Business Assocation Research: Australia Law - Case Study Example

Business Association Research Name Designation Subject Date According to Melbourne regulator insider trading was as unfair as a fixed horse race and it is capable of tarnishing the image of Australian Market.1 There are number of observations regarding the trading inside and diverse opinions about it. But everybody feel it as not ignorable or negligible. Some observers even expressed views of bringing a legislation to control it and many other felt it not a good practice. If it is not good, the important question is that whom to be punished? And who is the victim? The national companies and securities commission considered 50 inquiries into alleged insider trading activity by 28 april 1989 and presented them before Griffiths Committee in May 1989. More than half of these cases were referred to a state or corporate affairs commission belonging to a territory. These contain delegates of NCSC. Out of the 82 cases considered regarding insider trading by Corporate Affairs Commission (CACS) 25 took place in New South Wales.2 Out of all these cases considered by CACS only 2 of them completed the prosecution process. There were number of reasons for the failure of prosecution in the above mentioned cases. The prosecution did put cases on the persons who were not guilty and it failed to build the case correctly on those who were guilty. The prosecution lacked sufficient resources in case of strong cases. Prosecution failed to select appropriate cases for prosecution. Another fact which made prosecution work difficult is that it is not as easy as saying to get the evidence on trading inside.1 To answer the question of punishing whom the victims and the compensation that must be paid to them also must be explored. When we are doing analysis about the punishment and compensation for involvement in insider trading first of all it is important to discuss and analyze about the harm it causes to the fundamentals of the market. The important reason for the share holders losing confidence is due to the fact that they loose the chance of sharing profits. The small investors were more prone to the loss of sharing profit. The large investor can wait for the context of market recovery but small investor cannot. Some brokers who are more realistic claim that the insider trading is victimless crime. It does not mean that there were no victims. But they insist on the logic that every body cannot be protected in equity market and the total protection is not viable. So if this is the fact to be considered now the aim of the paper will be the persons or institutions those or that are to be compensated. When estimation of loss is considered it was the profit of small investors and they draw back to invest in new areas fearing the same. This trend makes the raising of new capital difficult in the market and it means that the resources of capital will become less. This trend of drawing back from the market results in cash crunch when the capital is required and this is harmful for the reputation of Australia in the international market. But as far as Australia is concerned the market is so thin and the seller is not forced to sell at lower price he deserves. Though there is harm due to insider trading It can be absorbed by market forces in Australia. This is the situation when the minor effects are neglected or ignored. If we put apart the presence of investors who do not have insider information there arises the consolidation of the financial and share holding position of a particular person, management or a stock in the market. So the harm really depends on the stock that was traded inside. Though the harm is done to the investors at the time of inside trading it does not mean that it will have negative effect even in future. So when we consider the opinion of lawyers in Australia particularly in Melbourne, the Law can control it but cannot avoid in entirely. Here also the issue of compensation arises as the fact was established that there are victims of insider trading. The individuals like Former NCSC Chairman Henry Bosch opined that There are more things which cause more damage to uninformed investors than the insider trading. According to another expert Barry French who was The New South Wales Corporate Affairs chief the deeds of the directors of the company who move money to manipulate things is still bigger crime than the insider trading. Those things will have more impact on the investors and on market than trading inside. Even here it was accepted that trading inside will cause more or less damage to some part of investors group. According to different views though the effect cannot be controlled it cannot be ignored too. One cannot support the argument of negligible affect of trading inside because the victims are minor in number. Then we will miss the opportunity when the majority number of investors suffer due to inside trading of less number of persons. Then it comes the context what number must be considered to estimate the harm? the number of investors or the amount that was involved in the insider trading. So as long as the harmful effect is accepted, the remedy or compensation factor also must be considered. The most reliable measure is to make arrangements for avoiding trading inside or arranging compensation for the people suffered due trading inside. There is second side of the argument too. The argument supports the Insider trading and even wants it to exist. Mr.Henry Manne a professor argues that the insider trading is capable of increasing the prices of stocks and shares in future. This gives more profit to the investors that they lost in the present due to uninformed trading. He even argues to that extent that this type of trading encourages the entrepreneurs for new ventures by consolidating their position and this results in future healthy trend in the market. The opposition to this statement comes in the form of quest for transparency. It is demanded that the insider trading must informed well before it starts. Now the question is that if it was done so can the beneficiaries of the trading inside can really reap the benefit of the trading? Again it depends upon the benefit the individuals and organizations want to reap by insider trading. If it was the consolidation of the position by having more share It can be informed before hand. If they had another motive generally harmful to the market it does not deserve the support of any individual or group of investors. according to the correctors of the Henry Manne s argument the insider trading can be limited to some informed individuals but it must be made public before it occurs. As the dealing will not involve outsiders the rise and fall of price will not affect the dealing and if it affected temporarily It can be compensated in future expected rise of the price of shares involved in the trading. But it is clear that the revealing of such information will not benefit the inside traders like Mr. Rivkin1 who was convicted by New South Wales court of criminal appeal. The avoidance of criminal nature in insider trading must be achieved by equal distribution of information. The more the distribution of information the less the chance of fraud in the trading as number of persons informed will be in more number the chance of occurring of fraud is very negligible. If the view of avoiding the insider trading was taken the need of lawful means shall be explored.1 According to lawyers both civil and criminal law can offer remedies to the problem. But one group of lawyers feel that the imprisonment can act as main deterrent. But that can be opposed as it was ultimate step to be taken on an entrepreneur for the sake of misuse of laws. The main argument in this paper is who should be compensated and how? So the penalties and compensation formula will work best for the research question in the paper. the brokers who are not informed of the insider trading were in the view that the insider trading is beyond the civil law and criminal law must be applied. but it is to be observed that these views are not coming from informed individuals. So rather than applying criminal law to the individuals involved in insider trading the more liberal way of penalties and disqualification from the trading can be treated as best for the frauds in the equity market. When the question that was to be answered in this paper is concerned the view of stock exchange officials do nothing good. They want to prosecute the persons involved in insider trading thus making the insider trading a crime. All the persons who express similar view the persons like criminal lawyers are not considering the loss happened to the small investors. they are not viewing it as a part of the method that corrects the fraud or the problem. When the compensation is considered the penalties must be taken into account. The compensation can depend on the penalties only. Either the government or other agencies cannot provide the compensation on their own. So when the proposal of choice between 20000 penalty and the imprisonment was considered many favoured the imprisonment. But one thing should be remembered was the persons favoured imprisonment were not the victims of the trading. So in the consideration of the compensation issue the reasonable penalty than can compensate the victims must be taken into consideration. To follow this method the penalty must be according to the amount involved in the Insider trading and the amount of loss of profit to uninformed and small investors. The penalty imposed on the individuals who resorted to insider trading must be adequate to compensate the victims uninformed investors . When civil penalties are considered an argument comes to fore; that is the enforcement. R.V.Rivkin’s case can be considered as a case out of very few cases that resulted in conviction for trading inside. This conviction made a land mark in area of law regarding trading inside. The elements which are essential regarding offences of trading inside were reviewed in this case by judiciary in the light of recent legislations.1 The judgment given by New South Wales Court of Criminal Appeal examined number of aspects of the above mentioned offence. They are as follows: It decided on the uncertainty that whether source of information can be part of information or not. The need of confidence in receiving information is examined. The subjective nature of the information known by the accused was discussed. The materiality level in the information source was analysed. Corporations Act, 2001 (Cth) (Corporation Act) were used to try Mr.Rivkin, though these sections were replaced by different provisions of 3rd division of part 7.10. Still the case is relevant enough to know about what legislations tell about insider trading. According to the details Mr Rivkin was sole director of Rivkin investments. When he tried to sell a property of his he came into contact with Mc Gowan of Impulse Airlines and was informed that Impulse Airlines was about to merge with Qantas Airlines and awaiting for permission from the regulator. This information was given to Mr. Rivkin to keep the purchase deal secret. But Mr.Rivkin used this information to buy shares in Qantas before the merger and price of shares increased before merger. He sold them for a profit. Though the price of shares still increased after merger and rivkin was unable to get that extra benefit but he benefited from the Mc Gowan’s information. He was convicted with both imprisonment and fine. The relevant legal issues regarding trading inside, which are considered in Mr. Rivkin’s conviction were: 1. Information 2.General availability of information 3. Affect on price of securities 4. Knowledge The legality in the way of procuring above things was examined in the case of Mr.Rivkin. 1 Though the conviction of Rivkin is legal, here the damages assessment was not appropriate. Actually by the act of Rivkin the valuation of the company was increased. In this case there is no body to compensate. The other share holders or investors who were not informed did not face any loss as the share value did not fall abruptly by the acts of Rivkin. But there will be some cases, where the damage assessment must be done and the need to decide the persons who deserve compensation. When the management of a company is purchasing shares from some of the informed share holders for less price by influencing them. The management can also buy shares for less value by decreasing the price of the share intentionally by releasing substantial number of shares by their trusted members among larger share holders. When this has been done the large number of share holders who are uninformed about the activities of the management were at loss as the company gains edge by capturing more number of shares thus by consolidating position. In the above mentioned situation the large number of share holders were victims and deserve compensation. The question is how to pay it? It should be paid from the person or organisation who gained from trading inside. After this answer comes the question about the way of damage assessment. The damage assessment can be done by calculating the difference between the price of the share before insider trading and price of it after the trading. If the price falls then there is scope for damage assessment, if not how can administrations assess the damage done? If the loss that was mentioned in the insider trading was in the form of the down fall in price of shares then there is the question of victims and their compensation along with assessment of damage. In the Rivkin’s case the prices of shares did not fall and there is no damage or loss to the share holders due to his act of insider trading. When there is no loss, there can be no compensation. When the price falls after the insider trading then the number of shares involved in trading multiplied by fall of price of each share can be a fundamental to assess the damage. This can be collected from the convict and can be used as source of compensation. The penalty measures can be decided according to the existing criminal and civil laws. If the penalties and the compensation method is satisfying all the persons involved in the trading and the persons who are victims there is no necessity for the criminalizing the insider trading. So the first thing to implement is fairness and transparency. Every body who resort to insider trading must inform beforehand. If it is not done the mechanism for detecting the insider trading must be there. For this thing the passage of information from the firms and bigger investors to the enforcement agencies is compulsory. The enforcement agencies can get this information from the regulatory bodies ant those bodies can get information directly form the companies and individuals. When the present law is considered in restricting or controlling insider trading according to Corporation Act 2001 the persons possessing the important information to gain than other were prohibited from trading. Earlier only the transactions regarding securities were prohibited. But after 2002 the futures contracts and the investment schemes of management were also included in the prohibition list.1 The aspects that are covered by the prohibition under the corporation act were Shares and securities Derivatives Investments in a scheme managed by the individuals having inside information according to the corporation act 2001 the violation of this act is a serious criminal offence. The law was up to that extent; the prosecutor has no need to prove the connection between the accused and an inside information. Without compensating the victims the law makers cannot find any justification in the executing of criminal act against the individuals involved in insider trading. according to the opinions of experts in different fields discussed in this paper the victim was the uninformed and small investor. So the penalty must be collected form the beneficiaries of Insider trading and it must be used in compensating them. If it is possible the administration can make insider trading fair transparent and legal by informing before hand and by compensating the loss of the victims from the ones involved in trading. Recommendation: The victim of insider trading is uninformed and small investors. so if the fraud of insider trading was unearthed or it was made legal according to the opinions of some experts like Manne the penalty or the fee collected must be in line for the payment of compensation for uninformed and small investors who do not show much interest in the internal activities of the company they invest. From the above discussion the insider trading can be of two ways. One way is the manner Rivkin acted. In this method there is no actual loss of price of shares, but the trading attracts only the questions of legality along with morality. Here the accused must be punished but there is no need of compensation. In the second case, when the companies try to consolidate their position by buying shares for a lesser market price by illegal and secret ways (manipulating the situation due to financial advantage), there is a need for the payment of compensation for the uninformed investors. References The references were given in the following format: Name of the author, year, title, name of publisher/sponsor, edition, type of media, date retrieved, name of website. 1.R Tomasic, 2004, The effects of insider trading, Australian institute of criminology, .electronic, 3-09-06, http://www.aic.gov.au/publications/lcj/casino/ch6.html 2. R Tomasic,2004, Insider trading regulation and law enforcement, Australian institute of criminology, ,electronic, 2-10-06, http://www.aic.gov.au/publications/lcj/casino/ch9.html 3. New zealand Business Round Table, 2005, Submission on securities legislation Bill, New zealand Business Round Table, ,electronic, 2-10-06, http://www.nzbr.org.nz/documents/submissions/submissions-2005/security_0305.pdf#search=%22damage%20assessment%20insider%20trading%2C%20australian%20law%22 4. Author not mentioned, 2003, IIllllegall IInsiider Tradiing iin Canada: Recommendatiions on Preventiion,, Detectiion and Deterrence, Insider trading task force, Electronic, 3-10-06, http://www.osc.gov.on.ca/PublicCompanies/InsiderTrading/iti_20031112_taskforce-report.pdf#search=%22damage%20assessment%20insider%20trading%2C%20australian%20law%22 5.Author not mentioned, 2005, AUSIEX Terms and Conditions of Share Trading Account, nab, ,electronic, 3-10-06, http://trading.national.com.au/nolt/Public/GettingStarted/AUSIEXShareTradingTermsAndConditions.asp 6. Author not mentioned, 2003, Insider Trading Report, Corporations and Markets advisory committee (Australian Government), ,electronic, 3-10-06, http://www.camac.gov.au/camac/camac.nsf/byHeadline/PDFFinal+Reports+2003/$file/Insider_Trading_Report_Nov03.pdf#search=%22damage%20assessment%20insider%20trading%2C%20australian%20law%22 7.Michael Adams, David Barker, Judith lancestar, 2002, Business Law and Ethics – Does It Have A Future, Murdoch University, electronic, 3-10-06, http://www.murdoch.edu.au/elaw/issues/v9n3/lancaster93_text.html 8.Author not mentioned, 2002, E Law – Murdoch University Electronic Journal of Law, Murdoch University, ,electronic, 3-10-06, http://www.murdoch.edu.au/elaw/issues/v9n3/lancaster93.txt 9.Australian law reforms commission, 2001, 26. Monetary Penalties in Legislation, Australian Government, ,electronic, 3-10-06, http://www.austlii.edu.au/au/other/alrc/publications/reports/95/26.Monetary_Penalties_in_Legislation.html 10. Common wealth consolidated acts, 2001, Corporations act 2001, Common wealth consolidated acts, ,electronic, 3-10-06, http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ 11. Author not mentioned, 2006, Conduct and disclosure, Treasury to Government, ,electronic, 3-09-06, http://fsi.treasury.gov.au/content/downloads/FinalReport/chapt07.doc 12. R.Tomasic, 2006, Casino Capitalism? Insider trading in Australia, Australian institute of criminology, ,electronic, 5-10-06, http://www.aic.gov.au/publications/lcj/casino/ch3.html 13. Juliette Overland, 2005, The future of insider trading in Australia, deakin,edu,au, ,electronic, 6-10-06, http://www.deakin.edu.au/buslaw/law/dlr/pdf_files/vol10_iss2/19.pdf#search=%22cases%2C%20insider%20trading%2C%20new%20south%20wales%2C%20australia%22 Read More