There has been a string of high profile insider trading cases in the media recently. In the last year alone, sentences of imprisonment have been imposed on Oliver Curtis (two years), Lucas Kamay, former NAB banker (seven years and three months), and former executive of Chinese miner Hanlong, Steven Xiao (eight years and three months).
What is insider trading
The insider trading provisions of the Corporations Act 2001 (Cth) impose an obligation upon a person who may possess ‘inside information’ not to act or participate, either by themselves, or through another person, in the market for certain traded financial products such as shares. It is important to be aware that ‘dealing’, ‘tipping’ or ‘procuring’ can each contravene the insider trading laws.
‘Inside information’ is any information that is not generally available and if it was generally available then a reasonable person would expect it to have a material effect on the price of the traded financial products. Information could be considered to have a material effect on the price or value of particular financial products if the information would influence persons who commonly acquire the financial products in deciding whether or not to acquire or dispose of the financial products.
Harsher penalties for insider trading
While insider trading and other market misconduct provisions may attract both civil and criminal liability, ASIC elected to pursue criminal charges in each of the three cases noted above. This demonstrates that ASIC regards insider trading as being sufficiently serious to warrant harsher penalties. In sentencing Oliver Curtis, Justice McCallum gave reasons for her decisions, stating that insider trading is not a victimless crime and that:
“White-collar crime is a field in which, perhaps more than any other, offending is often a choice freely made by well-educated people from privileged backgrounds, prompted by greed rather than the more pernicious influences of poverty, mental illness or addiction that grip other communities. The threat of being sent to gaol, provided it is perceived as a real threat and not one judges will hesitate to enforce, is likely to operate as a powerful deterrent to men and women of business.” 
Recent decisions have also demonstrated that ASIC will not shy away from pursuing charges of conspiracy against all offenders who are associated with the inside trader.
Legislative amendments also reflect this position, with the maximum penalty for insider trading being lifted in 2010 from five to 10 years’ imprisonment and from $220,000 to either $490,000 or three times the value of the benefits obtained from the conduct.
In light of this trend toward harsher penalties, it is imperative that public companies, particularly listed public companies, take steps to ensure their directors, officers and employees understand and comply with their obligations by implementing clear and effective trading policies.
It is an ASX Listing Rule requirement that listed entities have a policy on trading in their own securities by the entity’s key management personnel (KMP). While each trading policy should be tailored to suit the requirements of the particular entity, to comply with the minimum requirements of the Listing Rules, every policy must cover:
- the entity’s ‘closed periods’ when trading is prohibited
- the restrictions on trading that apply to the entity’s KMP
- any trading that is excluded from the entity’s trading policy, and
- any exceptional circumstances in which the entity’s KMP may be permitted to trade during a ‘prohibited period’ with prior written clearance, and the procedures for obtaining such clearance.
While entities are free to include any other matters that suit its individual circumstances in its trading policy, it is good governance, and important to reduce the risk of insider trading, to adopt a trading policy that also addresses the following matters:
- ASX recommends including a detailed explanation of the prohibition on insider trading under the Corporations Act. This may include an accessible and non-legalistic description and examples of insider trading, the sanctions that might apply and the significant legal consequences for directors, executives and employees if they breach these obligations.
- To maximise the effectiveness of closed periods in reducing the risk of insider trading, ASX recommends requiring ‘trading windows’ rather than ‘black-out periods’ in an entity’s trading policy, as they lead to shorter periods during which KMP may trade. Further, it is recommended that black-out periods occur following the close of books until at least one trading day after the interim and full year results are released, to allow the market to process the results.
- ASX also strongly suggests entities reserve the right in their trading policies to impose ad hoc trading restrictions on KMP where it thinks necessary.
- While the Listing Rules only require the trading policy to cover KMP, it is good governance to consider extending the application of the policy to govern trading by a wider group of employees, such as staff who work closely with KMP, have access to KMP’s emails or documents or who work in the finance area.
- Entities should also consider extending the trading policy to cover close family members of a KMP such as the KMP’s spouse, children and family company or trust.
- ASX recommends drafting an outline of the training and education that must be provided to employees and directors regarding insider trading and the entity’s trading policy generally. The policy should specify who is responsible for providing the training and education, the processes for certifying it has taken place, and a confirmation that ASX, ASIC and governance advisers are interested in whether companies comply with their policies or not.
- The style of the trading policy should ensure its terms are clear and understandable to those to whom it applies. For example, entities may consider including a summary of the key issues, a glossary of terms, clear headings or Q&A-style format, and contact details in the event that any queries arise.
The Oliver Curtis decision serves as a timely reminder of the serious consequences that may arise from contraventions of the insider trading provisions. Such cases are not just limited to financial services companies. It is now more important than ever that public companies, particularly listed public companies, take steps to ensure their directors, officers and employees understand and comply with their obligations by implementing clear and effective trading policies. Consideration should also be given to making such policies part of an employee induction process, with training updates on a regular basis.