Australian Insider Trading Laws – Forever unclear and inconsistent?

This Article provides a brief insight into the Australian insider trading laws and how their judicial application has been perceived as vague and complicated, hindering public confidence and market integrity.

Section 1042A of the Corporations Act 2001 (Cth) (“the Act”) defines information to mean:

“a)  matters of supposition and other matters that are insufficiently definite to warrant being made known to the public; and

b) matters relating to the intentions, or likely intentions, of a person”.[1]

It is not contended that this definition is ambiguous; however, case law has sought to extrapolate the meaning of Section 1042A of the Act. In Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (ACN 113 114 832) (No 4)[2] (“Citigroup”) the definition of ‘information’ was broadened to include “factual knowledge obtained by means of a hint or veiled suggestion from which the receiver of it can impute other knowledge”.[3]

But when is it ‘inside information’?

The realisation and acting upon any obtained information, understandably, does not necessarily negate the legality of resulting business. That is, unless it can be adduced that the means of which the information was obtained can be deemed as constituting ‘inside information’, namely whether:

“a)  the information is not generally available; and

b) if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of particular Division 3 financial products”.[4]

So what constitutes ‘generally available’ information?

The Act tends to indicate that for information to be general available it must be readily observable or disseminated within a reasonable time period. More specifically, whether:

a) “It consists of readily observable matter; or

b) Both of the following apply:

i It has been made known in a manner that would, or would be likely to bring, bring it to the attention of persons who commonly invest in Division 3 financial products of a kind whose price might be affected by the information: and

ii Since it has been made known, a reasonable period for it to be disseminated among such persons has elapsed; or

c) It consists of deductions, conclusions or inferences made or drawn from either or both of the following:

i information referred to in paragraph (a);

ii information made known as mentioned in subparagraph (b)(i)”.[5]

‘Readily observable’ is described as “facts directly observable in the public arena”,[6] or with regard to (a)(i), whether the information has been made available to common investors regardless of the size of the respective sector and applicable to both listed and unlisted companies.[7]

It is noteworthy that the words ‘public arena’ have not been confined to matters within Australia, and ‘generally available’ and ‘readily observable’ information includes information that is available overseas[8] and information that is obtained whilst within a subsidiary of a non-Australian conglomerate.[9]

When is it deemed to have had a ‘material effect’?

Despite a lack of clarity in the Act, Jacobson J in Citigroup commented in the context of share prices, that there would need to be information that ‘would, or would be likely to, influence persons’ who commonly acquire shares in deciding whether or not to acquire or dispose of[10] said shares, and/or the potential influence on general investor behaviour[11] before such information would have a material effect on the share price. Hence, information is deemed to have a greater material effect when it is derived from a more credible source.

In R v Bo Shi Zhu[12] the seniority of an employee was deemed directly relevant in considering the serosity of the matter, It was stated that generally an employee in a higher position possessed greater better ability to hide a breach of insider trading.[13]

What if the information was factually untrue?

The High Court in Mansfield v R and Another[14] rejected that the information possessed must be of a factual reality,[15] false facts and stipulations of fiction would not be excluded, regardless of whether they were acquired knowingly or unknowingly.[16] Rather, greater focus is placed on the intent and use of said information rather than its underlying validity.

Insider trading laws in Australia

In the late 1980’s the Griffiths Committee report[17] established various policy objectives as a basis for addressing and hindering insider trading, including:

a. Market Fairness;

b. Fiduciary duty theory;

c. Economic efficiency; and

d. Misappropriation theory (corporate injury).

The fiduciary duty theory lost applicability with the introduction of insider trading laws in Australia which removed the requirement of a link between the ‘insider’ and ‘the corporation’ in order to constitute insider trading.[18]

Misappropriation theory refers to damage caused to a respective company as a result of having inside information,[19] yet lacks the consideration that price sensitive information in possession, whilst not generally available, without misappropriation, does not necessarily ‘injure’ a company.[20] Section 1043A[21] of the Act, sets out the prohibited conducted of a person in possession of inside information. The High Court in He Kaw Teh v R[22] noted that ‘possession’ requires a cognitive element of awareness that the information was “in fact in the possessor’s physical control”.[23]

As a result, market fairness and economic efficiency remain the accepted rationales for prohibiting insider trading according to The Companies and Securities Advisory Committee (CAMAC).[24] Market fairness (as the name suggests) proposes that the access to information should be fair and equal within the market place, whereas economic efficiency focuses on protecting investor confidence in the market.[25]

These two rationales have been the subject of debate by both academics and professionals, with arguments that they envision conflicting goals, and are incompatible with one another.[26]

Conclusion

Without divulging into deliberation on the apparent ‘legislative astigmatism’ between the policies, the effect of the current legislation on endorsing a benchmark for prohibiting insider trading with regard to both policies clearly demonstrate that there is a underlying consensus of the court’s need for increased efficiency in legislature interpretation.

Whilst the current legislation meets a satisfactory standard of these policy objectives, there still remains an inconsistency in common law decisions and conflicting interpretations between judges, which in return, hinders investor confidence.

The almost feeble attempts at reform have done little to assist with this longstanding problem which suggests that there is a need for redefined practical legislation before there can be a noticeable change in public confidence in the accessibility of price sensitive information by market participants.

This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.

For any further information concerning this article, please contact JHK Legal.

Author: Matthias Klepper, Paralegal

Published: June 2015

[1] Corporations Act 2001 (Cth), s 1042A.

[2] (2007) 241 ALR 705.

[3] Ibid at 534.

[4] Corporations Act 2001 (Cth), s 1042A.

[5] Ibid, s 1042 C.

[6] Explanatory Notes, Corporations Legislation Amendment Bill 1991 (Cth) at 328.

[7] Ibid.

[8] R v Kruse [1999], (Unreported, O’Reilly J, Dec. 2, 1999) (District Court, NSW 1999).

[9] R v Bo Shi Zhu [2013] NSWSC 127.

[10] Ibid at [566].

[11] Hannes v DPP (No 2) (2006) 60 ACSR 1 at 9.

[12] R v Bo Shi Zhu [2013] NSWSC 127.

[13] Ibid at [190].

[14] (2012) 293 ALR 1.

[15] Ibid at [6].

[16] Ibid at [72].

[17] The Anisman Report in 1986; the Griffiths Committee in 1898; 2001 CASAC Discussion Paper on insider trading; The CAMAC Insider Trading Report (2003), and the Insider Trading Position and Consultation Paper (March 2007) (PCP).

[18] D. Pompilio. ‘On the Reach of Insider Trading’ (2007) 25 Company and Security Law Journal, 468.

[19] A. Jacobs. ‘Time is Money: Insider Trading from a Globalisation Perspective’ (2005) 23 Company and Security Law Journal, 237.

[20] D. Pompilio. ‘On the Reach of Insider Trading’ (2007) 25 Company and Security Law Journal, 469.

[21] Corporations Act 2001 (Cth).

[22] (1985) 60 ALR 449.

[23] Ibid at [450].

[24] The Hon Chris Pearce MP, ‘Insider Trading: Position and Consultation Paper 2007’.

[25] Simon Rubenstien, ‘The regulation and prosecution of insider trading in Australia: towards civil penalty sanctions for insider trading’ (2002) 20 Company and Securities Law Journal 89 at 93.

[26] R v Firns [2001] NSWCCA 191 at [53].