The Federal Government is set to increase the penalties for insider trading. The Head of Clayton Utz's M&A group, John Elliott, talks to Boardroom Radio about the changes and what could be next. Click here to listen to the interview.

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David Bushby We're speaking with John Elliott who heads up the mergers and acquisitions group at Clayton Utz in Sydney. A warm welcome to you John.
JohnElliott Thank you David.
David Bushby John, insider trading is back on the legislative agenda with proposed new laws to drastically increase penalties and jail terms for insider trading convictions. Can you give us some details?
John Elliott

Yes that's right David. Parliament is currently considering a bill that will more than double the criminal penalties for insider trading.

At the moment an individual who engages in insider trading can be sent to jail for up to five years and fined up to $220,000. Under the bill the maximum jail term will double to 10 years and the maximum fine will more than double - it will be either $495,000 or three times the profit that the person made from insider trading, whichever is bigger.

There are separate penalties for corporations of course - currently a corporation that engages in insider trading can be fined up to $1.1 million and that will increase dramatically. The court, in the case of a corporation, will be able to impose a fine of the greater of $4.95 million or three times the profit or 10% of the corporation's annual turnover. So as you can see there are some really hefty increases and they are intended to send a strong signal to the market.
David Bushby So there are certainly bigger penalties upon conviction. Stepping back into the process or the tactics of prosecuting insider trading, there is an option at the moment that these cases can be pursued as either a criminal case or under the civil regime. How has that played out to date?
John Elliott

It's been quite interesting. Of course a criminal case has to be proved beyond reasonable doubt. A number of years ago it was thought that because insider trading is difficult to pin down, it was asking too much of ASIC to require it to prove it beyond a reasonable doubt. So the law was changed to allow ASIC to ask for what are called civil penalties against insider traders. These are very large fines with no jail sentences and because they are civil penalties ASIC only has to prove insider trading on the balance of probabilities.

In practice I guess even though ASIC only has to prove on the balance of probabilities, the courts have looked at the size of the penalties and have said in effect that ASIC's evidence has to be really watertight.

Faced with that, ASIC appears to have said to itself well blow this, if we are going to be put through the ringer by the court we may as well go for broke and chase insider traders with the criminal law, we're just as likely to get a result and there is the added benefit of getting a few jail sentences.

So what's happened now is that the Government appears to have come on board with this bill with the massive increase in penalties that we have been discussing.
David Bushby So John we've been speaking about the size of penalties, but that is not the only change being considered is it?
John Elliott No it's not David. The same bill that's before Parliament would give ASIC a greater ability to use phone taps when it is investigating alleged insider trading. It would also make it easier for ASIC to execute search warrants. These two aspects of the bill however are being examined by a Senate Committee so it is unclear how that will turn out for the moment.
David Bushby Of course insider trading has long been a hot topic for reform. Can you envisage further reforms going beyond increasing penalties and punishments as we have just spoken about? Any further reforms coming in the near future?
John Elliott That is a very good question. These wheels tend to move a little bit slowly so I am not sure about the near future, but is known amongst lawyers that the actual content of the insider trading laws, as distinct from the penalties themselves, do need some attention. In 2003 - so seven years ago - the Government's own advisory body CAMAC gave the Government a report on what needed to be done to fix up the laws and we are still waiting to see what, if anything, the Government will do in response to that report.
David Bushby So what sorts of things need fixing up?
John Elliott

There are quite a few problems with the current provisions and we probably need to go on too long to talk about them all, but I will just mention a couple.

At the moment it is unclear how the insider trading rules work when you buy or sell shares through a stockbroker. For example, what happens if after you give your order to the broker you unexpectedly come into possession of inside information about the shares? CAMAC has recommended that you should only be liable for insider trading if you had the inside information before you place the order.

A second issue is what appears to be a gap in the Chinese wall defence.

Under the current law a company or firm is not liable if one part of that organisation has inside information and another part of the organisation does the trading in the shares, provided that there is an information block known as a Chinese wall between those two separate parts of the organisation.

The problem is that you can also be guilty of insider trading if you have inside information about shares and advise someone else to buy or sell the shares. That's what the legislation calls procuring and there is no Chinese wall defence to that. CAMAC has recommended that the law should be amended to provide such a defence and it is certainly difficult to argue with that.
David Bushby Yeah well there are certainly some serious issues to consider and as you said we are probably out of time to go into those and thank you again for your insights today John.
John Elliott It's been a pleasure David, good talking with you.
David Bushby That was John Elliott who heads up the mergers and acquisitions group at Clayton Utz in Sydney.

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