1 Corporate liability for insider trading
An introduction
The regulation of insider trading is a controversial and complex area of corporate law. In essence, insider trading is the act of trading in financial products (such as shares or other securities) while in possession of relevant non-public, price-sensitive information.
Insider trading is generally acknowledged, if not universally accepted, as a significant threat to market integrity, which is widely regarded as an essential requirement for the proper, efficient functioning of securities markets.1 Indeed, the accepted rationale for prohibiting insider trading in Australia is to protect and maintain market integrity.2 However, regulators are regularly criticised for a perceived lack of enforcement action in relation to insider trading. Indeed, although there has been a marked increase in the number of individual offenders convicted of insider trading in recent years, there has never been a successful criminal prosecution of a corporation for insider trading in Australia, and just one successful set of civil penalty proceedings, in which liability for insider trading was admitted.3
While commonly referred to as âinsiderâ trading, the prohibition under Australian law is not limited to those who might generally be classified as corporate insiders â such as directors, senior executives or other officers â and it is not limited to direct trading by the relevant person, but also encompasses the related conduct of the procuring of trading, and tipping. The term âinsider tradingâ is used in this context throughout this book. Additionally, the inclusive term âcorporationâ is used, rather than âcompanyâ or âbody corporateâ.4
Background to the prohibition of insider trading
Insider trading has been the subject of significant international attention and scrutiny over recent decades. The United States was the first country to formally prohibit insider trading.5 After the Second World War, Japan was pressured to adopt insider trading regulations modelled on the laws of the United States.6 Other countries gradually began to adopt laws regulating insider trading â in Australia, insider trading was first prohibited under statute in the 1970s7 â and the vast majority of countries with securities markets now have legislation which prohibits insider trading.8 There appear to be a number of reasons for the rapid increase in the enactment of laws prohibiting insider trading. Countries within the European Union were obliged to adopt insider trading laws as a result of a binding directive of the European Council issued in 1989.9 Other countries enacted insider trading laws as they sought to make their stock exchanges more competitive internationally, often in response to the enactment of similar laws in other jurisdictions.10 Although the insider trading regimes of different countries do not have the same characteristics, and the underlying reasons for the prohibition of insider trading vary, more than 90 countries prohibit insider trading,11 with all developed nations and 80 per cent of nations with emerging securities markets regulating this form of conduct.12 Additionally, the International Organisation of Securities Commissions views the regulation of insider trading as a âcornerstone of securities trading lawsâ.13
Despite the widespread adoption of insider trading laws internationally, insider trading has a reputation as a notoriously difficult offence to successfully detect and prosecute, and the regulation of insider trading continues to be the subject of ongoing debate. Some members of the financial services industry openly state that they believe insider trading is both rife and increasing, particularly when markets are volatile,14 and some commentators consider insider trading to be unavoidable and endemic to securities markets.15 Indeed, some anecdotal evidence appears to indicate that insider trading in shares in the period immediately prior to takeover announcements causes rises in share prices of, on average, 10 per cent.16 Empirical evidence, both within Australia and overseas, seems to indicate that corporate insiders are able to earn abnormal profits and avoid abnormal losses through share trading.17
The first conviction for insider trading in Australia did not occur until 1991,18 and further convictions were obtained intermittently, with only four additional convictions for insider trading in the following ten years. Since that time, the frequency and number of insider trading prosecutions and convictions has significantly increased, and greater enforcement action has been taken, particularly in recent years. However, there have been no successful criminal proceedings brought against a corporation for insider trading in Australia, or a successful set of contested civil penalty proceedings. In 2007, ASIC, the local regulator, brought civil penalty proceedings for insider trading against a corporation, the Australian subsidiary of the global investment bank, Citigroup, but those proceedings were unsuccessful.19 A set of civil penalty proceedings brought against Hochtief Actiengesellschaft by ASIC in 2016, in which liability for insider trading was admitted, was the first Australian case in which a corporation has been found liable for insider trading.20
As insider trading has the potential to create major negative impacts on global securities markets, the application of insider trading laws to corporations is a significant issue warranting further research and attention, because of the potential to reduce insider trading and improve the ability of regulators to take appropriate enforcement action. The reform of insider trading laws as they apply to corporations offers Australia the opportunity to adopt laws of international significance, and which would enable Australiaâs securities markets to remain globally competitive.
There may be a number of possible reasons why there has never been a successful prosecution or successful set of contested civil penalty proceedings for insider trading brought against a corporation: (i) corporations may not engage in insider trading â insider trading may only be engaged in by individuals in circumstances that would not result in a corporation having any liability for insider trading; (ii) corporations may engage in insider trading, but prosecutors and regulators may be reluctant to pursue insider trading cases against corporations due to uncertainties in the law and difficulties in applying insider trading laws to corporations; or (iii) corporations may engage in insider trading, but in circumstances where individuals associated with the relevant corporations may also have liability for insider trading, so that prosecutors and regulators elect to take action against those individuals, rather than to pursue the corporation.
Although it might technically be possible that corporations do not engage in insider trading, the idea that insider trading is only engaged in by individuals in circumstances that would not result in a corporation having any liability is less than compelling. Why would it be the case that individuals engage in insider trading and not corporations? The majority of Australian insider trading cases have involved conduct which occurred in a corporate context and the admissions of insider trading by Hochtief Aktiengesellschaft refute the suggestion that corporations do not engage in insider trading. It can also be observed that in certain circumstances where an individual has been successfully prosecuted for insider trading, a corporation may also have had potential liability for the offence.21 Insider trading may occur in circumstances where a corporation could be found to have engaged in that conduct, but prosecutors and regulators may be reluctant to take enforcement action, or may prefer to take action against individual offenders instead. Indeed, ASIC has noted, in the context of the general enforcement of corporate crime:
We may take action against corporations, individuals, or both, depending on the circumstances of the case. For example, taking action against individuals who are directly responsible or in charge, instead of corporations, may reduce the incentive for those individuals and others in similar positions to engage in like misconduct given the potential impact on their reputation and livelihood. This approach is likely to have a greater deterrent effect.22
However, if difficulties in the application of insider trading laws to corporations can be identified and resolved, appropriate insider trading enforcement action could be more effectively brought against corporations, increasing the general deterrent effect for all potential offenders.
Even though the majority of jurisdictions with insider trading laws also apply those laws to corporations, there are no recorded instances worldwide of a corporation being convicted in a criminal prosecution, with only a small number of successful civil proceedings for insider trading. Accordingly, while this book focuses upon the position under Australian law, the application of insider trading laws to corporations is a global issue. With insider trading acknowledged as a global problem with the potential to affect all securities markets, there is regular co-operation between the various international regulators responsible for insider trading enforcement to confront issues in detecting and prosecuting insider trading in their respect...