KEY TAKEWAYS

  • The ‘bogus’ announcement published earlier this year by environmental activist, Jonathan Moyle, regarding the withdrawal of funding to Whitehaven Coal by ANZ has reinforced the obvious – that false information can have a material effect on security prices.
  • A recent High Court case shows that if someone trades off the back of false information they can still be guilty of insider trading.

BACKGROUND

In Mansfield v The Queen; Kizon v The Queen the managing director of AdultShop. com Ltd, Mr Malcolm Day, disclosed information to the two accused, Mr Mansfield and Mr Kizon, in relation to the expected profit and yearly turnover of the listed company.  This information included that “Packer [the well-known businessman] had bought 4.9% of AdultShop”.  The accused then used this information to purchase shares in the company.  It later transpired that the information which Mr Day had given the accused was false with the accused alleging that Mr Day had lied to them.

The accused were charged with insider trading but the trial judge dismissed the matters, holding that for a contravention of the Corporations Act to arise, the information used by the ‘insiders’ must be a ‘factual reality’ or truthful.  The issue eventually came before the High Court for consideration late last year.

THE COURT’S DECISION

The central question which the High Court had to determine was whether “information” as defined under the Corporations Act had to be truthful or accurate for a person to have contravened the insider trading provisions of the Act.

The accused argued that in its ordinary usage, the word “information” means “knowledge communicated concerning some particular fact, subject, or event” and that if what is communicated is not fact but fiction, the knowledge imparted is not properly described as “information”.

The High Court rejected this argument and, in referring to the accepted purpose of the insider trading provisions of ensuring “that the securities market operates freely and fairly, with all participants having equal access to relevant information”, observed that:

“If, as counsel [for the accused] submitted, Mr Day’s motive for saying what he did to [the accused] was ‘pumping the stock of AdultShop’, the market would not operate freely or fairly if the [accused] acted upon what Mr Day said and invested in AdultShop shares.  Prohibiting those who received false information from Mr Day that was material to the price or value of AdultShop shares from trading in those shares allows the market to operate freely and fairly.  It matters not whether what Mr Day said was true or was information actually derived from the company.  The operation of the market would be adversely affected by trading that was founded on information not generally available which, if generally available, would reasonably be expected materially to affect the price or value of the securities.”

Justice Heydon expressed this concept more succinctly when he said:

“Valuable-seeming material may be true or false or partly true – which of these it is cannot be known until a time after it is acted on.  But the legislation proceeds on the basis that ‘insiders’ should not be allowed to use that material when it is not publicly available.  A key element in the prohibition on insider trading is [that the information must be such] that a reasonable person would expect it to have a material effect on the price or value of securities’.  ‘Untrue information’ can have that effect as well as ‘true’ information. “

IMPORTANCE OF THE CASE

A critical element in the insider trading prohibitions is that the conduct of acting on information when it is not generally available, irrespective of the accuracy of the information.  If the information has the requisite ‘price sensitive’ quality (which, in the case of false information, could only exist while its falsity remains unknown), then the insider trading prohibitions are engaged.