Written by Gitanjali Singh of Wolters Kluwer
Oliver Curtis was recently sentenced to two years imprisonment (to be released after serving one year) after being convicted of insider trading offences that dated back to 2008-2009: R v Curtis (No 2)  NSWSC 795 and R v Curtis (No 3)  NSWSC 866.
This decision follows recent high profile cases of traders such as Lukas Kamay (7 years and 3 months imprisonment) and Steven Xiao (8 years and 3 months imprisonment) who had been engaged in insider trading. In all of these cases ASIC elected to pursue criminal charges against the defendants. Such a course of action by ASIC is an indication that these contraventions are regarded as serious and would attract harsher penalties. Contraventions such as insider trading, along with the other market misconduct provisions (market rigging, market manipulation, false or misleading statements and dishonest conduct), attract both civil and criminal liability.
In such an environment it is imperative for corporations to understand what conduct would constitute ‘insider trading’.
What is insider trading?
The provision related to insider trading is contained in s 1043A of the Corporations Act 2001 (Cth). It imposes an obligation upon a person who may possess “inside information” not to act or participate, either by themselves, or through another person, in the market for certain traded financial products (Division 3 products, for example, shares).
Inside information is defined as information that is not generally available and if it was generally available then a reasonable person would expect it to have a material effect on the price of the traded financial products (in particular Division 3 products). According to the Corporations Act, information could be considered to have a material effect on the price or value of particular financial products if (and only if) the information would influence persons who commonly acquire the financial products in deciding whether or not to acquire or dispose of the financial products (s 1042D of the Corporations Act).
In order to gain a more detailed understanding of insider trading, please see the commentary available in CCH’s Australian Company Law Commentary Premium at ¶278-300 (Roadmap — Insider trading) and ¶278-550 (Prohibited conduct by person in possession of inside information: s 1043A).
Example – Oliver Curtis
In the case of Oliver Curtis, it was found that between about 1 May 2007 and about 30 June 2008 he and his friend John Hartman agreed that Hartman would, from time to time, procure Curtis to acquire or dispose of relevant Division 3 financial products, namely, Contracts for Difference. Hartman was employed as an equities dealer by Orion Asset Management Limited. As part of his role, Hartman was in possession of inside information about the trading intentions of Orion Asset Management Limited and he knew that such information was not generally available. The two men had agreed to communicate using a Blackberry device which was considered secure and virtually undetectable (known as “PIN” messaging or “pinning”).
It was found that Curtis undertook 45 separate transactions, beginning on 25 May 2007 based on trading instructions sent to him by Hartman via Blackberry PIN message. A profit of $1,433,727.85 was made as a result of these transactions.
No early guilty plea
Upon determining the sentence for Curtis, McCallum J observed that many of the considerations that might have gone towards reducing the sentence such as youth, good character and lack of prior offences were not as important in the absence of an early guilty plea. McCallum J stated that it was hard to establish that the defendant was truly contrite and maintained that the fact that Curtis forfeited $1.43 million without an admission of guilt could be seen to be “cynical”:  of R v Curtis (No 3)  NSWSC 866.
Not a victimless crime
The view taken by McCallum J was that it was wrong to regard white-collar crime as victimless as it does cause loss to traders. Further it causes harm to the community at large by damaging the integrity of the market: .
Jail as a deterrent
On the matter of whether it would be an appropriate deterrent to send Curtis to jail for his crime McCallum J stated at :
“In my view, however, punishment by a sentence of imprisonment has real bite as a deterrent to others in the case of white-collar crime. White-collar crime is a field in which, perhaps more than any other, offending is often a choice freely made by well-educated people from privileged backgrounds, prompted by greed rather than the more pernicious influences of poverty, mental illness or addiction that grip other communities. The threat of being sent to gaol, provided it is perceived as a real threat and not one judges will hesitate to enforce, is likely to operate as a powerful deterrent to men and women of business.”
Conspiracy charge — pursuing all participants
It is also of interest to observe that in this case ASIC chose to pursue a charge of conspiracy, over and above the insider trading offence. We can only discern that in pursuing this charge, ASIC desires to send a clear message to all market participants that it will pursue not only insider traders, but also those who are knowingly involved in that trading.
ASIC chairman, Greg Medcraft, expressed the view in his article Why ASIC pursued Oliver Curtis and will hunt down insider traders that the market has now been set on notice that insider trading is a serious offence. He stated that “Insider trading is a crime and it is increasingly likely to be detected. It will be investigated and where possible, prosecuted.”
Changing trend – harsher penalties
This current trend is a change from the previous regime where the repercussions of insider trading were milder. In December 2010, the maximum jail 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. In light of this, it is a fair assessment that Mr Curtis was sentenced to “only” 2 years because he was being sentenced under the older regime considering his offences took place in 2007 and 2008.
In this current environment of low tolerance for insider trading offences businesses need to be aware of the risk that the corporation would be exposed to if an individual were to place trades based on “inside information” on behalf of a corporation. A corporation could face fines of the greater of $4,950,000 or three times the benefit obtained or a fine as large as 10% of the corporation’s annual turnover. Over and above the harsh penalties imposed, businesses should not dismiss the damage that would occur to the reputation of the corporation once such offences are made public. This might also lead to potential loss of business. Further it must not be taken lightly that ASIC has demonstrated its willingness to pursue charges of conspiracy against offenders which puts more than just the accused individual at risk.
Further information on insider trading is available in CCH’s Australian Company Law Commentary Premium
¶278-320 General law position of insider
¶278-480 Information in possession of officers of body corporate or partners and employees of partnerships: s 1042G, 1042H
¶278-600 Roadmap — Exceptions to insider trading prohibition
¶11-043 R v Mansfield  WASCA 132.