Australian Institute of Criminology

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Chapter 10 - The prosecution of insider trading : obstacles to enforcement

Published in:
Casino capitalism? Insider trading in Australia / R Tomasic
Canberra : Australian Institute of Criminology, 1991
ISBN 0 642 15877 0
(Australian studies in law, crime and justice series) ; pp 115-126


Insider trading may be the perfect crime.
(Melbourne securities lawyer)

Australia has criminalised insider trading to emphasise community concern about such conduct. But the laws have done little to eradicate what has become an entrenched feature of many modem securities markets. None of the literature on insider trading helped evaluate the obstacles to the enforcement of laws and little of it prepares one for the insights into the securities market which a project such as this presents.

Insider trading falls into the broad area of white collar crime and the regulation of professional conduct. It can only be adequately understood by reference to the values of professionals in the industry and the social Organisation of work within the securities industry. Peer group pressure to conform to the culture of greed and a prevailing "casino mentality" among investors, as well as a tolerance of share market manipulation, have become ingrained within the social structure of the industry. At the same time, the law has increasingly become a largely symbolic mechanism and only a weak vehicle for orderly marketing. There is little in the performance of the industry organisations such as the ASX, the Institute of Directors, the Law Societies and professional accounting bodies to suggest that with this prevailing attitude they could fit into a scheme of self-regulation such as that prevailing in the City of London. Their interest is in protecting their members and it is idle to expect that short of a significant change in corporate culture they can widen the scope of their basic concerns.

The paucity of prosecutions

A central issue in any discussion of insider trading in Australia is the very low number of insider trading prosecutions which has made it impossible to provide a comprehensive description of the prosecution process as it works in Australia. Several reasons were offered for the paucity of prosecutions. Most commonly, these were the difficulties of proof. The difficulties of proving various elements of insider trading were illustrated by a Melbourne broker who said that "there is a problem of proof ... Brokers who are aware of insider trading going on would be reluctant to be witnesses for these reasons and for fear of losing clients. Brokers will not complain about each other if insider trading is going on". Another problem associated with proof was that apparent insider trading could be explained by other factors such as following the trading pattern of a market leader, playing a hunch or the results of research. The vagueness of the legal definition of insider trading, the delays in the legal system and the presumption of innocence were said to favour the accused. Problems in detection and the cost and difficulties of pursuing enquiries were also offered as reasons for the low level of prosecution.

A significant factor in insider trading is that the victim is often unaware that he or she has lost and the agencies are handicapped by a lack of complaints. One reason for the low level of insider trading prosecutions might be that there was not much insider trading activity. When this was put to the regulators, however, no one suggested that the lack of prosecutions was due to any lack of insider trading activity. The problem was largely seen as an evidentiary one, especially since, "people don't complain because they don't know that they have been the victims of insider trading". One regulator explained that, "the practices and procedures of brokers and the Stock Exchanges make the exercise of tracing transactions very time consuming". This official pointed out the "difficulties in obtaining the necessary evidence required to prove this particular offence; in particular, the requirement to show in a positive way that the information was in fact price sensitive and that the defendant was motivated to trade as a direct result of having that particular information. A reverse onus of proof would result in more prosecutions. The courts are seen as failing to deal adequately with insider trading because they do not understand the legislation" and "court rules made the prosecution of insider trading difficult". The complexity of the current legislation was also seen as making the prosecution of insider trading more difficult.

While the regulatory authorities must accept some of the blame for the poor prosecution record, claims of their lack of will or incentive to proceed vigorously against insider traders, must be matched against the obstacles facing them. The reluctance of professional advisers or companies to lend support in substantiating complaints or to act as witnesses, has increased the problems facing enforcement of a law that most acknowledge needs to be more vigorously enforced. A good illustration of the difficulties which professional advisers can cause to the enforcement effort was provided in oral evidence before the Griffiths Committee by one of the most experienced insider trading investigators in Australia, John O'Dea of the New South Wales Corporate Affairs Commission. O'Dea noted:

It has been my observation that when an investigator goes to a stockbroking firm and requests the scrip ledger cards, which are the history of all the dealings by that particular broker in the stock you are looking at at the time, that highlights the clients who have traded in the stock. When you ask for the client ledger cards and take copies of them, invariably one finds that when one visits the client who has traded in the stock, he has been forewarned by the broker that you are coming, firstly, because he wants to maintain good relationships, one can understand that and one can sometimes hypothesise as to other reasons why he may get in touch with the client, particularly when one looks at section 128(5) of the code, which prohibits the communication of [inside] information . . . If they pass on information to their clients, whether it be market rumour or what, the broker would want to ensure that the client is not going to say anything to an investigator when he turns up that might cause the broker some disquiet. One of the biggest drawbacks in the investigation is that the client is on notice before we get to him that there is a visit forthcoming. I think that is a general practice of most broking houses. There may be exr-ep6ons to it, but I think they would be very rare (Griffiths Committee, Hansard, p. 18 1).

O'Dea went on to identify the serious consequences of such professional conduct for the subsequent course of the investigation:

So it is very easy for the person, between the time the broker has phoned up and the time the investigator gets there, to have formulated a ready made excuse. I can quite readily give you two examples and you cannot do anything about them. One was a particular brick company some time ago. The excuse of the person was, "I was lying on Bondi Beach and I looked up at all the home units and saw they all had bricks in them and it occurred to me that bricks might be a good stock to invest in, so I did". Another was a matter of the stock of Arcadian Minerals, some time ago. The person was using a fictitious address and was under a false name. But because the person had to put the shares in the broker's nominee, the company could not trade the shares without going back to that particular broker. I exerted some pressure on the broker who was mysteriously able to get in contact with the other person, although that person paid in cash ... She said, "I was in the bus and I looked out the window and there was the P and 0 Arcadian tied up at the terminal. I thought that was a good omen so I bought "Arcadian Minerals".

It is quite easy, a broker having got in touch with his client, for the person to come up with any sort of excuse at all and there is nothing you can do about it. So unless you get a person cold, that path is a useless one to walk because you go to a lot of trouble and have a lot of interviews and get answers that will not take you anywhere. You get to the stage of being very selective about what matters you investigate (Griffiths Committee, Hansard, pp. 184-5). (Emphasis added)

The problem of finding persons to come forward to complain about insider trading compounds the difficulties of gathering sufficient evidence, especially evidence to the effect that the information was "material" within the terms of statutory definition. Some of the considerations underlying regulatory action in this respect were set out in a submission by the Victorian CAC to the Griffiths Committee. There it was said,

The Victorian Government is of the view that one of the more successful means of dealing with the problem of insider trading and market manipulation is the deterrent effect offered not only by successful prosecution but also by the fact that priority will be given to any complaint regarding these matters.

Whilst the exercise of that priority may not necessarily lead to prosecution, it will involve activity in gathering evidence and other material, questioning and interrogating people which it is submitted will bring about a reflection on the practices within the securities industry and raise the consciousness that insider trading and other market related matters are treated seriously and that any allegation of those practices will be punished (Griffiths Committee, Hansard, p. S480).

The detection of insider trading

In obtaining complaints or information about insider trading activity, the agencies seemed to follow a reactive strategy. A rigourous, pro-active enforcement strategy would be difficult because of resource constraints faced by the agencies. Effective control of insider trading requires reliable informers. In a submission to the Griffiths Committee, the Victorian Corporate Affairs Commission noted,

Because of the nature of these types of offences, it cannot be left entirely to the enforcement agencies to deal with the problem and the problem can and will only be addressed with full co-operation from within the industry. The recent arrests in Melbourne are an example of this type of co-operation where a person has come forward and volunteered information and documents from which the investigation has been able to flow, leading to arrests (Griffiths Committee, Hansard, p. S481).

This was further explained in oral evidence before the Griffiths Committee, as the following exchange, between the Chairman of the Committee and the Victorian CAC Commissioner and another senior CAC officer, shows:

Mr Whitehouse: ... for the last 12 months or so we were fortunate in having someone come forward with what I would consider first-hand information. This is probably the first time we have been able to obtain this type of information and, flowing from that, of course, activity has stepped up because there was a genuine belief that this was one we could get up and deal with ...

Mr Trevethan: There is no doubt that up until recently we did form the view that surveillance in these matters is a very costly and non-rewarding business and a lot of resources were wasted in the cooperative scheme.

Chairman: It has been and, depending upon how the cases were interpreted, may continue to be costly.

Mr Trevethan: That is quite right. But it is quite clear though that to try to find insider trading by virtue of doing examination of trades and various things is like trying to find a needle in a haystack in some respects. But if someone does come forward or you can get on to something and you are prepared to put the resources into it, as we are, then that is the best way you can achieve a result (Griffiths Committee, Hansard, p. 317).

In the course of the interviews, one regulator remarked that, "... the "clubishness" of business people means that they won't rat on each other". After detection, witnesses have become uncooperative or changed their evidence, thus making a successful prosecution impossible. It was also reported that "tips are often not useful; they are non-specific and often involve a question of bitterness". It therefore seems that there are serious difficulties involved in the detection of insider trading. These were well summarised by one regulator when he observed that "the main problem is identifying the insider trader the smart insider trader either conceals his identity or gets another person to trade for him". These problems are accentuated where the insider trading is done by off-shore entities. Hong Kong and New Zealand were often referred to in this regard.

Even where there is a strong indication that a person has been involved in insider trading activity, the problems of proof are serious. In the words of a senior regulator, the "detection of suspicious market movement is easy, but proving the link to insider trading is difficult". Thus the "lack of evidence to link market events with insider trading" is probably the greatest difficulty facing the enforcement process. Added to this was the frequently made observation that establishing this link was extremely time consuming and that the agencies lacked the technology for adequate market surveillance. These problems of proof were summarised by a senior Victorian CAC officer in evidence before the Griffiths Committee:

Chairman: Can you give the Committee, and obviously we have to be a little careful here, without in any way, shape or form identifying the individuals or companies that arc involved there, some indication as to the nature of the problems that arose there, some indication as to the nature of the problems that arose that precluded those matters from proceeding? For example, which ones failed on obvious problems of establishing materiality or whatever? Just give us a thumbnail sketch of the practical difficulties that you encountered.

Mr Whitehouse: The bulk of those that were written off we could not identify any insider trading at all. There were price movements. When we analysed the people who had bought and sold we could not find any link at all to any information.

Chairman: You are saying that price movement, as always, is the smoke for the fire in terms of insider trading. What you are saying is that, objectively, there appeared all the signs of insider trading taking place. Thus at the next step, trying to establish a link between those doing the insider trading and officers of the company and so on, you simply could not establish any link?

Mr Whitehouse: I am not saying we got it right. What I am merely saying to you ...

Chairman: You could not prove it?

Mr Whitehouse: No, Say I have the information and I give it to somebody else, he does the deal. I shut up, he shuts up, there is no way you can get proof (Griffiths Committee, Hansard, pp. 325-6).

Tippee liability

A perennial problem with the insider trading laws which seems to worry brokers particularly, has been identifying how far the law should go in defining tippees. The one aspect of the Anisman recommendations that attracted more criticism than any other, was his extended range of tippee liability. In looking at this issue there is a predictable tension between casting the net too wide, and so giving regulators a considerable discretion as to which cases to pursue, and alternatively codifying the classes of tippees more precisely. It may be that one of the most common forms of insider trading is by tippees, especially in regard to information obtained directly from corporate executives. The Securities Industry Act dealt with tippee liability in the following terms:

128. (3) Where a person is in possession of any such information as is mentioned in sub-section (1) or (2) that if generally available would be likely materially to affect the price of securities but is not precluded by either of those sub-sections from dealing in those securities, he shall not deal in those securities if -
(a) he has obtained, directly or indirectly, from another person and is aware, or ought reasonably to be aware, of facts or circumstances by virtue of which that other person is then himself precluded by sub-section (1) or (2) from dealing in those securities; and was
(b) when the information so obtained, he was associated with that other person or had with him an arrangement for the communication of information of a kind to which those sub-sections apply with a view to dealing in securities by himself and that other person or either of them 1.

Those brokers who oppose the expanded tippee liability proposed by Anisman argue that "it should be aimed to get the originator". The fiduciary principle was mentioned only once by a Perth broker who urged that the legislation or the courts "restrict [tippee liability] to those in a fiduciary posifion". Most of those who favour the exhaustive definition of tippees do so with some qualifications. One view was that, "you could never legislate to cover every contingency. Restrict it to the originator and associates and any professionals involved". Another broker who was in favour of an extension in principle warned that "if you go too wide the law would not be enforceable". The attitude of judges was also a factor and it was suggested by lawyers that because of judicial predispositions to light sentences in white collar cases, tippee liability "should be defined widely". There is not a great deal of support for a precise legislative definition of tippee liability and in these circumstances there is a case for the preparation of regulatory guidelines on this matter.

An illustration of some of the difficulties in proving that there was tipper-tippee communication was illustrated by John O'Dea in his evidence before the Griffiths Committee when he said

The difficulty of proving the communication is that if it is a verbal communication you are virtually wasting your time. You have a tipper-tippee situation. Both would have committed an offence. If the tippee has purchased, the tipper and the tippee arc likely to be charged. If it was a verbal communication you have no way of proving it. So you get back to the situation with the Bain matter. There is no secrecy about this one because the document has been tendered in evidence; it is a public document. There was a fax communication from the company to Roger Bain. Unless you get something tangible like that to start working on, you might as wen forget a lot of particular matters. All the indicators can be that there is insider trading, but it is quite impractical to go too far down the track with them (Griffiths Committee, Hansard, pp. 185-6).

Disincentives to investigation

The major disincentives facing the staff of agency officers in prosecuting insider trading were the evidentiary problems. These lead to "frustration", "disappointment with the end result and a disillusion when witnesses change their tune". The lack of cases is a disincentive because there is little precedent and the courts (particularly the lower courts) seem to take a conservative approach as a result. As well, it was said that "the time taken in detecting insider trading, gathering evidence and getting a result is a disincentive. Resource issues are also involved as there is a need to employ resources in areas where there are more tangible results". Insider trading cases require a lot of work, yet most do not go beyond the "strong reason to suspect a breach" stage, because of the difficulty of proving the materiality of the information.

Problems of proof

In examining the difficulties of proof in insider trading cases two issues repeatedly emerged. First, the predictable problem of being able to find witnesses. Secondly, problems in establishing that the information available to the trader was price sensitive in that it was likely materially to affect the price of the security. Evidentially issues have a particularly critical importance, "because of the conspiratorial nature of the actions of the persons involved in this offence". Another dimension of the problem of evidence is the need to be able to find expert witnesses to help establish that the information used was, price sensitive.

Whether or not professional advisers such as brokers, bankers and lawyers assist investigations of insider trading can be crucial to the prosecution process. The characteristic view of regulators was that "generally they are co-operative, but there is a natural caution to protect their clients". There was a feeling amongst the regulators that professionals could be more forthcoming than they were in assisting in investigations. There are some differences in the perceptions of different professional groups. For example, it was reported by regulators that "accountants and lawyers are very helpful but brokers are less likely to co-operate". The issue of expert witnesses is linked to the key issue of establishing the element of materiality required by the legislation. The looseness of this requirement is a serious defect in the current legislation and this research has shown that it is necessary to spell out more precisely what is meant by the phrase "likely materially to affect the price of those securities". The requirements as to materiality have made it very difficult for the prosecution to overcome the problems which they raise.

The standard of proof

Apart from any other problems of proof created by the language of the legislation, another significant difficulty arises because insider trading is a crime. As a result, the standard of proof required is criminal, that is, beyond reasonable doubt. Some regulators believe that if the standard of proof were to be lower the prosecution would become easier, but many had doubts about the wisdom of taking this approach. If a civil standard of proof on the balance of probabilities were introduced, many regulators feared that the sanction of imprisonment would have to be abandoned. This is seen to be inadvisable because "the principal deterrent would then cease to exist". A number of regulators added that even if a civil standard of proof were to replace the current standard, "you would still need to obtain the evidence" and "prove the elements of insider trading".

A common suggestion offered at this point was that rather than lowering the standard of proof, a more effective strategy might be to reverse the onus of proof, to require the accused to prove that his or her conduct did not fall within the terms of the Act. Such a step, although it may be seen as politically undesirable, could well be the only realistic solution short of a significant redrafting and simplification of the current legislative provisions. Some regulators perceive a "need to educate the judiciary" whilst others see the judiciary as lacking a grasp of the nature of market realities in this area.

The issue of materiality

A critical component of the legislation is that the information "would be likely materially to affect the price" of the securities in question. Brokers, financial advisers and Stock Exchange officials were asked how they would measure materiality and they were asked to comment on the US approach to materiality, which is to ask whether a reasonable person would consider information material. Brokers were almost unanimous in stating that "it is a complex matter". Most believed that a flat percentage change formula would not be appropriate, and that market conditions, the particular share, price and volume movements and the established trading patterns of particular stock must be considered. There was almost complete accord among the Stock Exchange officials about the unsuitability of a simple equation as a means of measuring what is material; many found the reasonably informed person approach acceptable.

In its submission to the Griffiths Committee, the ASX argued that a reasonable person test of materiality would not make much difference and that there ought to be some threshold, for example, of 5 per cent or more within three days of information becoming public, so as to allow normal market operations to continue where there are price movements below this threshold figure. However, as Professor RP Austin, observed, such a threshold "has to be arbitrary" (Griffiths Committee, Hansard, p. 125).

Rather surprisingly, many financial advisers suggested a simple percentage as a measure of a material change in price. Those who are closer to the market, however, rejected this approach. The matter is probably best explained by one of the merchant bankers who said "this is related to the volume of shares available, the price at which they are selling and the degree of liquidity in the stock. For BHP one dollar is a material change but in other companies one cent might be material". The concept of materiality should be more clearly defined by statute and not be left to the courts to make sense of very loose drafting. There is considerable industry support for the introduction of a statutory definition which would state that price sensitive information is material where two reasonably informed persons regard the information as material. There is no justification for reliance upon a percentagebased price change formula of materiality and the industry clearly regards such a formula as being inappropriate.

Regulatory goals and priorities

On a day to day basis, most regulatory agencies gave a low priority to insider trading. One major exception to this was the NCSC where "insider trading is given as high a priority as resources allow, although 40 per cent of all matters investigated involve some element of insider trading". Elsewhere, however, insider trading is given a low priority because of the pressure of other more immediate matters. Most regulatory agencies report though, that "once an incident of insider trading is identified, it is given top priority". The CACs believed there was no watching brief for insider trading offences held by them and "on a continuous basis insider trading has no special priority and there is no staff member assigned specifically to insider trading". The following response is probably quite characteristic of CAC officials: "insider trading is given a low priority because it is resource intensive, while the criminal standard of proof makes conviction difficult".

Resource constraints is the common excuse of most contemporary agencies for lack lustre performance. Respondents were asked about the main resource constraints affecting the detection and prosecution of insider trading. A senior regulator remarked that "this is more a question of government emphasis, State governments collect revenue but do not put it into the CACS. The level of computerisation, for example, is deplorable". The inadequacy of the regulators' computer monitoring capacity was raised time and again. Another resource issue which was repeatedly raised was that of insufficient high quality staff. It was often said that "CACs have difficulty retaining good staff" and that the agencies are the training ground for the private sector. The NCSC was seen by many as not having sufficient staff dedicated to the area of market surveillance.

Interviewees were asked to select from three policy goals, the one which they thought to be the most realistic. The three goals which were put to them were "punishment, orderly marketing or symbolic reassurance". The opinions of brokers were split slightly in favour of symbolic reassurance over orderly marketing. Punishment was not seen as a realistic goal. Most of the Stock Exchange officials saw orderly marketing as the most realistic goal. It was also said by ASX officials that section 128 is there to ... provide reassurance to the public that the industry is reliable". The financial advisers were also split in their opinions as to the most realistic goal of insider trading regulation. They fell into two camps - orderly marketing and symbolic reassurance. Orderly marketing was identified by the observers as the most realistic goal, slightly ahead of symbolic reassurance. One typical view, in favour of orderly marketing, was "I hope it is better than symbolic reassurance and punishment comes too late".

No lawyer thought that punishment was a realistic goal of insider trading regulation, although it has to be said that this purpose is not necessarily incompatible with the others put forward. As one lawyer noted, "it can't be punishment because no one is ever punished". The punishment goal should not, however, be regarded as being necessarily irrelevant. Another lawyer observed that, "insider trading regulation deters people and scares a lot of people who are thinking about it". Of the remaining options, orderly marketing was selected as the most realistic goal, whilst symbolic reassurance came a close second. Most regulators saw the realistic goals of insider trading regulation as orderly marketing, although punishment was often linked to this goal in some way.

Obstacles to regulatory cooperation

In view of the way in which regulatory resources are so thinly stretched, it seems that there should be room for considerable co-operation between the government agencies and the Australian Stock Exchange in relation to insider trading investigations. For most brokers the idea of greater cooperation had considerable appeal. As one broker said, "the Stock Exchange and the government regulators are in the same business - they are not adversaries". But it would only work "... provided that privilege and privacy between client and broker are not challenged". There were some brokers who see it "as duplication. The best way is to have brokers governed by the Stock Exchange only. One body would be more effective". The Stock Exchange officials were generally confident that there could be closer cooperation especially with the development of electronic trading. Another view was that "there is now a fine co-regulatory relationship with the CAC. The NCSC tends to engage in ambulance chasing and we are sometimes distressed by the press release style of operation of the NCSC. The ASC [Australian Securities Commission] would make it more difficult to co-regulate. The existing CAC structure is appropriate". Both sides reported that there is a generally good working relation between the ASX and the CAC, although in the past there had apparently been "an us and them attitude".

Conclusions

There are procedural and evidentiary dimensions of the prosecution process which are in urgent need of reform. In particular, in view of the enormous problems currently being faced in the enforcement of laws against insider trading, it might be appropriate to turn to unpopular strategies such as the reversal of the onus of proof once a prima facie case of insider trading has been established. This suggestion is not made lightly, but it is one which the peculiar nature of insider trading as a phenomenon may necessitate. Where information is within the exclusive knowledge of a very limited range of people and other evidence is not obtainable for a variety of reasons, such as due to its destruction, the problems faced by the prosecutorial authorities are apparently almost insurmountable. Reversal of the onus of proof must be seriously considered if the current law is not to be radically revised and if adequate support is not to be given to the regulatory agencies.

Perhaps not surprisingly there has been considerable opposition to this proposal. In its submission to the Griffiths Committee, the Law Council of Australia strongly opposed the reversal of the onus of proof on the grounds that s 128 of the Securities Industry Act does not require that the element of purpose or motive of the insider trader be shown (Griffiths Committee, Hansard, p. S256; see also Hansard at p. 176). Similarly, in its submission, the Commonwealth Attorney-General's Department took the view that a general reversal of the onus of proof would be "unreasonable" as it would be very difficult to find proof to negate an accusation in certain circumstances. Instead, a limited case for the reversal of the onus was seen to exist in regard to some matters which it would be comparatively easy for the defendant to disprove. Others simply opposed the reversal of the onus of proof in financial crime matters as a matter of principle. The Business Council of Australia strongly opposed the reversal of the onus of proof arguing that it would not be necessary if a reasonable man test was introduced for the purpose of determining whether a material change in the price of securities was likely to occur (Griffiths Committee, Hansard, p. S26).

As a result of these arguments, in its report the Griffiths Committee (Griffiths Committee, Report, p. 36) did not support the reversal of the onus of proof, arguing that this was unnecessary in the light of some of the other recommendations which it had made in its report. The reversal of the onus of proof was often suggested from within the agencies themselves, even though a prima facie case would still need to be established. In evidence before the Griffiths Committee the Victorian Commissioner for Corporate Affairs also noted that more expeditious handling of insider trading matters could be achieved by the reversal of the onus of proof, as occurs in s 186(2) of the Victorian Crimes Act 1958, dealing with the payment of secret commissions (Griffiths Committee, Hansard, p. 314). There are several federal laws, such as the Income Tax Assessment Act 1936 and the Proceeds of Crime Act 1987, which provide for the reversal of the onus.

A procedural reform of this kind would come within the guidelines for the reversal of the onus of proof laid down by the Senate Standing Committee for the Scrutiny of Bills. These guidelines were stated by the Minister for Justice, Senator Michael Tate in the following terms:

The Senate Standing Committee test for reversal's of the onus of proof is where both -
(a) the matters to be raised by way of defence by the accused were peculiarly within the knowledge of the accused; and
(b) it would be extremely difficult and costly for the prosecution to be required to negative the defence (Tate 1988, p. 6).

It is difficult to think of any crime which would more readily come within these guidelines.

At the level of prosecution, it is highly desirable that a single national prosecutorial agency be given responsibility for this area. The Federal Director of Public Prosecutions is the appropriate agency to undertake the prosecution of cases of insider trading, even if their experience in this area is not as great as it might be. With suitable training and experience, this agency could bring a level of professionalism and consistency of approach that has been absent from the efforts of individual jurisdictions, although regard would need to be had to coordinating the efforts of the Commission and the DPP during the investigation process.

In regard to penalties, it is essential to depart from the formula which has applied to this area. In particular, the long standing maximum fine of $20,000 for an individual offender has been seen as highly unrealistic and the raising of it to at least $100,000 for each offence is appropriate. This view was shared by all sectors of the industry. In the case of the associated penalty of five years imprisonment, the urgency for change is not as pressing, although other jurisdictions (such as the UK) have raised the maximum term of imprisonment.

There is also strong industry support for improved civil penalties, particularly the disgorgement of profits and at least double damages. Furthermore, the section which provides for compensation to victims needs to be made more credible. There is a widespread view amongst lawyers that this section is totally ineffectual and that it should be completely rewritten. The introduction of class or group actions for shareholders damaged by insider trading conduct, seems to be essential if civil remedies are to have any meaning.

In the context of the legislative phrase "persons connected with a body corporate in the preceding six months", as used in s 128 of the Securities Industry Act, the introduction of a defence to insider trading is probably warranted in circumstances where all short-swing profits derived during that period are returned to the corporation whose securities were traded. This defence should only be available where the payment was made within thirty days of the profit being made.

It is also desirable to clarify the present uncertainty as to whether off-market transactions are covered by the section. They clearly should be covered and it needs to be more emphatically stated in clear and unambiguous words. Judicial interpretation of section 128 has read the word "person" narrowly so as to cover only natural persons. Such an interpretation, even if it is correct, provides a major means of avoiding the insider trading prohibition. This would be contrary to the spirit of the legislation. It is clear that insider trading can be undertaken by a corporation and, indeed, the section contemplates this possibility.

The lack of any successful prosecutions seems to have led many in the industry to believe that the enforcement of the laws is not meant to be taken seriously. This perception is enhanced by the readiness of the NCSC to rely heavily on informal mechanisms to drive offenders from the industry, rather than to use the sanctions in the criminal law. The process of prosecution is regarded by the agencies as too risky and too costly, given the other demands upon the corporate regulators.

Adverse publicity is not welcomed by many in the securities industry and the stigma of conviction is especially feared. This is in line with research in regard to other types of white collar crime, as Fisse and Braithwaite (1983) have shown. Although the sanction of imprisonment is feared, the notorious fact that it has never been applied, and the expectation that it is unlikely to be imposed in the future, seriously undermines its deterrent effect.

Similarly, the fine of $20,000 was regarded in the industry as ridiculously low and as a consequence it has not been a real deterrent, especially as it, too, has never been applied. Unless the regulatory agencies are prepared to lose a few prosecutions, it seems unlikely that they will gain the experience and the confidence to bring successful prosecutions for insider trading in the future. It seems to be a particularly Australian characteristic that unless tax revenue is at stake, Australian regulatory agencies are not prepared to prosecute if there is a chance that they might lose in the courts. This suggests that legislation such as section 128 has served no other purpose than to provide symbolic reassurance.

Although the legislation has been far from ideal, that does not justify the extreme caution on the part of the Corporate Affairs Commissions in prosecuting insider trading. The lack of effort is partly a reflection of the failure of the industry itself, and especially of the self regulatory bodies such as the Australian Stock Exchange, to be sufficiently vigorous in their support of the prosecution effort Both the Commissions and the ASX branches have been poorly resourced and inadequately staffed and equipped to deal with complex crimes such as insider trading.

What is clear from this research is that there has been little if any pro-active policing by the Commissions with a preference, instead, for the reactive mode of regulatory policing of the kind described by Katzmann (1980) as a mail bag approach. Consequently the regulatory agencies have been unable to make any significant progress in the enforcement of insider trading laws. This is not because there is little insider trading, but rather, it is due to the effects of peer group pressures and to the existence of an anti-informer culture within the industry. It is clear that greater and more fundamental efforts at dealing with insider trading must eventually focus upon the ethical values and mores of the industry. This is essentially a long term task and is primarily the responsibility of the industry itself. In the meantime, if complete regulatory failure in this area is to be avoided, there is a pressing need for more vigorous pro-active policing and enforcement strategies although these are relatively costly and more time consuming. They are more cost effective in the long run. The cost of an effective strategy is small compared with the cost of a corrupt marketplace in which capital raising difficulties are encountered by the Australian corporate sector. Pro-active strategies will not be possible without a significant and sustained injection of additional skilled investigatory and prosecutorial personnel, adequate computer monitoring equipment of the kind used by North American and British agencies, and the political will to treat insider trading much more seriously as a problem than it has been over the past two decades.

Endnote

1.Section 128(3) of the Securities Industry Act is expressed in very similar terms to s 1002 of the Corporations Act 1989, although the Exposure Draft of the new insider trading legislation has proposed doing away entirely with this awkward provision regarding tippee liability; see further pp. 131-2 below.