Introduction

The concept of materiality applies to a wide spectrum of offences under the Securities and Futures Act [Chapter 289, 2002 revised edition] (“SFA”). Under Section 203 of the SFA, the intentional or reckless failure to disclose information must relate to information which “would likely to materially affect the price or value of [the company’s] securities.” With respect to Section 199 of the SFA, it is an offence to make a statement which is misleading in “a material particular”. At section 218 of the SFA, an element of the insider trading offence is whether, if the information in question was available to the general public, a reasonable person would expect the information to have a material effect on the price or value of the company’s shares.

Until recently, it was widely understood and believed by market participants that there was no distinction in the application of this concept of materiality to the various offences under the SFA. It was believed that the test of materiality was the same across the various offences under the SFA in so far as those offences refer to the concept of materiality. The recent landmark decision by the High Court in Madhavan Peter v Public Prosecutor and other appeals [2012] SGHC 153 (“commonly referred to as “the Airocean Appeal”) has now corrected this hitherto held common perception of the concept of materiality under the SFA.

Another landmark ruling arising from the High Court’s decision in this case is the introduction of the concept of “Trade Sensitive Information” in relation to offences for insider trading. The Court ruled that the concept of materiality for insider trading offences under Section 218 of the SFA was less rigorous by reason of the deeming provision contained in Section 216 of the SFA. In determining whether the information in question would have had a material effect on the price or value of the securities, Section 216, (which applies solely to insider trading trading offences), states that where the information had the likelihood of influencing persons who commonly invest in securities in deciding whether to subscribe, buy or sell those securities, that information shall be presumed to have a material effect on the price or value of the securities. The Court termed this information falling within Section 218, when read together with Section 216, as “trade-sensitive information.”

The purpose of this article is to consider these landmark rulings and the analysis underpinning them.  

Facts

Airocean was a company listed in the Singapore Stock Exchange (SGX). Through several subsidiaries, Airocean, provided air cargo logistics services such as freight forwarding and air terminal ground cargo handling. As at September 2005, the directors of Airocean were Thomas Tay (“Tay”), an executive director and the Chief Executive Officer (CEO); Johnson Chong (“Chong”), an executive director and the Chief Operating Officer (COO); Peter Madhavan (“Madhavan”), an independent director; Ong Seow Yong (“Seow Yong”), an independent director; (e) Ong Chow Hong, an independent director and the non-executive Chairman of the Board; and, Paul Dunn, an executive director.

On 6 September 2005, Tay and 3 officers of the subsidiaries of Airocean were questioned by the Corrupt Practices Investigation Bureau (“CPIB”) in connection with transactions between Airocean’s subsidiaries and Jetstar Asia Airways Pte Ltd (“Jetstar”) and Lufthansa Technik Logistik Pte Ltd (“Lufthansa”). Tay was questioned on whether he had offered any gratification to one Chooi Yee Cheong (“Chooi”) of Jetstar and to one Edward Goh of Lufthansa. During this questioning at the CPIB, Tay had admitted that he had told Simon Ang (a regional manager of one of the subsidiaries) to tell Chooi that “if he would help us, in the future if he needed help, we would help him.”

In view of these investigations against Tay, on 7 September 2006, the directors of Airocean decided that Airocean should seek legal advice on whether it had to disclose to SGX that its officers were involved in the CPIB investigations. For this purpose, the law firm of Tan Rajah & Cheah (“TRC”) was engaged to provide this legal advice to Airocean. TRC then requested to speak to the officers involved in the investigations. On the same day, it transpired that Tay was placed under arrest by the CPIB pursuant to section 6(b) of the Prevention of Corruption Act (Cap 241, 1993 Rev Ed) and was released on bail. His passport was also impounded.

On the following day, 8 September 2005, the directors of Airocean, except Dunn, met and reviewed the events concerning the CPIB investigations, details of which were recorded in the minutes of that meeting (“the 8th September Minutes”). The directors at that meeting agreed that “technically no action need[ed] to be taken.”

On 8, 9 and 16 September 2005, the solicitors from TRC interviewed Tay and three officers of the subsidiaries of Airocean. They completed their interviews by mid-September 2005. During the trial before the District Court below, Mr Imran Khwaja, (“Imran”) one of the solicitors from TRC, testified that sometime in September 2005, he had advised Madhavan that “the information and evidence available was vague” and “it was difficult to assess whether or not [Airocean] needed to make an announcement”; Imran also had informed Madhavan that “unless and until further information [became] available, no disclosure need[ed] to be made at [that] stage”.

Some three weeks later, on 26, 27 and 28 September 2005, Chong sold, respectively, 1,000,000, 500,000 and 515,000 of Airocean shares which were held by his mother.

On 25 November 2005, The Straits Times published an article entitled “Airocean’s chief executive under CPIB probe” (“the ST Article”).

Following a request from the SGX, on 25 November 2005, Airocean released a clarificatory announcement on the ST Article.

Madhavan and Imran prepared the draft of the announcement that was approved for release to the public through SGXNET.

On 28 November 2005, TRC wrote to Airocean to advise that the disclosure of the CPIB Investigations was not necessary.

After the release of the initial announcement on 25 November 2005, Airocean issued a second announcement on 1 December 2005 at the request of SGX.

On 2 December 2005, the Commercial Affairs Department commenced investigations into alleged contraventions of the disclosure provisions in the SFA by Airocean. This led Airocean to make the third announcement.

Following these investigations, Chong, Madhavan and Seow Yong were charged under Section 199 of the SFA for issuing a statement that was misleading in a material particular. Chong and Madhavann were also charged under Section 203(2) read together with Section 331(1) of the SFA for recklessly failing to disclose information to the SGX regarding the CPIB investigations against Tay, his release on bail and that his passport was impounded. Additionally, Chong was also charged for insider trading under Section 218(2) (a) of the SFA.

In the District Court, all three accused were convicted of the offences with which they were charged. In particular, Chong was sentenced to four months imprisonment for the insider trading charges. All three accused appealed to the High Court against the convictions and sentencing.

Colin Ng & Partners LLP (“CNP”) advised and acted for Chong in the District Court and in the Appeal before the High Court. Our Partner, Subramanian Pillai and Senior Associate, Ms Luo Ling Ling, represented and appeared for Chong at the appeal before the High Court.

The High Court’s Decision

The appeal by all three accused was heard by the Honourable The Chief Justice. The Court delivered its Grounds of Decision on the appeal on 27 July 2012. The Court set aside the convictions, sentences and Disqualification Orders of Chong, Madhavan and Seow Yong for the offences of issuing a misleading announcement in November 2005 (“Misleading Announcment charge”), and in recklessly failing to disclose material information to the SGX (“Non-disclosure charge”). In relation to Chong’s conviction for insider trading (“the Insider Trading Charges”), the Court upheld the conviction, but after considering CNP’s submissions on the appeal against sentence, the Court set aside the custodial sentence of four months imposed on Chong by the District Court, and in its place, imposed a fine of $200,000 and a five year disqualification from acting as a director of any company.

What is “material information”?

A common issue that arose in respect of the appeals before the Court was the definition of the concept of materiality that applied to the Misleading announcement charges, the Nondisclosure charges and the Insider Trading charges. As a general proposition, the Court held that for information to be material, such information must have considerable effect either on (a) “the behaviour of investors in subscribing for, buying or selling securities,” or (b), “on the price or value of securities.”

As for the Non-disclosure charges under Section 203(2) of the SFA read with Section 331(1) of the SFA, the element of materiality related to the likely effect the information had on the price or value of Airocean’s shares. The Court explained that for the purposes of the Non-disclosure charges, the relevant information is information which is likely to have the effect of making a significant change in the price or value of securities, and not information “which would merely be likely to affect the price or value of securities.”

As for the Misleading Announcement charges under Section 199 of the SFA, which prohibits the making of any statement that is “misleading in a material particular,” the element of materiality pertained “to whether the misleading portions of the November Announcement were likely to have the effect of stabilizing the market price of ... Airocean shares.” To be considered as “material”, the misleading particular must be “of sufficient importance to significantly affect the price or value of securities.”

This meant that the test of materiality for the purposes of obtaining a conviction for the Nondisclosure charges and the Misleading Announcement charges under the SFA is more rigorous than it was originally thought. The impact of the information on the price or value of the securities must be significant. It is not sufficient that the information would merely be likely to have an impact on the price or value of securities.

Following the High Court’s ruling on the concept of materiality, the threshold has now been raised. If the information was just one of the factors that were likely to have had an impact on the price or value of the securities, then, a charge under Section 203 or Section 199 would not have been made out. The burden on the prosecution is to prove, beyond a reasonable doubt, that the information had a significant impact or significantly affected the price or value of securities.

As for the insider trading charges, the Court explained that the concept of materiality as it applied to a charge under Section 218 of the SFA standing alone and a charge under Section 218 read with Section 216 of the SFA are different.

If Section 218 of the SFA is to be read alone, the materiality of the information is to be understood in terms of its significant effect on the price or value of the securities — a concept similar to that under Section 203 and Section 199 of the SFA. The threshold for all three offences was the same.

However, if Section 218 is to be read with Section 216 of the SFA, the concept of materiality in relation to insider trading offences must be understood differently. In this context, the materiality of information is to be understood in terms of the likelihood that the information would have in influencing persons who commonly invest in securities (“common investors”) in deciding whether to subscribe for, buy or sell the securities concerned.

It should be noted that Section 216 of the SFA provides that “a reasonable person would be taken to expect information to have a material effect on the price or value of securities if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, buy or sell the first-mentioned securities.”

In construing the deeming provision in Section 216 of the SFA, the Court ruled that the section “assesses the materiality of information based on whether the information is likely to influence a common investor in deciding whether to subscribe for, buy or sell the securities concerned.”

The Court referred to the ‘information’ under the non-disclosure charge, misleading disclosure charge, and Section 218 read alone as “materially price-sensitive information,” and that information for purposes of Section 218 read with Section 216 of the SFA as “tradesensitive information”.

The Court went on to observe that the element of materiality for the purposes of an insider trading charge can be proved in one of two ways as follows, that is - “with the aid of s 216 (i.e., by establishing that the information in question is trade-sensitive information), or, alternatively, without the aid of s 216 (i.e., by establishing that the information in question is materially price-sensitive information). As s 216 provides a different and (from the Prosecution’s perspective) less rigorous test of materiality than the test in s 218, most prosecutions for the offence of insider trading are likely to be based on s 218 read with s 216, rather than on s 218 read on its own.”

Following the Court’s ruling, it is now clear that the test of materiality to be adopted in cases of insider trading is less rigorous than the test for materiality in charges for Non-disclosure and Misleading Announcement under the SFA. The Court went on to explain that this distinction was defensible from “the perspective of commercial morality and market integrity” and it is a distinction that “flows from the legislative and regulatory structures that Parliament and SGX had put in place.”

In analysing this distinction in relation to the concept of materiality for the different offences under the SFA, the Court drew guidance from the Australian Corporations Act 2001 (now repealed) and the ASX Listing Rules, from which Singapore’s continuous disclosure and insider trading regimes were derived. The Court found that the distinction in relation to the concept of materiality found under the SFA did not exist in the Australian legislation and listing rules. The Court found that the two separate regimes in relation to the concept of materiality for disclosure offences on the one hand and the insider trading offences on the other under the SFA was deliberate and was intended by Parliament when the Securities & Futures Bill was passed.

Here, it should be noted that at the trial before the District Court and at the Appeal before the High Court, CNP had highlighted, on Chong’s behalf, the differences between the SFA and the Australian legislation / listing rules and drew the Court’s attention to the separate tests for materiality under the SFA. We argued that as a result of this distinction in relation to the test of materiality, Chong had been charged on the erroneous basis that the information needed to prove the Insider Trading Charges against him was the same as the information needed to prove the Non-disclosure and Misleading Announcement charges against him.

We are pleased to note that the High Court agreed with CNP’s submissions on the concept of materiality under the continuous disclosure and insider trading regimes in the SFA. The Court ruled that the District Court had failed to make this distinction between the different concepts of materiality in convicting Chong, Madhavan and Seow Yong of the various offences with which they were charged.

We now turn to the Court’s findings in relation to each of the charges against Chong, Madhavan and Seow Yong.

Reasons for acquittal under the Reckless Nondisclosure charge

In respect of this charge, the Court ruled that the requirement of materiality of the information (that is, Tay was questioned by the CPIB) was not satisfied with respect to the Reckless Nondisclosure charge.

The Court further ruled that the District Court had “misdirected itself on the law in relation to the concept of materiality applicable to the Non-disclosure Charges.” Instead of ruling on whether the information involved would “materially affect” the price or value of Airocean’s shares, the District Court had focused on the issue of whether the information was “likely to affect the price and value of Airocean shares.”

On the issue of whether the element of recklessness had been made out by the Prosecution, the Court held that although the Board of Directors were subjectively aware of the risk, they did not act unreasonably in not disclosing the information, or in taking the risk of not disclosing the information. The Court ruled that having no knowledge of the likely impact of the information, Airocean “had to act cautiously as any misjudged disclosure could be detrimental to Airocean and its investors.” Further, given that Airocean had received legal advice, as well as the pressing circumstances under which Airocean had to decide on the issue of disclosures, it was not unreasonable of them, at the September meeting, to decide that “technically no action needed to be taken”.

In the event, the Court found that the reckless non-disclosure charges were not made out. The convictions and the sentences imposed on Chong and Madhavan in relation to this offence were set aside.

Reasons for acquittal under the Misleading Disclosure charge

In respect of the charge on the Misleading Announcement, the Court found that the District Court had applied the wrong test for “materiality” despite the express words of Section 199(c) of the SFA. The Court observed that Section 199(c) is not concerned with the CPIB investigations impacting the decision of investors to buy or sell shares, but rather, is concerned with whether the misleading announcement in a material particular, was likely to have the effect of stabilising the market price of securities.

The Court found that the District Court had likewise erred in determining that the 25 November 2005 announcement did not disclose that Tay was being investigated by CPIB and that the investigations were in relation to transactions by Airocean’s subsidiaries. The Court ruled that the 25 November 2005 announcement by Airocean did disclose the material facts since any reasonable reader of that announcement would have known that Tay was under investigation.

The Court further ruled that the District Court appeared to have treated the two issues as a single composite particular, that is, Tay’s investigations by CPIB and the investigations involving the Subsidiaries. The Court found that the District Court had not considered whether, each of the information in itself, was likely to have had any impact on Airocean’s share prices. After considering the market impact evidence, the Court held that the 25 November Announcement was not materially misleading since the disclosure of the information did not have a material effect on the price of Airocean shares.

On this basis, the Court set aside the convictions and sentences imposed on Chong, Madhavan and Seow Yong under the Misleading Announcement charge.

Conviction under the Insider Trading charge

In relation to Chong’s conviction for the Insider Trading charges, the Court affirmed the District Court’s findings on the basis of the test of materiality under Section 218 read with Section 216 of the SFA.

The Court accepted CNP’s submissions and found that the information that Chong possessed at the time when he traded in Airocean shares were not materially price sensitive under Section 218 of the SFA read on its own.

However, based on the objective market impact evidence before the Court, the Court went on to rule that the information possessed by Chong was in fact trade sensitive information under Section 218 read with Section 216 of the SFA. The Court explained that Section 216 “deems information having the characteristic stated therein to satisfy the requirement of materiality set out in s 218.” The test under section 216 of the SFA is based on the “likely influence of the information in question on common investors in deciding whether to subscribe for, buy or sell the securities concerned upon receiving the information,” or “trade-sensitivity” of the information.

In considering the market impact evidence that was before the Court, the Court observed that: “the sharp increase in the volume of Airocean shares transacted on the first trading day after the 25/11/05 Announcement and on the first trading day after the 2/12/05 Announcement indicate that the Tay/Subsidiaries Information had a substantial likelihood of influencing common investors in deciding whether to buy or sell Airocean shares. I note that the changes in trading volume after the 2/12/05 Announcement might also have been caused or contributed to by the disclosure in that announcement of the CAD Investigations. This factor does not, however, explain the sharp changes in trading volume immediately after the 25/11/05 Announcement.”

In light of this market impact evidence, the Court found that by reason of the deeming provision in Section 216, Chong was in possession of information which was materially price sensitive. The conviction for the Insider trading charges was therefore upheld.

Conclusion

The landmark decision of the High Court in Madhavan Peter v Public Prosecutor and other appeals [2012] SGHC 153 has now put an end to the misconception that the test of materiality was the same for all offences under the SFA. The decision has now clarified that there are indeed two separate regimes under the SFA with regard to the test of materiality. In the process, the decision has provided invaluable guidance to participants in Singapore’s financial and securities markets, and, the regulatory framework that governs them.

As the Court observed, to adopt a common test of materiality for the continuous non disclosure regime and the insider trading regime under the SFA, would entail the rather curious situation that “whenever a connected person …. is found guilty of insider trading under s. 218, the company may be held to have committed the offence under s. 203 read with rule 703(1)(b) as it may have intentionally or recklessly failed to notify SGX of the inside information in question.”

Further, the requirement of a less rigorous test of materiality for insider trading offences is justified. As the Court observed, insider trading creates an uneven playing field to the disadvantage of common investors who do not have possession of the trade sensitive information. This affects market integrity. A less rigorous test of materiality under the insider trading regime is necessary to maintain a level playing field between common investors and “inside” investors.