Editorial: Insider trading law must be toughened

When the law is an ass, the only effective way of penalising offenders may be to name them. Such is the case with Paul Hyslop, the Auckland businessman who made a $40,000 profit from insider trading. An unworkable law, an obsequious securities watchdog and a distracted company contrived to cloak Hyslop in anonymity, despite his blatant piece of sharemarket manipulation. Only with the removal of a court order which prevented the Herald naming him can he be exposed to the requisite glare of publicity.

It should never have come to that, of course. Insider trading - the practice whereby shares are bought or sold on the basis of confidential company information - is anathema to well-managed sharemarkets. The reasons are obvious. The insider trader's gain is at the expense of other investors. And if investors suspect they are not getting a fair go, they will shy away from a market. In New Zealand's case, that applies crucially to overseas investors who are not accustomed to witnessing what appear to be manifest examples of insider trading and then seeing nothing happen.

In Hyslop's case, this has stemmed from the law allowing only those with first or second-hand access to information to be prosecuted. Hyslop came lower in a chain of people who had access to inside information on Fletcher Challenge's restructuring plans. The lack of breadth in the legal definition of an insider persuaded the Securities Commission that prosecution was unlikely to succeed. That, in turn, left Fletcher Challenge with no room to move. Under the law, either the company or an aggrieved shareholder - not the commission - must take court action.

The commission effectively put an end to that. However, if there is to be confidence in the market, companies such as Fletcher Challenge must be able -and willing - to take action when their shareholders are defrauded. At the very least, legal pursuit draws attention to the gaping holes in the law. Likewise, the commission report should have identified Hyslop. How could shareholders of Fletcher Challenge who felt sufficiently aggrieved bring proceedings if no one had been named? The commission defends its reticence by referring to its preference for putting issues on the table rather than "trying to attack someone." But authorities regularly and validly shame by naming when that is their preference or if other remedies are unavailable. It is, for example, the favoured sanction of that bastion of light-handed regulation, the stock exchange.

The Herald has a policy of protecting confidential sources. But no undertaking was made to keep Hyslop's identity secret after he gave the newspaper a secret Fletcher Challenge e-mail. In finding that to be so, Justice Robert Fisher also noted that Hyslop had been "less than candid" with the Herald about his purpose in seeking publicity for the secret document. The aim was the ramping of the Fletcher Challenge share price, the means by which Hyslop made a quick profit of $40,000. Needless to say, our securities laws also contain no express sanctions against such manipulation.

The frailty of the law and the Securities Commission stands in sharp contrast to most other countries, especially the United States. There, the Securities and Exchange Commission vigorously tackles insider trading. High-profile investors have been jailed for the offence. Contrast the SEC's legal arsenal with our commission's mandate which, in a case involving Eric Watson and McCollam Print, found it able to do little more than criticise behaviour "which is not what you would expect to see in well-regulated markets."

The Government is reviewing the insider trading laws. Alarmingly, however, the Commerce Minister talks of this process taking years. Recent instances of insider trading, including the fall from grace of Fletcher Challenge chairman Kerry Hoggard, suggest the practice is far from isolated. The fact that no successful action has been brought under the present law merely emphasises the urgent need for a stronger deterrent. Closing a plethora of loopholes and criminalising insider trading would go a long way towards achieving that. So would giving the Securities Commission adequate resources and the teeth to prosecute as well as investigate. Until that is done, a virtual open invitation to insider trading will continue to undermine the sharemarket's credibility.