In the wake of the recent insider trading scandal where confidential Australian Bureau of Statistics (ABS) data was allegedly used to trade on foreign exchange derivative contracts, ASIC has warned that it will pursue insider trading of foreign exchange and other derivatives contracts and is cracking down on leaking price sensitive information.
ASIC’s warning and the recent ABS insider trading case serve as a timely reminder that insider trading prohibitions extend beyond shares to all ‘financial products’, insider trading is vigilantly pursued and those involved face severe penalties.
In this Alert Partner Michael Hansel and Associate Katherine Hammond discuss the recent ABS case, the laws and penalties relating to insider trading and the vigilant enforcement action by ASIC.
ABS insider trading case
The recent highly publicised insider trading scandal allegedly involved a bank employee (the Trader) using confidential and price sensitive ABS economic data provided by an ABS analyst (the Insider) to trade in foreign exchange derivative contracts. The ABS case highlights the rigorous application of insider trading laws to financial products other than shares.
It is alleged that on at least three separate occasions involving up to 10 trades, the Insider provided confidential ABS data on jobs, retail sales, building approvals, capital expenditure and housing finance. The Trader used the data to buy foreign exchange derivative contracts in the minutes before the regular 11:30am ABS data release and then sold shortly after. The Trader is estimated to have made $7 million.
The scam is reported to have been unravelled by a foreign exchange broker who noticed that the Trader, its client, was making significant bets on the Australian dollar shortly before the announcement of significant economic news. He notified the Australian Federal Police (AFP) when he discovered via LinkedIn that the Trader was friends with an ABS employee. The tip-off sparked a nine month surveillance operation.
The investigation has led to seven criminal charges against the Trader and five against the Insider. The AFP has reportedly frozen the men’s assets, including a $2.4 million apartment bought from the reality television show “The Block”. Both men have been released on bail.
The Trader may also face restitution claims from major investment banks in New York who took the trades and would have lost the equivalent of the amount made by the Trader.
Insider trading laws – it’s not just shares
The insider trading laws in Australia provide that a person who has “inside information” must not:
- trade or procure a person to trade in financial products of a company; or
- communicate the inside information where it may be used to trade in Division 3 financial products (Financial Products).
“Inside information” is information that is not generally available which, if generally available, would reasonably be expected to have a material effect on the price or value of particular Financial Products.
A reasonable person is taken to expect information to have a material effect on the price or value of particular Financial Products only if the information would, or would be likely to, influence persons who commonly invest in the Financial Products in deciding whether to acquire or dispose of the Financial Products.
Importantly, Financial Products extends beyond securities or shares and also encompasses:
- interests in a managed investment scheme;
- debentures, stocks or bonds issued or proposed to be issued by a government;
- certain superannuation products; or
- any other financial products that are able to be traded on a financial market
The penalties for insider trading offences are severe and a custodial sentence is usually imposed.
Depending on the circumstances there is a broad range of potential criminal offences, ranging from insider trading itself to conspiracy to commit insider trading, receiving a bribe, abuse of public office and dealing in proceeds of crime.
For insider trading the maximum prison term is 10 years.
Suspicious activity reporting obligations
Since 1 November 2012, under Rule 5.11 of the ASIC Market Integrity Rules (ASX Market) 2010, a market participant (such as a broker) must notify ASIC if it has reasonable grounds to suspect that a person has placed an order or entered into a transaction while in possession of inside information, or which has the effect of creating or maintaining an artificial price or a false or misleading appearance in the market or price for trading in financial products.
The penalty for failing to comply is $20,000.
ASIC’s monitoring of insider trading
ASIC warns that it is committed to taking effective enforcement action against insider trading and ASIC commissioner Cathie Armour has said that ASIC considers its jurisdiction involves trading irregularities in derivative markets.
ASIC’s real-time market surveillance system, known as Market Analysis Intelligence (MAI), went live in late 2013 and enables ASIC to better detect, investigate and prosecute trading breaches.
MAI provides sophisticated data analytics to identify suspicious trading in real time and across markets. MAI is built around algorithmic trading technology and allows ASIC to analyse trade data for patterns and relationships so that it has greater means to catch insider trading and deter market misconduct.
Since 2009 ASIC has prosecuted 34 insider trading matters and of those 23 have been successful, with four still before the courts.
Insider trading may now be easier to prove
In a recent decision of the New South Wales Court of Appeal, it was held that prosecutors can, in appropriate cases, bring evidence at the same time of a number of suspicious trades to prove insider trading was occurring.
This type of evidence is known as coincidence evidence and can only be used if it would add “significant probative value” which substantially outweighs any prejudice which will be suffered by the accused.
Insider trading cases often involve a number of trades and it can be difficult to prove that an individual trade was made in possession of inside information. Consequently, prosecutors may resort to bringing the lesser charge of conspiracy to commit insider trading (which enables evidence of a number of trades).
Allowing coincidence evidence may make insider trading easier to prove and would avoid the need for separate trials for each count (which may each be unsuccessful on their own).
There have been calls for the government to be given greater powers to supervise foreign exchange markets which remain largely unregulated despite the reported $5 trillion in foreign exchange derivatives traded each day (compared to $5 billion a day in share market trades).