Australia: ASIC Takes A Hard Line On Insider Trading

Last Updated: 13 February 2009
Article by Brian Moller

The Australian Competition and Securities Commission has proven its commitment to taking a strong stance against insider trading by investigating and charging the former company secretary of one of Queensland's five largest publicly listed companies with insider trading.

Former Chief Financial Officer and Company Secretary of energy giant Queensland Gas Limited (Queensland Gas), Mr Mukesh Panchal, pleaded guilty on 4 February 2009 in the District Court of Brisbane, to four contraventions of sections 1311(1) and 1043A(1) of the Corporations Act.

ASIC began its investigations after it was alleged that Mr Panchal purchased 13 parcels of shares totaling 418,148 Queensland Gas shares valued at over $1.3 million between 15 January and 1 February 2008. This was in addition to the already substantial portfolio that he received as an incentive for his employment with Queensland Gas.

Mr Panchal purchased the shares with the inside knowledge of a looming $870 million joint venture with British based firm BG Group Plc to develop liquefied gas exports to Asia. Mr Panchal requested that the ASX issue a trading halt on Queensland Gas shares, and two days later, when the deal was announced to the market on 4 February 2008, the share price soared. The ASIC alleged that Mr Panchal purchased the parcels at a time when he possessed inside information that he knew would have a material effect on the price or value of the Queensland Gas shares.

Mr Panchal's shares were frozen by the District Court of Queensland at the time of the allegation at ASIC's request under section 18 of the Proceeds of Crime Act 2002. Mr Panchal has since been ordered to pay a pecuniary penalty of $322,155.50, this being an estimate of his gain. The shares have now been released and disposed of by Mr Panchal. Queensland Gas terminated Mr Panchal's employment with the company on 28 February 2008.

This matter will return to the District Court of Brisbane for sentencing on 15 April 2009. ASIC Commissioner Belinda Gibson said that "this outcome will prove a strong deterrent against insider trading and reflects ASIC's focus last year on market integrity offences".

The case of Mukesh Panchal should serve as a harsh reminder to all corporations, their directors and company secretaries as to the importance of understanding the prohibitions on insider trading. The insider trading prohibition is designed to ensure that the market is conducted in a fair and equal manner, to prevent profiteering by those with price sensitive information not available to the general public, and to ensure that shareholders are not disadvantaged by share price manipulation based on insider knowledge.

The insider trading prohibition is contained within Part 7.10 Division 3 of the Corporations Act and:

  • applies to a person;
  • in possession of price-sensitive information;
  • that is not generally available to the public;
  • that the person knows, or ought reasonably to know; and
  • is not generally available and is materially pricesensitive.

Insider trading occurs when an insider, in possession of such inside information, uses the information to acquire or dispose of a Division 3 financial product, either directly or indirectly. Division 3 financial products include securities, interests in a managed investment scheme, stocks, bonds and debentures, superannuation products and any other financial product able to be traded on a financial market.

It is important to note that a person need only possess inside information at the time a transaction takes place – it is not necessary to prove that the person used the inside information. Similarly, whether information possessed by the insider is materially price sensitive is determined according to the "reasonable person test". The question to be asked is, would a reasonable person be taken to expect information to have a material effect on the price or value of shares if the information would, or would be likely to, influence persons in deciding whether or not to acquire or dispose of those shares?

If the insider trading prohibition applies, a person, being either a principal or an agent, must not apply for, acquire or dispose of financial products, procure another person to trade in the financial products to which the information relates, or communicate the inside information either directly or indirectly to another person likely to trade in the product.

Defences to the Insider Trading Prohibition

There are two main defences under section 1043M of the Corporations Act that a person facing criminal prosecution for a breach of the insider trading prohibition may rely upon:

  • That the information came into the person's possession in a manner that would be likely to bring it to the attention of those persons who commonly invest.
  • That the other party to the transaction knew or ought reasonably to have known of the information.

Penalties for Breach of Insider Trading Prohibition

If a Court finds that the insider trading prohibition has been breached, it may result in criminal charges under section 1311 of the Corporations Act with the maximum penalty for a person being a $220,000 fine and five years imprisonment. The Court can also impose the following two civil penalties:

1. Order a person to pay a pecuniary penalty of up to $200,000 if the breach:

  • materially prejudices the interests of acquirers and disposers of the relevant financial products;
  • materially prejudices the issuer of the relevant financial products, or members of the issuer if the issuer is a corporation; or
  • is serious.

2. Order a person to pay compensation to another person or corporation for damage suffered as a result of the contravention.

Corporations and their directors and officers should also be aware that the Court can hold liable any person who aids, abets, counsels, procures, induces, is knowingly concerned in or conspires with others to affect the contravention of the insider trading prohibition.

How to Avoid the ASIC Knocking on your Door?

In order to avoid being the subject of an ASIC investigation, corporations and company officeholders should always seek legal advice whenever information comes to hand that may be at risk of breaching the insider trading prohibition. The fate of Mukesh Panchal is a stark reminder of the serious and wide reaching implications of a breach of this prohibition for both the individual and corporation concerned.

© HopgoodGanim Lawyers

Australia's Best Value Professional Services Firm - 2005 and 2006 BRW-St.George Client Choice Awards

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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