THIS week’s imprisonment of stockbrokers Greg Blank and Andrew Forbes has been hailed by some experts as a victory against white-collar crime, yet their convictions in fact highlight inadequacies of our legal system.
“Rather than demonstrate the Johannesburg Stock Exchange’s ability to rid itself of insider traders,” says a corporate lawyer, “the convictions set unwanted precedents in convicting criminals on difficult-to-prove fraud charges, and do not provide us with an important first-time insider- trading case. The reason is a number of gaps in our legislation which make it difficult to prove insider trading.”
Section 440 of Chapter 15A of the Companies Act defines an insider trader as someone trading shares with price-sensitive information concerning a company’s internal affairs or its operations, assets, earnings power or its involvement in transactions.
Crucial omissions from the Act hamper apprehension of insider traders:
* Firstly, the Act limits the use of this price- sensitive information to get rich to knowledge of a company’s internal affairs. So using other information which could significantly affect a share’s price would not be considered insider trading.
When Blank knew that Old Mutual would buy a particular share in a vast quantity and on a certain date, he did not breach the insider-trading code. Rather, this is referred to as front running. Though the information was illegally obtained from former Old Mutual investment head Marco Cellotti and second-in-command Dave Shapiro, and though it was of a price-sensitive nature, it did not fall under the insider-trading code.
This type of semantics reduces the effectiveness and capabilities of the JSE through duplication of surveillance requirements. While it is the autonomous Securities Regulation Panel’s task to detect insider trading, the JSE undertakes to iron out front running or fraud. Yet both bodies have to use the same surveillance techniques — conducted through computer checks of share-price movements — and the same comprehensive investigation of all possible trading irregularities.
* Secondly, the legislation does not include all types of financial instruments, but concentrates on those which form a part of a company’s capital structure. This can include debentures and ordinary and preference shares, but does not account for state-issued securities, like treasury bills or government bonds. Even futures and options are omitted from the Act.
The Katz Report, released in April by the JSE, concedes that this represents “a gap in the legislation at present”. It recommended that the Companies Act remain unchanged, but that the Financial Market Control Act of 1989 be extended to include all types of securities.
* Thirdly, there is no legislation to protect third parties affected by insider trading. This means that if Blank’s actions ultimately resulted in a shareholder suffering capital losses, he would have no action against the JSE or against Blank.
The Katz Report states that “…victims of insider- trading transactions which take place on the exchange have no legal remedy…”, and suggests that this may well be a factor which deters transactions on the exchange.
* Fourthly, in addition to individuals not being able to institute legal proceedings against those committing illegal deals, class actions are not allowed according to the Act. This means that a group of shareholders cannot conduct a civil action against a stockbroker employing someone who is found guilty of market manipulation.
* Finally, to make it easier to catch insider traders it is essential for the burden of proof to shift from the state to the individual. Essentially, the Act needs to be amended to permit civil, rather than only criminal, actions by the JSE and Securities Regulation Panel against individuals.
On the face of it, the difference between Blank and Forbes’ sentences makes little sense: Blank committed 48 counts of fraud against Old Mutual (R10-million) and was sentenced to eight years’ imprisonment; Forbes, who committed 229 counts of fraud against private clients (R5-million), was sentenced to three years’ house arrest and 48 hours a month of community service.
Neither the JSE nor the Securities Regulation Panel were willing to comment this week. The former said it was the task of the Securities Regulation Panel to deal with insider-trading issues; the latter said it was precluded from speaking to the press — apparently on orders from the panel’s chairman, Mr Justice Cecil Margo.
A representative at his office said Judge Margo was “away somewhere in Zimbabwe or Zambia”, adding that “he would probably not comment anyway, as his term of office runs out at the end of this month”.
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