War against insider trading goes to court

  • Opinion
  • Saturday, 12 Dec 2015

This year has record number of criminal cases. Will SC get important wins?

HAS the war against insider trading escalated to a new level? The enforcement numbers over the last five years (see table) suggest that the Securities Commission is hardening its approach to dealing with those who profit illegally by using privileged information.

This year has been a bumper year for criminal prosecution of insider trading. So far, the SC has charged 13 people for committing or abetting insider trading. In comparison, there were five such cases last year and between 2003 and 2013, only three individuals were prosecuted for insider trading.

The latest court action was on Tuesday, which resulted in a director of Transocean Holdings Bhd — he resigned from the board the next day — facing 28 charges for acquiring more than 630,00 shares of the logistics company in 2009 while in possession of material non-public information. Two other were charged for abetting him.

This year is also notable because in May, three individuals were sued for insider trading in the shares of WCT Bhd, whose listing status was taken over by WCT Holdings Bhd in 2013. The regulator initiated the civil action because it’s seeking a disgorgement of three times the profits earned by the defendants from the transactions. It’s also claiming a civil penalty of RM1mil from each person and that the trio be barred from being directors of any listed company.

Between 2011 and 2014, the SC didn’t file any suits related to insider trading (or if you prefer a fancier term, “abuse of informational asymmetry in the marketplace”).

In its recent annual reports, the commission has consistently talked about the importance of combating insider trading in order to ensure that the capital market remains fair and transparent.

In last year’s annual report, for example, the SC says in 2014, a significant amount of its resources were chanelled into investigating and prosecuting insider trading breaches.

Explains the SC in its annual report 2012: “Insider trading undermines the basic principle of a fair market and serves to unjustly enrich those who trade on non-public material information at the expense of others.

“Insiders, including directors and principal officers of companies and professionals working on corporate exercises, have privileged access to material information relating to the affairs of the companies concerned. They are required to maintain the highest standard of ethical conduct, integrity, confidentiality and governance when carrying out their duties. Misuse of privileged information would adversely impact the integrity and competitiveness of the entire capital market.”

Before this year’s spike in the criminal prosecution of insider trading, regulatory settlements had seemed to be a favourite in the SC’s enforcement toolbox.

The idea is to hurt the culprits by going for their wallets.

“The scourge of insider trading is not only a threat to the integrity of the capital market, it also unjustly enriches the wrongdoers at the expense of counterparties who transacted in good faith based on publicly available information,” the SC explains in its annual report 2013, adding that regulatory settlements that year led to the effective deprivation and disgorgement of illegal profits made by the individuals who had traded on inside information.

In addition, dragging people to court is a major commitment of time and resources. As it is, probing insider trading and collecting evidence is challenging and protracted. When people are willing to pay up instead of contesting in court, that’s often a win in the regulator’s eyes.

However, it may well be that the low-hanging fruits are scarce these days. Which is perhaps why the SC is hauling many more people to court than before.

If indeed this is the trend for the coming years, it will test the SC’s ability to build solid cases, make compelling arguments and ultimately secure favourable judgements.

This will be a long-drawn battle. Insider trading cases are likely to take years to work their way through our judicial system.

We can’t expect quick victories, but we do need the SC to fight the good fight and deliver huge blows against insider trading.

It’s time we find out if judges can be persuaded to hand out stiff sentences and if such punishment will be effective deterrent against insider trading.

Executive editor Errol Oh is wondering about the status of the SC’s civil suit against Datuk Ishak Ismail relating to his purchase of shares in Kenmark Industrial Co (M) Bhd in 2010.

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