THE DAVID GLEASON COLUMN
My word, some bunk has been written in recent weeks about the so-called sins of insider trading, ever since the new Act (no 135 of 1998) became effective – and by commentators who should know better.
It seems everyone is in agreement with the general premise that once the phrase “insider trading” is intoned, those suspected of it must have been involved in a truly desperate crime.
Insider trading is defined as being the use of price-sensitive information not available to the general public for the purpose of personal gain. And the trouble with this kind of all-embracing definition is that it seeks to catch everything in an undiscriminating way. Insider trading also means different things at different times, and the people targeted as the likeliest culprits are usually the wrong ones.
Essentially the regulators are attempting to make sure that everyone using a financial market is equally well equipped with the same information. In theory that means that only your innate brilliance – your ability to ride a hunch – will make the difference between success and failure.
This is utopian bollocks. How many times have you heard the phrase “information is power”? But regulators are now attempting to make certain this aspect of trading is neutralised. So beware the kind of conversation you might overhear when next you visit the pissoir – if you make use of an overheard “snippet”, you might possibly be trading illegally (especially if you know that the individuals doing the talking are people likely to be in possession of price-sensitive knowledge).
Information and its use is the edge which gives individuals that margin which makes them better (or worse) than the competition. This is why everyone stampedes to get their hands on information. Proponents of the Act argue it only covers price-sensitive information is involved, to which the obvious retort is that even that definition is open to disagreement.
For decades “inside” information has been vital in determining the true price. There is the famous story of the British Rothschild Bank which, when asked to fund a substantial government borrowing, did so after first determining well ahead of all its rivals that Arthur Wellington had defeated Napoleon Bonaparte at Waterloo. Nowadays, if you displayed that foresight, you’d be locked up.
Too often, the other side of the coin is ignored. In this case it begins with the premise that all financial markets seek at all times to achieve maximum efficiency – in the case of a stock exchange that efficiency is the speed and accuracy with which the real, true value of a share is priced.
People have contended that insider trading should be allowed. The argument is that all the information about a company isn’t always in the market and insiders play a crucial role in getting it there. And it is certainly true that once big players or institutions are seen in the market, the shares in which they are trading are immediately brought into focus and public play. The trouble is that there’s has been no debate in this country about the validity of the vital role played by so-called insiders in winkling out information and then putting it to use.
Where insider trading is concerned, all paths lead to the company itself, or a company’s professional advisers (accountants, lawyers, merchant bankers and so on). It is a well-appreciated saying that if you want your business known about town, tell your banker that the information you’re about to give him is secret. That will ensure most people know within a day or so.
Information obtained from a person or persons who are in positions of trust or hold a fiduciary position in a company is the crux of the issue. And that leads, in turn, to just when it is that information should be made generally available.
Imagine Joe Bloggs steps into your office unexpectedly. He knows, he says, your company’s net asset value is R6 a share, but for some strange reason he’s prepared to offer you R8. Discussions are now in progress; a cautionary is issued.
In theory, if your purpose is to do the best for your family, you should quietly go and buy as many of the company’s shares at R5 as you can. If the deal goes through and you make a pot of gold, that’s illegal. If the deal fails and the share price falls to R4, no one will give a tinker’s damn.
If in the process your broker also buys a little mountain of the shares (acting on the back of your transaction), he is also transgressing the law. Personally I think it is quite legitimate to argue – as a general statement, of course – that every time someone is charged under this new Act, the CEO of the company involved should also be charged, unless he can prove he wasn’t privy to the information on which the transactions are based.
The issue now is the moment when information is released. It is pretty clear that a very thin line, with consequent potential for arguments, has been drawn between keeping essential company business secret and when that information should be released.
In other areas of unscrupulous behaviour the phrase insider trading is a misnomer. For example, a manager of funds in an asset management company may decide to buy shares in a company in large quantities for reasons which have nothing to do with the special information. This is hardly insider trading. If it is done to rig a price, however, (as former Gensec Asset management dealer Gawie Botha alleges is the case with Sanlam unit trusts) that is price manipulation and falls, presumably, under another criminal proscription.
If the same manager buys the same shares in advance of his official order, that is front running – with the intention, presumably, of making a profit by selling immediately the price rises (as it should on a large order).
But why is it necessary to introduce a new Act to cover these misdemeanors? We already have a companies Act which provides for action in respect of some crimes, and there is the Financial Institutions Investment of Funds Act, which is draconian.
In the end, however, actions which fleece other people are fraudulent – and there is adequate scope in this country’s criminal code to take account of fraud. This is after all the crime for which Greg Blank, famous as the only man to suffer for the Mutual scam, was sentenced to eight years in jail.
The Insider Trading Act provides for penalties of up to R2-million, 10 years in jail, both or parts of both. It sounds stiff but is no worse than the remedies already available. So why introduce yet another piece of legislation? Perhaps because no one in South Africa has ever been prosecuted for insider trading – and I suspect the authorities are desperate to lock up someone, anyone.
On the other hand, it also true that South Africa has a very fine criminal code. The only problem lies in its hopelessly inadequate policing. Will this Act and the Financial Services Board bureaucracy set up to administer it really prove any more efficient?