Criticism of ASIC has reached new heights following its
decision not to prosecute David Jones' directors, Leigh Clapham
and Steve Vamos, for insider trading. However, ASIC appears to have
thoroughly investigated the matter and, considering the
Commission's strong track record when it does prosecute, the
decision not to proceed is most likely well-founded.
The facts relating to the David Jones share trades are as
follows. On 29 October 2013, David Jones directors Leigh Clapham
and Steve Vamos bought shares in David Jones. The day before, Myer
had approached the David Jones board with a merger of equals
takeover offer that had not been disclosed to the ASX.
Three days after the share trades, David Jones released positive
quarterly sales results, following which shares in David Jones
surged 7%. This prompted immediate suggestions of insider trading
by Clapham and Vamos.
The ensuing disapproval from David Jones shareholders saw them
vote down the remuneration report in protest at its AGM that
November, and receive an unreserved apology from chairman Peter
Mason for David Jones' conduct. Unsurprisingly, ASIC commenced
an investigation into the matter.
ASIC's efforts against insider trading are part of its
responsibility to protect the integrity of our markets. While
insider trading prosecutions are just one component of its market
integrity responsibilities, they are undoubtedly the media
measuring-stick for ASIC's effectiveness.
The media and the reading public perceive insider trading as the
epitome of market misconduct. Even so, it isn't since Steve
Vizard's prosecution for breach of his duties as a Telstra
director (relating to three share trades that the media widely
condemned as insider trading) that we have witnessed such a media
furore in this regard.
This furore perhaps sparked ASIC's decision to take the
unusual step of openly explaining its reasoning behind the decision
not to proceed against Clapham and Vamos. ASIC confirmed it has
provided those involved with a "no further action"
While assuring the public that the "no further action"
letter is not an exoneration, ASIC also took the opportunity to
explain the general process that it follows in deciding whether or
not to prosecute following an investigation.
Under corporations law, ASIC must be confident of being able to
prove four points before it brings proceedings:
that the person possessed inside information;
that the information was not generally available;
that a reasonable person would expect the information to have
had a material effect on the value of the share (had it been
generally available); and
that the person knew, or ought reasonably to have known, that
the information was material and not publicly available.
In this case, Clapham and Vamos stated they bought the shares in
order to support the company in the wake of CEO Paul Zahra's
announcement that he would shortly resign.
Without evidence to the contrary, this left ASIC with the task
of proving the two directors ought reasonably to have known that
their information in regard to the upcoming financial results of
David Jones was material. ASIC concluded that evidence amounting to
proof wasn't available.
Despite the widely reported shock and indignation at the
conclusion, ASIC appears to have thoroughly investigated the David
Jones matter and decided there is no case for taking further
action. ASIC's track record is strong when it does push the
button on prosecutions: since 2009, ASIC has brought 32 actions,
with 23 successes and several matters still before the courts. This
suggests the decision not to proceed is well-founded.
Collecting the scalps of rogue traders is undoubtedly an
effective way of protecting market integrity. However, the roles
played by ASIC's investigations themselves should not be
overlooked. No company wants ASIC knocking on its door and
launching an investigation into insider trading. This threat of
investigation can often be a stronger stick than its execution.
Australia's insider trading prohibitions and market
integrity rules have evolved following specific inquiries and
reforms to the financial services industry. The evolution continues
still, with brokers as of January 2013 being required to report
"suspicious activity" to ASIC.
Insider trading is difficult to prosecute, but this is a product
of the Commonwealth government striking a balance between
prosecuting criminal behaviour and preserving the legal rights of
Australians. The lack of a prosecution in the David Jones matter
shouldn't in itself be taken to suggest any flaw in the
regulation of our markets, and does not suggest there is a case for
law reform in this area.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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