In the Wild West days before the global financial crisis, so much seemed easy and lax. Credit, for sure, but also insider trading and market manipulation. For some, credit’s even cheaper – if you can get it – but the banks aren’t tossing it round like confetti any more. Insider trading is far less likely too, not thanks to economic conditions but the sustained clamp down since the GFC – and the court victories – achieved by the Australian Securities and Investments Commission.
Since the start of the GFC, ASIC has launched a breathtaking 26 insider trading actions, with most completed and most successful. Hard to bring let alone win, these cases are crucial to our markets being trusted and they remind potential perpetrators that the risks of detection are real and that chances of being ordered to surrender ill-gotten gains, and even end up in jail, aren’t remote.
Three high profile cases ASIC (and the Director of Public Prosecutions) recently won include former Hanlong Mining executive and ex-investment banker, Bo Shi Zhu (aka Calvin Zhu) who, after pleading guilty last week, was sentenced to two years and three months in jail.
A second win, in December, was former executive vice president of global gas giant, BG Group plc, Dr Stuart Fysh who was jailed for two years, with a minimum 12 months non-parole, and ordered to forfeit virtually his entire profit of around $640,000.
Fysh’s conviction was for buying shares in Queensland Gas Company when he had inside information about BG Group’s interest in QGC, a couple of months before the two groups announced a strategic alliance.
[Writer's note: In July 2013, after this article first appeared, three of NSW’s most respected judges, including the Chief Justice, took less than five minutes to grant Fysh’s appeal and acquit him. To be fair to ASIC, it’s hardly surprising it went after Fysh, based on the facts outlined in its releases. A senior executive buying shares in a target he knows his employer is considering making a strategic investment in is hardly proper conduct. But he’s got to actually know, and ASIC lost the appeal because the prosecution failed to prove that Fysh -- who wasn’t on the company’s deal team -- actually did know enough.]
And a month earlier, in November, Ulf Ronnie Lindskog was also invited to become a house guest of Her Majesty. More on him later.
But the biggest, most high profile fish hooked recently was Rajat Gupta. Gupta committed his crimes in the US, so it was their authorities that reeled him in, but I’m highlighting his case because it’s such a stark reminder that insider traders not only sit on the inside, they can sit at the very heart of some of the biggest, most respected organisations and power networks.
Just like Gupta, they can be apparently worthy, respected individuals moving stealthily in their victims’ innermost circles. They might be someone reading this article right now, someone you work with or who you’ve properly confided in.
Rajat Gupta was far more of a pillar than Fysh, and not just of corporate America but of global business.
Gupta was a former head of consulting firm McKinsey and a non-executive board member of companies like Goldman Sachs and Procter & Gamble, yet his key role in the now infamous Galleon Group insider trading ring destroyed his once illustrious reputation, earning him a two-year prison sentence and a $5 million fine. (He is appealing).
Whenever he addressed students at the Indian Business School, Gupta apparently finished off with this quote from the epic Hindu scripture, the Bhagavad Ghita, "You have the right to work, but never to the fruits thereof. Not only should you do your very best, you have to do it with your best intention.” Go figure.
In 2008 when the GFC struck, Gupta sat on the board of Goldman Sachs while it confidentially crafted a capital raising to ease the bank through the crisis, yet he tipped off a hedge fund manager about it. In sentencing him, the judge described Gupta’s act as "the functional equivalent of stabbing Goldman in the back.” He turned out to be wielding one of the so-called "great vampire squid’s” own tentacles, but against itself.
I’ve been thinking a lot about who we trust, so much so that it’s the basis of my upcoming novel, under the guise of an eco- and cyber-thriller.
People on boards, senior executives, advisors and lenders are frequently entrusted with price-sensitive, confidential information.
Business couldn’t operate without trusting them with its secrets. But sadly, a few aren’t deserving of that trust, and will abuse it either for immediate personal financial gain, to win favours or for some other seemingly incomprehensible reason.
So back to Ulf Ronnie Lindskog who pleaded guilty to doing it for loot. While helping out on a confidential private equity bid proposal for Spotless in 2011, he bought shares in Spotless. His guilty plea was a stunning, and quick victory for ASIC, just like the case against Bo, who also was convicted for doing it for the dough.
James J. McDermott Junior offers us a salacious case of spilling secrets to win favours. McDermott was no mere consultant or executive, but the chairman of a prestigious New York investment bank. He committed his crime splayed back on the pillows, big-noting himself to his mistress, a Canadian porn star, by blabbing to her about mergers his firm was secretly working on.
I’ve had some brushes with insider trading myself, none as X-rated, but all ugly. Here are two.
In the late 1980s a senior executive of ASIC’s predecessor phoned me up. "I have the worst possible news for you,” he said in the most sombre tone, continuing that someone who’d worked on a takeover where I was a lead adviser, had secretly bought shares in the target before the bid went public.
The guy wasn’t a gossip, so I was perplexed why he was telling me this, until his words "the worst possible news for you” struck home. I blurted out: "You’re not saying it was one of my people?” The phone trembled in my hand.
"It’s far worse,” he answered. I shuddered, thinking he must be wrongly accusing me! I glanced up at my office door – people had offices in those days – and held my breath, waiting for the cops to burst in, handcuff me and march me off as a perp to walk out in front of the TV cameras that, I feared, were already rolling outside.
"It’s far worse,” he repeated. "It was one of our people … a Commission staffer.”
Then, in the late 1990s, a takeover my bank had been confidentially advising on was finally publicly announced, and the market was awash with tales of an investigation into some unusual pre-bid trading in call options in the target.
Media reports said the regulator had followed the money and was already sitting on photos of the as-yet unknown options trader that had been snapped by CCTV cameras while he was allegedly transacting with bank tellers. The shots, apparently, were not clear enough for a ready ID.
The regulator’s chairman at the time and I were both members of a takeovers discussion group of senior M&A bankers and lawyers. At one meeting, I half-jokingly suggested that he should bring the rumoured photos to pass them round the table as, surely, one of our group could help nail the miscreant’s identity for him. He smiled wryly and, without admitting a thing, asked, "What if the photos show one of you?”
We all laughed at what we thought was a preposterous joke, but it wasn’t. The person later charged and eventually convicted was one of my most trusted work colleagues.
Recalling this extremely painful episode reinforces how even good people can seem to do bad things.
It’s a point that ASIC has in more recent years been right onto, to its great credit and the market’s benefit.
John M Green is a leading company director, commentator and novelist.
His upcoming novel, The Trusted, an eco- and cyber-thriller is being released in April in paperback and ebook.
Click here for a free chapter and book trailer.