Insider trading laws 

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20Aug

Insider trading laws 

By Rajiv Baldeo | Laws | 20 August 2015

What is insider trading?

Insider trading occurs where a person uses information that is not yet available to the public (insider information), usually to gain an advantage for themselves or someone else in the trading of financial products. The Australian Securities and Investment Commission (ASIC) has the power to pursue this as a criminal matter or a civil matter.

The offence of insider trading

To be liable for the offence of insider trading, a person needs to:

  1. Possess information that is not generally available to the public (insider information).

    It must also be information of a kind where a reasonable person would expect it to have an effect on the price or value of a financial product, or influence someone to buy, subscribe for or sell a financial product.
  2. Know, or reasonably know that:
    1. The information is not generally available, and
    2. If the information was generally available, then it would have an effect on the price or value of a financial product, or influence someone to buy, subscribe for or sell a financial product.

If that person (Person A), meeting the above criteria, then subscribes for, purchases or sells (or enters into an agreement to do so) any such financial products, or gets someone else (Person B) to subscribe for, purchase or sell such financial products, then Person A will be guilty of the offence of insider trading. It is also an offence for Person A to either directly or indirectly give that information to Person B, if Person A knows that Person B will reasonably act on the information in buying, subscribing for or selling financial products.

The prosecution does not need to prove that the specific person knew that the information was insider information of the kind defined above; they only need to prove that a reasonable person would have had that knowledge.

What financial products are included?

The types of financial products covered by this provision include securities, derivatives and any other financial products that are able to be traded on a financial market.

Exceptions

There are a few exceptions to this offence, as outlined in the Corporations Act. Exceptions include insurance underwriters, or if there is a legal obligation to reveal that insider information to another person, or a legal obligation to purchase securities under the Act.

Possible defences to the offence of insider trading

In the situation where Person A entered into a transaction or agreement, or got Person B to enter into that transaction or agreement at a time where certain information was in Person A’s possession, it is a defence if:

  1. The Court is satisfied that the information was made known to Person A in a way that would, or would be likely to bring it to the attention of people who commonly invest in financial products. The information has to have been around for a long enough time for it to be disseminated among those people.
  2. The Court is satisfied that the other party to the transaction or agreement knew, or ought reasonably to have known, of the information before entering into the transaction or agreement.

In the situation where Person A communicated the information to Person B, or caused it to be communicated to Person B, it is a defence if:

  1. The Court is satisfied that the information was made known to Person A in a way that would, or would be likely to bring it to the attention of people who commonly invest in financial products. The information has to have been around for a long enough time for it to be disseminated among those people.
  2. The Court is satisfied that Person B knew, or ought reasonably to have known, of the information before the information was communicated by Person A.

Penalties

Insider trading is a serious indictable offence and is generally dealt with in the District Court. The maximum penalty for an individual convicted of the criminal offence is 10 years imprisonment and/or fines of up to $450,000. For a corporation, the maximum penalty for the criminal offence is a fine of up to $1.1 million.

Prior to 2010, the maximum penalty for the criminal offence was 5 years imprisonment and and/or a fine of up to $220,000. In December 2010 those penalties were effectively doubled, which clearly demonstrate parliament’s intentions. Recently, the Court of Criminal Appeal explained the seriousness of the criminal offence as follows:

“Generally speaking, insider trading is not a “victimless” crime; it is a serious criminal offence. It has the capacity to undermine to a significant extent the integrity and efficacy of markets as well as confidence in the commercial world generally. Persons who receive price sensitive information in relation to securities are expected to conform to exacting standards of honesty. Insider trading has been described as a form of cheating; a form of fraud.”

Obtaining expert legal advice immediately from a criminal law specialist is therefore essential in such cases. This is even more important for offences of insider trading as ASIC has wide ranging information gathering powers to investigate financial markets, which may include compelling you to attend an examination and provide information against your will. The role of a criminal lawyer in these circumstances is focused on ensuring you are treated fairly and in accordance with your legal rights. It is a specialised service distinct from the provision of commercial services provided by commercial lawyers.

If you need advice from a criminal defence lawyer, contact one of our criminal law specialists immediately at either our Sydney or our Parramatta offices. We have particular experience in all types of criminal proceedings. Call 1800 NOT GUILTY or fill in our contact form and arrange a free conference with a solicitor today.