Questions remain about the enforcement and strength of Australia’s insider trading laws. Insider trading laws in spotlight again after rise in Leighton shares before Hochtief takeover bid

Insider trading laws in spotlight again after rise in Leighton shares before Hochtief takeover bid

March 15, 2014

Georgia Wilkins

The startling ramp-up in Leighton Holdings’ share price last week – ahead of Hochtief’s takeover move on Monday – is just the latest in a series of events that have sparked questions about the enforcement and strength of Australia’s insider trading laws.

Last month, the corporate regulator was questioned for not taking action after two David Jones directors – with the approval of the company’s then chairman – bought shares in the retailer days before a positive sales update and a day after a then-secret takeover approach from rival Myer Holdings.

In January, the Australian Federal Police said it had dropped a proceeds-of-crime investigation of former Gunns chairman John Gay, who pleaded guilty to insider trading last year after selling $3.09 million of Gunns shares before a profit downgrade. He was fined $50,000.

And the surge in Leighton shares last week came after an earlier buying spree of Leighton shares by Hochtief between December and February – ahead of Leighton’s financial results on February 20.


In that instance, Hochtief has denied it bought the shares with the benefit of any price-sensitive information, and said its purchases were within the allowed trading window.

The Australian Securities and Investments Commission has confirmed it is investigating last week’s rise in Leighton’s share price and a corresponding surge in trading volumes; Hochtief has said it was not the buyer, and Leighton has said it did not know about the imminent offer from Hochtief until Sunday.

But the events – especially last week’s trading in Leighton shares – have sparked concern from investor groups about the perceived integrity of Australia’s markets, and have reignited calls for a government review of Australia’s insider trading laws.

Professor Ian Ramsay, of the University of Melbourne law school, said the laws needed urgent reform.

”For a number of years now, insider trading laws have been criticised not just by those who work in the area but even judges,” he said.

”It would be appropriate to do a review to seek some clarity in the law.”

He said the government should act on recommendations handed down more than 10 years ago by the Corporations and Markets Advisory Committee (CAMAC), of which Professor Ramsay was and is a member.

That report called for, among other things, a widening of the definition of inside information and a strengthening of the reporting requirements for company directors.

”All governments for 10 years have been sitting on 38 recommendations to clarify the law on insider trading,” Professor Ramsay said.

ASIC has a mixed track record in pursuing and successfully prosecuting insider trading cases.

While some – including the Australian Shareholders Association – attacked Gay’s penalty as too slight, more hefty sentences have been handed down in cases including former Sydney trader John Hartman, jailed for more than a year after pleading guilty in 2009, and PricewaterhouseCoopers tax consultant Nicholas Glynatsis, jailed last year for 21 months for insider trading on CFDs.

A number of ASIC’s successful insider trading cases have come out of takeover proposals similar to those at Leighton and David Jones.

”It is one of the fertile grounds that we see for insider trading,” said Juliette Overland at the University of Sydney business school.

In the past, ASIC has won convictions by being able to argue that a takeover proposal was market sensitive by nature.

This argument gained it a conviction in the case of former Macquarie merchant banker Simon Hannes, whose status as an insider hinged on his knowledge Dutch company KPN had designs over transport group TNT.

But ASIC commissioner John Price told a Senate inquiry last month that when it came to David Jones, the advice was different.

”In this case we did seek the advice of an external market expert … and that expert’s conclusion was the information was not material,” he said.

While ASIC has been blamed for a lack of action, Professor Ramsay said it was the laws that needed to change. ”The law is murky enough to actually not be helpful to people who are participating on a daily basis in the market,” he said.

Responsibility for market supervision shifted from the Australian Securities Exchange to ASIC in August 2010, but there remains significant overlap between the two in monitoring share market activity. Every month, the ASX issues between 20 and 60 ”please explain” notices to companies with unusual movements in their share price or trading volumes.

A further two dozen ”continuous disclosure” queries are made on average to entities each month, raising separate concerns about a company’s continuous disclosure obligations following a media report or company announcement.

ASX is required to refer any of these matters on to ASIC if it suspects a breach of the Corporations Act.

ASIC also has its own market surveillance team, and in November launched its new Market Analysis Intelligence system, which it said would boost its ability to detect, investigate and prosecute trading breaches. According to its most recent enforcement report, ASIC has prosecuted 32 insider trading actions since 2009, 23 of which were successful.

But Chi-X chairman John Fildes says the perception of offshore investors is that Australia’s market needed greater oversight.

”One theme that constantly comes up is unexplainable price movements prior to an announcement, an earnings release, a deal being announced or something like that and I think it is perceived globally that Australia has some issues,” he told Financial Review Sunday last month.

While ASIC seeks advice from expert brokers on whether to pursue an investigation of last week’s surge in Leighton shares, ASA chairman Ian Curry said the market’s expectations were clear. ”They have got to take some action and be able to let the market know what they’re doing as quickly as possible,” he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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