Criticism of ASIC has reached new heights following its decision not to prosecute David Jones' directors, Leigh Clapham and Steve Vamos, for insider trading. However, ASIC appears to have thoroughly investigated the matter and, considering the Commission's strong track record when it does prosecute, the decision not to proceed is most likely well-founded.
The facts relating to the David Jones share trades are as follows. On 29 October 2013, David Jones directors Leigh Clapham and Steve Vamos bought shares in David Jones. The day before, Myer had approached the David Jones board with a merger of equals takeover offer that had not been disclosed to the ASX.
Three days after the share trades, David Jones released positive quarterly sales results, following which shares in David Jones surged 7%. This prompted immediate suggestions of insider trading by Clapham and Vamos.
The ensuing disapproval from David Jones shareholders saw them vote down the remuneration report in protest at its AGM that November, and receive an unreserved apology from chairman Peter Mason for David Jones' conduct. Unsurprisingly, ASIC commenced an investigation into the matter.
ASIC's efforts against insider trading are part of its responsibility to protect the integrity of our markets. While insider trading prosecutions are just one component of its market integrity responsibilities, they are undoubtedly the media measuring-stick for ASIC's effectiveness.
The media and the reading public perceive insider trading as the epitome of market misconduct. Even so, it isn't since Steve Vizard's prosecution for breach of his duties as a Telstra director (relating to three share trades that the media widely condemned as insider trading) that we have witnessed such a media furore in this regard.
This furore perhaps sparked ASIC's decision to take the unusual step of openly explaining its reasoning behind the decision not to proceed against Clapham and Vamos. ASIC confirmed it has provided those involved with a "no further action" letter.
While assuring the public that the "no further action" letter is not an exoneration, ASIC also took the opportunity to explain the general process that it follows in deciding whether or not to prosecute following an investigation.
Under corporations law, ASIC must be confident of being able to prove four points before it brings proceedings:
- that the person possessed inside information;
- that the information was not generally available;
- that a reasonable person would expect the information to have had a material effect on the value of the share (had it been generally available); and
- that the person knew, or ought reasonably to have known, that the information was material and not publicly available.
In this case, Clapham and Vamos stated they bought the shares in order to support the company in the wake of CEO Paul Zahra's announcement that he would shortly resign.
Without evidence to the contrary, this left ASIC with the task of proving the two directors ought reasonably to have known that their information in regard to the upcoming financial results of David Jones was material. ASIC concluded that evidence amounting to proof wasn't available.
Despite the widely reported shock and indignation at the conclusion, ASIC appears to have thoroughly investigated the David Jones matter and decided there is no case for taking further action. ASIC's track record is strong when it does push the button on prosecutions: since 2009, ASIC has brought 32 actions, with 23 successes and several matters still before the courts. This suggests the decision not to proceed is well-founded.
Collecting the scalps of rogue traders is undoubtedly an effective way of protecting market integrity. However, the roles played by ASIC's investigations themselves should not be overlooked. No company wants ASIC knocking on its door and launching an investigation into insider trading. This threat of investigation can often be a stronger stick than its execution.
Australia's insider trading prohibitions and market integrity rules have evolved following specific inquiries and reforms to the financial services industry. The evolution continues still, with brokers as of January 2013 being required to report "suspicious activity" to ASIC.
Insider trading is difficult to prosecute, but this is a product of the Commonwealth government striking a balance between prosecuting criminal behaviour and preserving the legal rights of Australians. The lack of a prosecution in the David Jones matter shouldn't in itself be taken to suggest any flaw in the regulation of our markets, and does not suggest there is a case for law reform in this area.
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