Chapter 3 - Insider trading cases in Australia
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 17-30
In evidence presented to the Griffiths Committee in May 1989, the National Companies and Securities Commission reported that it had undertaken 50 inquiries into alleged insider trading activity as at 28 April 1989. Almost half of these inquiries led to matters being referred to a State or Territory Corporate Affairs Commission which were "delegates" of the NCSC under the unwieldy cooperative federalism arrangement by which companies and securities laws were administered in the 1980s. During the same period the Corporate Affairs Commissions (CACS) undertook a total of 82 insider trading inquiries. The NCSC had referred 22 of these matters to the CACS, 17 came from an Australian Stock Exchange (ASX) reference and 13 came from shareholder and company complaints. Only 24 matters came from surveillance by a Commission. Of the total CAC inquiries, 25 took place in New South Wales, 30 in Victoria, 17 in Western Australia and 2 in South Australia. The NCSC reported that of the insider trading inquiries undertaken by the Corporate Affairs Commissions, 8 had led to the initiation of a prosecution and 2 inquiries led to the completion of a prosecution.
Fifty per cent of the NCSC inquiries had resulted from surveillance undertaken by the Commission itself. Nine inquiries had arisen from shareholder complaints and the remainder came from complaints by the company, references from a CAC and references from the ASX (see Griffiths Committee, Hansard, p. S401-S403).
In August 1990, the Australian Stock Exchange reported (Sydney Morning Herald, 20 March 1990, p. 33; Australian Financial Review, 21 March 1990, p. 22) that its surveillance of the stock exchange transactions since March 1989 had revealed 105 possible breaches of securities regulations of which there were a total of 22 potential insider trading cases. There were ten possible instances of company directors being involved in insider trading. Five of the possible insider trading matters involved the securities of the top 150 companies and nine involved mining companies. There were 28 possible market rigging cases and five cases involving false or misleading statements (figures for 1.3.89 to 30.6.90 supplied by ASX; see also Sydney Morning Herald, 25 August 1990, p. 42). Against the evidence of the current incidence of insider trading in Australia, it should be thought significant that to date no insider trading investigation has led to a conviction. It is useful to look more closely at the difficulties presented by those cases that have arisen. The fact that no prosecution has been successful could be explained by several factors:
- the accused was not guilty;
- the prosecution resources were insufficient to mount the case properly;
- the prosecution failed to allocate adequate resources to "strong" cases;
- the prosecution was inept in selecting and prosecuting the cases;
- Australian judges and magistrates have been extremely conservative in dealing with "technical" white collar crimes;
- evidence of insider trading is extremely difficult to obtain;
- the law is unenforceable.
If it is any consolation for Australian regulators, the experience of prosecutors in the USA reveals very similar problems. According to US Assistant-Attorney Neil S Cartusciello, "[a]bsent the cooperation of defendants involved in insider trading, prosecution would be well near impossible" (see The Sun, Baltimore, 15 July 1990, Business Section, p. 1). The following discussion is limited to cases drawn from the 1980s.
The Black Hills Case
In 1985, committal proceedings were brought against Ronald Wise and Yosse Goldberg who had been charged with having contravened sub-sections 128(l) and 128(4) of the Securities Industry (Western Australia) Code. The hearings turned on the meaning of the phrase "Likely materially to affect the price of those securities" in sub-section 128(l). The information in question concerned favourable assay results in a Kalgoorlie mining project controlled by Black Hills Minerals Ltd. Wise and Goldberg were both directors of this company, as well as of two other companies, Western Continental Corporation Ltd (WCC) and Vikna Pty Ltd (Vickna). WCC owned between 30 and 40 per cent of Black Hills and Vikna was a wholly owned subsidiary of WCC. Because of WCC's financial problems a rescue was organised in 1981 by a consortium comprising Bond Corporation Ltd (50 per cent), L R Connell and Partners (25 per cent) and Spedley Securities Ltd (25 per cent). Assets valued between $20 and $30 million were transferred from WCC. Some shares and options in Black Hills Minerals Ltd were transferred from WCC to the consortium and were re-transferred in September 1982 to Vikna, a wholly-owned WCC subsidiary. This transaction led to charges being laid under s 128.
The Crown alleged that Wise and Goldberg were prevented from dealing in these securities because they possessed knowledge of favourable assay results from drilling in a Kalgoorlie gold exploration project, in which Black Hills was a 25 per cent participant. This information did not appear to be generally available, and it was not known to the rescue consortium. The rescue consortium agreed that it was to be paid two million dollars as a fee for the rescue and that the securities in Black Hills would be re-transferred to the WCC group. The two-million-dollar fee was met by $1.89 million in cash and the retention of a little over half of the shares in Black Hills, which were valued at 13 cents each. The prosecution argued that Wise and Goldberg as directors of Black Hills were persons who were connected with a body corporate for the purposes of s 128 and that they were in possession of information regarding the value of the Black Hills securities, which was not generally available. It was also argued that if the information were generally available, it was likely materially to affect the price of the securities. The defendants argued that it was necessary for the prosecution to prove that had the information been generally available it would have affected the price of the securities in the particular transaction under question, that is, the price inter partes.
The defence argued that s 128 had to be read in the context of Part X of the Securities Industry Code. Whereas s 123 referred to the price of securities "in a stock market" and s 124 referred to the "market price", s 128 referred only to "the price" of the securities, that is, the price inter partes in a particular transaction. It was argued that if the legislature had intended to refer to the stock market price in s 128, it would have done what it had done elsewhere in Part X. Further support for this argument was found in s 130 which referred to a price differential in a particular transaction, and in the fact that s 128 covered the securities of proprietary companies which cannot have a stock market price.
The prosecution argued that s 128 imposed a blanket prohibition on dealing in securities and not merely on dealings in respect of a particular transaction, that is whether it was off-market or by way of a gift, etc. The defence successfully prevented the prosecution from leading evidence regarding the likely effect of the information on the stock market price by objecting that the relevant price was the inter partes price. There was insufficient evidence for the prosecution to show that the price of the shares in the transfer from the consortium to Vikna was likely to be affected by the information in question. An officer from Bond Corporation argued that the price of the securities was not considered to be relevant to the transaction and that the value of 13 cents a share was arrived at by a process unrelated to the market value of the shares. Despite its purported irrelevance, this was also the current market price of the shares.
The magistrate agreed with the defence interpretation of s 128. A contributing factor was probably the appearance for the defence of a prominent Sydney Queen's Counsel. Also relevant was the fact that the prosecution did not, or was not allowed to, present further arguments in support of its interpretation of s 128. Another factor leading to the failure of this case was the inability of the prosecution to ensure that evidence from the consortium was presented. Members of the consortium decided not to press the complaint against Wise and Goldberg and apparently preferred to make their own commercial arrangements for compensation for the failure to disclose the price sensitive information about the favourable assay results which might have been likely to affect the true value of the securities in Black Hills. This case illustrates that courts were prepared to accept an extremely narrow interpretation of the transactions covered by s 128 and in some respects were extremely conservative in their approach. The fact that a higher court might have reached a different view to that reached by the magistrate in the Black Hills Case is unhelpful as insider trading cases rarely go beyond the committal stage to a higher court. It is interesting to speculate about the impact of senior counsel appearing in committal proceedings. It is perhaps not unreasonable to say that their presence has a significant influence upon the proceedings and ultimate outcome of an insider trading case.
The Bain Case
In 1988, Sydney stockbrokers Roger Bain and Ian Storv were charged with four insider trading charges under s 128 of the Securities Industry Act 1980 (Cwlth). It was alleged that dealings had taken place in the shares of Australian United Gold NL (AUG) and Kalgoorlie Resources NL. The matters were dealt with separately. Due to the death of Story, the case against him did not proceed. In May 1989 it was found that Bain had a prima facie case to answer (Sydney Morning Herald, 6 May 1989, p. 43) but the case against Bain was dismissed after it went to trial. The NSW Corporate Affairs Commission decided not to appeal against this decision (Sydney Morning Herald, 10 November 1989, p. 26).
Bain had bought his first parcel of 20,000 AUG shares around March 1987. At that time there had been no gold ore discovery. On 23 June 1987, Bain was asked to help draft a press release announcing an ore find by AUG. Two days later he bought 20,000 AUG shares. On 29 June AUG made a public announcement of the ore discovery. Bain sold one parcel of 20,000 shares in July and a second parcel of AUG shares was sold at a loss after the October 1987 market crash. The profit on the July sale was about $2,500. The issue in this case was whether the information in the press release would materially affect the price of the securities. Bain argued that there were other factors which were available to him apart from information in the press release. Story had apparently telephoned Bain on June 24, the day before he bought shares on the 25th, and had told him that as a result of fundamental analysis, he thought that the AUG shares were undervalued by, 10-15 per cent. From this Bain concluded that Story knew of the contents of the press release.
Bain also argued that he had bought shares in AUG on 25 June in order to "help the market out". As Bain and Co had been involved with the underwriting of the three million dollar AUG share placement, Bain claimed that he was "embarrassed" that the shares seemed to be undervalued (The Weekend Australian, 6-7 May 1989, p. 28). He also claimed that he thought that AUG would release the press statement immediately, an expectation that AUG had agreed was a reasonable one especially as the failure to release the press statement was due to an "administrative breakdown" at AUG (Australian Financial Review, 2 May 1989, p. 3). Bain also argued that AUG stock had been recommended to him from May 1987 and that to a large degree the information in the press release was already in the public domain. In addition, an expert witness for the defence gave evidence that the press release could not have materially affected the share price of AUG shares as there "was nothing new in the report" (Sydney Morning Herald, 9 May 1989).
The Rancoo/Claudianos Case
The Rancoo case involved the defendant Charles Claudianos, who was employed as a Senior Technical Officer with Anutech Pty Ltd from April to October 1987. Rancoo Pty Ltd, a company listed on the second boards of the Hobart and Melbourne Exchanges, owned 12 per cent of Anutech. On 9 October 1987, Rancoo announced a joint venture agreement with Anutech for the purpose of developing a new generation of vaccines to fight Herpes and AIDS (Cleary 1989, p. 48). On 30 September 1987, 20,000 shares in Rancoo Pty Ltd were purchased in the names of Charles Claudianos' sister-in-law and brother-in-law. The shares were purchased by Hennessy, who was manager of the section of a bank in which Charles Claudianios' brother, John Claudianos, worked. Insider trading charges under s 128(2), (4) and (5) of the Securities Industry Act 1980 (Cwlth) were brought against Charles Claudianos. Over a ten day period of higher than usual trading, Rancoo's share price moved from $1.05 to $2.50 (Sydney Morning Herald, 9 September 1988; The Canberra Times, 16 May 1989, p. 10, 17 May 1989, p. 6 and 28 May 1989, p. 4).
The defendant, Charles Claudianos, was charged under s 128(2) for trading himself, although this charge was confined by particulars to an allegation that John Claudianos was induced by the information provided by Charles Claudianos to deal in the shares. The Magistrate dismissed all charges because of the lack of evidence of the passing of information between the brothers. He decided that there was no direct evidence of contact between them and that the only evidence was indirect. In subsequent proceedings in the ACT Supreme Court, Chief Justice Miles 1(1990) 2 ACSR 73 at 781 pointed out that the magistrate was "not quite correct" in concluding that there was no direct evidence to suggest that there had at any time been any communication between Charles Claudianos and his brother. Expert evidence for the prosecution was provided by a share market consultant who traced the history of price movements in Rancoo shares. He expressed the view that the information upon which Claudianos apparently acted would have been seen as material by a reasonable investor. Counsel for the defendant, however, pointed to various press reports going back to February 1987 which dealt with the involvement of Rancoo in vaccine research. On this basis, he questioned the "materiality" of the information upon which Claudianos allegedly traded, namely, the article in Nature magazine and the press release announcing the $1 million five-year-grant from Rancoo. The magistrate regarded the "real issue" to be the lack of contact between the defendant and his brother (Coelli 1989, p. 7). Strangely, he concluded that there had been "nothing to suggest that Charles Claudianos played any role at all in his brother's decision to buy shares" (Coelli 1989, p. 7). The charges against Claudianos were therefore dismissed by the magistrate.
It can be said that the decisions of magistrates hearing insider trading cases have often been based upon questionable interpretations of the relevant legislation. This was evident from the following exchange between the Chairman of the Griffiths Committee and a senior Victorian CAC official:
Chairman:... it is fair to say, is it not, that magistrates almost by definition have shown an inability to deal with the complex legal issues that are involved [in insider trading cases] and perhaps to some extent are intellectually or otherwise intimidated from taking a robust attitude to these issues because of those sorts of complexities?
Mr Whitehouse: I think that they do have a problem in that area, yes.
(Griffiths Committee, Hansard, p. 323).
This was again confirmed in the Claudianos case when the magistrate's decision in that case was subsequently reviewed; Myers v. Claudianos (1990) 2 ACSR 73. In that decision, Chief Justice Miles noted (at 77) that the case against Claudianos was "based on circumstantial evidence". Contrary to the finding of the magistrate in this case, the Supreme Court found (at 79) that:
the primary facts which the evidence was capable of establishing and to which I have already referred were sufficient to enable a tribunal of fact to conclude, first, that on or about 29 September 1987 there was communication between the respondent and his brother by telephone in which the respondent informed his brother of the forthcoming announcement which was likely to increase the market value of Rancoo shares, secondly, that acting on that information as an inducement, John Claudianos caused shares to be purchased on 30 September 1987 and, thirdly, that both John Claudianos and the accused acquired a beneficial interest in some or other of those shares. Proof beyond reasonable doubt of those essential facts, along with the uncontroversial facts, was sufficient proof for the purposes of establishing a prima facie case of the elements of the three charges.
Chief Justice Miles concluded (at 82) that the magistrate's decision that a prima facie case had not been made out, was made within jurisdiction. Moreover, the Chief Justice (at 83) was not prepared to exercise his discretion to remit the matter to the magistrate for rehearing, despite concluding that "the magistrate was wrong in law in not deciding that there was a case to answer. He was also wrong insofar as he dismissed the informations upon the basis that the prosecution had not proved the charges beyond reasonable doubt". However, due to the rule against double jeopardy, he would not remit the case. A procedural blunder on the part of the prosecution in its case before the magistrate contributed to this finding by the Supreme Court. The prosecution had been drawn into arguments as to whether prosecution witnesses should be believed, when it should not have allowed this to occur before a prima facie case had first been established. This case also raises serious questions concerning the legal skills available to the prosecution in cases such as this. It also illustrates that magistrates are often not best placed to hear cases of this complexity.
The Tricontinental Connection
A series of insider trading charges were laid by the NCSC in March 1989 against persons who had at some time had a connection with the merchant bank Tricontinental. Those charged with a variety of offences were Yasni Ariff, Robert De Greenlaw, Richard Prowse, Martin Mullins and Ian Johns. In all, 21 insider trading and conspiracy charges were laid against the defendants Ariff, De Greenlaw and Prowse. Mullins was charged with corruptly receiving secret commissions and conspiracy involving Ian Johns (Potter 1989a, p. 29; Murrill 1989, p. 18). Johns was charged on five counts, including an insider trading charge to the effect that he made a profit of $1.5 million from trading 6.7 million shares or about 20 per cent of the shares in Falcon Australia Ltd (Falcon) a Perth exploration company, on the basis of confidential price sensitive information which he had obtained through his position at Tricontinental (Potter 1989b, p. 25).
Also charged was the broker Peter John Newton, who had allegedly authorised the buying and selling of various shares in conjunction with De Greenlaw. It was alleged that Newton and De Greenlaw made $30,000 buying 100,000 shares in MBfI Australia Ltd (MBfI) and then selling them to Australian American Assurance (AAA), in which company De Greenlaw was a funds manager. It was also alleged by the prosecution that the basis of the purchase was the knowledge that AAA planned to go into the market to buy a large stake in MBfI Australia Ltd. AAA's presence in the market was seen as being likely to raise the price of the shares. Like Prowse, Newton was charged under the tippee provisions [Section 128(3)]. The charges against Newton were dismissed early in the proceedings without the magistrate giving reasons for his decision, although he thought that the evidence against Newton was circumstantial (Murrill 1989a, p. 27; Backhouse 1989, p. 23). The prosecution failed because it could not establish the existence of an association or an arrangement for the communication of information. As counsel for Newton argued, "the prosecution's real problem is that it has led no evidence from which any inference can be drawn, either that there was an imparting of information from Mr De Greenlaw to Mr Newton or as to what that information was". He also argued that "It is not legitimate as a matter of inference to deduce from the fact that shares were placed in Mrs De Greenlaw's name [by Newton] that that was the result of the communication of pricesensitive information" (Murrill 1989b; Gowdie 1989).
Ariff, Prowse and De Greenlaw were all sometime employees of Tricontinental, of which Johns was the Managing Director. In 1986 Ariff moved to AAA, where De Greenlaw was a funds managers In 1988 Ariff was working at the State Bank of Victoria as "corporate lending manager". Ariff was charged that whilst she was in possession of information either as a result of her position with the State Bank of Victoria or as a result of information obtained through De Greenlaw concerning the intention of AAA to buy a substantial number of shares in the companies whose shares were traded, she dealt in those shares via Keihouse Pty Ltd (Keihouse), in her own name and in the names of relatives. In respect of De Greenlaw, it was alleged that he traded in the shares of Black Flag and of MBfI through his company, El Burro Investments Pty Ltd (El Burro), and that he did so while he was in possession of privileged information that his employer, AAA, intended investing in these companies. It was alleged by the prosecution that Prowse traded in Black Flag shares via Keihouse (a company of which he was a director and shareholder with Ariff) and that this trading occurred after he received inside information from Ariff (Murrill 1989c, p. 14).
The charges against Prowse were dismissed at the committal stage because of the tenuous connection between Ariff s knowledge and actions and those of Prowse. The magistrate observed that "proof that Ariff had the proscribed information and that she dealt on behalf of Keihouse, and therefore Prowse, is not such that would lead me to say that the information she possessed he possessed". The Magistrate also commented that the phrase "generally available" meant that the information had to be "generally available to those who generally deal in securities in the public arena" (Murrill 1989c, p. 20). The magistrate found that Ariff and De Greenlaw should be committed for trial. He found that it seemed to be more than a coincidence that De Greenlaw caused El Burro to deal in the shares of Black Flag which were ultimately purchased by AAA. Ariff was committed to face trial on a charge of dealing in Segenhoe shares in the name of Sloan in March with the knowledge that AAA also intended to buy a substantial number of Segenhoe shares (Murrill 1989d).
The insider trading charge against Johns was dismissed in February 1990. It might be noted that Johns was committed for trial on three charges (Murrill 1990, p. 25). The magistrate also found that Mullins had a case to answer, but Mullins elected to give evidence on 19 February 1990 and was thereafter discharged (Bolt 1990). The magistrate found that "the evidence was incapable of establishing beyond reasonable doubt that the offence of insider trading has been committed either by Mullins or by Johns". Insider trading charges against De Greenlaw were dismissed by the Victorian County Court in February and March 1991 1.
The Teh Case
Insider trading charges were brought under s 48 of the National Companies and Securities Commission Act 1979 (Cwlth) against a former NCSC employee, Kian Lang Teh. Teh had been charged on 28 counts and the hearing of this case was adjourned for mention until 14 December 1989 (see The Canberra Times, 9 November 1989, p. 19; Australian Financial Review, 9 November 1989, p. 34; see also Potter 1989c, p. 1; Murrill 1989e). The same problems of proof arise under NCSC Act s 48 as in the insider trading provisions of SIA s 128 and CA s 1002.
The Wheeler Case
The Corporate Affairs Department in Western Australia alleged that Terrence Brian Wheeler was involved in the analysis of mineral samples supplied to a company of which he was managing director. Wheeler then allegedly bought 130,000 shares in Parmelia Resources NL (Parmelia) and 50,000 shares in its associated company Technomin Australia NL (Technomin). The Parmelia share price went for a spectacular run after the release of the assays showing high grades of gold. Wheeler was charged with two charges under s 128 of the Securities Industry Act (Smith 1989, p. 20) and he elected to go directly to VW early in 1990. A nolle prosequi was filed in respect of these charges in November 1989. The stumbling blocks in this prosecution were the existence of a necessary "connection" with a relevant corporation and the "possession" of information. In addition, the perennial issue of materiality also apparently proved to be a stumbling block for the prosecution.
One charge against Wheeler was brought under s 128(t) in relation to the dealing in Parmelia shares. The first requirement was to connect Wheeler with Parmelia because the section required that the person in possession of the information must be connected with the body corporate in whose shares the dealing took place. Section 128(8) (see also 1002(9) of the Corporations Act 1989 (Cwlthl) deems various categories of natural persons to be connected with a body corporate, namely, an officer of that body corporate, a substantial shareholder or a person in a professional or business relationship with that body corporate or a related body corporate. Wheeler was in charge of Genanalysis, a laboratory which received core mineral samples for purposes of analysis. The consulting geologist for Parmelia had been forwarding core samples to Genanalysis. These were accompanied by purchase orders in the name of Hunter Resources Ltd, which was a joint venturer with Parmelia Resources. A business relationship existed between Wheeler and Hunter Resources Ltd but Wheeler did not deal in the shares of Hunter Resources Ltd. Rather, he purchased shares in two other companies, Parmelia and Technomin. It seems that Hunter Resources Ltd was not acting as agent for Parmelia in regard to the drilling program which produced the assay results which led Wheeler to buy and sell shares in Parmelia.
The Western Australian Crown Solicitor's Office concluded that: "Even if Wheeler was aware of Parmelia's involvement which we say he was, there was no evidence to support a conclusion that the [professional or business] relationship required by sub-section 8(c)(i) existed. Such a relationship was, as a matter of law, a pre-requisite to the subsequent prohibition against dealing in Parmelia shares". Consequently, the WA Crown Solicitor's Office advised that the prosecution against Wheeler could not proceed. A second charge against Wheeler was laid pursuant to s 128(2) of the Securities Industry Act in relation to the purchase and sale of 50,000 Technomin shares. This charge again required that Wheeler be connected with Parmelia. Section 128(2) required that there be a transaction which involved the two bodies corporate or involved one of them and the securities of the other. This charge was also faulty for the same reasons as the charge brought under s 128(l). The Wheeler case illustrates the narrowness of the connection requirement under Australian law. In contrast, American courts have taken a far broader approach to the issue of connection (see for example the Winans Case discussed in the next chapter). The narrowness of the statutory provisions as illustrated in the Wheeler Case adds to the problems faced by a prosecutor in this area.
The Sun Securities Ltd Case
Insider trading charges were laid against Sun Securities Ltd and against Kenneth John Smith. Smith allegedly acquired inside information while a director of Australian Shipbuilding Industries Ltd (ASI) and then utilised this information in acquiring ASI shares in the context of a proposed takeover of ASI by Sun Securities Ltd. The Sun Securities case is the first insider trading case to involve a company as a defendant (Lague 1989). An ex parte application was made to the Supreme Court of Western Australia by Sun Securities Ltd for writs of mandamus and prohibition seeking to direct the Crown to provide further particulars of the insider trading charge and to amend the charge by including such particulars. In Ex parte Sun Securities Ltd (1990) CCH ASLR para 76-195, Kennedy J was asked to find that the prosecution should treat ss 128(7) and (7A) as elements of the offence requiring that particulars based on these provisions needed to be included in the charge brought under s 128(6). His Honour declined to so order, concluding that ss 128(7) and (7A) should be treated as exemptions and not conditions precedent to a charge being laid under s 128(6). Kennedy J also rejected the argument that the offence of insider trading required the element of fault or knowledge by the company to be proved. Insider trading charges against Smith were dismissed by the Perth District Court in February 1991. Smith had argued that the information in question was not price sensitive2.
From time to time allegations of insider trading flare in the news media but it is difficult to know whether the conduct referred to, if true, is any more than the populist notion of insider trading. Almost routinely allegations are made of "insider trading" using the CPT (consumer price index) figures, for example. Some further examples of recent media allegations include the Canberra Building Society affair and allegations involving the Westpac Bank.
The Canberra Building Society Affair
In 1988, an allegation of insider trading was made in Federal Parliament by John Langmore MER in respect of the directors of the Canberra Building Society. Nothing further has come of this case (see, for example, Davis 1988, p. 1; Davis 1989, p. 1; Salins 1988, p. 1). The case arose in the context of a possible takeover of CBS by the St George Building Society, although no takeover eventually transpired. A report by a senior ACF Administration official apparently cleared the members of the CBS board of allegations which had been made, although insider trading charges could not have been formally laid as the society was regulated by the Co-operative Societies Ordinance (Davis 1988b, p. 1; Salins 1989).
The Westpac Bank Allegation
Another alleged insider trading case concerned the Westpac Bank. This case surfaced during the 1990 federal election campaign. The allegations involved foreign currency dealers employed by Westpac buying and selling currencies on their own account. As one financial journalist summarised this affair:
According to banking sources and the documents sighted, these dealers would buy large blocks of a particular currency at an advantageous rate and then break that parcel into smaller amounts to be dealt out to various clients at an off-market rate that was non-competitive for the clients. Often the rate was made possible by foreknowledge of the placement of a major order from a corporate client or the intervention of the Reserve Bank in foreign exchange markets. The profits arising from such transactions were referred to as "secret commissions" and often cost clients thousands of dollars (Lampe 1990, p. 41).
Although the conduct in question contravened the bank's own internal procedures, it did not come within the terms of the insider trading provisions in the Securities Industry Act as the inside information related to foreign currency transactions which were not included within the definition of "securities" for the purposes of the insider trading legislation. Six months earlier, the managing director of Westpac's financial services group was reported in the Australian Financial Review (22 August 1989, p. 2) to have stated that Westpac ensured that "pretty precise instructions" about the nature of permissible conduct were given to Westpac employees and that outside experts were brought in periodically to "audit" existing procedures.
Insider trading as an issue has also been raised from time to time in a number of cases which have primarily concerned some other matter. Usually, the party who has threatened to pursue an insider trading action agrees to settle the matter for some concession. Such a settlement seemed to occur between the broking firm BZW Meares Ltd and its client Claremont Petroleum NL, after Ian Story used information, gained by the broking firm from its client, to seek to interest Elders Resources Limited in buying shares in Claremont. Passing reference was made to the settlement in the securities licensing case of NCSC v. Story (1988) 6 ACLC 560 at 566-7.
In ICAL Ltd v. County Natwest Securities Australia Ltd and anor (1988) 6 ACLC 467 at 502, in response to a cross-claim, the court was not prepared to grant an injunction on the ground that there had been communication of price sensitive information as the documents containing the information had already been admitted into evidence before the court in a public hearing. As Bryson J observed (at 502)
I do not consider that it would be wise to make use of the remedy of an injunction against a company or directors of a company when the supposed insider trading was in fact an exercise undertaken, as this one appears to me to have been, with the interest of shareholders. Generally promoting interest in shares and competition with the offeror is an ac6vity on which, in my view, a high value should be placed and I am reluctant to restrain it by injunction.
In 1986 the NCSC investigated the insider trading implication of the cross investments between BHP and Elders IXL Limited (National Companies and Securities Commission 1986b, Ch. 8) In the attempted takeover of BRP by Bell Resources Ltd, allegations of insider trading were rumoured. The alleged insider trading transaction is said to have involved a profit of $23 million, but the NCSC did not pursue this matter further as sufficient hard facts were not available locally, but were held off-shore (Sydney Morning Herald, 17 June 1988).
The Keygrowth Limited Case
Finally, in a recent case, that of Keygrowth Ltd v. Gregory Mitchell & Ors and NCSC (1991) 3 ACSR 476, Nathan J of the Supreme Court of Victoria actually found a claim made under s 128 of the Securities Industry Act to be proven, although this case primarily concerned breaches of s 11 of the Companies (Acquisition of Shares) Act 1980 (CASA) and the making of a CASA s 60 unacceptable conduct declaration by the NCSC. The case arose as a compensation action by Keygrowth Ltd against Mitchell, one of its former directors. The National Companies and Securities Commission (NCSC) subsequently intervened in this action and Mitchell brought a counter claim against the Commission. The insider trading finding in this case seems to have been incidental to the main concerns of the parties and received almost no publicity. The judge devoted most of his judgment to the complex compensation action and an unacceptable conduct declaration, and gave almost no attention to discussing the principal elements of the offence of insider trading. Oddly enough, despite the finding that insider trading had occurred, it is difficult to justify this finding. In the November 1990 decision of Keygrowth Ltd v. Gregory Mitchell & Ors and the NCSC, Nathan J of the Supreme Court of Victoria summarised the issues as follows:
The dispute at the fulcrum of this case is the alleged conspiracy engaged in by Mtchell, Schreuder and Buggy (the trio) to obtain control of Keygrowth's cash in contravention of the Acquisitions Code. Keygrowth and the NCSC contend the conspiracy amounted to engaging in unacceptable conduct entitling the NCSC to make a declaration to that effect, and Keygrowth to recover any profit made by Mitchell as a result of the conspiracy (s 45). All other issues are incidental to this... ((1991) 3 ACSR 476 at 479).
Nathan J also noted (at 484) that:
Keygrowth also contend Mitchell, as a director possessed information not generally available and used it to his own advantage and to the detriment of others. This is "insider trading" in breach of s 128 of the Securities Code and hence is liable to account for the profit.
Further, that Mitchell owed a fiduciary duty to Keygrowth, pursuant to s 229 of the Companies Code, or at common law, and he failed to discharge it. Keygrowth suffered loss and damage which can be measured by the amount of Mitchell's gain.
Keygrowth Ltd sought compensation for the damage which it had suffered due to the actions of one of its directors and several other persons (see also NCSC 1990, p. 58). The complex facts of the case involved a takeover bid by Transequity Ltd on the 29th of November 1989 for the listed public company cash box, Keygowth Ltd. This takeover offer was to close on the 16th of February and involved a scrip offer of two Transequity shares for one Keygowth share. On the 16th of November 1989 Transequity obtained an option over 15.25 per cent of shares in Keygrowth from F&C Investments. Mitchell was a director of Keygrowth. Two of Mitchell's companies, Gemalla Ltd and Elmit Pty Ltd, held some 22 per cent of Keygrowth's shares. On 3rd January 1990, these and other Keygrowth shares were sold to four companies controlled by Buggy. A total of more than 35 per cent of Keygrowth's shares changed hands through the Canberra office of Were's, a share broking firm.
In October 1989, the Board of Keygowth had given power to Mitchell to invest the company's liquid funds on fixed term deposit ranging from 100 to 180 days. Mitchell invested some $3 million of these liquid funds on a 120-day term with the Hong Kong Bank. Late in December 1989 Schreuder visited the Hong Kong Bank and re-negotiated the $3 million deposit made by Mitchell to an on-call facility. As Nathan J noted (at 21 of the unreported judgment):
Schreuder could only have done this if he had been provided by Mitchell with the customer number and deposit number of the deposit it is impossible to accept that the Hong Kong Bank would accept instructions to renegotiate a deposit of this magnitude unless it was confident it was receiving the instructions from an appropriate authority. That authority requires the provision of a customer number and deposit number. It is further to be noted that the deposit address was Mitchell's business premises in Footscray. All of these details Schreuder would have had to provide to the Hong Kong Bank. They can only have come from Mitchell. That fact alone is compelling evidence of the concert between the two.
Subsequently, Nathan J concluded that the $3 million from Keygrowth was used by Schreuder, Mitchell and Buggy to fund the takeover of Keygrowth by the trio.
On the 8th February 1990, Buggy became a director of Transequity, a company controlled by Schreuder who held more than 90 per cent of Transequity's shares. On the 16th of January, Mitchell gave notice to Keygrowth and its directors that he proposed to call a general meeting on the 8th of February to remove the other directors of Keygrowth and replace them with Schreuder and Billinge, both of whom were at the time directors of Transequity. On the 18th of January, Marks, the managing director of Keygrowth, had asked Mitchell to resign from the Board after discovering that Mitchell's companies had sold all of their Keygrowth shares. Interestingly, on the 12th of January all of the directors of Keygrowth, including Mitchell, had signed a resolution to the effect that they did not have an interest in any contract entered into by Transequity, the takeover bidder.
The NCSC inferred that Transequity was associated with the Buggy companies, or the Buggy vehicles as Nathan J described them (Keygrowth Ltd v. Gregory Mitchell & Ors and NCSC, unreported judgment Supreme Court of Victoria 1990, p. 3). On the 14th February 1990, the NCSC made an unacceptable conduct declaration regarding the acquisition of some 35 per cent of Keygrowth shares by the four companies controlled by Buggy (mainly involving the sale of the Keygrowth shares by the companies controlled by Mitchell).
Nathan J (at 484) made the following observations regarding Mitchell, the first defendant:
I found Mr Mitchell to be a disingenuous witness... He was not a small-time gambler or a person to be easily manipulated. I find he approached his directorship in Keygrowth with a motive plain to all. That was maximisation of profit and dissatisfaction with the poor performance, as he saw it, of Keygrowth's directors. I am satisfied he perceived Keygrowth to be a cashbox, and if he could obtain control of it, a vehicle capable of bringing him and his interests immense financial rewards. The motivation for the conspiracy in which I find he engaged was the most common of all. Greed.
Nathan J provided further insights into the motivations of Mitchell when (at 26 of the unreported judgment) he added that:
Mitchell had expressed dissatisfaction with the way Keygrowth was performing, and had indicated to other Board members ... that he was interested in taking it over. The mechanism was a return of capital. Thus he would have had available the shell of Keygrowth to obtain back-door listing for his own and other enterprises. He said as much in the witness box. There is no reason to believe he ever abandoned the prospect of obtaining backdoor listing for his other interests. Thereafter, the ambitions of Schreuder coincided with the desires of Mitchell. Mitchell was prepared to deliver Keygrowth to Schreuder, stiipped of its cash reserve in a self financing takeover. Mitchell would obtain back-door listing for his interests and Schreuder the remaining assets of Keygrowth. I find this conclusion irresistible when it is remembered that Mitchell was prepared to oust the Keygrowth Board whilst remaining a director but not a shareholder, and to replace it with Schreuder and consorts, one of whom he had not even met.
Mitchell's companies had sold their shares in Keygrowth at a premium. Gemalla had sold its 19.9 per cent holding in Keygrowth for 94 cents a share and Elmit sold its holding for 87 cents a share. Nathan J found (at 8) that Keygrowth's shares had been thinly traded, at between 60 and 75 cents per share, during the last three months of 1989. Nathan J also found that Mitchell had misused inside information within the terms of s 229 of the Companies Code and s 128 of the Securities Industry Code. In relation to s 229 he observed (at 486):
This section imposes upon directors and officers of a company a duty to act honestly and not make improper use of information acquired by virtue of a position as an officer so as to obtain gain for himself.
In my view, Mitchell acted in flagrant and utter disregard of these duties. When Schreuder approached him in late December a purchase price of 90 cents per share was settled upon, that is, some 50 per cent above the market. I find the discrepancy amounts to Schreuder offering a premium or an amount over and above that generally obtainable, although I accept a premium may attach to a single large shareholding, particularly if the holding brings the purchaser control. However, that was not the case here ... I consider Mitchell was determined to gain for himself the premium, and to do so to the exclusion of other shareholders.
Nathan J concluded that the purchasers were prepared to pay the 90 cents per share to Mitchell's companies as this was "a premium for unlocking the cashbox and remaining in place to move the spill motion [in relation to Keygrowth's board] which they confidently expected to be successful". In breaching these provisions of s 229 of the Companies Code (s 232 Corporations Act), Mitchell was found to be liable to account to Keygrowth under s 229(7) for any profit flowing from the contravention.
Turning to s 128, Nathan J concluded that Mitchell had contravened s 128(2) and that Mitchell was also liable to account for profits made and to compensate Keygrowth under s 130 of the Securities Industry Code. In finding a contravention of s 128(2), Nathan J was presumably referring to the transaction between the takeover target Keygrowth and Transequity, the offeror. However, it is not exactly clear how Nathan J reached this conclusion as Mitchell did not trade in Keygrowth shares. Section 130(l)(b) would only have applied if Mitchell was caught by Securities Industry Act s 128(l) or (2). It is also not exactly clear what price sensitive information was derived by Mitchell from Keygrowth and then relied upon by him.
As Nathan J concluded at 487:
I consider Mitchell contravened sub-s (2) of this section [SIA s 1281, in that he was in possession of information not generally available and which would be likely to materially affect the price of the securities. That information is the price settled upon to affect the crossing lie the sale of Mitchell's shares in Keygrowth to Buggy's companies], and of course the conspiracy which preceded it. Had it been known to the market generally that Schreuder was prepared to pay 90 cents a share, it is reasonable to infer, as previously stated, there would have been any number of willing sellers. Mitchell could not have commanded that premium had it not been for the conspiracy. (Emphasis added)
This reasoning is all quite curious. It is difficult to see how the information used by Mitchell constituted inside information in the s 128 sense as the information was derived from a source extraneous to the company which Mitchell was a director, namely from the so-called conspirators. This would require a somewhat strained reading of the phrase "shall not deal in any securities of any body corporate if by reason of his being, or having been, connected with". It would also be necessary to broadly interpret the term "information", to the effect that the offeror was prepared to pay a premium on the market price of the shares of Keygrowth in a situation of a scrip offer. However, this was apparently the price sensitive information involved in this case, but it is not clear how this information was known by reason of a connection with Keygrowth. If Nathan J is correct, the information would not need to be obtained from the company with which the alleged insider trader was connected.
Nathan J had earlier noted that "Mitchell acted in flagrant and utter disregard of [his] duties [as a director]". Although Mitchell may have been a rogue who misused his position as a director for his own personal benefit, it is submitted that, contrary to the conclusions of the court, this should not be sufficient to constitute insider trading.
The decision in Keygrowth seems to take us full circle from earlier questionable cases, such as the 1978 case of Waldron v. Green, in which judges have refused to draw any inferences concerning the communication of insider information from the facts before them. If anything, Nathan J was far too ready to conclude that insider trading occurred, just as McInerney J in Waldron v. Green was far too reluctant to do so. Perhaps recording the first insider trading finding was seen as being such a milestone that His Honour was somewhat too hasty in disposing of this rogue in this fashion. The conviction certainly does not assist us greatly in resolving the almost insurmountable complexities of SIA s 128. It is interesting to note that in the Keygrowth case the other defendants, Schreuder and Buggy, were missing, so that the full weight of the courts sanction for the abuses which led to the NCSCs unacceptable conduct declaration fell upon Mitchell. Perhaps not surprisingly, an appeal has been lodged in this case.
Finally, this case may also have significance for the implications that it casts upon the viability of the new s 1005 of the Corporations Act. That section provides for civil liability for insider traders, but does not require a prior criminal conviction for insider trading before a civil action can succeed. However, a successful appeal in Keygrowth would show that one would first need to prove insider trading beyond reasonable doubt and not merely upon the balance of probabilities, as occurred in Keygrowth.
1. The 1991 De Greenlaw trial which lead to the dismissal of three insider trading charges was the first of three trials arising from these circumstances. It may be the last. The De Greenlaw case turned on the issue of materiality with Campton J finding that the word "materially" required the Crown to satisfy the jury that the purchase order for shares would "substantially" or "significantly" raise the price. See further, Pheasant B. 1991, "'Not guilty' verdict blow to regulators", Australian Financial Review, 19 February, pp. 1-2. See also Frith D. 1991, "Insider trading charges dismissed", The Weekend Australian, 23-24 March p. 31. Insider trading charges against Peter Newton were also dismissed after the prosecution admitted that on the evidence presented to the jury a conviction against De Greenlaw or Newton would not be possible.