesh Panchal, who punted $1.3 million on his company's stock ahead of an alliance with British Gas.
The Panchal case took 12 months from discovery by the ASX to successful prosecution by the DPP. He pleaded guilty and will be sentenced next week.
There was one other successful insider trading prosecution during the period from January 2008 to March 2009. But the successful action against Perth broker Colin Hebbard, who tipped off his Citi Smith Barney clients about a takeover offer for Vision Systems, took two and a half years.
During the same 15 month period only 1 in 40 ASX referrals were prosecuted and an insider trading case dating back to 2007 was discontinued.
ASIC and the DPP can do little about the delays inherent in the court system. However, they can make greater use of the civil penalty provisions of the Corporations Act.
As it is now, the bulk of insider trading prosecutions are pursued under the offence provisions of the Act and therefore require the criminal burden of proof to be 'beyond a reasonable doubt'.
It is difficult to prove elements of insider trading offences beyond reasonable doubt because many elements refer to the defendant's state of mind.
"This difficulty may result in cases not being pursued even where there has been a breach of the provisions,” the explanatory memorandum for the Financial Services Reform Bill 2001 said.
"This is undesirable because it casts the law into disrepute and also threatens the integrity of financial markets.”
It is believed the DPP last used the civil penalties of the Act in 2005 when prosecuting John Petsas and Marc Miot on insider trading charges relating to the merger of BRL Hardy and Constellation Brands in 2003.
As part of a settlement agreed to in November 2004, Petsas and Miot each consented to a declaration being made that they contravened the insider trading provisions of the Act.
ASIC commissioner Belinda Gibson has previously told Business Spectator that the commission has ramped up its efforts to prosecute insider trading.
But the latest ASX statistics show that the insider trading prosecution pipeline is well and truly clogged.
Insider trading is as rampant at it has ever been with suspected breaches of the law being picked up by the ASX markets surveillance division at the rate of about one every fortnight for the past year. It spiked to about double that rate in the past three months.
But the ASX's success in finding what it believes are "significant breaches of the Corporations Act” is not being matched by the prosecution of those behind the insider trading.
The Australian Securities and Investments Commission and the Director of Public Prosecutions are failing to convert the strong leads from the ASX into court cases.
You only need look at the latest ASX insider trading referrals to ASIC and compare them with ASIC advisories on court actions and successful prosecutions to see how far behind ASIC and the DDP are lagging.
ASX yesterday published its first quarterly activity report by the markets surveillance division. It is part of efforts to provide greater transparency about what the ASX is doing in the area of policing market behaviour.
The quarterly report provides data on referrals to ASIC going back to the March quarter of 2008. It includes data on breaches of continuous disclosure, market manipulation and insider trading.
In that 15 month period, there were 38 referrals to ASIC for suspected insider trading. The ASX has a number of ways of spotting insider trading including the routine analysis of all share trading leading up to a major merger or corporate transaction.
In that same 15 month period, there was only one successful prosecution for an insider trading referral from the ASX during that period. It involved former Queensland Gas company secretary Mukesh Panchal, who punted $1.3 million on his company's stock ahead of an alliance with British Gas.
The Panchal case took 12 months from discovery by the ASX to successful prosecution by the DPP. He pleaded guilty and will be sentenced next week.
There was one other successful insider trading prosecution during the period from January 2008 to March 2009. But the successful action against Perth broker Colin Hebbard, who tipped off his Citi Smith Barney clients about a takeover offer for Vision Systems, took two and a half years.
During the same 15 month period only 1 in 40 ASX referrals were prosecuted and an insider trading case dating back to 2007 was discontinued.
ASIC and the DPP can do little about the delays inherent in the court system. However, they can make greater use of the civil penalty provisions of the Corporations Act.
As it is now, the bulk of insider trading prosecutions are pursued under the offence provisions of the Act and therefore require the criminal burden of proof to be 'beyond a reasonable doubt'.
It is difficult to prove elements of insider trading offences beyond reasonable doubt because many elements refer to the defendant's state of mind.
"This difficulty may result in cases not being pursued even where there has been a breach of the provisions,” the explanatory memorandum for the Financial Services Reform Bill 2001 said.
"This is undesirable because it casts the law into disrepute and also threatens the integrity of financial markets.”
It is believed the DPP last used the civil penalties of the Act in 2005 when prosecuting John Petsas and Marc Miot on insider trading charges relating to the merger of BRL Hardy and Constellation Brands in 2003.
As part of a settlement agreed to in November 2004, Petsas and Miot each consented to a declaration being made that they contravened the insider trading provisions of the Act.
ASIC commissioner Belinda Gibson has previously told Business Spectator that the commission has ramped up its efforts to prosecute insider trading.
But the latest ASX statistics show that the insider trading prosecution pipeline is well and truly clogged.
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