The Prohibition of Insider Trading in Australia - Essay Example

Insider Trading Name Date Course Abstract The corporations act 2001(Cth) is for the purposes of regulating the conduct of the traders and companies in the market. Sections 1013 and 1014 of the corporations act 2001 prohibit the insider trading. This is for the purposes of growing the financial market in Australia which is an important aspect of economic growth. The rules and regulations that govern the operations of the sector determine the confidence of the investors. This is aimed at promoting fair practices during the operations in the financial market. This has led to debates regarding the suitability of the act in promoting fair business practices. It is also important to note that section 1311 of the corporations act 2001 (Cth) stipulates stiff penalties for the offenders which have also led to some debates and arguments against the prohibition. This has generated debate among the business stakeholders who support the law and those who do not support it. Those who do not support the prohibition of insider trading argue that the penalties are not fair as they are too stiff. This is because of the fines and jail terms that are imposed on the offenders. On the other hand, the support for the corporation act 2001 (Cth) is based on its ability to eliminate unfair practices when trading with securities. The act has thus contributed to the sanity in the financial market by ensuring that fairness is promoted and those who benefit illegally are prosecuted after an intense investigation. Introduction The corporations act 2001 (Cth) prohibits the insider trading for the purposes of ensuring that the financial market operates in an efficient manner that is fair to all the players1 (Michelle, 21). According to section 1013 (1)(a) of the corporations act 2001 (Cth), insider trading occurs when one has inside information that is not available to the general public. Such information is mainly applicable during trading in securities. The person in possession of such information has an advantage over the other who also intends to trade on the security. This goes against the principle of fairness as is intended by the Corporations act 2001(Cth) which provides guidelines when trading in securities. It is also illegal for a person who has such information to pass it to other persons for the purposes of ensuring that they use it on their own behalf according to section 1013 (c)(ii). Sharing the information in order for it to be used indirectly is also considered insider trading and it is punishable by the law. The inside information is referred to as the general information regarding the trading process and it is not available to the members of the public this is according to section 1013 (a)(i). The use of such information gives one competitive advantage over the others. The term insider is also used to describe a person who has the inside information. However, it is also important to note that the corporations act 2001 (Cth) is not against the individuals as it does not prohibit them from carrying out other trading activities2 (Utpal, 90). It is only concerned with the misuse of the inside information for the purposes of gaining competitive advantage. The paper thus discusses the concepts of insider trading in relation to the act and the prohibition of insider trading. Debate The prohibition of the insider trading in Australia has led to the prosecution of individuals who have been found guilty. Some of the people found guilty have received harsh penalties including imprisonment and fines. In the case of ASIC V John Petsas and Marc Miot, a civil penalty of $75,000 was imposed on Petas and $65,000 on Miot. This was after they were found guilty of insider trading at BRL Hardy limited. A further compensation penalty of $128,495.15.was imposed on them3 (Australian Securities and Investments Commission, 2013). Some of the people therefore consider the law unfair. However, it is also important to note that the individuals who have been involved in insider trading have also gained a lot of competitive advantage over the other people participating in the trade due to the possession of prior information regarding the intentions of the company as well as its financial situation. This has led to the general public missing out on different trading opportunities. This is unfair as only a few people always benefit from security trading due to the insider trading. It is also important to note that the insiders in most cases do not work alone. This is because they always participate indirectly in the process by passing on the information to the confidants4 (Coffee, 23). However, according to section 1013, all the parties involved are guilty. This has also led to the people working with the insiders receiving harsh penalties. In the case of ASIC V Mr. Oswyn Indra de Silva of 2010, Mr. Oswyn was found guilty of insider trading and was sentenced to a jail term of two and a half years. This is after it was established that he traded in equities with the full knowledge of the intentions of the company (Australian Securities and Investments Commission, 2013). The process however requires a thorough investigation. This is for the purposes of building a strong case against the insiders and hence their prosecution. Some of the people accused of insider trading have been acquitted due to lack of evidence. This was in the case of ASIC V Citigroup in 2007 where ASIC had accused the company of passing in side information from the toll bid to a proprietary trader working on interests of Citigroup. The process of proofing the case is thus a complicated process as most of the insiders always cover their tracks. The use of harsh sentences is also for the purposes of discouraging other people from participating in the process. Position According to section 1043A, insider trading is illegal and those who are found participating in it should face prosecution. The penalties vary from years of imprisonment to payment of fines according to section 1311. This is however dependant on the nature and extent of the insider trading. The corporation act 2001 (Cth) clearly defines insider trading. According to section 1042A, insider trading involves trading of a public company’s stock or securities by the individuals who have the information about the company‘s security. This is thus considered unfair to the other investors or members of the public who do not have the information about the securities of the company. The availability of the information is also responsible for giving the individuals concerned a competitive advantage over the other investors due to the possession of information regarding the status of the company. In most instances, the individuals always outdo the others and thus benefiting illegally from the process. Those who work with the people participating in the insider trading are also liable for prosecution in accordance with section 1131. However, it is required that proof is established before the prosecution. The cost of capital securities is usually raised due to the insider trading. This in turn leads to the decrease in the economic growth. It is for this reason that stiff penalties are usually imposed on the offenders. However it is also important to note that the employees of the public companies are not totally prohibited from participating in the trade on securities5 (Harris, 12). Debate Some of the economist have different views and believe that insider trading can be beneficial to the market6 (Bozanic, et al, 2012). Others argue that the prohibition of the insider trading has led to the wrongful prosecution of individuals suspected to be involved in the process. However, there is no evidence that people have been wrongfully prosecuted. Victimization of the employees of the public companies participating in security trading is also a reason that has contributed to the opposition of the insider trading. This is because the employees in most instances are in possession of the information regarding the company7 (Afroza, 205). This to some extent prevents most of the employees from participating in the investment process. On the other hand, the act also limits the investment of the employees in relation to the security trading. The penalty that is imposed to the individuals who are found guilty is also seen as too strict. This is because in most instances the individuals involved are usually supposed to serve prison sentences and also pay hefty fines. In the case of ASIC Vs Bart Doff, Bart was found guilty of insider trading in shares in Qantas Airways limited. He was sentenced to 350 hours of community service, a fine of $30,000 and a penalty of $37,255.25. It is also important to note that insider trading still occurs due to the difficulties that are involved in investigating the cases. This is because most of the individuals always participate indirectly to the process. This is usually carried out by the individuals concerned passing information to their associates. The support for the act is thus not in full support among different stakeholders. Analysis The corporations act 2001 (Cth), is meant to ensure that fraud related incidences are eliminated during the trading process. This is for the purposes of ensuring that the process is fair and the all the investors are protected. The prohibition of insider trading is thus important for the purposes of ensuring that the process is efficient. This is also good for the economic development of the country and the sector. It is important for the investors to have the same level of information according to section 1042C so as to avoid the insiders from gaining competitive advantage. According to section 1013, if one has information that the others do not posses, then it is important to ensure that the person does not participate in the process. Alternatively, the information may also be made public so as to eliminate the competitive advantage this is according to section 1042C. This is beneficial for all the investors participating in the process. It also plays an important role in establishing a fair ground for the process. On the other hand, the stiff penalties are also appropriate. The stiff sentences are also for the purposes of discouraging the other individuals from committing the crime. It is also important to note that the number of individuals participating in the crime could increase if the law is not firm in dealing with the insiders. The availability of the act is thus for the benefit of the investors as well as the economy of the country8 (Sudarshan, 79). The corporations act 2001 (Cth) is also considerate to some of the situations for the purposes of ensuring that individuals are not wrongfully convicted. This is because individuals who are working for the company or the investors may unintentionally come cross the confidential information of the company with regard to the security trade, this is ac cording to section 1042G. It is also for this reason that inside information has been clearly defined by the act. According to the act, the inside information is information that is not available to the public and it has the potential of having a material effect on the price and value of the security. According to section 1308A, the maximum fine that can be imposed on the individuals found guilty is up to $200,000. On the other hand, the jail term is up to five years. The individuals found guilty also faces the risk of civil liability. This means that the persons found guilty could still face other charges in case a civil law suit is filed against them. In this case, they will be forced to pay form the damages depending on the outcome of the case. This is therefore a very stern action that is meant to completely eliminate insider trading. Although the corporations act 2001(Cth) does not outline or recommend for disciplinary action against the employees of a company who are found guilty of the offence, most of the employees are usually dismissed from the company. This is for the purposes of gaining the confidence of the investors as well as eliminates unfair practices within the company9 (Thompson, 13). The disclosure of public material is also enhanced through section 1042C. This is for the purposes of equipping the investors with adequate knowledge that is required for the process. However, it is also for the purposes of ensuring that the non –public material is not used by the individuals for the purposes of gaining competitive advantage. Transparency and ethics are also enhanced in the process through prohibiting insider trading according to section 1013DA. It is thus evident that section 1013 is good for the purposes of promoting good business practices. This is because it ensures that the guilty are punished and hence discouraging the practice. The confidence of the investors is also enhanced through ensuring that the process is transparent. The corporation act 2001 (Cth) also prevents the chief executive officers and directors from illegally benefiting from the security trading. This is because the chief executive officers always have access to all the confidential information related to the security trading. In the case of ASIC v Stephen William Vizard, Stephen was guilty of breaching his duty as a director of Telstra Corporation limited by misusing the information given to him as a director for his benefits. He was banned from managing any corporation for ten years and was ordered to pay a penalty of $390,000. They may misuse the information by passing it to their friends or any interested parties in the securities. This reduces the fairness of the process as the information leads to competitive advantage. The chief executive officers are liable to prosecution in case they are found guilty of insider trading. This has thus played an important role in ensuring that the chief executive officers and other senior members of the management in a company do not benefit unfairly10 (Wee, 15). Arguments The arguments in support of the section 1042A and 1013 prohibiting the insider trading are due to the positive impacts that it has in the market. It is argued that prohibiting the insider trading enables the free flow of information in the market. This is because some information regarding the company has to be disclosed to the public. It is also urged that the disclosure of information promotes fairness in the sector and hence benefiting all the parties involved. The penalties that are imposed on the offenders are also stiff for the purposes of eliminating the practice. It is argued that the presence of the stiff penalties has played an important role in terms of reducing the practice and hence encouraging competition in the financial market11 (Chang, 725). Those in support of the prohibition also argue that the financial market is a sensitive sector which requires a high degree of transparency and fairness. This is because the investors may lose money incase they do not make proper decisions. The corporations act 2001 (Cth) therefore plays an important role in terms of ensuring that the process is transparent and hence enabling the investors to make informed decisions12 (Aitken, 12). It is thus evident that the argument that supports section 1042A and 1013 are mainly due to the advantages that it has on the investors as opposed to benefiting the insiders. The arguments against the corporations act 2001 (Cth) also have some reasonable grounds. The disclosure of the information to the public about a company may not be fair. This is because the weaknesses of the company might easily be disclosed and hence discouraging some of the investors. On the other hand, it is argued that the corporations act 2001 (Cth) ignores the concepts of the willing buyer willing seller principle13 (Aspris, 21). This is because the buyer has a right of selling the shares to any willing buyer. This is regardless of the information that they may have accessed prior to the process. It is thus argued that the process is victimless regardless of the information that one may possess regarding the process. On the other hand, it is also argued that the corporations act 2001 (Cth) is more of censorship. This is because it prosecutes the individuals who expose the confidential information about the securities. The punishment is also stiff as compared to some of the offences. This is also considering that individuals who expose other confidential information of a company may go unpunished or receive lighter sentences. It is thus argued that the corporations act 2001 (Cth) is not fair at all to the individuals concerned. On the other hand, it is argued that other businesses usually take place regardless of the prior possession of the information regarding the business. In other businesses like the real estate, one party usually has more information than the other. This does not prevent the business from taking place. It is thus argued that the same should be applicable in the financial market. Conclusion In conclusion, section 1042A and 1013 in regard to the prohibiting insider trading is for the purposes of protecting the investors. The act also plays a big role in ensuring that no one has a competitive advantage over the other in regard to the financial market. The penalties for the offenders are also stiff and it is meant to eliminate the practice by discouraging anyone from participating in the practice. This has played an important role in reducing the number of cases related to practice. The transparency of the process ensures that the investors are confident with the company. The corporations act 2001 (Cth) also ensures that the employees a company participating in the process as well as the chief executive officer do not misuse the information at their disposal. Those who are found guilty of the offence are also at risk of facing a civil suite. This may increase the amount that the individual has to pay as fine. However, it is also evident that section 1131 faces some opposing views due to the heavy sentences and fines that it imposes on the offenders as well as its general concepts and provisions. The arguments that support the prohibition are mainly based on the benefits that the corporations act 2001 (Cth) has over its disadvantages. The arguments against the prohibition are however based on some of its weaknesses. Summation The prohibition of insider trading is due to the advantages that it offers the insiders as compared to the investors. It also raises the question of the integrity of the process when some players have a competitive advantage over the others. The debate of prohibiting the insider trading revolves around the advantages and the disadvantages that it offers to the interested parties during the process. It is also important to note that the corporations act 2001 (Cth) is clearly for the purposes of promoting fairness as well as ensuring that all the players have the same information during the process. The issues of ethics are also of concern during the process and hence the provisions in the corporations act 2001 (Cth) is for the purposes of ensuring that ethics is maintained. A thorough investigation is also required before the concerned individuals are prosecuted. This is for the purposes of ensuring that the concerned individuals are identified and prosecuted. On the other hand, those who are indirectly involved in the insider trading are also liable for prosecution. However, it is argued that the prohibition of insider trading is unfair as it may lead to the weaknesses of the company being exposed due to the exposure of information to the public. It is also argued that it goes against the willing buyer willing seller principles. However, it is also argued that the prohibition has a positive impact on the economy. References Afroza, Begum. "Blending fairness and efficiency: An analysis of its desirability in the context of insider trading laws in Australia", Journal of Financial Crime, 2013, Vol. 20 Iss: 2, pp.203 – 221. Utpal, Bhattacharya. The World Price of Insider Trading Journal of Finance, 2002, Vol. LVII, No. 1 Coffee, John. Law and the Market: The Impact of Enforcement, University of Pennsylvania Law Review, 2007. Harris, Larry. Trading & Exchanges, Oxford: Oxford Press, 2003. Sudarshan, Jayaraman. The effect of enforcement on timely loss recognition: Evidence from insider trading laws. Journal of Accounting and Economics, 2012, Vol 53, Issues 1–2, pp 77–97. Thompson, James. A Global Comparison of Insider Trading Regulations. International Journal of Accounting and Financial Reporting, 2013, Vol 3 no 1. Michelle, Welsh. Understanding Company Law, 16th Edition. Thomson Reuters, 2011. Wee, Marvin, How Do Insider Trading Policies Affect the Information Content of Insider Trades? University of Western Australia, 2012. Chang, Millicent. The effect of cross-listing on insider trading returns, 2012, Vol 52 Issue 3, pages 723–741. Aitken, Michael. Exchange Trading Rules, Surveillance, and Insider Trading. University of Queensland Business School, 2012. Aspris, Angelo. Does insider trading explain price run-up ahead of takeover announcements? Accounting and finance. 2012. Australian Securities and Investments Commission, (ASIC). (2013), Publications. Retrieved on 10 September 2013 from, Bozanic, Z., et al. The social constitution of regulation: The endogenization of insider trading laws. Accounting, Organizations and Society, 2012. Read More