Australia: Insider Trading: What can we learn from Australia's first corporate penalty?

Earlier this year we published two articles discussing recent insider trading cases against individuals. Since then, an Australian court has, for the first time, determined the civil penalty for a corporation's breach of the law against insider trading.

The case was ASIC v Hochtief Aktiengesellschaft [2016] FCA 1489. The judgment was delivered by Justice Wigney of the Federal Court, who as a barrister, had acquired considerable experience in corporate criminal defence and prosecution.

ASIC claimed that Hochtief AG had engaged in insider trading by 'procuring' its Australian subsidiary to acquire shares in another company, Leighton Holdings. Hochtief was already a substantial shareholder in Leighton, holding more than 50% of issued and voting shares. At the hearing in February 2016, Hochtief admitted insider trading in a statement of facts agreed with ASIC.

We don't intend to focus on the details of the conduct here – although it is outlined below – but to look at what Justice Wigney said in determining the penalty.

KEY LESSONS FROM THIS DECISION

  • Reputation counts:
  • Hochtief argued that its good corporate reputation and standing should count in its favour. ASIC pointed to criminal cases involving individuals – where the person's good character was not taken into account – and argued that this should also apply to corporations. The Court rejected this. It noted that an individual's good reputation was often the very factor which resulted in them being entrusted with inside information in the first place and allowed them to play on that information. This was not the case with corporations where there had been no dishonesty or deliberate or intentional disregard of the law.

  • Meaningful contrition and process improvement counts:
  • Factors influencing the penalty were the personal attendance of the German-based General Counsel before the court to deliver a public apology, the disgorgement by the company (before any penalty was imposed) of the notional profits achieved from the transaction, and the improvements in compliance and education put in place after the contravention.

  • Not every incident of insider trading is serious enough to warrant a penalty...but it usually will be.
  • Even where a contravention is admitted, the maximum penalty can only be imposed if the contravention is 'serious'. Although the Court accepted that Hochtief's contravention involved inadvertence and carelessness, it was nevertheless serious – and in forming that view, the court was required to consider the contravention's potential or actual consequences.

    ASIC argued that any contravention would almost by definition be serious. The court rejected this, identifying some contraventions that could be regarded as trivial or inconsequential. For example, a contravention by a financially unsophisticated person who unintentionally encouraged someone else to acquire a small parcel of shares (even if they were never acquired) in an inconsequential company, without any awareness that the inside information they had was not generally available.

  • Principles in individual criminal prosecutions don't always apply to civil penalty cases:
  • This was a civil penalty case rather than a criminal case, but on several occasions ASIC sought to rely on criminal law principles. The Court did not accept that a court, when deciding whether a contravention was 'serious' in order to impose a civil penalty, would be assisted by the observations of a sentencing judge in a criminal case as to the seriousness of the criminal behaviour. The Court pointed to the very clear line between civil and criminal matters emphasised recently by the High Court in Commonwealth v Director, Fair Work Building Industry Inspectorate [2015] HCA 46 (see our associated article). However, in some other aspects, the application of criminal principles is appropriate.

  • Size isn't everything, but it is something:
  • The fact that a contravening corporation is large with vast resources does not of itself mean that a significant penalty must be imposed. The size of the penalty is based on achieving deterrence. The amount required to achieve this will be larger where a company has great resources.

DETERMINING THE PENALTY

The court had to determine the appropriate penalty to impose, where the maximum penalty was $1 million. ASIC said $600,000. Hochtief said $100,000.

The court considered the relevant principles, which included the seriousness of the conduct. The judgment usefully emphasised some important points (in addition to those above) that often get missed:

  • Criminal penalties are associated with retribution and rehabilitation. The purpose of a civil penalty is primarily, if not wholly, protective in promoting the public interest in compliance.
  • The principal object of a civil penalty is to put a price on a contravention, sufficiently high to deter repetition by the relevant corporation and others who might be tempted to contravene.
  • The penalty must be high enough that the individual and the public at large do not regard it as an acceptable cost of 'doing business'.
  • With insider trading, general deterrence has a high degree of prominence in determining the amount of penalty – as there is a real public benefit in protecting the integrity and efficacy of the market.

In brief, factors which played on the Court's mind in considering the seriousness of the contravention were:

  • the involvement of very senior officers of the company;
  • the lack of a comprehensive compliance system, procedures or training in place (other than an ad hoc procedure to deal with the specific transaction); and
  • a lack of corporate education.

Factors pointing towards the contravention being less serious were that there was no dishonest, deliberate or reckless conduct on the part of any relevant person, and it could be fairly characterised as involving inadvertence and carelessness.

The conduct was significantly less serious than a contravention involving actual knowledge that the information that was possessed was inside information, and deliberate conduct in defiance of the insider trading prohibition – however, it was not a simple mistake or 'mere carelessness'.

The court settled on a penalty of $400,000.

REVISIT PREVENTATIVE MEASURES

It is clear that Hochtief was aware of the insider trading risk and had taken steps to prevent it occurring, when the arrangements were first put in place. When circumstances change, protective mechanisms need to be revisited to ensure they still work. In this area, the "set and forget" can have a real downside.

THE CONDUCT

Hochtief had implemented a plan to increase its shareholding to 69.9% of the ordinary shares in Leighton by the end of January 2016, under the 'creep exception' in the Corporations Act.

Steps were taken to ensure that material price-sensitive information did not pass from those Hochtief directors who were also directors of Leighton, to the individuals who were instructed (by a written standing instruction) to undertake the creeping acquisition. An information barrier was put in place and instructions given to ensure that the individuals undertaking the acquisition did not become aware of and did not discuss the affairs of Leighton with any officer or employee of Hochtief AG or Hochtief Australia.

Circumstances changed, and for unconnected reasons the Hochtief directors who were also Leighton directors varied the creeping acquisition instructions to permit the acquisition of shares over an additional 14-day period. At the time of the variation those directors possessed price-sensitive material information not known to the public.

The Court considered the extent and duration of the contravening conduct when determining the penalty.

ASIC unsuccessfully argued that as the variation of the instructions to acquire shares occurred before the expiry of the initial authorised period, any acquisition of any shares after that initial authorisation was 'procured' under the amended instruction and therefore was to be viewed as insider trading.

Hochtief successfully argued that the earlier instructions authorised all purchases up to 30 January 2016 and the only additional purchases 'procured' as the result of the amended instruction were those made after that date. Accordingly, the contravening conduct concerned only one day's trading rather than four days' trading and acquisitions.

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.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.