Inside traders better left to bounty hunters

Act MP STEPHEN FRANKS, a former member of the Securities Commission, looks at whether insider trading should be dealt with as a crime.


A business icon, the leader of a New Zealand company who created wealth for many New Zealanders, has been exposed as an insider trader.

Yet he is still the chairman of another prominent company.

If loss of reputation is a penalty, why does he retain the other position? What price should be paid to make a proper example of an insider trader?

Are lots of crooks getting away with it in our markets? Are cheats prospering? Or do we really think insider trading is not truly dishonest?

If so, why - and is criminalisation the answer?

If insider trading fears are widespread in New Zealand, a partial reason may be widespread non-compliance with the more silly parts of existing law. In 20 years of commercial law I rarely came across insider trading as most people would define it.

But when the law has loopholes that cheats can use, while the ethical person can be hit, it is hardly surprising there is mixed respect for the law.

Criminalisation was a handy emotional election issue for Labour. But it is only an answer if the underlying law is improved.

Government agencies such as the Securities Commission will only detect and prosecute insider trading effectively if they have much more to spend.

They will need expertise to match some of the smartest the market can pay.

Overseas, high profile prosecutions have failed to secure convictions. Confidence in market integrity then takes a knock.

While trials drag on, the victims receive no compensation.

This is not to deny our insider trading law is a mess. It was a panicky Government response to the 1987 sharemarket crash.

The Government has promised a limited review in August. It may fix it, or make it worse.

Recently, Commerce Minister Paul Swain assured Kim Hill and myself (and her listeners) that the review would be extended to look at insider trading definitions. I welcome that.

But if the fix is no more intelligent or principled than what we have, confidence in the integrity of our markets will be damaged, not enhanced.

I believe that private bounty hunter enforcement is likely to be more vigorous, more flexible and better resourced than relying on Government. It is what our current law provides for. Hurdles have blocked the use of it, but they could be easily removed.

Triple damages are available now.

Shareholders can sue at the expense of the company where directors will not act. Shareholders can, at the expense of the company, get an independent lawyer's report to help decide whether a lawsuit is justified.

Removing the unnecessary costs and risks of remedies would be a straightforward task for a Government with resolve.

The first task must be removing the definition defects from insider trading law.

We would all expect the law to catch Kerry Hoggard. Unfortunately, it catches far more than that.

Among other problems, the existing law does not permit necessary selective disclosure, due diligence, or essential prospectus compression.

It makes a listed investment company culpable for using its own research, and if by chance Kerry Hoggard's board had colluded with him, the law may not have even covered him. Unfortunately, our law is primitive.

What should be done?

Loopholes in the director exemption process should be closed.

Directors' trades should be immediately reportable.

The law could be simplified even more if directors had to give prior notice of trading intentions.

Insider trading law should be confined to conduct we all agree it is dishonest, using proven concepts such as theft of information.

The gatekeeper roles of the courts and the commission should be limited, as they are only necessary when underlying definitions are so broad they catch too much. Better definition will fix that.

The public spirited plaintiff who successfully sues an insider trader using existing remedies should be properly compensated by the offender.

A bounty or fair share of the award should reflect the litigation risk and initial expense, as well as the deemed loss.

Criminalisation should only be considered after the law has been refined, and then only if we are happy that it could take funds perhaps better directed at violent crime and burglary.