Australian Institute of Criminology

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Chapter 5 - The extent of insider trading in Australia

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 41-54


I think you would have to have your head in the sand if you did not think there was a problem there.
(Clive Speed, Assistant Director Australian Business Council, in evidence to Griffiths Committee Hearings, Hansard, p. 43)

The reaction to the publication of the Anisman report was a call from the securities industry for more evidence about the nature and extent of insider trading in Australia. Such a reaction is sensible in ensuring that, before the law is changed, there is a real problem to be solved. In this case however, there was a typically Australian response from the securities industry-go immediately, on the defensive and use delay as a tactic. It has often been said by industry representatives that insider trading is not a significant problem facing the securities markets and that insider trading is not the most serious problem with which securities regulators have to deal. The latter position has been frequently advanced by the former NCSC Chairman, Mr Henry Bosch, who has been reported to have said about insider trading: "I don't believe it's the most serious crime occurring in the market compared to such issues as share price ramping, hoarding and directors abusing their powers" (Sydney Morning Herald, 14 March 1989, p. 27). Similar comments by Mr Bosch were reported in The Australian, 16 February 1989, p. 13, and The Canberra Times, 19 April 1989, p. 6). A similar downplaying of insider trading is evident in the views of the chairman of the Australian Securities Commission's statutory advisory committee, Mr Mark Burrows, who reportedly remarked that certain accounting practices and put and call options were "quite clearly more serious abuses than insider trading" (Sydney Morning Herald, 21 July 1989, p. 29). In the same report, Mr Bur-rows is also reported to have made a plea that insider trading laws should not be tightened to a point where they had incredible consequences on normal commercial behaviour".

The extent and prevalence of insider trading is an important starting point in any debate on the topic and this chapter therefore incorporates some of the findings of the research project (see also Tomasic & Pentony 1989a, 1989b, 1989c, 1989d, 1989e, forthcoming). The publicity surrounding the enforcement of insider trading laws, especially in the United States, led many to believe that insider trading might also be a problem facing the securities markets in Australia.

A salutary warning in the course of the interviews came from a broker who told us that "the people who do it do not talk about it". That is of course very likely to be an accurate statement and it makes clear that it is impossible, as with many other crimes, to be precise about the incidence of insider trading. The approach we took was to put a number of questions to those best placed in the market to gauge the extent of insider trading. The questions were designed to establish the market place perception of the extent of insider trading, the most likely insider traders and the conditions in which insider trading flourishes. It was emphasised to participants in the study that the insider trading being discussed was the statutory form. This was a necessary qualification as many interviewees did not have an accurate understanding of what is prohibited by the legislation. A Perth entrepreneur, having been harshly critical of insider trading, was shocked to learn that his own and his associates' routine conduct was in fact insider trading.

The prevalence of insider trading

Despite the comment of a prominent Sydney broker (the only broker to refuse to participate in the study) who said: "you don't expect brokers to tell you it goes on do you?", not one of the brokers denied that insider trading took place. Most of them did not agree that it was widespread, but a considerable number of them said that it ranged from being widespread in some areas, to being rife. A typical response was that "insider trading exists but it is not widespread. It does not occur on a wide scale". A Melbourne broker went further than most by saying that "it is a fairly perfect market but there are isolated examples".

In the course of the interviews with brokers and merchant bankers, it became clear that for some the questions touched on raw nerves. A common reaction was initially to be evasive and to make fine points by referring frequently to the importance of information and its role in the operation of the market. It was often pointed out that the quality of the available information tends to vary and some made the obvious point that "gossip is not inside information". Gossip, rumours and low grade information created risks for people who treated it as inside information and it was said that "lots of people act on information believing it to be inside when it is not or does not affect the price". The fact that investors are prepared to use information of this type is a reflection on the compliance level within the marketplace. One broker who thought that insider trading was not as widespread as in the late 1960s and early 1970s, explained that there is "not so much insider trading as deliberate spreading of rumours which, if true, would be price sensitive. Stocks move on these rumours". This conduct is of course illegal, not as insider trading but as price manipulation. A broker who believed that insider trading as a problem is "blown out of all proportion", provided a perspective of the way in which the stock market operates by saying that the "market often feeds on itself". It is easy to be critical of brokers but it needs to be understood that they are under great pressure from clients to arrange the best possible deal and, as one broker said, "brokers need information to survive and sometimes it might be inside information".

A factor which might also contribute to the perception of widespread insider trading is the extent to which the market is subject to analysis and research. An issue often raised was whether brokers' reports on companies amounted to insider trading. In many cases the question was disingenuous because the research referred to was not completely pure. It was said that brokers and analysts often attend company briefings - "roadshows" and company organised business lunches - during which it appears that information that is at least price sensitive, if not "inside", is routinely provided by the company in order to boost its share price. It was also said that if this information is assessed as valuable, the broker would purchase shares which would then be recommended to clients who would, in turn, purchase the shares from the broker. Brokers did not recognise any ethical or legal difficulties with such conduct and one was so relaxed about it that he was forced to cut short our interview so that he could keep an appointment to gather some "superior information" from a company. The fact that such conduct is regarded as routine and that it appears to be the way by which relevant information reaches the market place does not speak highly of the ASX listing rules. There is no doubt that in this area, at least, company disclosure practices must be improved.

Those who do not believe that insider trading is widespread put forward a variety of reasons for their view. One broker made the point that "good news is often anticipated by the market". In the words of a then senior Melbourne broker, "insider trading is not as serious as other abuses. There is no evidence that it is bad enough to justify the Anisman approach. Discount what politicians say". He observed that "laws do not abolish insider trading". This broker reflected a common view in saying that the "entrepreneurs' form of insider trading is more common". The principal of a firm whose high ethical standards are acknowledged by the industry said that, based on his firm's client base, insider trading was not widespread but he went on to say that he "does not deal with entrepreneurs". The attitude of brokers, especially in Melbourne, to the "new operators", "entrepreneurs" and the "newer players in the market" was uniformly critical and the impression was created that such persons, whoever they might be, were capable of any type of illegal, sharp or undesirable business conduct. The readiness to identify these persons with insider trading shows, apart from anything else, that insider trading is generally regarded as reprehensible.

In contrast to the brokers, most of the financial advisers reported that insider trading was widespread but there was some uncertainty about its precise extent. The strongest view from this group was expressed by a manager of a very large fund who said "if you are not an insider then you are on the outside. Insider trading is very, very, extensive". Another funds manager described insider trading as "endemic to the market" and he went on to say that "the majority of insider trading is in small volumes, less than $100,000, and it is not possible to make enough money to make insider trading worthwhile". The "extensive inter-relationship between Australian companies arising from cross-directorships" was the reason another funds manager supported the view that insider trading is widespread. Several others within this group also thought that insider trading was widespread. According to one accountant, "insider trading is pretty widespread at the bottom end of the market; mainly it is buying to prop up the price" and a very senior merchant banker made the point that "it is impossible to know, but considering the ease with which it could be done then I would expect that insider trading is widespread". An older accountant thought that insider trading was widespread because there was no way of effectively stopping it, but he also thought that there was more market rigging than insider trading.

One of the merchant bankers quite correctly noted that the question of the extent of insider trading was partly a definitional issue. As he put it "there is some which falls strictly within section 128. In terms of the Anisman definition - that is a person trading with information not available to others - there is a lot more". The remainder of the financial advisers group, who did not agree that insider trading was widespread, put for-ward several views. A merchant banker said, "there is little evidence that it is widespread" while another of the advisers explained that "in terms of the section 128 definition the amount of insider trading is limited. There may be some buying to support the market price". An investment adviser said that he "would be surprised if insider trading was a high percentage of overall transactions. Most traffic goes through respectable brokers".

A representative of the Australian Merchant Bankers Association, Dr William Beerworth, confirmed the views of many market observers when he told the Griffiths Committee in 1989:

My impression is that insider trading exists, but it is awfully hard to detect. I cannot think of an incident where I can absolutely say with confidence I believe insider trading has occurred in that case, but I think one becomes very cynical. If you become an avid reader of the financial press, as one has to in merchant banking, one often gains the impression that the market has extraordinary prescience in advance of the number of takeover bids. It is quite often the case that the stock rises rapidly and them have been studies which undoubtedly have been referred to you. One cannot help but feel that quite often insider trading drives prices. Similarly, it seems to be quite often the case that prior to the announcement of bad results in some companies, large blocks of stock shift across the market or, if good news is coming, people take what may appear to be anticipatory action. It is very hard, sir, not to form those impressions if you do carefully watch a large number of financial transactions, but again, it is extremely difficult to pinpoint them or to have particular knowledge of them. I suppose at the end of the day one becomes fairly cynical (Griffiths Committee, Hansard, p. 153).

Representatives of the securities industry have argued that price movements arise for "random and unpredictable reasons", as was suggested by the Group Managing Director of the Australian Stock Exchange (Griffiths Committee, Hansard, p. 122). Alternatively, it is often suggested that price fluctuations have nothing to do with the availability of price sensitive information, because that information was already known to the marketplace, even if not formally distributed. This was a view put by a representative of the Securities Institute of Australia to the Griffiths Committee in saying that:

"A lot of information that people think is insider information has already been published, perhaps even in small print in company reports and releases. People perhaps do not read them, understand them or see the meaning of them" (Griffiths Committee, Hansard, p. 226).

It should be noted that these are arguments put by industry representatives who are paid to defend the industry and are some distance removed from the rough and tumble of the market. Their views are at variance with the views of senior people who are in the front line. The arguments are undoubtedly true in some cases, but cannot be universally accepted as explanations for price movements which other informed observers regard more sceptically. None of the stock exchange officials interviewed for this study denied the existence of insider trading, but predictably they did not accept that it was widespread. They explained that the perception of insider trading could be attributed to the media.

When the ASX began its own more sophisticated surveillance of the market it found that the incidence of insider training activity was far more extensive than it had been prepared to acknowledge previously. In March 1990 the ASX reported that it had passed on to the NCSC 15 possible insider trading cases which it had detected during the first nine months of its new computerised surveillance service.

None of the market observers rejected the possibility of insider trading occurring, but there was some disparity in their assessments of its extent. Senior financial journalists in Sydney and Melbourne had no doubt about the existence of insider trading. A Sydney journalist backed his opinion with examples of insider trading and said that in his view "insider trading is not only rife-it is ingrained". His counterpart in Melbourne observed that "insider trading is rife. A large percentage of trading is insider trading. Institutions and brokers rely on what they call market information which is another form of insider trading. It is totally entrenched". He also offered examples to support this view. Another emphatic statement from a market observer was that "insider trading is very widespread. No one buys shares unless they have information". A former broker also observed that "insider trading is quite widespread". The views of the people who were associated with the market seemed to vary according to how directly involved they were. One of them who was very closely associated through his link with a major company said that "maybe it happens in entrepreneurial stock. It is wrong to describe it as widespread". Another, whose linkage was less direct, said that "it is widespread but you cannot assess its extent". It was also reported that "no doubt a fair amount has taken place over a long time but "rife" is an unfortunate term to use".

Lawyers generally felt that they were poorly placed to assess accurately the extent to which insider trading occurred. And, of course there is the natural reserve lawyers seem to have about being directly associated with illegal conduct such as insider trading. That is not to say that some lawyers are not involved in insider trading activity. According to partners in the large firms, such lawyers are to be found in firms other than the large law firms or amongst lawyers who have gone into business or whose law practice tends to be the base for wider entrepreneurial activity.

Lawyers commonly responded that they were sure that it occurred although they had not seen much direct evidence of insider trading, and were not able to assess its extent. Only two did not think that insider trading was widespread although the comment was made that "insider trading does not have to be widespread to be a matter of concern". In Perth, insider trading activity seemed to be far more open to view than it was in Sydney or Melbourne and it was said that "the passing of confidential information is prevalent in Perth", because "Perth is an incredible networking place so that something can travel around society very quickly". The common perception of Perth as a frontier town in matters of corporate behaviour was confirmed by a number of other interviewees in that city (and elsewhere in Australia) but this does not necessarily mean that insider trading is not to be found in other cities; it might be that insider trading is just better concealed there. Even in Melbourne, which seems to be very parochial about its business figures, one lawyer responded "I suspect that insider trading is widespread, but not amongst lawyers. I would be surprised if insider trading was not extensive, especially in entrepreneurial companies. As market rigging and ramping are present a lot, so also is insider trading". Another Melbourne lawyer, who defended the practice of insider trading, confirmed this when he reported that "there is no doubt that insider trading is out there and that it definitely goes on more than just a little". Similarly, a Sydney law firm partner observed that "insider trading does exist, and probably more than people want it to exist" but other Sydney lawyers did not believe that insider trading was as widespread as the press often reported it to be.

Many of the government regulators confidently asserted that insider trading was "extremely widespread", that "it goes on all the time", that "it is an art form in Western Australia", and that "it is common as a form of petty crime". One experienced investigator summed up his reaction by asking: "is there any other form of trading?" However, some were not so sure of the incidence of insider trading. They suspected that it was widespread, but could not point to evidence to show how extensive it actually was. One echoed the widely held view when, commenting on the assertions of widespread insider trading, he said, "it is my strong belief that this is so; the pitiful record of company regulation means that there is a massive opportunity to make easy money".

In order to establish more accurately the degree of insider trading, participants in the study were asked whether they had heard of or had seen any cases of insider trading over the past year. Some brokers reported negatively but most said that they had seen or heard of instances ranging from "one" to "hundreds" to a "hell of a lot". Others either suspected, guessed, read about or heard rumours of cases of insider trading. The responses to this question illustrate how difficult it is to be sure that the conduct is actually insider trading. Those who suspected insider trading, did so on the basis of price movements leading up to takeovers. Others remarked that it was "difficult to determine if it was inside information" that was being used. It was also pointed out that "this industry is prone to rumours - deals are based on rumours" some of which are "deliberately generated [from particular companies] and are wrong". One broker who had knowledge of several cases said that it was "nothing on a big scale. It was being done by people who were not aware of it being a breach of the law". The attitude towards entrepreneurs was again illustrated by the observation that "some activities of the directors of entrepreneurial companies are so self-serving as to be, if not insider trading technically, at least its equivalent".

Most of the financial advisers had either seen or heard of cases of insider trading over the past year and one who had not, said that cases of insider trading would be "easy to find if I looked". A merchant banker who was aware of cases, told of putting evidence of classic insider trading to the NCSC "and they had neither the resources nor the time to follow it up". This matter was later raised in interviews with NCSC officers and their response was that the report had been followed up but that they were unable to establish a case. The NCSC, because of resource limitations, took a very conservative approach to prosecutions and needed to be assured of a better than 50 per cent chance of succeeding. Some Stock Exchange officials said that they had not come across any cases of insider trading and of those who had seen some cases, the scale ranged from "perhaps one" to "several at least". Another ASX official reported that he had not come across any "definite cases but I have had suspicions". It seems that the attitudes of ASX officials change dramatically once they begin to look for insider trading conduct in earnest.

Market observers reported that they had seen or heard of instances of insider trading in the last year. Those who were most definite about it said that they saw insider trading "... during the bull market" or that it was seen "all the time involving brokers and institutions". One respondent from Perth answered with some degree of understatement that "I can't say precisely, but it appears that a lot of well timed investment takes place". An observer who had not seen any cases of insider trading, went on to say that, "if I looked I could identify insider trading with 50 per cent accuracy". Price movements in the course of takeovers led some to conclude that insider trading had taken place. Others said that they had not heard of insider traders "not even in gossip" or that what they had heard was "only innuendo".

Most lawyers reported that they had heard of instances of insider trading during the last year but this was often second-hand and, at most, no more than a handful of instances had been reported. It would be reasonable to say that lawyers in large law firms would be far less likely than other groups to risk being directly involved in insider trading activity or be prepared to report the involvement of others where they have professional relationships with them. The regulators were not able to be any more informative in this regard than the lawyers. On the whole, very few cases of insider trading were identified by them. Most referred to a couple of cases which they knew about, and often these were based upon rumour or cases being investigated by the NCSC. An explanation for the lack of awareness of any insider trading was the "need for a vocal victim" to complain to the CAC before the regulators would know of insider trading. This illustrates graphically the dilemma of insider trading. Very often, the victim is not even aware that insider trading has taken place and the ability of the regulating agencies is limited by the absence of documented complaints. The lack of a bleeding victim, an atypical situation in white collar crime, leads to the superficial conclusion that insider trading is a victimless crime. Although the regulators had little hard evidence of insider trading, many suspected that what were unusual share price movements in particular stocks could be insider trading.

The precise level of insider trading is impossible to determine. The very nature of the phenomenon makes this inevitable. Although discussion about insider trading is often shrouded in myth, rumour and rhetoric, sufficient information was found across all sectors of the industry to lead to the conclusion that insider trading is far more widespread than many are prepared to acknowledge. The practice referred to earlier of many Australian companies selectively briefing brokers and institutional investors seems to stray into the realms of proscribed insider trading in the sense that the brokers and institutions could be categorised as tippees. Although insider trading activity in Australia does not seem to be anywhere near the proportions of the Milken-Boesky-Levine ring in the United States, it is still widespread enough to be of concern.

Is insider trading more common now?

An effort was made to clarify a further dimension of the level of insider trading by asking whether in recent years it has become more, or less, common. In this respect it was interesting to note how the benchmark was taken as the mining boom of the late 1960s. Most brokers said that there was now less insider trading than in earlier years. A number qualified their views by saying that the level of insider trading depended upon market activity. The most common reason for saying that there was now less insider trading than in the past was that the market had responded positively to the introduction of the securities industry legislation. Typical of this school of thought was the explanation that "the industry is much cleaner now due to better regulation". Others said that "the effect of the laws", "better policing" and the fact that "people think twice now" have contributed to a reduced level of insider trading. The legislation has had "a frightening effect" and it has led to "heightened consciousness". An observation from a Sydney broker was that insider trading is "less acceptable now. In the late 1960s and early 1970s it was regarded as normal". "But", he went on to say, "the risks are higher now". Those who thought that insider trading was now more common attributed the increase to the larger volume of trading reflecting the view that "its frequency depends on the state of the market".

The prevailing view among financial advisers was that insider trading is now less common than it was previously, and only a few expressed a contrary view. According to some, the legislation and the presence of the NCSC contributed to the reduction while others said that directors, companies, bankers and brokers are now more aware of their responsibilities. One of those who did not agree with the majority view explained that "insider trading has always existed but the difference is that it is more talked about now".

There were not many informative responses from the ASX officials on this issue and no discernible pattern emerged. One official said "I do not know. The pre-Rae period reflected less subtle forms of insider trading". One of those who said there was now less insider trading, pointed out that "it is less common, but it is more visible now". Market activity was seen by one official as a factor in determining the level of insider trading. According to him, "it depends on the level of market activity. In a bull market strains are intense and are hard to see; less experienced and less ethical people come into the market". The market observers suggested that the incidence of insider trading is about the same as in earlier years. There was some support for the view that the level of insider trading varies according to the level of market activity while the other view was that it was more visible now. A more detailed response was that "people are more wary. A bull market gives better opportunities and the debate on insider trading may have slowed it down. In any case the market is much cleaner now". One view was that "insider trading has always happened and it is always high".

Amongst the lawyers, many of whom were too young to have experienced the mining boom of the late 1960s, two views of the extent of contemporary insider trading activity tended to prevail. The most prevalent was that insider trading was more common today due largely to the increased volume of stocks traded and to the increased interest in the market during the bullish conditions of the mid-1980s. As one Melbourne lawyer put it, "insider trading goes on depending upon the volatility of the market. After the economic downturn in the early 1970s there was limited insider trading. After the October 1987 crash them will no doubt also be limited insider trading". Another view which was expressed by a number of practitioners was that "there is no difference in the level of insider trading from previous years, only in the level of people's awareness of it".

The senior regulators interviewed were usually able to provide a better historical picture of the development of insider trading in Australia in the last twenty years. Some thought that it was difficult to say whether insider trading was now more or less common. Most suggested that there was probably more insider trading occurring in recent years. This was attributed to a number of factors such as "the upsurge in speculative trading", the boom conditions of the 1980s and the bull market. It was also reported that "there is more insider trading overall today, probably because the market is bigger". Many saw the extent of insider trading as being related to the level of opportunity which existed at any one time (see also Tomasic & Pentony 1989b). One senior regulator's view was that "the motive remains constant, the question of greed versus the risk of being caught. There may be more-opportunity to insider trade with the increase of takeover activity". On the other hand, a few regulators thought that the level of insider trading had not changed much.

Although it is true that the introduction of securities industry legislation in the 1970s and the more high profile activity of the NCSC has had some effect upon changing the behaviour of licensed industry professionals, it was frequently said that these laws and regulatory structures were of little concern to many in the industry. In any event, the bullish conditions of the mid-1980s increased market activity to such an extent that many believe there has been a corresponding increase in the level of insider trading. Merchant bankers were more prepared to acknowledge this than brokers. Although the cruder examples of insider trading from the period of the nickel boom seem to have decreased, many believe that contemporary insider traders have simply become more sophisticated rather than more deterred from such conduct. The public and the media have, however, also become increasingly aware of insider trading as an issue of concern. This concern is not unfounded, as the views of the participants in the study strongly suggest that the level of insider trading has at best remained constant or, more likely, that it has increased during the boom market conditions of the mid- 1980s. If, as many say, insider trading is just more visible now, then there must be something seriously wrong with the law or its enforcement explaining the lack of successful prosecutions.

Who are the likely insider traders?

Interviewees were asked whether particular groups of investors or traders were more likely to be involved in insider trading. Perhaps consistent with their stated lack of awareness of the extent of insider trading, the brokers varied considerably in their views about who was likely to engage in insider trading. The groups that were most often referred to by brokers were (in order) executives, entrepreneurs, directors, and promoters. A number of brokers thought that no particular group was more likely to insider trade than any other. Others described as being likely insider traders were a diverse range of persons and organisations including institutions, merchant banks, brokers, field staff, newer players, lower level staff, certain ethnic groups, speculators, banks, fund managers, professional investors and those driven by greed.

Brokers as a group generally thought that persons closely associated with companies were the most likely to engage in insider trading. One broker explained that the "people who are most likely to do it are fairly high up the corporate ladder". Another broker ventured the opinion that insider trading is likely to be done by "anyone who has access to the books but they are often poor judges as to the effect [of inside information] on the market". Also identified were "promoters of small companies and those associated with the promotion of companies". Of the brokers who took a contrary view, one said that management does not insider trade because "management has too much to lose". Another broker suggested that "directors in tightly-held situations could insider trade, but by and large they are very ethical". There was a view that the range of persons involved in insider trading is too broad to define precisely but it was said: "it is often surprising who does it. People talk who should not". It was not surprising to hear that greed and insider trading went together. Brokers pointed to those they described as "less ethical persons turned on by money and under pressure to make it", or those who "are ignorant or driven by greed", as being the more likely insider traders.

Institutions such as insurance companies and superannuation funds are major and substantial investors and it was suggested that "perhaps the privileged treatment of institutions amounts to insider trading". This was an oblique reference to the interest of institutions in obtaining the superannuation business of the company. As one put it, "institutional investors will punt as they get the tips". Others thought that "institutional investors are informed from a wide range of sources and it would be extremely rare for them to be engaged in insider trading". Several references were made to insider trading from off-shore and this issue was followed up with the brokers. A Melbourne broker described off-shore insider trading as a "real worry". Another broker reported that this form of insider trading is done "via an obscure broker". According to a broker from Sydney, this is "the smartest way to do it, but it tends to limit you to the better class of stock". Another described it as "common in high volatility stock" and he said that it is primarily done in this way for tax reasons. A Sydney broker reported that when insider trading is done this way it is "safer", but he was probably correct in wondering how common this method of insider trading really is. There is a widely held public perception that insider trading from Hong Kong (and other off-shore locations) is easily arranged and is totally free of risk. This perception is probably well placed given that Australia has few formal arrangements with foreign jurisdictions for the international enforcement of securities law.

Financial advisers agreed that the most likely insider traders were associated with the company but they also mentioned brokers and their staff, some lawyers and accountants, speculators, entrepreneurs and advisers. On the subject of off-shore insider trading, there was some disagreement about its effectiveness. Several financial advisers said that this was the most likely or most effective way of doing it but others took a contrary view. One merchant banker said that "only the majors are traded overseas and they are not susceptible to insider trading because these companies are more security conscious. Second line stocks are not done overseas A similar view was expressed by a banker who reported that "it does not happen in low grade stocks but big scams could be done overseas in the industrials". He reported that this is less widespread than is popularly believed and because doing it overseas could be risky, "the operation would stick out". He felt, however, that the preferred way would be to use an off-shore vehicle to trade in Australia. A prominent merchant banker convincingly explained that the way to conduct a risk free off-shore operation was to "set up in New Zealand and get the New Zealand directors to trade in New Zealand". He also suggested that "Netherlands Antilles and Monaco tax companies - where the directors are invisible - are perfect for insider trading". It is interesting to note that in evidence to the Griffiths Committee, the chief of the Victorian Corporate Affairs Commission's Investigations Branch, said that about 20 per cent of the insider trading cases investigated by the Commission had involved an off-shore or overseas element (Griffiths Committee, Hansard, p. 328).

The ASX officials presented a mixed view on this point. Some coyly professed simply not to know who were most likely to be insider traders. One official who was prepared to speak more openly said that the more likely groups are "quasi-entrepreneurs who follow takeovers. Circumstances suggest that they have been given information". He also added that "it is more likely to be directors and persons associated with directors who insider trade".

The market observers offered a very wide range of views, the majority view being that insider trading occurs mainly amongst people associated with the market, close to companies or, according to some, by a combination of these groups. One financial journalist said that "senior management of broking firms could not care less about insider trading during the boom. The most dynamic people during that time were insider trading". Merchant bankers, investment bankers, brokers and brokers' staff were all mentioned as being likely to engage in insider trading and according to one observer, "merchant bank staff are subject to peer pressure to engage in insider trading". One interviewee referred to a newspaper report which provided figures suggesting that the directors of a mining company had been very profitably engaged in insider trading. Controllers of smaller companies were identified as being likely to be involved in insider trading. The point was made that large companies are conscious of insider trading and take precautions to prevent it. As one accountant explained, "in larger companies the use of share plans resulted in no insider trading by executives and employees".

Lawyers tended to make educated guesses about the identity of insider traders. They felt, not surprisingly in view of the nature of their client base, that insider trading by the management of corporations was less common than might be expected particularly with large corporations. But nonetheless their reasons were often compelling. One Perth lawyer explained that although "management is the obvious place to look, they know that they will be looked at most". Tnis conclusion was confirmed by other lawyers. Brokers, and to a lesser extent merchant bankers, were the occupational groups most often suggested as being involved in insider trading. As one Melbourne lawyer observed: "There seems to be a very easy morality amongst brokers". It was also reported that the "junior staff in merchant banks were more likely to be involved".

The answers of the regulators fell into two broad categories. There were those who took what might be called the crime and opportunity perspective, arguing that insider trading was not restricted to any particular group and that "it is a matter of opportunity and personal integrity". Others referred to particular groups or networks of persons who were likely to insider trade. As one official put it, "the general public is not involved in insider trading, but there is a rogues' gallery of lawyers, accountants and ex-directors who insider trade". One regulator observed that "networks of traders who help each other are known but are fluid. In this regard, Perth is probably different from Sydney or Melbourne". A good summary of the range of the insider trading risk groups was given by a regulator in the following terms: "Firstly, the promoters and financiers involved in the incorporation of a new company which intends to have a public float; secondly, directors and major shareholders of an existing company; thirdly, shareholders, underwriters, professional advisers and their respective employees, as well as other persons associated with the share market, including stock exchange employees".

Identifying insider traders by reference to the occupational categories most likely to be at risk is by no means an easy matter. While it is clear that some groups in the securities industry may have a greater opportunity to insider trade than others, opportunity alone is an insufficient indicator. Some groups such as directors of large public companies are seen as having too much to lose and as being too readily detectable to be likely to directly engage in insider trading. Directors and corporate executives are, however, often perceived to be likely to pass on information to tippees, if they trade at all. It seems that other factors apart from the opportunity to insider trade need to be considered in pin-pointing risk groups. A critical factor is likely to be the personal integrity and, related to it, the level of professionalism of an individual faced with the opportunity to insider trade. The low risk of apprehension is another factor which is likely to be exploited by the more sophisticated market operators.

Although it is clearly not necessary to go off-shore to insider trade, this is widely recognised as an effective means of reducing even further the low risk of apprehension. Perhaps brokers and merchant bankers are in the best positions to act in this way. These groups are generally seen as being most likely to engage in insider trading because they are in positions which give them considerable opportunity to do so. Linked to this is the relatively low degree of professionalism amongst some members of these groups compared with members of the traditional professions. Insider trading cuts across occupational boundaries as a result of the well developed networks for the transmission and exploitation of price sensitive information which are found in some sectors of the securities industry, and in some locations. Perth was singled out as one such location, although this does not mean that similarly oriented networks do not exis in other Australian cities. Networks in Perth were, at one time, based on the buildings in which the parties worked. The Sydney based manager of one of the largest investment funds in the country stressed the importance of socially based networks in Sydney and the disadvantages of being outside them. It was surprising, to say the least, that his fund and the institution with which the fund was associated were out in the cold when inside information was being trafficked. Those at the entrepreneurial end of the industry, as well as the marginal members of the industry, such as geologists and tippees, were also frequently and commonly identified as insider traders. In the final analysis it is clear that in varying degrees insider trading is to be found throughout the entire Australian securities industry and amongst all groups who are involved with it.

Conclusions

At the start of this project it was not expected to be possible to quantity the precise extent of insider trading. This expectation proved to be correct. It is impossible to say, with any precision, how extensively insider trading is carried on. In retrospect, brokers could not have been expected to say much that was very different from what they actually did. It is no reflection on their truthfulness and candour to say that they were expected to paint the industry in its best light. It is significant that none of them was prepared to deny that insider trading at least occurs. Given the opportunities that are available and, even if the argument that there are always "bad apples" in any profession is accepted, it is clear that the temptation to make substantial profits through insider trading is ever present and would be very difficult for some to resist. A noticeable feature of the inter-view process was that the further from the centre of the market the more often insider trading was said to be widespread. The brokers said that it was not widespread and it was not surprising that the exchange officials said the same (though it was clear that the brokers and the ASX officials had different perspectives of how the market worked). The financial advisers thought that the practice was widespread as did the lawyers and the market observers. The regulators were inclined to say that it was very widespread. Most of the participants regarded insider trading in takeovers as commonplace and this confirms, to a degree beyond that which had been expected, the widely held views about the link between takeovers and insider trading.

In evidence before the Griffiths Inquiry, Mr Leigh Hall, the Chief Manager of Investment Operations for the AMP Society, said that he suspected that share price rises occurred prior to takeover announcements "in more cases than not". His suspicions in this regard were confirmed by the AMP Society's Manager for Australian Shares Research who observed that "It is a very hard one to quantify. One tends to suspect that Leigh's [Leigh Hall's] comment is right-that in more cases than not. In fact in recent cases we have seen significant price movements of stocks before takeovers have been announced" (Griffiths Committee, Hansard, p. 205). To some extent, this must be put down to an anticipation of likely price movements in particular shares as a result of, for example, meetings being held between particular corporate executives. In itself, this is not a sufficient explanation of the frequency of price movement which seems to take place prior to a takeover announcement being made. The representative of the Life Insurance Federation of Australia, Mr James Grealish, told the Griffiths Committee when asked about the level of insider trading activity in the context of takeovers that "[obviously there has been a level of [insider trading] activity" (Griffiths Committee, Hansard, p. 355). The former NCSC Chairman also pointed out to the Griffiths Committee that: "Most, but certainly not all [insider trading takes place in the context of takeovers]" (Griffiths Committee, Hansard, p. 207).

It appears that the level of insider trading is probably slightly lower than in the pre-prohibition period and the main difference is that it now seems to be less blatant. This is not altogether surprising in view of the widely held belief that the legislation is moribund. It also reflects the reality of human nature that where there is a chance to make money it will be taken by some despite laws to the contrary, and despite the ethics of the matter. It was interesting to be told that insider trading is not a major problem. What made it so significant was that other forms of market abuse were quite readily identified. It was striking how often participants in the study referred to warehousing and, in particular, to price rigging which seems to be so commonly practised as to be almost legitimate by default. While there could be an element of envy about "entrepreneurs", it was impossible to fail to notice the strength of the disapproval of their activities. There was considerable variation in the opinions as to who engaged in insider trading and in which stocks this occurred. The weight of opinion leans strongly towards persons associated with companies and there was a discernible pattern in the responses that showed that brokers and other marketplace professionals were also engaged in it to varying degrees.

The impression gained from this study is that insider trading is done on two levels - casually, in situations where opportunity to insider trade arises and in a calculated way. It is also likely that it is conducted on two scales. At one end of the spectrum is "petty" insider trading, usually conducted by lower level staff and smaller investors. At the other extreme is insider trading which involves considerably larger sums. The key to the difference in scale is the amount of money required to make the investments. In the course of the study it was learned that for a large player a profit of $100,000 is regarded as unexceptional. Figures were produced by interviewees which indicated that over a two-day period an apparent insider trading operation yielded a profit of $890,000 and there have been allegations of a profit of $23 million from an off-shore insider trading operation. The latter may however represent an unusual level of insider trading. It is unlikely that there is insider trading on a "Boesky" scale taking place in the Australian market for the simple reason that the Australian market is too small to sustain such an operation.

Those securities in respect of which insider trading is most likely to take place tend to be shares rather than, for example, options. There was some reference to options as a possible vehicle for insider trading. The general view of the participants in the study was that insider trading is more likely to occur in "lower quality" stock such as mining, resources, high technology and speculative stock generally. This is an understandable assessment since this type of stock is more likely to react to good news and more likely to yield better profits through the more spectacular movement of its price. There were, however, many respondents who remarked that insider trading is not confined to a particular type of share.

In the course of the project much of what was said was logical, plausible or predictable but there were two particularly surprising matters. The first was the ease with which one can trade in inside information. It seems that this can be done quite simply, either by using a false name or through a nominee or tippee. Persons wishing to do so can generally rest easy in the knowledge that the risk of challenge, detection and ultimate prosecution is so low as to be virtually non-existent. Even if one is suspected of insider trading, there will be a minimum of professional opprobrium. For the more determined insider trader, the use of an off-shore medium such as one based in London, Hong Kong, New Zealand, Luxembourg or Monaco is a riskless operation. None of the people who discussed it were able to say how common this mode of insider trading actually is.

The second surprise was the level of ignorance, especially among brokers, about what constitutes insider trading. As mentioned earlier, there is some evidence that when a broking firm discovers non-public price sensitive information in the course of visits to a company, it is common for the firm to use that information to trade on its own account before it is passed on to selected clients or to institutions that the firm would like to have as clients. When this matter was discussed with brokers many of them did not consider the possibility that what they did, as a matter of course, might bring them into conflict with the prohibition on insider trading. This matter further emphasised the point made by most interviewees that there must be something done to improve the disclosure practices of listed companies. The level of ignorance is, perhaps, understandable given that section 128 of the Securities Industry Act is very complex and that there has been little guidance about it from decisions of superior courts. It might also be explained by a lack of ethical training in the broking industry. This observation should not be interpreted as a denunciation of the ethical standards of all brokers. One should not, however, understate the pressure to make money that brokers must feel (see also Tomasic & Pentony 1989e).

With respect to the extent of insider trading in Australia, the following observations need to be made. The first is that the popular impression of insider trading which embraces rumours, gossip, guesses and uninformed tips is not necessarily always the type of insider trading that is referred to in provisions such as section 128 of the Securities Industry Act. The impressions of the degree of insider trading are exaggerated by this popular impression. It is also relevant to note that this research was undertaken after the 1987 crash so that the responses to questions about the extent of insider trading represent the base level perception of insider trading, rather than the higher levels that could be expected during a bull market. Not surprisingly, it seems that insider trading occurs mainly, but not exclusively, in the lower level stocks and that it is more likely to be undertaken by persons associated with the company, but it does not mean that others more actively engaged in the market do not do it. Although it is impossible to assess precisely the extent of insider trading it is reasonable to say that it is widespread and that it is not an occasional aberration.

In a more significant sense, it is clear that insider trading in Australia has reached a point where the current corporate and securities laws have reached their limits in being able to control the social and economic problem of insider trading. It should be emphasised that it is irrational to say that because insider trading is not perceived as the most prevalent form of securities market abuse it should therefore be given the very low priority accorded to it by regulators and professionals alike. As the research shows, the actual extent of insider trading is not negligible and professionals across the country have reported a level of such conduct as to make closer regulatory and professional attention to it a real concern for the securities markets in Australia.

Perhaps the experience of the Chairman of the House of Representatives Committee on Legal and Constitutional Affairs is typical of anyone who has systematically looked at the problem of the extent of insider trading. During the course of the 1989 insider trading hearings he concluded: "I want to make the point that to some extent the extent of insider trading is academic. If we say there is a problem, it is our duty to come to grips with it. It does not matter whether half a per cent (sic) of people are involved, or 20 per cent. It is a matter of principle. It is interesting, as the inquiry has processed, that my initial perception of the extent of insider trading I now conclude was a very conservative view, and this might be a much bigger problem than I had originally anticipated" (Griffiths Committee, Hansard, p. 252; see also pp. 42-3).