Earlier this year we published two articles discussing recent insider trading cases against individuals. Since then, an Australian court has, for the first time, determined the civil penalty for a corporation’s breach of the law against insider trading.
The case was ASIC v Hochtief Aktiengesellschaft  FCA 1489. The judgment was delivered by Justice Wigney of the Federal Court, who as a barrister, had acquired considerable experience in corporate criminal defence and prosecution.
ASIC claimed that Hochtief AG had engaged in insider trading by ‘procuring’ its Australian subsidiary to acquire shares in another company, Leighton Holdings. Hochtief was already a substantial shareholder in Leighton, holding more than 50% of issued and voting shares. At the hearing in February 2016, Hochtief admitted insider trading in a statement of facts agreed with ASIC.
We don’t intend to focus on the details of the conduct here – although it is outlined below – but to look at what Justice Wigney said in determining the penalty.
Key lessons from this decision
Hochtief argued that its good corporate reputation and standing should count in its favour. ASIC pointed to criminal cases involving individuals – where the person’s good character was not taken into account – and argued that this should also apply to corporations. The Court rejected this. It noted that an individual’s good reputation was often the very factor which resulted in them being entrusted with inside information in the first place and allowed them to play on that information. This was not the case with corporations where there had been no dishonesty or deliberate or intentional disregard of the law.
Meaningful contrition and process improvement counts:
Factors influencing the penalty were the personal attendance of the German-based General Counsel before the court to deliver a public apology, the disgorgement by the company (before any penalty was imposed) of the notional profits achieved from the transaction, and the improvements in compliance and education put in place after the contravention.
Not every incident of insider trading is serious enough to warrant a penalty…but it usually will be.
Even where a contravention is admitted, the maximum penalty can only be imposed if the contravention is ‘serious’. Although the Court accepted that Hochtief’s contravention involved inadvertence and carelessness, it was nevertheless serious – and in forming that view, the court was required to consider the contravention’s potential or actual consequences. ASIC argued that any contravention would almost by definition be serious. The court rejected this, identifying some contraventions that could be regarded as trivial or inconsequential. For example, a contravention by a financially unsophisticated person who unintentionally encouraged someone else to acquire a small parcel of shares (even if they were never acquired) in an inconsequential company, without any awareness that the inside information they had was not generally available.
Principles in individual criminal prosecutions don’t always apply to civil penalty cases:
This was a civil penalty case rather than a criminal case, but on several occasions ASIC sought to rely on criminal law principles. The Court did not accept that a court, when deciding whether a contravention was ‘serious’ in order to impose a civil penalty, would be assisted by the observations of a sentencing judge in a criminal case as to the seriousness of the criminal behaviour. The Court pointed to the very clear line between civil and criminal matters emphasised recently by the High Court in Commonwealth v Director, Fair Work Building Industry Inspectorate  HCA 46 (see our associated article). However, in some other aspects, the application of criminal principles is appropriate.
Size isn’t everything, but it is something:
The fact that a contravening corporation is large with vast resources does not of itself mean that a significant penalty must be imposed. The size of the penalty is based on achieving deterrence. The amount required to achieve this will be larger where a company has great resources.
Determining the penalty
The court had to determine the appropriate penalty to impose, where the maximum penalty was $1 million. ASIC said $600,000. Hochtief said $100,000.
The court considered the relevant principles, which included the seriousness of the conduct. The judgment usefully emphasised some important points (in addition to those above) that often get missed:
Criminal penalties are associated with retribution and rehabilitation. The purpose of a civil penalty is primarily, if not wholly, protective in promoting the public interest in compliance.
The principal object of a civil penalty is to put a price on a contravention, sufficiently high to deter repetition by the relevant corporation and others who might be tempted to contravene.
The penalty must be high enough that the individual and the public at large do not regard it as an acceptable cost of ‘doing business’.
With insider trading, general deterrence has a high degree of prominence in determining the amount of penalty – as there is a real public benefit in protecting the integrity and efficacy of the market.
In brief, factors which played on the Court’s mind in considering the seriousness of the contravention were:
the involvement of very senior officers of the company;
the lack of a comprehensive compliance system, procedures or training in place (other than an ad hoc procedure to deal with the specific transaction); and
a lack of corporate education.
Factors pointing towards the contravention being less serious were that there was no dishonest, deliberate or reckless conduct on the part of any relevant person, and it could be fairly characterised as involving inadvertence and carelessness.
The conduct was significantly less serious than a contravention involving actual knowledge that the information that was possessed was inside information, and deliberate conduct in defiance of the insider trading prohibition – however, it was not a simple mistake or ‘mere carelessness’.
The court settled on a penalty of $400,000.
Revisit Preventative Measures
It is clear that Hochtief was aware of the insider trading risk and had taken steps to prevent it occurring, when the arrangements were first put in place. When circumstances change, protective mechanisms need to be revisited to ensure they still work. In this area, the “set and forget” can have a real downside.
Hochtief had implemented a plan to increase its shareholding to 69.9% of the ordinary shares in Leighton by the end of January 2016, under the ‘creep exception’ in the Corporations Act.
Steps were taken to ensure that material price-sensitive information did not pass from those Hochtief directors who were also directors of Leighton, to the individuals who were instructed (by a written standing instruction) to undertake the creeping acquisition. An information barrier was put in place and instructions given to ensure that the individuals undertaking the acquisition did not become aware of and did not discuss the affairs of Leighton with any officer or employee of Hochtief AG or Hochtief Australia.
Circumstances changed, and for unconnected reasons the Hochtief directors who were also Leighton directors varied the creeping acquisition instructions to permit the acquisition of shares over an additional 14-day period. At the time of the variation those directors possessed price-sensitive material information not known to the public.
The Court considered the extent and duration of the contravening conduct when determining the penalty.
ASIC unsuccessfully argued that as the variation of the instructions to acquire shares occurred before the expiry of the initial authorised period, any acquisition of any shares after that initial authorisation was ‘procured’ under the amended instruction and therefore was to be viewed as insider trading.
Hochtief successfully argued that the earlier instructions authorised all purchases up to 30 January 2016 and the only additional purchases ‘procured’ as the result of the amended instruction were those made after that date. Accordingly, the contravening conduct concerned only one day’s trading rather than four days’ trading and acquisitions.