Weak law lets trader walk

By BRIAN FALLOW

Someone who was slipped advance information on Fletcher Challenge's restructuring in May last year cannot be prosecuted despite making a quick $40,000 profit.

But the Securities Commission wants the law changed to catch such "insider trading" in the future.

The commission says its investigation into trading of Fletcher shares in May last year highlights deficiencies in the insider-trading laws.

Its report does not name those involved, referring to them only as "AB," "CD" and "EF."

Commission chairman Euan Abernethy said, "AB, we felt, was really a victim of circumstances. She received information through a mistake ... and she didn't make anything out of it. But the way the law is at present she could have been liable."

On the other hand EF, who used the information to manipulate the market, is beyond the scope of the insider-trading laws, or any other, Mr Abernethy said. "But if we named him we would have had to name the whole lot."

Fletcher Challenge expressed disappointment that those involved will not be subject to any form of sanction but is not taking any action itself.

Serious Fraud Office director David Bradshaw said: "At the moment I have closed my file on the matter and there is no prosecution."

A subpoena from the office effectively gagged further reporting of the investigations by the Business Herald last year.

Early last year Fletcher Challenge was considering options for a possible merger of Fletcher Paper with Fletcher Challenge Canada. By late April the plans were well advanced but remained confidential.

On April 30 a draft press release was accidentally posted on an electronic noticeboard in an internal Fletcher Challenge local area network to which AB, an independent contractor who was doing work for the company, had access.

It confirmed what she had heard six weeks earlier from a co-worker, who had learned of it in confidence from a Fletcher employee.

She faxed the first page of the draft release to a relative, CD, a Fletcher Paper shareholder, then called him 1 1/2 hours later, as soon as she learned that the draft had been on the electronic noticeboard by mistake, and told him to destroy the fax and ignore its contents.

Instead, he left it on his desk where another relative of his, EF, found and copied it without CD's knowledge.

EF bought almost 300,000 Fletcher Paper shares on May 6 and the morning of May 7 before distributing copies of the leaked page to brokerages and the media.

The share price rose. EF subsequently sold for a gross profit of around $40,000.

CD bought a further 150,000 Paper shares on May 3 and May 7, but later told the commission he had disregarded the leaked page because it seemed to contain information that had already appeared in the New Zealand Herald on April 30.

But the commission said the Herald article explicitly stated that the company had not confirmed the deal.

AB counts as an insider, not because of what she saw on the noticeboard, but because of the earlier information she got in confidence from a colleague who got it in confidence from a Fletcher employee involved in the merger.

But CD and EF do not count as insiders because the law allows the chain to go to only two removes from a principal officer, employee or substantial shareholder in the company.

The Securities Commission suggests a wider definition that would include anyone who gets inside information from an insider and holds it in "circumstances imparting an obligation of confidentiality."

It also suggests that the law's prohibition against tipping, which in this case would make AB liable, should be extended to those who use and profit by the information.

And it says the case raises a serious question about the need for express sanctions against market manipulation.

Where insider trading is the misuse of genuine, confidential information, market manipulation is the use of misleading or deceptive information put into the public domain.

The commission's report comes as the Government reviews the insider-trading laws. The primary focus of the review is on issues of detection, enforcement and penalties, and Commerce Minister Paul Swain has said he does not want progress on those matters held up while a comprehensive debate on the definitions of insider trading, which could take years, goes on. However, the discussion document now open for submission does invite comment on definition issues.

Following EF's trail of manipulation


May 7, 1999.-

* 8.30 am (approx): Business Herald reporter Mark Reynolds receives anonymous phone call offering document on Fletcher Paper merger with Fletcher Canada.

* Soon after EF pulls up in a black Mercedes at bus-stop outside Herald offices.

* Later that morning 13 brokers and media also receive faxed copies.

* Prices of Fletcher Challenge letter stocks rise on buying demand.

* Fletcher Challenge denies authenticity of document.

* July 1999: Serious Fraud Office investigation begins into insider trading allegations.