Commerce Minister tackles insider trading

By BRIAN FALLOW

Commerce Minister Paul Swain is in favour of making insider trading a criminal offence.

"I'm not saying that that ultimately is what is going to happen, because I am aware of enormous complexities. Some jurisdictions have it and some don't," Mr Swain said at a media briefing yesterday.

"I would hate to see a situation where the test for criminality was so high that it was there in the statute book but we were never able to do anything."

One difficulty is that the standard of proof required in criminal proceedings is "beyond reasonable doubt," whereas in civil proceedings it is "on the balance of probabilities," a lower hurdle.

Another difficulty of criminalisation arises from the right to silence, which might hamper the Securities Commission's ability to investigate, and impede any civil lawsuit parallel to the criminal action.

A Government discussion document on insider trading, now out for submissions, notes that when it was made a criminal offence in England the self-regulatory procedures of the stock exchange were brought to a standstill in insider trading cases because of the rules against self-incrimination.

Criminalising insider trading would also have to be squared with the desirability of ensuring victims were compensated for the losses they suffered.

It is not good enough, Mr Swain said, that someone could be caught out at insider trading and get away with merely offering to compensate those who had lost money. That was akin to punishing a burglar by making him return the stolen video, and letting it go at that.

Whether insider trading becomes a criminal offence or not, Mr Swain is keen to see a couple of high-profile test cases "to send a strong signal that insider trading is not going to be tolerated any more."

Since the current law was adopted in 1988 no one has been found liable for insider trading.

"Either we are all lily-white and honest in New Zealand, or there is something wrong with the regime."

The minister has avoided a first-principles, start-from-scratch review of the legislation, because it would be "an excuse to do nothing for at least two years."

The document addresses not only enforcement issues but the more fundamental question of whether the definitions of insider trading in the current law are adequate.

The Securities Commission thinks not.

The discussion paper also outlines some options for increasing disclosure requirements, in line with Australian law.

And it revives the question of whether the commission should be able to undertake its own legal actions in insider trading matters.

At the moment neither the commission nor any other public body is able to undertake prosecutions of insider traders. It is left to private legal action, which is costly and time-consuming.

"I would like to see a prosecution role for the commission," said Mr Swain.

The discussion document also considers whether the private enforcement provisions should allow for class actions, and whether plaintiffs should be allowed to seek the court's leave not to be liable for costs.

Submissions on the discussion document close on October 13.

Mr Swain expected officials to come back to him with their recommendations by the end of February. He would hope to have any legislation flowing from the process in effect by the middle of next year.

Meanwhile, the takeovers code will be put to the cabinet on October 9. The Takeovers Act allows the cabinet to adopt the code or not, but not to tinker with it.

If adopted, the code would not come into effect until next July, said Mr Swain.

The time is needed to make changes to other legislation so that the Securities Commission can give the Takeovers Panel support to enforce the code.