Recent high-profile insider trading cases that have captured the public's attention (such as those against Oliver Curtis, Richard Kamay and Steven Xiao) have seen increasingly harsh penalties being ordered by the Courts. In each of these cases, ASIC elected to pursue criminal charges due to the seriousness of the conduct.
Businesses should take note of these harsher penalties and also watch such cases with interest, because they highlight a real and emerging risk: that any individual or business caught up in allegations of insider trading (or market manipulation) is likely to face serious reputational damage.
What is insider trading?
Insider trading can be conveniently summarised as occurring when:
a person possesses "inside information" and, either by themselves, or by procuring another person to act, participates in the market for certain traded financial products (for example shares), in circumstances where they know (or ought reasonably to know) that first, the "inside information" is not generally available and, secondly, if that inside information were generally available it would be expected to have a material impact on the traded financial products.
Insider trading, along with the other market misconduct provisions (market rigging, market manipulation, false or misleading statements and dishonest conduct), attracts both civil and criminal liability.
Parts One and Two of this article relate to both types of conduct.
How do the Courts view insider trading?
Gone are the days when Australian "white collar" criminals could expect to successfully argue that insider trading offences are "victimless" and undeserving of lengthy gaol sentences.
As numerous recent cases have shown, the Courts now view insider trading is a form of cheating, with the capacity to unravel public trust, which is critical to the viability of the market.1 In other words, it should be considered as a form of fraud.2
By way of an example, the distinction between "white collar" and "blue collar" offences was flatly dismissed by McCallum J during the recent sentencing hearing of Oliver Curtis. Addressing a submission that a non-custodial sentence would be appropriate, her Honour asked Counsel:
""If your client had been charged with larceny, would we be having this debate? If you stole $1.4 million, would you be putting a submission for a non-custodial sentence"3
Further, factors which might have once led to a reduction in sentence (such as youth, good character, lack of prior offending, the loss of future career progression and prospects of rehabilitation) are now considered unremarkable, and in the absence of an early guilty plea, are unlikely to assist a defendant to obtain a reduced sentence.4
Recent cases have seen the Courts express the view that people who engage in white collar crime are generally intelligent and often have no prior criminal offences, but are driven by profit and greed and take advantage of their professional standing and demeanour.5
Are the penalties for insider trading getting harsher?
In December 2010, the maximum gaol sentence for insider trading and the other market misconduct provisions doubled from 5 to 10 years imprisonment.
The maximum fine was also increased from $220,000 to either $490,000 or three times the value of the benefits obtained from the offending conduct (details on the changes to penalties for corporations are set out in Part Two).
These changes reflect a policy position that both insider trading and market misconduct should be understood (in case they were not already!) as serious criminal offences. All other things being equal, these changes will lead to more severe penalties as courts order sentences reflecting the underlying intention of the increased penalty regime.6
And this has already begun to happen...
Twice in the last 12 months, a Court has ordered a record longest sentence ever for insider trading offences:
- The first instance was in July 2015, when the Victorian Court of Appeal upheld what was then Australia's longest sentence for insider trading: 7 years and 3 months against Richard Kamay. He had conducted multiple trades over a 9 month period based on market sensitive information obtained from a friend who worked for the Australian Bureau of Statistics before that information was released to the market.
- The second instance was in March 2016, when Mr Steven Xiao, the former managing director of Hanlong Mining, received a sentence of 8 years and 3 months. He had used market sensitive information gained through his position to engage in more than 100 illegal trades, culminating in 65 contraventions of the Corporations Act.
In contrast to these record long sentences, the recent Oliver Curtis case also warrants a mention here. As those familiar with the case will know, Curtis was sentenced for a period of "only" 2 years, in part because he was being sentenced under the older, more lenient regime, as his offending conduct took place in 2007 and 2008 (i.e. before December 2010). He was therefore not at risk of setting an undesirable record.
(This is Part One of a two-part article. Read Part Two here)
Footnotes
1 R v Glynatsis [2013] NSWCCA 131 at [79]
2 R v Xiao [2016] NSWSC 240 (Xiao) at [78] – [85]
4 R v Kamay [2015] VSCA 296
5 R v Kamay [2015] VSCA 296
6 Xiao at [87]
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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