What is Insider Trading?

Insider trading is when a person or company uses information not available to the public to make a profit or avoid losses.

The offence

Section 1043A of the Corporations Act 2001 defines insider trading as prohibited conduct. It states that if a person (the insider) has inside information, and they know or ought reasonably to know that the information is inside information, they must not:

• apply for, acquire or dispose of financial products or enter an agreement to do so;
• procure another person to apply for, acquire or dispose of financial products or enter an agreement to do so;
• directly or indirectly, communicate the information to another person they know or ought reasonably to know would:
  • apply for, acquire or dispose of financial products or enter an agreement to do so; or
  • procure another person to apply for, acquire or dispose of financial products or enter an agreement to do so.

“Inside information” is information not generally available that a reasonable person would expect to have a material effect on the price or value of financial products.

Information is “generally available” if:

• it consists of readily observable matter; or
  • it has been made known in a manner that would bring it to the attention of people who commonly invest in products whose price might be affected by the information; and
  • a reasonable period for it to be spread among those people has elapsed; or
• it consists of deductions, conclusions or inferences made or drawn from the readily observable matter.

Information would have a “material effect” on the price or value of a product if it would influence people who commonly acquire those products in deciding whether to acquire or dispose of them.

“Financial products” refer to products that include securities, derivatives, interests in managed funds, stocks, bonds and superannuation products.

Exceptions

Some actions are exempt from classification as insider trading offences. These include:

• underwriters applying for or acquiring products under an agreement;
• the acquisition of products under a requirement imposed by the Act;
• the communication of information under a requirement imposed by a Commonwealth, State or Territory government;
• when a company had arrangements in place that could reasonably be expected to ensure information was not communicated (“Chinese walls”);
• transactions or agreements made by partners or employees of a person who has inside information i.e. an offence is not implied merely because of the association;
• financial services agents acting under specific instruction from a client who has inside information i.e. an offence is not implied merely because of the association.

Defences to prosecution for insider trading

The Act specifies defences to prosecution for insider trading, including it is a defence if the person communicated the information to a person who already knew the information. Some defences relate to specific financial products such as insurance, where underwriters require the disclosure of certain information under legal obligation.

The onus is on the prosecution to prove that defences do not apply.

Penalties for insider trading

A person found guilty of insider trading faces up to 10 years imprisonment and/or the greater of $495,000 or three times the profit gained or loss avoided. For a company, the maximum penalty is the greater of $4.95 million, three times the profit gained or loss avoided or 10 per cent of the company’s annual turnover in the relevant period.

The Australian Securities and Investments Commission (ASIC) can opt to pursue civil penalties instead of criminal penalties, working with the Commonwealth Director of Public Prosecutions.

Sentencing considerations

ASIC has compiled 17 criteria most commonly considered when sentencing a person for insider trading:

• amount of profit made
• character of the offender
• any expression of remorse or contrition by the offender
• any extra-curial punishment (for example loss of employment)
• specific deterrence (deter the offender from re-offending)
• general deterrence (deter the general public from offending)
• manner in which the information was acquired
• personal circumstances of the offender
• whether there was any breach of confidence
• manner in which the trial was conducted and guilty plea
• relationship with the relevant company
• whether there was any delay in prosecution
• prospects of rehabilitation
• relationship with the securities industry
• whether there was acceptance of a pecuniary penalty order
• amount of money wagered
• any hardship to the offender’s family.

For advice or representation in any legal matter, please contact Armstrong Legal.