Editorial: Tranz Rail case must be pursued

All has not gone to plan since the Securities Commission filed insider trading proceedings against high-profile businessman David Richwhite and five other former leading Tranz Rail shareholders. In a year of pre-trial skirmishing, the market watchdog has suffered a number of setbacks. None, however, has been as damaging as Justice Hugh Williams' recent ruling that the commission's claim falls outside a two-year statute of limitation. This effectively quarters the maximum amount that could be extracted from the defendants if the commission proved its case. Talk of tens of millions of dollars has been supplanted by the prospect of, at best, a relatively shallow trawl of extremely deep pockets.

Given this, the commission must think long and hard about its approach. In the first instance, it will seek leave to appeal against the decision of Justice Williams denying its claim for punitive damages. But if, as seems likely, this proves unsuccessful, it must ask whether it is time to cut its losses; whether the cost to the taxpayer of pursuing this action can be justified, even if it were to be successful. An exit might be achieved through an out-of-court settlement with no admission of liability by the defendants.

It would be unfortunate if the commission went down that road. When a law change in late 2002 gave it the power to bring insider trading proceedings, it was expected to tackle the practice in the vigorous, effective manner of regulators in the United States and Australia. A state agency is perhaps the only entity with the means to match the money and legal firepower of the very wealthy.

In so doing, it would enhance market integrity and inspire investment. Success would be no small matter, given overseas investors' dismay over the laxity of our securities regulation and the implications for economic development of New Zealanders' current preference for the housing market.

The nub of the law change lay in an acknowledgment of that "public interest" when insider trading was alleged. Previous legislation had paid no heed to matters of integrity and investor confidence. It deemed that insider trading action should be brought by aggrieved shareholders or the wronged company. They stood to gain the financial rewards of a successful case and, therefore, they should incur the financial burden of litigation.

Fortunately, the law has widened that scope, and this country is now in step with other comparable jurisdictions. It will be even more so with legislation that introduces criminal remedies for insider trading, including prison terms of up to five years. As of now, however, it is clearly in the public interest for the Tranz Rail case to be pursued, even within the constraints of ineffectual legislation. The commission should, in the first instance, consider the consequences of settling out of court. On balance, these would be even more lamentable than if the case were lost. There has never been a prosecution for insider trading. That, in the past, could be attributed to unworkable legislation. Now, if the commission, after a two-year investigation, were to opt out of its first proceeding, it would send a message that little had changed. The talk of market integrity and recognition of a public interest would seem a pretence.

Insider trading is, of course, difficult to prove. There is never a guarantee that litigation will be successful, and it is usually protracted and costly. But all mature markets boast a regulator that is prepared to put the practice under a blowtorch. If all investors are to receive a fair go, and our market is to flourish, nothing less will suffice.