Here is the next exciting installment for those people who read my post of a few days ago on insider trading.
I agonised over whether or not it was worth making the proposal that there be a civil remedy against companies where it can be shown – according to civil standards of proof (ie on the balance of probabilities rather than beyond reasonable doubt) – that a share trader was disadvantaged by a companies neither releasing market sensitive information nor halting trading in their shares.
I think at first blush it is entirely reasonable for there to be such a remedy. The odds are still heavily stacked against the shareholder on account of the scandalously high cost of litigation. The company will almost always be much much larger financially than the shareholder.
Anyway, my old torts teacher and some law professors I spoke to all thought that it was a worthwhile case to make – without saying they agreed with it.
If I’m wrong it will be because, under such a regime company officials are often unsure of whether or not to release some information. It might therefore be appropriate to impose some threshold, so that – for instance – the remedy is only availlable where the information could reasonably be expected to move the market by 10%.
Thanks to James Farrell who suggested I explain insider trading at the outset of the column. I pinched his example without shame, but not without acknoweldgement – at least where it is possible, namely here.
Anyway, for better or worse, here is the column.
Imagine if you hired a real estate agent to sell your home and he knew that a coming rezoning would double its value. He doesn’t tell you, but he gets his cousin to buy it. That’s insider trading. And that’s the can of worms that Steve Vizard opened up.
Insider trading is for those privileged few (or is it many?) for whom privilege is not enough unless it is also used as a licence to exploit. Like most duplicitous conduct, it’s a drag on our economy. Stock market returns must be higher increasing businesses’ cost of capital to compensate outsiders for the poor terms on which they trade stock with insiders.
Inevitably some have argued the extreme case for legalising insider trading because it’s so difficult to police and to draw the line between insider trading and legitimate trading by insiders. But securing convictions and/or drawing the line is difficult for most white collar crimes. Should we dicriminalise them all?
Without vigorous attempts to secure market transparency there’d be a huge loss of confidence and so of market efficiency.
There’s also a deeper issue of ethics and expediency. One of the distinguishing characteristics of advanced and prosperous societies its out of fashion to call them ‘civilisations’ as opposed to tribal societies is the distinction between the interests of the ‘office’ and the person holding it.
As an office-holder you incur a duty to act on behalf of others however much you might prefer to advantage yourself or your family. It’s what you know, not who you know. And I’m not just talking about government offices. It’s one of the foundations of our society and of our economic prosperity. Employees act for their employers, school councilors act for their schools. And company officials act for their company and thus for its shareholders.
Of course these responsibilities are often flouted. But they’re honoured in the breach in our outrage and support of legal sanctions for too flagrant betrayals.
There’s an odd paradox though. The ASX knows that a lot of insider trading takes place. It can even tell you when it’s taken place for instance in most cases where share prices in a company move towards the value they will hold as a result of some public announcement before that announcement is made.
But to secure a criminal conviction one must prove wrongdoing by a specific accused person beyond reasonable doubt. Now a lot of trading on insider information is not done by insiders. It’s done by their associates who pick up information at the club and on the golf course. The information might be passed on just to impress, or as part of a rich barter economy of favours. It’s not what they know it’s who they know.
And if an analyst or broker recommends buying a stock, who can prove beyond reasonable doubt that they came to their view by unacceptable means? ASIC says that the difficulty of obtaining a criminal conviction was why it plumped for civil rather than criminal action against the very silly Mr Vizard.
But can we do more? In about a third of recent cases in which price sensitive information was released in a recent informal study of the issue, there was strong evidence of insider trading with share prices moving to reflect information before it was publicly released.
Now companies can suspend trading in their own shares pending release of market sensitive information. If you think about it, if you traded shares at a disadvantage during a period in which the company had inside information which appears to have found its way to market before it was publicly released, then it seems more likely than not (the civil standard of proof) that you’ve suffered from insider trading.
At present you’d fall between two stools. S 1043L of the Corporations Act gives you a civil remedy (attracting the lower standard of proof), but you have to enforce it against the individual who was at fault and if they’re less silly than Mr Vizard you won’t know who they were.
There’s also the common law of negligence. If a firm’s in possession of information which would move its share-price by a substantial margin and it leaks out, then I reckon the company owes you. Now to succeed in an action of negligence, the plaintiff must prove duty, breach and damage. In this case the latter two might be demonstrated. But as I understand the law an individual shareholder could not prove that those in the company had a duty to them only that they had a duty to the company as a corporate entity.
I find this surprising. In the grand daddy of legal cases, probably the most famous one of them all, a firm was held liable for a dead snail it inadvertently bottled with its ginger beer. Donahue v Stevenson established the proposition that a firm’s customers are, in Lord Atkin’s famous expression the firm’s “neighbours”.
They have a close enough relationship with the firm that they are owed a duty of care – because those in the firm can reasonably forsee the damage their negligence can inflict on them. Now almost all companies have a lot more customers than they have shareholders, but the law holds that their relationship with the company they jointly own is too distant to bring forward a duty of care.
If it became possible for shareholders to sue firms where those firms might reasonably have protected them from insider trading, corporate Australia’s complaisance towards insider trading could take a healthy hit.
It’s no panacea. The principles are harder to apply in the common case where more than one firm has the information, for instance where one company is negotiating a supply contract with another. But a little practice applying them in the simpler cases might help us understand how best to extend them.
It might help us moderate a whole culture of insider benefits.
Indeed Steve Vizard picked up some shares just the other day. He picked up shares in a Tattersalls float for $2.90. It was all perfectly legal. They were a special allocation for special people including former Victorian premier Jeff Kennett, Liberal Party powerbroker Michael Kroger, BHP Billiton chairman Don Argus and Collingwood president Eddie McGuire and lots of others. The shares rose as high as $3.62 on the float and no doubt some of the special people bailed out so they could move onto their next meal.
It wasn’t what they knew, it was who they knew.