A swathe of insider trader and market manipulation cases has revealed how white collar criminals are using complex financial products including contracts for difference (CFD) to avoid detection.
Lawyers said the highly leverage nature of CFDs made them particularly tempting for younger traders because they require far less capital and can reap larger profits than if the same amount was invested in underlying shares. Recent cases have reflected an increased popularity of CFDs, including that of Nigel Derek Heath, 51, of Wahroonga in Sydney who pleaded guilty to two market manipulation charges at the Downing Centre Local Court on Tuesday.
The charges against the experienced day trader – who had a $1.4 million CFD portfolio and a masters in law – concerned trades in four resource companies between February 16, 2012 and October 11, 2013.
Geoff Hoffman, partner in charge at Clayton Utz in Sydney said CFDs gave traders economic exposure to movements in a share price without actually owning shares in a particular stock.
They could be exploited by anyone who was confident about the direction a stock was going to move, he said.
Insider traders were also attracted to contracts for difference because they believed the trades would be harder for regulators to detect.
But Mr Hoffman said many came undone because the investment bank that sold the CFD would ordinarily hedge their position.
'THEY THINK THEY WON'T GET CAUGHT'
"They think they won't get caught. And were it not for the hedging activity, it might be unlikely that it would be detected," Mr Hoffman said.
"It's the order the bank puts into the market to execute the hedge that throws a red flag up with the regulators about a big buy that's occurred immediately before a big announcement."
Allens partner Matthew McLennan said CFDs were attractive to young traders who did not have access to large amounts of capital.
"If you own the shares it puts a natural limit on how much you can gain," Mr McLennan said. "Whereas with a CFD, or some other form of leverage, you increase your upside substantially and risk a lot less capital."
Directors had obligations to disclose their CFDs just as any share holding. But directors could also take advantage of CFDs because they did not involve registering a transfer, and could therefore have a better chance of the trades escaping detection by the company, Mr McLennan said.
Norton Rose Fulbright partner David Porter, said the initial margin that traders took was often between 3 per cent and 30 per cent of an actual share price.
Mr Porter worked on a case involving Sonray Capital Markets, which provided advice on CFDs until it collapsed in 2010 owing more than $46 million.
READILY AVAILABLE, MANY PRODUCTS
The company's former sole director Russell Andrew Johnson, was sentenced to 6˝ years jail for false accounting, theft and deception and conspiracy to steal in April while its former chief executive Scott Kenneth Murray, was sentenced to a non-parole period of two years and six months for 10 similar charges in October 2011.
Mr Porter said what made CFDs attractive was that they were readily available in any number of over-the-counter products including shares, currencies and futures.
"They are harder to detect because they don't involve share registers," he said. "You can just enter into some over-the-counter contract."
Ashurst partner Jonathan Gordon said another attraction of CFDs was that they could also be used to establish a short position.
For example if a person has inside information which they think will ultimately lead to a fall in the share price, the person may choose to take a short CFD position to profit from a later share price fall, Mr Gordon said.
He said while many traders might not know that the insider dealing laws applied to CFDs and other derivatives, and not just to shares, the recent success of ASIC's enforcement actions would have now made it clear.
"Traders should be aware that ASIC has very sophisticated surveillance systems in place to detect unusual trading activity, including through CFDs," Mr Gordon said.
SUSPICIOUS ACTIVITY PASSED ON
Head of compliance at provider IG Natalie Beirne said it also had legal obligations to monitor trading for market abuse and insider trading and any information about suspicious activity was passed directly to ASIC.
Ms Beirne said it needed efficient CFD markets for the products to be as transparent and viable as possible.
Though dissimilar to a share registry, IG held information about who held CFDs that could be readily provided to authorities, she said.
"Our dealing desk monitors transactions processed, they are familiar with what is going on in the market, announcements and trading halts, and will report anything that is suspicious," Ms Beirne said.
It also had an automated monitoring system that picked up unusual trading patterns and large trades.
Australian Institute of Company Directors Steve Burrell, general manager of communications said companies could impose additional prohibitions or restrictions on CFD trading and require directors to disclose trades under their internal trading policies.
"A trading policy must also be lodged with the ASX for disclosure to the market so any restrictions on trading are public knowledge," Mr Burrell said.
ASIC DEVOTING RESOURCES TO THE ISSUE
An ASIC spokesman Andre Khoury said it pursued insider trading matters involving all financial products and it was just as possible to get caught in the CFD market as in the physical market.
"ASIC is devoting its resources to confronting the issue and has the systems to effectively detect, analyse and investigate potential cases of insider trading," Mr Khoury said.
The roll-out of ASIC's market surveillance system in 2010 made it easier and quicker to identify suspicious trading by connecting patterns and relationships.
It could make inquiries into the listed derivatives space that it previously could not pursue because it did not have the information, he said.
Trading by directors was subject to more scrutiny because of the expectation they possess market sensitive information unavailable to the rest of the market.
"The message is simple – we are watching trades on Australia's financial markets and can detect misconduct faster and more easily than ever before."
ASIC had brought more than 33 cases since 2009 that resulted in more than 20 convictions.