By pursuing recent high profile cases against Richard Kamay, Steven Xiao and Oliver Curtis, ASIC has shown that it will prosecute those who have engaged or been involved in insider trading. What does this mean for you and your business?
Recent high-profile insider trading cases that have captured the public’s attention (such as those against Oliver Curtis, Richard Kamay and Steven Xiao) have seen increasingly harsh penalties being ordered by the Courts. In each of these cases, ASIC elected to pursue criminal charges due to the seriousness of the conduct.
Businesses should take note of these harsher penalties and also watch such cases with interest, because they highlight a real and emerging risk: that any individual or business caught up in allegations of insider trading (or market manipulation) is likely to face serious reputational damage.
What is insider trading?
Insider trading can be conveniently summarised as occurring when:
a person possesses “inside information” and, either by themselves, or by procuring another person to act, participates in the market for certain traded financial products (for example shares), in circumstances where they know (or ought reasonably to know) that first, the “inside information” is not generally available and, secondly, if that inside information were generally available it would be expected to have a material impact on the traded financial products.
Insider trading, along with the other market misconduct provisions (market rigging, market manipulation, false or misleading statements and dishonest conduct), attracts both civil and criminal liability.
Parts One and Two of this article relate to both types of conduct.
How do the Courts view insider trading?
Gone are the days when Australian “white collar” criminals could expect to successfully argue that insider trading offences are “victimless” and undeserving of lengthy gaol sentences.
As numerous recent cases have shown, the Courts now view insider trading is a form of cheating, with the capacity to unravel public trust, which is critical to the viability of the market. In other words, it should be considered as a form of fraud.
By way of an example, the distinction between “white collar” and “blue collar” offences was flatly dismissed by McCallum J during the recent sentencing hearing of Oliver Curtis. Addressing a submission that a non-custodial sentence would be appropriate, her Honour asked Counsel:
“”If your client had been charged with larceny, would we be having this debate? If you stole $1.4 million, would you be putting a submission for a non-custodial sentence”
Further, factors which might have once led to a reduction in sentence (such as youth, good character, lack of prior offending, the loss of future career progression and prospects of rehabilitation) are now considered unremarkable, and in the absence of an early guilty plea, are unlikely to assist a defendant to obtain a reduced sentence.
Recent cases have seen the Courts express the view that people who engage in white collar crime are generally intelligent and often have no prior criminal offences, but are driven by profit and greed and take advantage of their professional standing and demeanour.
Are the penalties for insider trading getting harsher?
In December 2010, the maximum gaol sentence for insider trading and the other market misconduct provisions doubled from 5 to 10 years imprisonment.
The maximum fine was also increased from $220,000 to either $490,000 or three times the value of the benefits obtained from the offending conduct (details on the changes to penalties for corporations are set out in Part Two).
These changes reflect a policy position that both insider trading and market misconduct should be understood (in case they were not already!) as serious criminal offences. All other things being equal, these changes will lead to more severe penalties as courts order sentences reflecting the underlying intention of the increased penalty regime.
And this has already begun to happen…
Twice in the last 12 months, a Court has ordered a record longest sentence ever for insider trading offences:
- The first instance was in July 2015, when the Victorian Court of Appeal upheld what was then Australia’s longest sentence for insider trading: 7 years and 3 months against Richard Kamay. He had conducted multiple trades over a 9 month period based on market sensitive information obtained from a friend who worked for the Australian Bureau of Statistics before that information was released to the market.
- The second instance was in March 2016, when Mr Steven Xiao, the former managing director of Hanlong Mining, received a sentence of 8 years and 3 months. He had used market sensitive information gained through his position to engage in more than 100 illegal trades, culminating in 65 contraventions of the Corporations Act.
In contrast to these record long sentences, the recent Oliver Curtis case also warrants a mention here. As those familiar with the case will know, Curtis was sentenced for a period of “only” 2 years, in part because he was being sentenced under the older, more lenient regime, as his offending conduct took place in 2007 and 2008 (i.e. before December 2010). He was therefore not at risk of setting an undesirable record.
What are the chances of getting caught?
Our discussions with ASIC indicate that the majority of market conduct issues are identified by ASIC’s own Market Analysis and Intelligence Unit. This Unit “flags” trades for review by its enforcement team, rather than relying on “suspicious activity reports” submitted to ASIC by market participants.
Further, in April 2016, ASIC received a significant funding injection to upgrade its analytics capabilities. Whilst much of this funding is earmarked for specific projects, the enhanced analytics capabilities are likely to be reflected in increased enforcement action relating to misconduct in financial markets.
ASIC boasts a success rate of around 85% in the insider trading cases it pursues where liability is determined by a Court.1Therefore, it is imperative that those participating in the market understand the ways in which ASIC views market transactions and the limits it perceives on acceptable conduct.
But inside traders are rogues…what’s the risk to businesses?
Businesses need to be aware that if an individual is placing trades based on “inside information” on behalf of a corporation, and none of the corporate defences apply, the penalties for that corporation are particularly harsh. In fact, they could face fines of the greater of $4,950,000 or three times the benefit obtained (being generally available) or a fine as large as 10% of the corporation’s annual turnover (being available in certain circumstances).
Further, given the recent public interest in insider trading offences, the fines identified above could pale in significance compared to the reputational damage to a company. For example, a company could have its name trashed in the media based on the conduct of an employee who has engaged in insider trading as a high profile trial plays out.
Worse still would be the potential loss of business if it is a client’s inside information which has been used improperly by an employee conducting illegal trades.2In this context, it is crucial for an organisation to effectively manage these and other compliance risks, as the defences depend on compliance.
Businesses should also remember that any instance where an organisation (whether through an employee or otherwise) is found to have breached insider trading laws is likely to be treated harshly by ASIC. If a company in this situation fails to demonstrate that it had effective controls to either prevent or pick up offending conduct, or establish the basis for defences, it could face difficulties in defending such a claim in the courts and in the eyes of the public.
Directors and employees should also be aware that the rules are strict, and at times complex. For example, as we recently observed, compliance with an entity’s trading policy does not necessarily equate to compliance with the insider trading provisions.
Is there anything else businesses should know?
It should be observed that in Oliver Curtis’ case, ASIC pursued a charge of conspiracy. This decision was apparently approved by the Court despite a submission by Curtis that it was contrary to the interests of justice. In pursuing this charge, ASIC appears to be sending a message to market participants that it will pursue not only insider traders, but also those who are knowingly involved in that trading.
Interestingly, in Steven Xiao’s case, ASIC pursued the defendant despite his attempt to evade prosecution, even though this meant contesting extradition proceedings in Hong Kong. ASIC’s pursuit of Xiao is further evidence of how seriously it views contraventions of insider trading laws, and of its desire to pursue significant offenders (despite the associated cost and procedural difficulties).
ASIC maintains that one of its key goals is to ensure that Australian markets are fair and efficient.5 Its published results for the 6 months ending December 2015 indicate that it was particularly active in this space during that period.
Buoyed by recent success stories, we expect that this trend will continue.
Article Courtesy of
|
|
|