Bearing down on insider trading


1 Suspicious movement: Insider trading is rife when the share price of a company suddenly rises or falls before the company makes an announcement. — AFP2 Ranjit: ‘Instituting criminal charges is the culmination of a lot of work.’3 Yoong: ‘I am pleasantly surprised to see that no one among us is involved in insider trading.’

THE Securities Commission Malaysia’s intense efforts to stem insider trading was put under the spotlight at the launch of the SC’s 2015 annual report recently.

The commission had preferred 219 criminal charges against 16 individuals for insider trading last year, the SC chairman Datuk Seri Ranjit Ajit Singh had highlighted, as he talked to the press about the market watchdog and regulator’s heightened market surveillance in 2015 to prevent misconduct and preserve market integrity.

Criminal prosecution against 16 – the highest number in insider trading cases so far – is a vast jump from charging only five individuals in 2014.

And it was no easy task to bring 16 people to court. According to the 2015 annual report, 74% of the commission’s active investigations last year were devoted to insider trading, compared to other misconducts such as corporate governance issues, fraud and market manipulation.

However, these cases on insider trading represent only the tip of the iceberg, say observers.

“Insider trading is quite rampant. But few get caught. You can sense there is insider trading when the share price of a company suddenly rises or falls before the company makes an announcement. And this happens quite often,” says a senior securities analyst who declines to be named.

Although Bursa Malaysia does send out UMA (unusual market activity) queries to such companies, the market phenomena persist.

Under Section 188 of Capital Markets & Services Act (CMSA), an insider is one who possesses material information that is not generally available and will have an impact on the price of a security (like a share or warrant). And this insider is not allowed to deal with securities that the information is linked to.

If a person is found guilty of insider trading, he can face an imprisonment of up to 10 years and a fine of at least RM1mil.

Under the law, not only people who communicate the material information can commit insider trading, people who receive the information and proceed to deal in the related security will also be in breach of the law.

Hence, in the case of APL Industries Bhd, the SC not only instituted criminal charges against former APL chief executive officer Datuk Stanley Thai Kim Seng – for communicating non-public information over an audit information that APL had actually suffered a very much bigger loss for its financial year ending June 2007 – but it also slapped charges against remisier Tiong Kiong Choon, who was given the information.

Thai, more known for controlling glover-maker Supermax Bhd and supporting the opposition in the last general election, was charged with passing the negative information to Tiong. And Tiong was charged with disposing 6.2 million of APL shares ahead of the announcement to Bursa Malaysia. This case is now pending in court.

Generally, people who may leak out market-moving information are company owners, senior staff, consultants, bankers, deal-makers, accountants and lawyers, as these individuals are likely to have a role in a project or deal at its planning stage.

According to Ian Yoong Kah Yin, a former investment banker, the SC’s vigorous work in recent years against insider trading and other market abuses has made a mark in the market and its stern enforcement has a deterrent effect.

The high-profile case of Stanley Thai, as well as that of market player Low Thiam Hock (known as Repco Low in stock market circles), has caused market players to sit up.

Low, who was recently sentenced to five years jail and fined RM5mil for manipulating Repco’s shares in 1997, is appealing against the decision.

According to a dealer, those who previously thought market offences could be resolved through political connections and other means no longer see the SC as “a tiger without teeth.”

“The SC’s excellent work against market abuse and the publicity created certainly has a deterrent effect on potential wrongdoers. Over the past two to three years, incidences of insider trading are on the decline compared to the 1990s. There is more adherence to securities laws and regulations now,” Yoong observes.

Adds Yoong, “In my 13 years in investment banking, I am pleasantly surprised to see that no one among us is involved in insider trading. Everyone seems to embrace the culture of honesty and integrity.

“Compared to its early days, the SC of today is a well-managed professional body. It was voted as one of the top three market regulators in the world. Malaysia should be proud of the SC.”

Yoong was referring to the Financial Sector Assessment Programme conducted by World Bank and IMF (International Monetary Fund) in 2012, in which SC Malaysia fetched the highest score among all the countries extensively assessed for financial stability and development. Singapore came second while France was in third spot for that year’s international assessment of market regulators.

Despite the SC’s tangible success in nabbing insider traders, Ranjit had declared at the press conference after the report launch that “corporate governance will be the continuing theme for the commission for 2016”.

“Market abuse is something that will affect the market.It is important we continue to safeguard the integrity of the market,” he had said, adding that a revised Malaysian Code on Corporate Governance will be launched in April.

Fortunately, the SC is not alone in combating insider trading and other market misconduct. The courts have started playing their role. In recent years, custodial sentences were meted out.

As Ranjit had noted, “The seriousness of capital market offences was recognised by the courts when chief executive officers, directors and audit partners who breached securities law were sentenced to prison terms ranging between 12 and 18 months.”

In a court decision on March 18, 2013, affirming a two-year jail sentence and fine of RM3mil on Datuk Philip Wong Chee Kheong for market manipulation of Suremax shares, the High Court judge said the conviction and sentencing were appropriate in light of public interest, integrity of the market, investor confidence, and negative impact to the economy.

Apart from criminal prosecutions, the SC also undertook civil enforcement actions against possible insider traders, and in many cases had forced the offenders to disgorge an amount of money equivalent to three times the ill-gotten gains.

Last year, the SC instituted civil suits against five individuals for insider trading breaches and demanded six others to disgorge over RM3mil for restitution to investors due to their actions.

There were also occasions in which the SC demanded payments as statutory settlements. This took place in the case of Inti Universal Holdings Bhd in late 2013.

But to take offenders to court is no easy task. It involves years of gathering evidence and interviewing witnesses.

For example, in the case of APL Industries, it took SC about six years of investigation before bringing Thai to court. And for Repco Low’s case, investigations that involved interviewing nearly 30 witnesses, plus court proceedings, have in total consumed 18 years.

Even Ranjit had lamented how time consuming investigations are, “It’s never easy because of the complexity of the cases. Instituting criminal charges is the culmination of a lot of work.”

In an email interview with Sunday Star this week, Ranjit says new advancements in technology have further complicated SC’s investigation into breaches of financial law, as the commission now has to sieve through numerous broker accounts of a trader before being able to locate evidence that could be used in court to prosecute wrongdoers.

Still, this has not deterred the SC from carrying out its enforcement work to bring about credible deterrence.

“It’s important that persons who are contemplating engaging in misconduct are dissuaded from doing so because they have an expectation that there will be rigorous enforcement – through our criminal prosecution efforts, civil actions, as well as administrative actions,” says the SC chief.

Given the increasingly interconnected global financial landscape that markets operate in, and the many cross-border complex transactions undertaken by perpetuators of commercial crime, it is clear the path forward for SC is very challenging.

Despite this, the SC says it will continue to take stern action against people involved in insider trading as it is a market abuse.

“To ensure investors are protected and the market integrity is always preserved, we will not hesitate to take offenders to court. There will be continuous enforcement to demonstrate SC’s commitment to ensure there is no attempt to abuse the market integrity,” Ranjit notes.

Insider trading under stern scrutiny

Malaysia’s market watchdog and regulator is coming down hard on the crime to protect public interest, market integrity and investor confidence.

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