Securities law in Australia is predominantly governed by the Corporations Act 2001(the Corporations Act). On the other hand, the Australian Securities and Investments Commission (ASIC) is charged with the mandate of regulating the securities market with insider trading being a current priority.
The Australian insider trading provisions are notoriously difficult to comprehend as they poise a conundrum in definitions of insider trading and insiders. Insider trading defeats the essence of the fiduciary duty bestowed upon an individual connected with the company and serves to diminish confidence in the financial market. It entails trading with the use of material non-public information for self-enrichment which is deemed an unfair and unjust advantage to other in
At the outset the ASIC Chairman Greg Medcraft sentiments manifest an imperative need to fully breathe life to the provisions criminalizing insider trading. Traders should not have unfettered leave to contaminate the financial market by a practice that hinders market fairness and efficiency.
This paper seeks to underscore the indispensible need to strengthen the Australian insider trading laws and to justify the necessity of the recent indictment of Oliver Curtis. It shall further explore key dimensions of the current Australia insider trading legal provisions, the rationale for its prohibition and the lacunae that the ASIC should seek to fill so as to crystallize the laws and send a sound message to perpetrators of insider trading that the hard fought war against the vice is called for.
It is of particular significance to point out that the sustained and rigorous commitment to end insider trading in Australia is in consonance with the trends in other jurisdiction such as South Africa and the United Kingdom as shall be discussed concisely in some sections of this study.
Insider trading laws prohibit any person who possess confidential price-sensitive information which is deemed to impact on the price or value of certain securities from trading in those securities. The prohibition extends to actions that lead to procuring trading with that information or communication of that information to a person likely to trade. This will, however, only apply to acts or omissions of any body corporate including a foreign body corporate within Australia and acts or omissions outside Australia in relation to the financial products of a body corporate that undertakes its business within or has been established in Australia.
This provision revises the position in Danae Investment Trust plc v Macintosh Nominees Pty Ltd where the court imposed territorial limitations and held that a company incorporated in Australia could not transact in shares where the transaction occurred in United Kingdom which contrary to s 128 of the Securities Industry Code 1981 (SA).
It is vital to underscore the fact that by dint of s 1043A, mere possession of that information does not amount to insider trading but the use of such information is incriminating. It is not sufficient to argue that you were not aware that such information was of the nature of material non-public information. The standard that will be applied is that of a reasonable man who ought to be aware of the nature of that information at the time.
Suffice to say, if it is proven that the body corporate or insider was aware of the information and actually used it the burden of proof will shift to the accused to discharge himself from liability, a position that that has been strenuously rejected offending the basic tents of Criminal law that the prosecution has the burden of proof.
It is worth noting that it is not a prerequisite that a nexus must be established between the insider and the company trading to attract liability. A clear and striking example is where an insider was charged with the possession of insider information though he pleaded that he was acting as a broker, but his plea failed.
It is submitted that the information must have a material effect on the price and value of the financial product that will eventually influence commonly traders in the product. This position has since been replicated by Spigelman CJ in R v Hannes where he explicated that the legislative provision on material effect was clear and needed no further explanation.
The prohibition needs no better explanation than the above and the actions of Oliver Curtis display deliberate and remiss actions that do no warrant remorse.
Fiduciary duty bestowed upon a person demands of the individual not to make profit or otherwise avoid loss through reliance of material insider information that is not public. This contravenes the duty of confidentiality and a conspicuous breach of the duty not to have a conflict of interest which poses to the reputation of the company and the value of its securities. It should be noted that the scope of fiduciary duty is limited to the company and the directors or officers of the company do not owe a fiduciary duty to the shareholders.
The prohibition, in addition, servers to avoid misappropriation of information which entails use of price sensitive information that when the user owes a fiduciary duty to the owner of the information. Essentially misappropriation of information occurs where the fiduciary duty is breached. The abuse of propriety rights over insider information may injure the reputation of the company and destabilize the value of its financial products.
The integrity of the financial markets is highly dependable on fairness and efficiency in trading and the lack of it undermines investors’ confidence. To promote market fairness, information that common traders should possess must be one that can be accessed through ordinary skill, research and analysis which can be deemed as public information. However, it should be noted that some individuals possess superior skill and intelligence in the trade resulting from their commitment. This cannot be seen as an unfair advantage as this based on hard work.
A crime must contain a physical element which is commonly regarded as the mens rea. In the case of insider trading, dealing in the financial products in a manner that constitutes acquiring, disposing them and entering into an agreement to either acquire or dispose, amounts to trading. Procuring another person to trade and the communication of insider information also amounts to a transaction prohibited within the act.
The challenging question embedded in R v Evans was whether to treat the agreement as a normal contractual agreement for sale or purchase or it should be fashioned as conspiracy in the criminal perspective. The court was guided by the latter in this case since the entire act fulfilled the actus reus element of a crime. The same reasoning was applied in in Cutis case as Mr Hartman and Curtis were fully aware of the nature of information that they used and so conspired to commit the crime.
A person may be guilty of procuring if he encourages or induces an act to done even though it is not beneficial to him. It has been argued that if the employee was not aware of the essential facts that amount to the offence then the principal will not be in breach of s 1043A(2). It is not necessary that they know that the acts amount to a crime but knowledge of the essential elements of the offence will suffice.
Section 1043A (2) is of the effect that the insider cannot either directly or indirectly communicate or cause the information to be passed to another person. The offence of communicating commonly regarded as ‘tipping’ will be take effect where the product is bale to be traded on a financial market. It should be noted that the offence will still stand even though the trading has been suspended by the exchange.
Oliver Curtis contravened the above arguments in every sense of the word. The prosecutor noted that he Oliver received tip-offs, information that was generally not available to the public, from his friend Mr. Hattman on when to buy and sell and at what price which is a full definition of the prohibition above.
The tragedy of Oliver Curtis case that seems ambivalent is that he agreed to forfeit the sum of $1.4 million despite the fact that he refused to admit and persistently argued his case to defeat. Nonetheless the below defenses are useful in the proceeding in insider trading.
The South Africa Jurisdiction have argued that if one can prove that he would have acted in the same manner even without the insider information this would be a successful defense. It has further been provided that in the United Kingdom that if one reasonably believed that the information would be released to the public hen this could be a possible defense. The possibility of this defense being applied in Australia is dependent on the circumstance of the case at hand.
It is submitted that if the disclosure took place in the normal and usual performance of the functions of insider’s employment one could escape liability. In South Africa though it is important the insider disclosed that the information was insider information while communicating. An insider could also apply a statutory defense if the other party was aware ought reasonably to have been aware of the inside information.
The ASIC is still facing the challenge of burden of proof as it majorly relies on confessions and whistleblowers. On the other hand, the legislation has been said to be too complex in its application as it almost creates ambiguities. Similarly, it provides sentences which end up being suspended and the pepetrators don’t end up behind bars.
The power to institute criminal proceedings in insider trading is vested on the ASIC in the Commonwealth Director of Public Prosecutions (‘DPP’). Such an action can only be brought within 5 years after the offence has been committed pursuant to section 1316 of the Corporations Act. The ASIC may apply for orders to freeze bank accounts and the operations of the personal property of the accused during the criminal proceeding. The proceeds or any profits made by the accused may be a subject of forfeiture though an application by the prosecution through the DPP.
Punishment for insider traders has varied considerably depending on the circumstances of each case. The courts have however commonly taken into account the amounts of profits made and character of the offender as the criteria for determining the penalty. In R v Hannes which is one of Australia’s largest cases because of the amounts of illegal profit made, the court stated that the accused had tremendously undermined the integrity of the market through his act.
A person is automatically disqualified from being a director or managing a corporation if they are found guilty of insider trading and the disqualification commences from the time of conviction and it goes for five years. The ASIC may apply for a longer period of time from the banning if they can prove that the circumstances at hand fit the further ban.
Surprisingly, Mr. Hartman had previously served fifteen months in prison for insider trading offences from a sentence in 2010. The challenging question embedded in this reality is as to how effective is the ASIC and its mechanism when a crime can be committed twice by the same offender even after serving a term in jail. The correctional essence of criminal penal system can be argued to be losing meaning.
Breach of the insider trading provisions is subject to imprisonment and/or a fine .Orders may be sought pursuant to Proceeds of Crime Act 1987 (Cth) and the Crimes Act 1914 (Cth) to retrieve any benefits that an insider had since managed to acquire and the insider be ordered to pay the affected person. The court is also vested with a broad discretionary power to deal with the consequences of insider trading.
The ASIC may in special circumstances institute civil proceedings so as to recover unjust enrichments that a body corporate is entitled to recover. It may also apply for injunctions or specific performance to compel the insider to compensate the injured party. It is vital to note that ASIC is solely mandated to apply for a declaration of contravention or a pecuniary penalty order where an insider fails to compensate the aggrieved party. Such civil actions however must be brought within six years. The purpose of such actions is to bring a deterrent effect and prevent the enjoyment of the benefits of such criminal acts.
Section 1043L (2) demands of the issuer brings an action for compensation of the financial products or securities that the insider acquired or procured someone to acquire them thereby causing him loss.
Remedies of Parties to the Insider’s Transaction
Section 1043L (3) the party whose goods financial products were bought may bring an action on the insider to recover the loss or the difference between the prices had the information not been disclosed or the unfair advantage not been used.
The impact of the jurisprudence created by Oliver Curtis case is negligible and depicts a weak legal system and enforcement mechanism and criminal sanctions that can be said to be ‘toothless’ and ’ whistling in the wind’. The benefits incurred by perpetrators do not match the severity of the criminal sanctions enforced by the legal mechanisms put in place by the ASIC.
The ASIC prides itself of having a success rate of 80% in combatting insider trading and has since 2009 brought 39 cases to court. However most of these cases have been brought to their attention by whostblowers because it is has almost been impossible to detect insider trading by itself. Essentially, the custodians of information that has the meaning of inside information must be careful as to the use of such information and not negligently handle it. Most importantly, the ASIC should improve its investigative mechanisms and not rely on whistle blowers to detect crime. This will crystallize the insider trading provisions and assist in curbing more criminals who seek to ruin the reputation and stability of the financial markets.
It can be concluded that the effectiveness of the penalties provided for insider trading are not deterrent and it is incumbent upon the ASIC concomitantly with the courts to provide for stringent measures that will go beyond to deter insiders. Several proponents have argued that Instituting civil proceeding against a convicted person may create ambiguity and the ASIC should come up with clear measure on how compensations will be effected by instituting the suits.
Lyon Gregory and Olessie Jean ;The Law of Insider Trading in Australia 2005
Stewart Emily,’ Insider Trading: Lawyers say small number of insider trading cases before courts 'tip of iceberg'.10 Jun 2016, http://www.abc.net.au/news/2016-06-09/insider-trading-cases-tip-of-iceberg/7497236Ampolex Ltd v Perpetual Trustee Company (Canberra) Ltd [No 2] (1996) 14 ACLC 1514, 1519, 1522 (‘Ampolex [No 2]’).
Australian Securities and Investments Commission v Adler NSWCA 131
Brunninghausen v Glavanics (1999) 32 ACSR 294.
Danae Investment Trust plc v Macintosh Nominees Pty Ltd(1993) 11 ACLC 273; appeal at 1242
Financial Services Authority Code of Market Conduct April 2001, Annex B, paras 1.8.5 & 1.8.6.
Giorgianni v R (1985) 156CLR 473.
Curtis  EWCA Crim 123
R v Hannes NSWSC 1182.
Yorke v Lucas (1985) 158 CLR 661.Corporations Act 2001
Attorney-General’s Department, Commonwealth Government, Insider Trading — Proposed Amendments to the Corporations Law (1990) 6 (‘Draft Legislation and Explanatory Paper’
Proceeds of Crime Act 1987Australian Securities and Investments Commission (ASIC) Digest, vol 1
D’Aloisio ,Chairman Australian Securities and Investments Commission Supreme Court of Victoria Law Conference ,Insider trading and market manipulation ( A speech, Melbourne 13 August 2010)
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