KEY POINTS:
In a perfect world, the Securities Commission would have pursued insider trading proceedings against David Richwhite and Sir Michael Fay through the courts. Out-of-court settlements with no admission of liability by the defendants always carry the hint of second-best. That is not ideal in a country that has yet to witness a successful insider trading prosecution. In reality, however, the $20 million settlement by the two expatriate businessmen represents a significant victory for a watchdog that presides over a market which, until now, has been ridiculed for the laxity of its securities regulations.
There have been several twists and turns since the commission first filed proceedings in October 2004. These accused Midavia Rail Investments, a company owned by Mr Richwhite and Sir Michael, of insider trading and Mr Richwhite of tipping off Midavia to sell $63 million of shares in 2002 when he, as a Tranz Rail director, knew of unpublicised financial problems at the rail operator. The commission suffered a particular setback when it was found to have initiated proceedings outside what was then a two-year statute of limitation. This barred it from pursuing a claim for a $100 million penalty, based on losses allegedly avoided by the defendants.
The commission's final take equates to the bulk of the compensation penalty that might have been imposed if prosecution had been successful. On that basis alone, it is a favourable outcome. Litigation could have dragged on for years, stretching the commission's resources. Additionally, victory was by no means guaranteed because insider trading is difficult to prove. The commission had to weigh up what was in the best interest of the public, who would derive no financial benefit from a successful prosecution, and of Tranz Rail shareholders, who stood to be compensated if that were achieved. On balance, it has made the right choice.
The defendants, of course, take comfort from the fact that there is no admission of liability. Such was also the case in settlements totalling $7.5 million reached with other leading shareholders in related Tranz Rail allegations. But the figure of $20 million tells its own eloquent tale. Even for men reputed to be worth at least $500 million each, that is a significant sum.
This is about far more than the degree of financial inconvenience to Mr Richwhite or Sir Michael, however. The Tranz Rail case represents the first time the Securities Commission has, itself, taken insider trading proceedings in "the public interest". Before 2002, such action had been the preserve of the companies in which the trading had occurred or aggrieved shareholders, an approach posited on the fact that only they stood to gain financially. This proved unworkable, and as it floundered, so did investor confidence and the integrity of the local market.
Further reforms later this year will emphasise the importance of a sound market, as well as giving the commission a specific enforcement role and making insider trading a matter of criminal penalty, rather than civil liability. This will lift the proof threshold, thereby making prosecution more taxing. More importantly, however, it will bring the local market into line with comparable overseas jurisdictions. In the likes of the United States, investors are accustomed to the jailing of convicted insider traders. The new law will give them and local investors far more confidence of fair and vigorously policed regulations here.
The Securities Commission, hampered by weak legislation and starved of funding, has had a chequered career. Its successful flexing of new muscle in the Tranz Rail case represents an important precedent. As it matures, so does the market.
