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Chapter 2 - Legislative and judicial responses to insider trading

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 5-16


Insider trading has been proscribed in Australia since 1970. Until 1989, the main insider trading prohibition was in s 128 of the Securities Industry Act 19801 (Cwlth) which has been largely reproduced in the original version of s 1002 of the Corporations Act 1989 (Cwlth). Insider t rading has been punishable by a penalty of $20,000 and/or imprisonment for five years. Compensation for damages sustained by a victim of insider trading is available under ss 1013-1015 of the Corporations Act. Insider trading conduct is also prohibited under s 232(5) of the Corporations Act in the case of the misuse of inside information by an officer of a corporation and under s 128 of the Australian Securities Commission Act 1989 (Cwlth) where there has been misuse of information by a member or staff member of the Australian Securities Commission (ASC).

Although, like other securities market offences, there are few cases dealing with insider trading in Australia, the subject has been under review from time to time. A feature of insider trading is that, of all forms of marketplace abuse, it is most easily recognised by the general public and most media discussions of sharp practice in the stock market concentrate on insider trading. The populist notion of insider trading is, however, not necessarily what is prohibited by the legislation. The prohibition of insider trading in s 1002 can be traced back through s 128 of the Securities Industry Code 1980 to s 75A of the Securities Industry Act 1970 of New South Wales, which first introduced the prohibition following the revelations made by the Rae Committee. The small number of cases arising from the legislation has resulted in a lack of judicial clarification of the law and, in an attempt to reform the law, the NCSC in 1983 commissioned a report from Philip Anisman, a Canadian expert on insider trading. The Anisman report, of 1986 reviewed the policy arguments for the regulation of insider trading and stated that:

Insider trading is essentially a problem of non-disclosure; a person whose position provides him with access to information that indicates a disparity between the value of a corporation's securities and the price at which they may be acquired or disposed of acts on the information before it becomes available to those with whom he trades in order to obtain for himself, without risk, the benefit of his early knowledge. It can occur, and has, in the shares of both closely held, private companies and widely held, public companies, and with respect to the latter, either directly, in a face-to-face transaction or otherwise, or impersonally through the facilities of a stock exchange. Not surprisingly, the context of an impersonal market necessitates a broader focus than direct transactions and presents a number of conceptual and practical difficulties for the development of legislation (Anisman 1986, p. 2).

Insider trading at common law

The courts have generally tended to be reluctant to impose a duty on officers of a corporation not to insider trade. In Percival v. Wright (1902) 2 Ch 421 Swinfen Eady J said that management of a corporation does not owe a fiduciary duty to shareholders to avoid misusing corporate information for its own benefit. He took the view that their only duty was to the company. Although Percival v. Wright was only a decision of a trial court, it has been followed mainly because of the failure of the legislature to overrule it and also as a result of judicial inertia in the face of an old judgment. As Mahon J said in a New Zealand case, Coleman v. Myers [1977] 2 NZLR 225 at 273:

... [I]n New Zealand, as in other Commonwealth jurisdictions, nothing has been done by the legislature to vary or abolish the effect of the decision in Percival v. Wright and this general reluctance on the part of legislatures to intervene in the matter may be explicable by the difficulty in constructing the appropriate statutory formula. In every ordinary aspect of the administration of the affairs of a limited company it is essential that the directors be the fiduciary agents of the company alone. The concept of corporate management would collapse if there were any general rule that the directors were also the fiduciary agents of the shareholders. For that reason any legislative intervention directed at a remedial alteration of the Percival v. Wright position would require very careful drafting so as to avoid any possibility of derivative arguments aimed at extending the new fiduciary concept thus established.

Percival v. Wright was an action by shareholders to set aside a sale of shares on the ground that the directors as purchasers ought to have informed the vendor shareholders that they were engaged in pending negotiations for the sale of the company which would have significantly raised the value of the shareholders' shares. Swinfen Eady J said (at 425-27) that:

... It is urged that the directors hold a fiduciary position as trustees for the individual shareholders, and that, where negotiations for sale of the undertaking are on foot, they are in the position of trustees for sale ... It is contended that a shareholder knows that the directors are managing the business of the company in the ordinary course of management, and implicitly releases them from any obligation to disclose any information so acquired. That is to say, a director purchasing shares need not disclose a large casual profit, the discovery of a new vein, or the prospect of a good dividend in the immediate future, and similarly a director selling shares need not disclose losses, these being merely incidents in the ordinary course of management. But it is urged that, as soon as negotiations for the sale of the undertaking are on foot, the position is altered. Why? The true rule is that a shareholder is fixed with knowledge of all the directors' powers, and has no more reason to assume that they are not negotiating a sale of the undertaking than to assume that they are nor exercising any other power . . . I am therefore of opinion that the purchasing directors were under no obligation to disclose to their vendor shareholders the negotiations which ultimately proved abortive. The contrary view would place directors in a most invidious position, as they could not buy or sell shares without disclosing negotiations, a premature disclosure of which might well be against the best interests of the company. I am of opinion that directors are not in that position.

There is no question of unfair dealing in this case. The directors did not approach the shareholders with a view of obtaining their shares. The shareholders approached the directors, and named the price at which they were desirous of selling. The plaintiff's case wholly fails, and must be dismissed with costs.

Other courts have taken a different view, as in the Privy Council decision in Allen v. Hyatt (1914) 30 TLR 444 which, strangely, has not been as influential as the earlier single judge decision. In Allen v. Hyatt the directors were negotiating an amalgamation of their company with another company and induced shareholders to give the directors options to purchase their shares by representing that this was necessary to effect the amalgamation. The directors then exercised the options to purchase the shareholder's shares and the directors made a handsome profit as a result. It was argued that the directors should be regarded as being trustees for the shareholders of the profit which they had made. The Privy Council distinguished Percival v. Wright and concluded (at 445) that:

... the directors must here be taken to have held themselves out to the individual shareholders as acting for them on the same footing as they were acting for the company itself, that was, as agents.

In contrast, in the United States, the special facts doctrine, as expounded by the US Supreme Court in Strong v. Repide 213 US 419 (1909), has extended the duties of directors to imply a fiduciary obligation to shareholders in situations where directors were acting contrary to the interests of other shareholders. Under this doctrine, the knowledge of the directors in Percival v. Wright would have created the special facts which imposed different duties upon directors to those which they normally owed to shareholders.

In Coleman v. Myers, Mahon J at first instance criticised Percival v. Wright as being contrary to contemporary commercial morality and concluded that it was wrongly decided and should not be followed. In Coleman v. Myers a father and son were the only directors of a New Zealand family company. They devised a plan to acquire the company through the vehicle of another company owned by the son. They planned to pay for the takeover by selling off assets of the family company. As directors of the family company, the father and son recommended to the other shareholders that they should accept the takeover offer, stating that the offer price for their shares represented their real value. This was not so. After the sale of the assets and the repayment of the debt, the directors made a profit of several million dollars. They failed to disclose to the shareholders the likely extent of the profit and the son had stated that the assets of the company would not be sold after the bid. Having succeeded in obtaining acceptances from the necessary number of shareholders the directors, through the son's company, then compulsorily acquired the remaining minority shares. The minority shareholders challenged the actions of the directors claiming that there had been a breach of fiduciary duty in failing to disclose the inside information to the shareholders when recommending acceptance of the offer. Mahon J found that Percival v. Wright had been wrongly decided, but found in favour of the directors on other grounds. On appeal, the Court of Appeal decided that although Percival v. Wright was correctly decided on its facts, a fiduciary duty was owed by the directors to the shareholders and therefore they should account to the shareholders. In so finding, the Court of Appeal did not disapprove of the views of Mahon J on the wider relevance of Percival v. Wright. In the New Zealand Court of Appeal, Woodhouse J thought that Percival v. Wright was based upon a very restrictive argument and facts. He said (at 324):

In my opinion it is not the law that anybody holding the office of director of a limited liability company is for that reason alone released from what otherwise would be regarded as a fiduciary responsibility owed to those in the position of shareholders of the same company. Certainly their status as directors did not protect the defendants in a Canadian case which finally made its way to the Privy Council; see Allen v. Hyatt (1914) 30 TLR 444. The decision in that case turned upon the point that the directors of the company had put themselves in a fiduciary relationship with some of their shareholders because they had undertaken to sell shares of the shareholders in an agency capacity. But there is nothing in the decision to suggest that in the case of a director the fiduciary relationship can arise only in an agency situation. On the other hand, the mere status of company director should not produce that sort of responsibility to a shareholder and in my opinion it does not do so. The existence of such a relationship must depend, in my opinion, upon all the facts of the particular case.

The special facts doctrine was also referred to by Cooke J who said that this was a case where a fiduciary relationship arose from the special facts. Despite the strength of the judgment in Coleman v. Myers, the decision in Percival v. Wright was followed by the Supreme Court of Western Australia in Divine Holdings Pty Ltd v. Paracel Pty Ltd (1980) 4 ACLR 928.

Insider trading under statute law

Corporations Act 1989 (Cwlth) s 232: The problems that arose in the common law decisions have been partly remedied by the enactment of s 232(5) and (6). Section 232(5) prohibits an officer or employee, or former officer or employee, from making improper use of information obtained by virtue of his or her position as an officer or employee of the company to obtain advantage for himself or herself or to cause detriment to the body corporate. Section 232(6) prohibits officers or employees from making improper use of their positions to gain an advantage or to cause detriment to the body corporate. Section 232(3) has imposed criminal liability of $20,000 or imprisonment for five years, or both, where the contravention is committed with intent to deceive or defraud the company, its members, creditors or any other person. Where no such intent is proved, a penalty of up to $5000 has been provided. Under s 232(7), the court may order that a person convicted under s 232 be ordered to pay compensation to the corporation for damage suffered as a result of the same act. Few insider trading prosecutions have been brought under s 232 or its predecessors and none has been successful, although in view of the difficulties in obtaining convictions under the insider trading provisions it is likely that regulatory authorities will make more use of the section than has occurred to date.

In Waldron v. Green (1977-78) 3 ACLR 289, a case brought under s 124(2) of the Companies Act 1961 (Cwlth) which was a precursor of s 232(5) of the Corporations Act, the difficulties of proving improper use of information by a director are well illustrated. Green was a director of Endeavour Oil NL. He learnt that a call of 5 cents a share was about to be made on shareholders in the company. The effect of the call was to reduce the value of shares in Endeavour Oil to 11 cents each. Shortly after learning of the likely call, Gwello Pty Ltd, a company of which Green was a shareholder and director, sold large parcels of its shares in Endeavour Oil at 14 and 15 cents per share. On behalf of Gwello Pty Ltd it was stated that it sold the shares not because of the information but because it was in financial difficulties at the time and needed the funds. In defence of Green, it was argued that the kind of information required by the equivalent of s 232(5) was factual information of a concrete kind and not rumour or speculation. It was said that the information must entail some degree of specificity. An earlier insider trading case, that of Ryan v. Triguboff (1976) 1 ACLR 337, brought under s 75A of the Securities Industry Act 1970 (NSW), had failed due to the lack of "specific information" as then required in that statute. In Waldron v. Green it was held that there was no need for there to be specific information for the purposes of the section. McInerney J said (at 295-96):

Our section does not require that the information be "specific". In many cases a hint may suggest information or may enable an inference to be drawn as to information. Information about impending stock movements or share movements may often be veiled ... The third ingredient is that the respondent must have acquired the information by virtue of his position as an officer of the corporation. It was clearly open to the magistrate to find this ingredient on the evidence before him. I am unable to accept ... [the] ... submission that there was no evidence to indicate that the respondent acquired information from his directorial position, as against what everyone in the public domain knew. There is the plainest of evidence that he was present at the meeting of the Board of Directors at which there was discussion on the question whether a call should be made. Whether or not he gained additional information from outside sources as, for instance, by the reports of marketeers and people studying movement of shares is not to the point. What the section is concerned with is the question whether an officer of a corporation has acquired information by virtue of his position. If he does, it is nothing to the point that that information is supplemented by information acquired as a matter of common knowledge or by reference to outside sources.

The case, however, turned on whether Green had made use of the inside information about the impending call. As there was no direct evidence, the prosecution argued that a causal connection should be inferred between the information gained by Green and the sale of shares by Gwello. In the words of McInerney J (at 298-99):

The argument for the prosecution may be said to involve the proposition post hoc propter hoc-a proposition which Scrutton LJ in Clan Line Steamers Ltd v. Board of Trade [1928] 2 KB 557 at 569 stigmatised as "an old fallacy" and as "generally wrong". Something more, then, must be established than the mere sequence, in point of time, of the gaining of the information and of the sale. The mere occurrence of the two events in sequence one to another does not establish causation. In the absence of other evidence, the inference of causation is at best an inference of equal degree of probability with the inference that the two events are not causally connected. Such other evidence as there is concerning the sale is equivocal ... Looking at the evidence as a whole, I do nt think that the evidence at the close of the prosecution case established, on the balance of probability-or even possibility-of a call in order to decide to sell Gwello Pty Ltd shares in Endeavour Oil NL.

The inference that the respondent did thus use that information is, in my view, of no more than equal degree of probability with the inference that he did not. Consequently, in my view, the prosecution failed to make out a case and the magistrate tightly acceded to the "no case" submission.

Corporations Act 1989 (Cwlth) s 1002: Insider trading is specifically prohibited under this section and up until early 1991 was subject to a penalty of up to $20,000 and/or imprisonment for five years. Where a person has been convicted of insider trading, civil liability exists under s 1005 and s 1013, where a person can show that he or she has suffered loss as a result of the insider trading. The basic prohibition of insider trading is contained in s 1002(l). Figure I sets out the principal elements of this definition. Although the Commonweath Attorney-General has proposed reforming s 1002, the following features of the original s 1002 insider trading provisions need to be highlighted:

  • Section 1002(2) covers information gained by an officer of one corporation about another corporation which related to a transaction between these two bodies corporate.
  • The tippees of insiders are prohibited from trading on the basis of inside information where s 1002(3) is satisfied..
  • Persons precluded from trading by s 1002(l), (2) or (3) are precluded by s 1002(4) from procuring any other person from dealing in those securities..
  • By virtue of s 1002(5), an insider is precluded from communicating inside information where trading is permitted on a stock market in the securities concerned and the insider knows or reasonably believes that the person to whom the information is communicated will make use of that information..
  • A body corporate is prohibited by sub-s (6) from dealing in securities where an officer of the body corporate is precluded from trading in those securities by sub-sections (1), (2) or (3). "Officer" is broadly defined in s 1002(12). Exceptions to this prohibition exist:.
    1. where there is an effective Chinese Wall [see p. 891 in place per s 1002(7); or.
    2. where some other officer of the corporation enters into the transaction pursuant to s 1002 (8)..

    In addition to these defences, s 1002(10) exempts the holders of dealer's licences from the insider trading prohibition where all that he or she does is to effect the transaction as agent for an insider pursuant to instructions. To take advantage of this defence, the dealer must not be an associate of the insider or have given any advice to the insider regarding that security. A general defence to insider trading is provided in s 1002(l 1) where it is proved that the other party to the transaction with the insider knew, or ought reasonably to have known about the information in question.

    The tippee provisions of s 1002(3) were largely unworkable in that the prosecution under this provision had to establish that the tippee was aware or ought reasonably to have been aware of the fact that the person from whom the price sensitive information was obtained was precluded from trading. The word "obtained" is unlikely to require a deliberate attempt to obtain the information so that an unsolicited receipt of information will constitute a person as a tippee. This was the finding of the House of Lords in Attorney General's Reference (No 1 of 1988) [1989] 2 All ER 1. Of greater concern is that s 1002(3)(b) requires that the tippee either was an "associate of the other person" or alternatively, that the tippee had "an arrangement for the communication of information" of the kind which is proscribed. The "associate" provisions of the Corporations Act are relatively specific whilst the term "arrangement" is likely to require evidence of some continuity and formality. As insider trading conduct tends to be opportunistic, it is difficult to see how either of these requirements can be readilysatisfied.

    Figure 1: For an insider trading action to succeed under S1002 the questions in the figure must be answered in the affirmative.
     For an insider trading action to succeed under S1002 the �A;questions in the figure must be answered in the affirmative.

    It is quite possible for a person to be charged under a number of sub-sections of S1002. For example, a person can be charged under sub-sections (1), (2) or (3) and sub-sections (4), (5) and (6)

    Section 1002(l) requires that the following elements of the offence must be proved on the criminal standard of proof:

    First, the insider must be a person who in the previous six months has been connected with a corporation. Does the "person" mean only a natural person or does it comprehend a corporation, otherwise than by virtue of s 1002(6). In Hooker Investments Pty Ltd v. Baring Bros Halkerston & Partners Securities Ltd (No 2) (1986) 10 ACLR 525 at 527, McHugh JA of the NSW Court of Appeal explained that, despite the existence of provisions similar to s 22(a) of the Acts Interpretation Act 1901 (Cwlth):

    the context of sub-ss 128(l), (2) and (3) [Corporations Act ss 1002(l), (2) and (3)] strongly indicates that "person" in those sub-sections is confined to a natural person.

    First, it is not any person who is prohibited by s 128(l) or s 128(2) from dealing in the securities of a body corporate. The sub-sections prohibit only a particular type of person from dealing in securities. He must be a person "who is or has been connected with a body corporate". The terms in s 128(g) [CA s 1002(9)] appear to be an exhaustive statement of the circumstances in which a person is connected with a body corporate. The natural meaning of the opening words of that sub-section appears to be that a person is connected with a body corporate for the purposes of s 128 if "and only if" being a natural person he answers one of the descriptions in paras (a) (b) or (c). It would be strange if the legislature had defined the necessary connection for a natural person but left the connection between two bodies corporate entirely at large. The result seems stranger still once the highly artificial nature of the definitions in sub-s (8) [CA sub-s (9)] is borne in mind ... Secondly, the scheme of s 128 seems to be that sub-ss(l) and (2) are directed to natural persons who come within the definition of s 128(8). Section 128(3) [CA s 1002(3)] then applies to a natural person who receives information from a person caught by s 128(l) and (2) ... Thirdly, s 130 [CA s 1005, ss 10131015], which provides for compensation and for an accounting of profits by a person acting in breach of s 128, points to the word "person" in sub-ss 128(l), (2) and (3) being confined to natural persons ... In our opinion the scheme of s 128 together with the terms of s 128(8) and s 130 make it abundantly clear that "person" in sub-ss 128(l), (2) and (3) means a natural person.

    Second, the requirements to establish a connection are set out in s 1002(9) which refers only to the connection of a natural person. The types of person who are connected are officers of a body corporate, or a related body corporate, substantial shareholders and persons, who might be reasonably expected to have access to the insider information in question by reason of a professional or business relationship with the corporation in question. The question of connection by virtue of being a substantial shareholder was raised in Darvall v. Lanceley (1986) 10 ACLR 893 but McClelland J did not believe that the information in question was in the possession of the plaintiff as a substantial shareholder.

    Third, the insider is prohibited from dealing in any securities of that corporation in certain circumstances. Subject to s 93(4), section 9 provides that to "deal" in securities "means (whether as principal or agent) acquire, dispose of, subscribe for or underwrite the securities, or make or offer to make, or induce or attempt to induce a person to make or to offer to make, an agreement ..." in this regard. The term "securities" is given the meaning set out in s 92 and means debentures, stock, or bonds of a government or a government authority; shares, debentures or prescribed interests of a body corporate; units in shares or of prescribed interests made available by a body corporate, and option contracts. The term "debenture" is defined widely by s 9. At first instance in Hooker Investments Pty Ltd v. Baring Bros Halkerston & Partners Securities Ltd (1986) 10 ACLR 462 Young J considered whether unallotted shares could be the subject of the insider trading prohibition. He decided that they could not because "Until it is allotted a share just does not exist ... Until it is issued and becomes an actuality it is not a security in any sense at all".

    Fourth, the insider must by reason of his or her connection with the body corporate be in possession of information. An issue yet to be decided is whether constructive possession or actual possession is necessary. As Anisman has pointed out, "the nature of the 'facts' may vary dramatically, from a vague intention to a signed agreement including all the stages of negotiation and steps in decision-making in between". In Ryan v. Triguboff (1976) 1 ACLR 337, Lee J drew a distinction between facts and deductions or inferences, although in that case s 75A of the NSW Securities Industry Act required that there be knowledge of "specific information". In Hooker Investments Pty Ltd v. Baring Bros Halkerston & Partners Securities Ltd, Young J followed the reasoning of McInerney J in Corporate Affairs Commission v. Green [1978] VR 505 and thought that the inside information should be:

    factual knowledge either of a concrete kind or that obtained by means of a hint or veiled suggestion from which one can impute other knowledge... To my mind information in sub-s (1) goes further than knowledge and includes the situation where someone has been informed of something which he does not know to be true nor does he care whether it is true or not. In other words, information may include a rumour that something has happened with respect to a company which a person neither believes nor disbelieves.

    Anisman (1986, p. 90) has suggested that any definition of information must include "facts, intentions, opinions and other data that may give rise to an inference about future events of value ... While inclusion of such a definition in the legislation is perhaps unnecessary, it may be desirable as a matter of caution."

    Fifth, the issue of whether the information is not generally available was considered in Kinwat Holdings Pty Ltd v. Platform Pty Ltd (1982) 6 ACLR 398 which involved a takeover situation in which Platform Pty Ltd and a target company shared four common directors. It was alleged by the plaintiff that, because of the connection between the directors and the target, information that was not generally available would be likely materially to affect the price of the target's stock. The information in question had however become public in a number of ways. An affidavit had been filed and a letter sent to the Sydney Stock Exchange. This letter was the basis of a news story containing the information which was published in The Courier Mail newspaper. In these circumstances, Connolly J concluded that the information in question was generally available.

    Sixth, the likelihood that the information will materially affect the price of those securities cannot be determined ex post facto but must be apparent at the time of the dealing. It is not sufficient to show that the price of the securities subsequently rose or fell as a result of the information becoming available. The comparable phrase "is likely to" has been interpreted widely in other legislation, such as s 45 of the Trade Practices Act 1974 (Cwlth).

    As to price, McHugh JA suggested by analogy with other sections of the Act in Hooker Investments Pty Ltd v. Baring Bros Halkerston & Partners Securities Ltd (No 2) (1986) 10 ACLR 524 that the price referred to is "the sum of money or its equivalent for which a security is bought, sold or offered for sale". He added that "[t]he expression "price" in those sections clearly does not cover the sum to be paid to a company upon the issue and allotment of its shares." Young J (10 ACLC 462 at 467) had stated at first instance that:

    Price normally does not mean value; there is all the difference in the world between value and what somebody might be prepared to pay for something, and what the section is directed at is information which affects the decision as to how much to pay for something, not what something is worth in the eyes of an impartial arm's length valuer. One cannot get something that has a price until that something has come into actuality so that it can be dealt with.

    Whether certain information was price sensitive was considered by Bryson J in ICAL Ltd v. Natwest Securities Aust Ltd (1988) 13 ACLR 129. The alleged price sensitive information in that case was the intention of keeping a 19.5 per cent share holding in ICAL for a year, a number of profit and loss projections of ICAL and other companies, and certain variations in the book and market values of specified assets. Bryson J found that the information was not price sensitive as the documents containing the allegedly price sensitive information had been admitted into evidence before him in a public hearing.

    The information must therefore be likely materially to affect the price of the security. There is no definition of materiality in the Act and experts may differ as to whether a particular change is a material one or not. Resort to a particular percentage formula to determine whether a material change has occurred is not likely to be very useful. For example, a ten per cent change in the price of BHP shares might be a material change because of the relatively high volume of shares that would need to be traded before such a change occurred, but a similar change in the price in the shares of a speculative mining company may not be material. As Anisman said:

    Perhaps the most important issue relating to undisclosed information is the standard for determining its significance, in that the threshold of materiality, the most common test of significance, controls the application of the prohibition against trading and tipping... any measure of materiality must distinguish between facts which, while giving their possessor an advantage over others who are ignorant of them, are not sufficiently important to warrant his exclusion from the market pending their disclosure and those which are (Anisman 1986, P. 91).

    The Unites States test of materiality is somewhat broader than that used under Australian legislation. The classic American formulation of the materiality test was laid down in SEC v. Texas Gulf Sulphur Co (1968) 401 F2d 833 (2d Cir). Here the US Securities and Exchange Commission alleged violations of s 10 of the Securities and Exchange Act 1934 and of Rule 10(b)(5) which had been promulgated pursuant to s 10. It was alleged that the company and various individuals had purchased shares and had received stock options in Texas Gulf Sulphur at various times between the first visual assessment of a rich drill core and the publication of a press release some five months later. The press release was claimed by the SEC to have been misleadingly neutral or equivocal in its contents in the context of what was known by the defendants at that time. After the press release appeared, further shares and stock options in Texas Gulf Sulphur were purchased by some of the individual defendants. In the US Second Circuit Court of Appeals the majority held that from the first visual assessment of the core sample, all of the defendants were in possession of material inside information which they should have disclosed and that the subsequent press release was misleading. The majority opinion on the issue of materiality was reflected in the opinion of Circuit Judge Waterman who said:

    The basic test of materiality ... is whether a reasonable man would attach importance ... in determining his choice of action in the transaction in question ... This of course, encompasses any fact which in reasonable and objective contemplation might affect the value of the corporation's stock or securities ... Whether facts are material within lOb-5 where the facts relate to a particular event ... will depend at any given time upon a balancing between the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company's activity.

    His Honour stated that a "major factor" in determining whether the discovery of the drill core was material was "the importance attached to the drilling by those who knew about it". He added that the behaviour of the defendants themselves in reacting to the discovery "constitutes highly pertinent evidence and the only truly objective evidence of the materiality of the ... discovery".

    Anisman (1986, p. 95) has argued that in Australia, "[a] legislative scheme regulating insider trading should, in short, contain an express definition of the standard of materiality to be employed". This has been a major gap in the Australian approach to the regulation of insider trading. Arguably, the standard of materiality developed by the courts in the United States-that which a reasonable person would regard as being material-should be adopted in Australian legislation in the absence of further judicial guidance.

    In the course of the interviews, brokers, financial advisers and stock exchange officials were asked how they would measure materiality and how they viewed the US approach to materiality. Brokers were almost unanimous in stating that this was a complex matter. Most felt that a flat percentage formula would not be appropriate, and that market conditions, the particular share, price and volume movements and the established trading patterns must be considered. There was support for the use of a percentage movement formula as a test of materiality but by itself this was thought to be insufficient. However, techniques and the data for examining trading patterns appear to exist within the broking industry.

    Endnote

    1. Section 128 of the Securities Industry Act 1980 was as follows:

    128

    1. A person who is, or at any time in the preceding 6 months has been, connected with a body corporate shall not deal in any securities of that body corporate if by reason of his so being, or having been, connected with that body corporate he is in possession of information that is not generally available but, if it were, would be likely materially to affect the price of those securities.
    2. A person who is, or at any time in the preceding 6 months has been, connected with a body corporate shall not deal in any securities of any body corporate if by reason of his so being, or having been, connected with the first-mentioned body corporate he is in possession of information that-
      1. is not generally available but, if it were, would be likely materially to affect the price of those securities; and
      2. relates to any transaction (actual or expected) involving both those bodies corporate or involving one of them and securities of the other.
      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-
        1. he has obtained the information, 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
        2. when the information was 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.
        3. A person shall not at any time when he is precluded by sub-section (1), (2) or (3) from dealing in any securities, cause or procure my other person to deal in those securities.
        4. A person shall not, at any time when he is precluded by sub-section (1), (2) or (3) from dealing in any securities by reason of his being in possession of any information communicate that information to any other person if-
          1. trading in those securities is permitted on a stock market, whether within or outside the Territory; and
          2. he knows, or ought reasonably to know, that the other person will make use of the information for the purpose of dealing, or causing or procuring another person to deal, in those securities.
          3. Without prejudice to sub-section (3) but subject to sub-sections (7) and (7A), a body corporate shall not deal in any securities at a time when any officer of that body corporate is precluded by subsection (1), (2) or (3) from dealing in those securities.
          4. A body corporate is not precluded by sub-section (6) from entering into a transaction at any time by reason only of information in the possession of an officer of that body corporate if-
            1. the decision to enter into the transaction was taken on its behalf by a person other than the officer;
            2. it had in operation at that time arrangements to ensure that the information was not communicated to that person and that no advice with respect to the transaction was given to him by a person in possession of the information; and
            3. the information was not so communicated and such advice was not so given.(7A) A body corporate is not precluded by sub-section (6) from dealing in securities of another body corporate at any time by reason only of information in the possession of an officer of that first-mentioned body corporate and that related only to proposed dealings by that first-mentioned body corporate in securities of that other body corporate.
            4. For the purposes of this section, a person is connected with a body corporate if, being a natural person-
              1. he is an officer of that body corporate or of a related body corporate;
              2. he is a substantial shareholder within the meaning of Division 4 of Part IV of the Companies Act 1982 in that body corporate or in a related body corporate; or
              3. he occupies a position that may reasonably be expected to give him access to information of a kind to which sub-sections (1) and (2) apply by virtue of-
                1. any professional or business relationship existing between himself (or his employer or a body corporate of which he is an officer) and that body corporate or a related body corporate; or
                2. his being an officer of a substantial shareholder within the meaning of Division 4 of Part IV of the Companies Act 1981 in that body corporate or in a related body corporate.
                3. This section does not preclude the holder of a dealers licence from dealing in Securities, or rights or interests in securities, of a body corporate, being securities m rights or interests that are permitted by a securities exchange to be traded on the stock market of that securities exchange, if-
                  1. the holder of the licence enters into the transaction concerned as agent for another person pursuant to a specific instruction by that other person to effect that transaction.
                  2. the holder of the licence has not given any advice to the other person in relation to dealing in securities, or Tights or interests in securities, of that body corporate that are included in the same class as the first mentioned securities; and
                  3. the other person is not associated with the holder of the licence.
                  4. Where a prosecution is instituted against a person for an offence by reason that the person was in possession of certain information and entered into a transaction in contravention of this section, it is a defence if the person satisfies the court that the other party to the transaction knew, or ought reasonably to have known, of the information before entering into the transaction.
                  5. For the purposes of sub-section (8), "officer", in relation to a body corporate, includes-
                    1. a director, secretary, executive officer or employee of the body corporate;
                    2. a receiver, or a receiver or manager, of property of the body corporate;
                    3. an official manager or a deputy official manager of the body corporate;
                    4. a liquidator of the body corporate; and
                    5. a trustee or other person administering a compromise or arrangement made between the body corporate and another person or other persons.