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KEY TAKEAWAYS
Insider trading is a type of
white collar crime in Australia that attracts severe criminal
penalties, including imprisonment, fine and convictions which can
have lifelong consequences. It is the practice of deriving a
benefit or causing a loss as a result of using otherwise
non-publicly available information to trade in stock exchange of
buying or selling shares or other securities of listed
companies.
INSIDER TRADING MEANING?
Insider trading is stock exchange trading to derive a benefit
by accessing confidential information that isn’t available in
the public. It includes buying, selling or trading shares or other
securities such as bonds or stock options of listed companies from
price-sensitive unpublished information that has the potential to
affect the stock price that has not yet been disclosed.
Insider trading is only legal if the trading takes place on the
foundation of publicly available information.
The below is an article written by our
white collar crime lawyers Sydney team. For specific legal
advice on insider trading laws, please contact our office to speak
to our lawyers.
IS INSIDER TRADING ILLEGAL IN AUSTRALIA?
Why is insider trading illegal? It is illegal
to inside trade only when a person engages in buying or selling
stocks on insider information that isn’t yet publicly available
and is therefore against the law because it gives an unfair
advantage at the expense of others, and greatly benefiting the
inside trader(s) who have practiced in this conduct.
Insider Trading Penalties
What exactly is the punishment for inside trading in Australia?
The maximum penalty applicable to offences of insider trading is 15
years imprisonment, prescribed by schedule 3 of the
Corporations Act 2001 (Cth).
For a corporation, the maximum penalty is the greater of $11.1
million, three times the profit gained, or loss avoided or 10 per
cent of the company’s annual turnover in the relevant
period.
Who Investigates Insider Trading in
Australia?
The offence of insider trading involves a person or corporation
utilising information that is not available to the public, in order
to make a profit or avoid losses.
The Australian Securities and Investments Commission
(‘ASIC’) may elect to pursue either civil or criminal
penalties when investigating insider trading offences and can
choose to refer matters to the Commonwealth Director of Public
Prosecutions (‘CDPP’).
The Australian Federal Police or AFP may also investigate and
prosecute insider trading in Australia.
Policy reasons behind prohibiting insider trading include that
it gives persons or corporations involved unfair advantages in the
market and can lead to incredibly unethical business practices.
Insider trading is criminalised under
section 1043A of the Corporations Act 2001 (Cth).
It states that if a person possesses inside information, and
they know or reasonably ought to know that the information is
inside information, they must not:
- apply for, acquire, or dispose of financial products or enter
an agreement to do so, - procure another person to apply for, acquire or dispose of
financial products or enter an agreement to do so, - directly or indirectly, communicate the information to another
person they know or reasonably ought to know would do the
aforementioned actions.
Inside information is defined to include information that is not
generally available.
If the information were to be generally available, a reasonable
person would expect it to have a material effect on the price or
value of financial products.
Information will be deemed to have a ‘material effect’
where the information would, or would be likely to, influence
persons who commonly acquire financial products, in deciding
whether or not to acquire or dispose of such financial
products.
However, exceptions include:
- underwriters (those working in the finance industry who assess,
evaluate, assume risk regarding payments) applying for or acquiring
products under an agreement; - the acquisition of products under a requirement imposed by the
Act; - the communication of information as under a requirement imposed
by a Commonwealth, State or Territory government, or the
Corporations Act itself, - when a company had arrangements in place that could reasonably
be expected to ensure information was not communicated, such as
‘Chinese Walls’.
A defence may also be presented where the person to whom the
information was communicated, was already aware of such
information.
Other defences pertain to specific types of financial products,
such as insurance, where there is a legal obligation regarding the
disclosure of certain information.
The onus is placed on the prosecution to prove that any defences
raised, do not apply, by negating it beyond reasonable doubt.
WHAT ARE EXAMPLES OF INSIDER TRADING? | HOW DO INSIDER TRADERS
GET CAUGHT?
The below are some examples of insider trading. Insider traders
often get caught from tip-offs to prosecuting authorities such as
the Australian Federal Police or Australian Securities and
Investments Commission (ASIC).
Example of Insider Trading #1
The case of 24-year-old Lukas Kamay remains the largest insider
trading prosecution in Australia.
Kamay was a currency trader at the National Australia Bank, who
was good friends with 25-year-old Christopher Hill, who worked at
the Australian Bureau of Statistics.
The pair met at Monash University where they were both studying
commerce and economics.
After university, with both men landing dream roles in their
respective positions, the pair had a meeting in which Hill agreed
to use his position at the ABS headquarters in Canberra to send
Kamay employment, trade, and retail figures moments before they
were released to the market.
Kamay would then utilise the data to make trades on currency
markets based on which direction the Australian dollar was expected
to go.
Whilst the pair originally agreed to making a profit limited to
$200,000 split between them, Kamay opened three separate secret
trading accounts, without telling Hill.
Kamay ultimately made more than $7.2 million over nine months,
even purchasing a $2.57 million apartment on the TV program The
Block.
Kamay and Hill were arrested in May 2015, after a four-month
investigation by ASIC and the Australian Federal Police which was
sparked by a tip-off from a stockbroker.
Stockbroker, Joel Murphy had noticed the incredibly high success
rate of Kamay’s transactions, and that they all involved
statistical data.
Murphy went through Kamay’s Facebook friends, and found
Hill, who worked for the ABS.
He then found out that Hill worked in the market sensitive news
release team and rang the ASIC to report the pair.
Kamay was sentenced to seven years and three months in jail with
a non-parole period of four years and six months. Hill received a
three year and three-month imprisonment sentence.
The money involved was restrained by the AFP-led Criminal Assets
Confiscation Taskforce, and officially forfeited to the
Commonwealth, upon the pair’s sentence.
Kamay’s attempt to appeal the severity of his sentence was
dismissed in 2015, with ASIC permanently banning him from providing
financial services in Australia in
2017.
Example of Insider Trading #2
Another example of insider trading is if a board member of a
corporation has knowledge not yet publicly available that a merger
is about to be announced which will likely cause the stocks of the
company to go very high up. That board member, with that knowledge,
purchases lots of shares in the company without reporting the trade
to the Securities and Exchange Commission and does all this before
the news goes public.
Example of Insider Trading #3
A government worker learns of the news of a new regulation being
passes likely to benefit an electrical company. The worker
discreetly purchases shares in the electrical company before
influencing the regulation to get passed through quickly and makes
a gain as a result.
Example of Insider Trading #4
A company employee overhears the Chief Financial Officer talking
about the company going into bankruptcy due to financial issues.
The employee then tells his friend who owns shares in that company,
resulting in the friend to swiftly sell his shares to avoid a
loss.
Example of Insider Trading #5
A solicitor who represents a chief executive officer (CEO) of a
company discovers during a confidential discussion that the CEO is
about to be charged for a raft of fraud offences. The solicitor
sells a significant number of his shares in the company knowing
that after the CEO gets charged for fraud, the company’s stock
price will go down.
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