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.
What’s that saying: the law is an ass.
Your article misses the fundamental driver behind the ASIC’s action. Betrayal of public trust represents one of the most serious crimes anyone can commit against the collective social organism. It should be put up on the same level with murder and other serious offences against the individual.
So what if this small step isn’t the final solution. The fact that the established institutions and underlying social mores continue moving towards stamping out behaviour that is inherently damaging to the collective is much more significant.
The original quote from Mr Bumble in Oliver Twist goes something like “If the law supposes that … the law is a [sic] ass—a idiot. If that’s the eye of the law, the law is a bachelor; and the worst I wish the law is that his eye may be opened by experience—by experience.”
And so experience in learning to deal effectively with betrayal of public trust will eventually open the law’s eye fully. The process should not be damningly declared a furphy, rather you should offer constructive criticism in your analysis.
I suggest that the insider trading laws be changed to parallel tax law.
That is GUILTY until proven innocent !
Otherwise you are whipping white collar criminals with lettuce leaves.
Hands up anyone who was surprised by the suggestion on insider trading. Isn’t that the (traduced) Invisible Hand of the sub literate Gordon Gekkos?
unless your a comedian…..