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Hanlong insider trading case will test ASIC’s resolve

Insider trading detection in Australia has evolved, but ASIC still needs a win. AAP

Five senior executives of the Chinese-owned investor Hanlong Mining have had assets frozen after the Australian Securities and Investments Commission (ASIC) launched an investigation into alleged insider trading.

Hanlong is currently involved in takeover bids Australia-based mining groups Sundance Resources and Bannerman Resources.

The executives are alleged to have been involved with highly lucrative trades in the takeover targets’ shares and derivatives before the bids were announced.

The case comes after the highly publicised jailing of Rio Tinto executive Stern Hu on bribery charges ignited diplomatic tensions.

It is a high-stakes case for the regulator, which has a patchy record when it comes to successful insider trading prosecutions.

It will also test ASIC’s new market supervision role, which it took over from the Australian Securities Exchange (ASX) earlier this year.

So just what constitutes insider trading and how well does our regulatory system police it? Juliette Overland, senior lecturer in business law at the University of Sydney Business School explains why ASIC needs a win.

How has ASIC’s new market supervision role helped it detect these alleged cases of insider trading?

The fact that ASIC now has the market supervision role, which used to belong to the ASX, should enable it to act more quickly.

In the past ASIC was dependent on the ASX, or other bodies, notifying it of suspicious trading and then acting on it.

ASIC has taken a number of employees who previously worked for the ASX in market surveillance and built its own team, so this now happens internally at ASIC. ASIC has control of the surveillance technology now, and while those technologies are very detailed and sophisticated, the regulator responsible for mounting the case can see what is occurring, or has occurred, without having to rely on notification from an external body.

In a case such as this, where there appear to be a concern that people might flee the jurisdiction, ASIC’s new powers may have helped its chances of success in being able to secure a prosecution in this case.

The details are not yet entire clear in this case, but generally speaking, how does ASIC go about detecting insider trading?

Because so many insider trading cases occur within the context of corporate takeovers and takeover announcements, both ASIC and previously the ASX have had a policy of reviewing prior trading in relevant shares and securities.

They do this for shares in the companies that are involved in the bid, and related derivatives, which appears to be where the alleged insider trading has occurred in the Hanlong case.

They generally go back over a period of between three and 10 days prior to the announcement of the takeover and look for any unusual trades – for instance, where there has been an unusual number or volume of trades, it could mean somebody knows something that isn’t publicly available.

They have very sophisticated formulas and algorithms for calculating what – for a particular company or security – is an unusual volume of trading, or number of trades.

This appears to be what they have done in this case.

How successful has ASIC been in proving liability or guilt in these sorts of investigations?

In terms of successful cases, it has not always had a good run. It has had some big - and very public - losses which has led to a lot of criticism and scrutiny.

The Citigroup civil case for insider trading, which ASIC started in 2006 and lost in 2007, was particularly bad for ASIC because it came at a time when ASIC hoped to demonstrate an improved rate of success in insider trading cases.

If the proceedings against Citigroup had been successful, it would have been the first time a company had ever been found liable for insider trading in Australia.

There were multiple counts of insider trading alleged against Citigroup, and ASIC lost on every one in the Federal Court.

The previous big loss was the prosecution of businessman Steve Vizard in 2005, which ASIC had wanted to run as a criminal proceeding, but the Director of Public Prosecutions (DPP) declined to take it on as a criminal proceeding.

ASIC took on the case itself as a civil action, but civil proceedings were then limited to a breach of directors’ duties. Vizard admitted liability for the civil action but there was a view at the time that he should have faced a criminal prosecution and that the DPP might have been willing to take it on if a better case could have been mounted.

Then Federal Treasurer, Peter Costello was also publicly critical of ASIC in the absence of a criminal prosecution in what appeared to be a clear breach of the insider trading laws.

ASIC has had some smaller successes since, but it will be hoping for some large public successes and this Hanlong case, if successful, may enable ASIC to demonstrate additional credibility in its role in enforcing market integrity.

Is this failure to bring successful actions due to deficiencies within ASIC itself, or are there limitations within the relevant legislation?

There are a number of inherent difficulties in successfully prosecuting insider trading.

The first is that it is hard to detect the trading itself. For physical offences, for example murder, there a body or some other kind of physical evidence to indicate a crime has taken place.

Share trading happens everyday, with millions of transactions occurring without wrongdoing. Demonstrating that someone is trading with inside information is a very difficult thing to prove. While there is technology to pick up on unusual trades, if the trading falls within a range that appears to be normal it may not be detected in the absence of a whistle-blower or other evidence.

The second difficulty is that when the proceedings actually begin, it is also very hard to prove what somebody actually knew.

The legislation in very strict in that respect. It requires proof of knowledge, not only that the person had the information, but that they knew or should have known that it was not publically available.

As a matter of proof, it is difficult to prove what somebody knew – or what they must have know – particularly when it is somebody who trades on a regular basis who can offer other plausible reasons for the trading.

Isn’t there also the broader problem of actually defining what constitutes inside information?

This is an important issue.

Some people would take the view that the share market actually runs on the basis of trying to get access to information that others don’t have so you can use it to your own advantage.

Australian laws also define inside information much more broadly than in other jurisdictions. Rumours are still caught by the definition of inside information.

Other jurisdictions, for example many in Europe, are careful to exclude rumours from the definition of inside information, specifically to avoid this problem.

So even though prosecutors in Australia could mount an insider trading case based on rumours as inside information, there are none that have successfully been brought.

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