Time to prosecute insider traders

By BRIAN GAYNOR

Our insider trading laws are a farce. That is the only conclusion one can draw from the Securities Commission report into alleged insider trading in Fletcher Challenge Paper shares.

At least two individuals bought shares when they had access to a confidential document, yet the commission, which can investigate but not prosecute for insider trading, has decided that a prosecution would fail.

As this was the eighth insider trading investigation by the commission in the past two years, and no one has yet been charged, it is very clear that legislation covering this important area of sharemarket activity is hopelessly ineffective.

This extraordinary story began on April 30, 1999, when a draft press release announcing a merger between Fletcher Paper and Fletcher Challenge Canada was accidentally posted on an internal computer noticeboard that was available to 200 Fletcher Challenge staff.

"AB," an independent contractor working for a company that provided support services for Fletcher, printed off the notice and faxed it to a relative, "CD," at his home.

When Fletcher discovered the mistake, the company secretary sent a strong message to all employees who had access to the noticeboard. The e-mail stated: "If you have already copied this file, please destroy it immediately and be aware that having read it, you are deemed an "Insider" under the Securities Amendment Act."

AB said she had phoned CD and told him to destroy the fax. CD initially said he had destroyed the fax, but then claimed he left it on his desk. CD denied giving the leaked document to any other person.

A few days later, Paul Hyslop, who is CD's brother-in-law, visited CD's home and photocopied the leaked document. Both CD and Mr Hyslop claimed the leaked document was taken without CD's knowledge.

On May 3, AB's husband bought a relatively small number of Fletcher Paper shares in the joint names of himself and AB.

CD bought 150,000 shares on May 3 and May 7 last year, at $1.65 and $1.72 respectively. He sold these shares for a profit of approximately $120,000 late in July this year, when Fletcher Paper was taken over by Norske Skog at $2.50 a share.

Paul Hyslop bought 110,000 Fletcher Paper shares just before he obtained the leaked document and almost 300,000 shares on May 6 and the morning of May 7. His order, placed on the morning of Friday, May 7, was accompanied by a specific instruction that the purchases were to be made before 2 pm that day.

Between 10 am and noon that same day, Mr Hyslop gave the leaked document to the Herald and a business services bureau. He gave a false name to the bureau and instructed it to fax the document to a number of destinations at 2 pm.

At 1.58 pm the bureau began faxing the leaked document to 13 stockbroking firms and the news media.

Fletcher Paper shares leaped 7c to $1.79 until trading was suspended at 3.07 pm. Later in the day, Fletcher Paper said it was having discussions with Fletcher Challenge Canada, but no decisions had been reached.

On Monday, May 10, Fletcher Paper shares rose again and Mr Hyslop sold 350,000 at between $1.82 and $1.85 a share.

He realised a gross profit of approximately $40,000 on his Fletcher Paper share trading exploits. This extraordinary story looks like a classic case of insider trading and market manipulation. But the Securities Commission spends 28 pages of its 41-page report pointing out why AB, CD and Paul Hyslop have not breached any laws.

This is ironic because the commission is the architect of the country's insider trading rules.

For some unknown reason, the commission appears to have taken a sympathetic view towards AB. Because she was an important link in the chain, this makes it difficult to prosecute CD and Mr Hyslop.

This sympathetic line of reasoning is consistent with the commission's findings over the past two years in cases that involved Eric Watson and McCollam Printers, former Brierley Investments directors, Strathmore, Force, E-Phone and Spectrum Resources.

One frustrating aspect of this week's development was the comment by Fletcher Challenge chief executive Mike Andrews that, "We are disappointed that it appears those involved will not be subject to any form of sanction."

Mr Andrews will be well aware that the onus is on the public issuer (Fletcher Challenge) or aggrieved shareholders to prosecute under our insider trading regulations.

The Securities Commission's report into the insider trading by former Fletcher Challenge chairman Kerry Hoggard concluded: "In the view of the commission, there was a clear breach of an important law by Mr Hoggard. Fletcher Challenge may have an action against Mr Hoggard for a pecuniary penalty under the Securities Amendment Act. It is for Fletcher Challenge and its shareholders to decide whether it is appropriate to pursue this matter."

Why is Mr Andrews feeling disappointed, when Fletcher is primarily responsible for prosecuting Kerry Hoggard, AB, CD and Paul Hyslop?

The business community has supported the country's self-regulatory security rules, but is not prepared to show leadership when breaches of these light-handed regulations occur.

Paul Hyslop's Fletcher Paper share trading activity has focused attention on his role as a director of Wilson Neill since his appointment last January.

The Dunedin-based company, which has more than 8000 shareholders and is not known for the quality of its disclosure, has been on a roller-coaster ride all year, with its share price fluctuating wildly between 3c and 19c.

Wilson Neill's March 2000 year annual report disclosed that Mr Hyslop bought 17 million shares in February at 2.5c each. Before the end of the financial year he sold 4.3 million shares and bought 1 million, leaving him with 13.7 million shares as at March 31.

Since then, Mr Hyslop seems to have embarked on a frenzy of buying and selling Wilson Neill shares. Share registry records show that he owned only 4 million shares in early August, but now holds 20.1 million. His Wilson Neill 2000 share registry account contains 28 pages, with 10 share transfers per page. Is this appropriate behaviour for a director of a company that is seeking Stock Exchange listing?

One of Mr Hyslop's privately owned companies, and an individual using his residential address, have been big traders of Wilson Neill shares.

Share registry records also reveal that Colin Herbert, a former managing director of Wilson Neill, has been a big buyer and seller of shares, and Micada Holdings, a company owned by chairman Trevor Mason, has reduced its holding from 28.7 million to 13.7 million shares since May.

Although Wilson Neill shares are traded through the Stock Exchange's computer system, the company is not subject to any insider trading regulations because it is not officially listed on the NZSE.

There is the possibility that individuals who have been talking up Wilson Neill have been selling shares at the same time.

Our laws need a major overhaul and non-listed companies should be covered by new legislation.

Ironically, Paul Hyslop's bizarre behaviour may be the catalyst .