In finance terms, markets like the Australian Securities Exchange (ASX) are semi-strong form efficient. This means that all publicly available information is, in theory, accurately reflected in the pricing of securities. As the pricing of securities relies upon PUBLICLY available information, the opportunity exists for unscrupulous individuals to use their knowledge of unannounced financial reports, planned mergers/acquisitions or other business deals to profit from the markets lack of information. For example, let’s say you were at a BBQ, and a mate told you that a large publicly listed company was in the process of planning to purchase their small publicly listed company. The details were not yet public and, when they were, would result in the share price increasing. Consequently, someone who invested before the acquisition was made public could stand to profit. Below, we turn our attention to insider trading and set out the penalties for offenders.
But, Surely You Can’t Do This
You’re right – this is what’s known as insider trading. Insider trading is an offence in many countries, including Australia. The above example is basically what occurred in 2001 when the infamous Rene Rivkin made a very small profit on the acquisition of a small airline by Australian icon QANTAS. This profit, of only a couple thousand dollars, ended in an investigation by the market watchdog, the Australian Security and Investment Commission (ASIC), a criminal conviction and resulted in Rivkin spending several months in prison.
The Crime of Insider Trading
Section 1043A in the Corporations Act prohibits an insider from using themselves or disclosing information that’s not generally available for a financial gain. This means that a person who knows, or ought to have known, that they were privy to inside information must not enter into an agreement or apply for, sell or otherwise acquire a financial product. A person with inside information is also prohibited from directly, or indirectly, communicating the information to someone else if they know, or should’ve known that this person would use the information for a similar purpose.
The monetary penalties and potential imprisonment for this offence are severe – the purpose being to deter would-be insider traders and protect both investors and general faith in the market.
How has the Landscape Changed Since Rivkin?
One of ASIC’s key purposes is to create a “fair and efficient market”. To achieve this goal, ASIC receives significant levels of funding from the Commonwealth Government to, among other things, monitor financial trades and pursue insider trading tipoffs. The penalty for those caught engaging in insider trading increased to a maximum of 10 years in jail in 2010.
There has also been an increase in ASIC’s ability to efficiently monitor trading. ASIC can now better monitor trades with new technology and identify events that indicate insider trading before they occur. For example, the purchase of shares in a company before a company announcing a beneficial merger can result in examining a trader’s account to determine whether they were tipped off or, perhaps, just got lucky.
Who Else Has Been Caught Since Rivkin?
Since Rivkin was imprisoned in 2003, there have been numerous others who have been tempted to engage in insider trading. Recent examples include former NAB banker Lukas Kamay, who achieved notoriety by obtaining statistical data from a friend at the Reserve Bank before its official announcement, and using the information to trade based on expected changes. Lukas became more widely known after he attempted to purchase one of the apartments renovated on the reality TV show ‘The Block’ using the funds he received from insider trading. He has since been sentenced to a minimum of over four years in prison. His accomplice, a friend from university inside the RBA, also received a two-year minimum prison sentence.
Even more recently, a Chinese businessman, Steven Xiao, was sentenced to a minimum of five years in prison for his role in over 100 insider trades involving Australian mining companies over a four year period. Similarly, an accomplice of Xiao’s was imprisoned for a minimum of two years. Key factors in the two businessmen receiving an upper range sentence include the numerous and significant breaches of trust over a sustained period, the fact that they took out financing to maximise their gains and also fled the country when they had the chance.
These sentences are a result of the increased penalties and market watchdog’s ASIC needing to show its bite is equal to, or worse than, its bark. While insider trading is relatively victimless on a small scale, maintaining trust in the integrity and efficiency of a finance exchange must begin at a low level before the issue becomes systemic and, in the most extreme case, cause significant negative impact on the Australian economy. ASIC appears to hand down these punishments to deter white collar criminals from engaging in insider trading, and we will continue to watch closely to gauge their effectiveness.
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