Last month the Federal Court ordered that Mr John Gay, former Gunns Ltd Chairman, pay a pecuniary penalty of $500,000 in relation to insider trading, serving as another reminder that trading whilst in the possession of 'insider knowledge' can have serious consequences.
Mr Gay had sold Gunns Ltd shares prior to the release of the company's half yearly results in February 2010. The civil penalty was agreed by Mr Gay with ASIC after mediation and is in addition to a penalty of $50,000 imposed on Mr Gay in criminal proceedings in relation to the same conduct.
The penalties for insider trading for individuals are the greater of $765,000 or 3 times the benefit gained and up to 10 years imprisonment. ASIC considers these offences to be serious and generally warranting criminal prosecutions and has maintained a consistent focus on enforcement in this area.
Other recent high profile prosecutions include ANZ bank employee Lukas Kamay who was sentenced to 7 years imprisonment in March of this year for trades made based on information gained from a friend working for the ABS. Mr Kamay used the ABS statistics to predict market movements and made approximately $7 million profit during trading over a 9 month period.
ASIC's ability to detect insider trading has improved in recent years. ASIC now utilises a market surveillance system based on algorithmic trading technology to identify suspicious trading. Market participants such as brokers are also obliged to notify ASIC where there are reasonable grounds to suspect that a person is trading while in possession of inside information, with penalties of up to $20,000 for failing to make a notification.
What conduct is prohibited?
Insider trading laws prohibit a person from trading in shares or other securities, or having another person do so, while they are in possession of 'inside information'. Inside information is information which is not generally available, but if the information were generally available it could reasonably be expected to affect the price or value of the relevant shares or securities.
Inside information is usually associated with the type of information that is possessed by the board of directors or senior management. However, inside information can be held by any individual within or outside of an organization, where that information is not generally available to the public. It could be information that was overheard or inadvertently disclosed. As the prosecution of Mr Kamay shows, it may not even be information that is about a particular share or company, but may be general information about the market or market conditions, which is not publicly available.
'Tipping' is also prohibited. Tipping is where inside information is disclosed to a person who is likely to use that information to trade or to pass that information onto other traders.
If you are an individual and receive a hot tip about some great shares and you are not clear that the source of that information is public, proceed with caution. If you are in doubt as to whether you are in possession of inside information, you should seek legal advice before proceedings with any trading activity.
What can companies do to prevent contraventions?
The prohibition on insider trading is in place to ensure that all investors have equal, timely access to price sensitive information. It aims to prevent people in the know making profits at the expense of ordinary investors that are not privy to certain information, which would harm the trust of investor and discourage participation of investors in the market.
To prevent contravention of insider trading laws, companies should ensure internal processes are in place to govern how and to whom information is disclosed, when information is disclosed to the market and to monitor and restrict trading by persons who might have insider information. Specifically companies should:
- develop a disclosure policy and limit the number of people who are authorised to provide or comment on price sensitive information;
- have an up do date securities trading policy;
- ensure compliance procedures are introduced to support implementation of formal policies;
- communicate with all staff in relation to the risks of insider trading; and
- regularly review all such policies and monitor compliance.