/ 7 July 2008

Busting cartels threatened by new Bill

The competition authorities’ cartel-busting exploits could be brought to a grinding halt by a new law being considered by Parliament.

This is according to the Law Society of South Africa, which argues that the Competition Amendment Bill, if promulgated as it stands, could undermine the recent successes of the Competition Commission when prosecuting collusive parties that take part in price-fixing.

The argument is made in the Law Society’s submission on the amendment Bill, which was filed with the parliamentary portfolio committee on trade and industry last week.

In it the society argues that the commission’s corporate leniency policy — which was instrumental in busting bread and pharmaceutical cartels in the past year — could be undermined by making the conduct of directors and managers who take part in collusive practices a crime.

The corporate leniency policy allows the commission to grant immunity to a member of a cartel who makes a split from fellow cartel members and is seen as vital to the commission’s work because cartels are notoriously secretive.

“This policy shift could limit the ability of the competition authorities to resolve complex cartel activities through the leniency programme,” says the Law Society’s submission.

“Directors involved in such conduct are unlikely to volunteer information that would assist the Competition Commission to get rid of the cartel if, by doing so, they risk going to jail.

This may also lead to a significant decrease in the number of cases that are settled without the need for prosecution before the Competition Tribunal, as a consent order that acknowledges guilt in respect of a prohibited practice could lead to the prosecution of the directors involved,” says the submission.

“Rather than settle matters that could eventually lead to prosecution, directors are likely to adopt more aggressive litigation strategies.”

“The corporate leniency policy would be decimated by criminal prosecution,” says Stephan Malherbe of Genesis Analytics.

“Something is needed, but not criminal prosecution. These amendments may be trying to fix something that is not actually broken,” says Malherbe.

Chris Charter, a director from Cliffe Dekker, says that the amendment Bill goes a step too far in stating that directors can be criminally prosecuted for having “knowingly acquiesced” to collusive practices.

“Our Act goes a couple of steps too far because it says you didn’t take part in anti-competitive practices but you knew about it and then, if you didn’t know about it, you should have known about it,” says Charter.

He says this is not international best practice and that a director should be prosecuted if he or she knew about the collusive practices, not if he or she should have known about it.

“There is a time and a place for criminal prosecution of directors and this may be the place, but not the right time,” says Charter.

“We need to find a solution that is a bit more surgical than a weapon of mass destruction, which the Act resembles.”

Brink Cohen Le Roux’s Paul Coetser says that cartel behaviour used to be criminalised, but this was stopped in 1998 and in the 10 years it was law there were no prosecutions.

“Was that because there were no cartels or because they didn’t have the resources and ability to prosecute companies and directors?” asks Coetser.

Competition law adviser Vani Chetty says criminal prosecution would place an extra burden on the competition authorities because criminal standards — instead of basis — would have to be used when collecting information during an investigation, so that the information could be used if the authorities wanted to go after the directors.

Hofmeyr Herbstein and Gihwala director Vishal Koovejee says that if criminal prosecutions for directors became law, the entire framework would need to be defined — how evidence is used, how the summons process would work and how the competition authorities and the National Prosecuting Authority would work together to facilitate convictions.

Koovejee also said there might be a need for an amnesty period where directors and firms who have been engaged in collusive practices can come forward and declare their past activities to avoid prosecution.

“The writing is on the wall, the time to come forward is now,” says Charter. “Directors and managers should realise what they are in for and start taking steps.”

Insider trading regime does work
Criminal prosecutions are not necessary to change attitudes and practices of corporate South Africa.

This came to light in a report, The Impact of South Africa’s Insider Trading Regime, which was commissioned by the Financial Services Board (FSB) and conducted by Genesis Analytic.

The report examines the successes of the Insider Trading Act of 1998. Genesis Analytic’s Stephen Malherbe says the report has important lessons for the legislators debating the new amendment Bill to the Competition Act, which allows for criminal prosecution of directors.

The report details the successes of the Insider Trading Act in influencing corporate South Africa’s attitudes towards insider trading.

Although the Act allows for criminal convictions of up to 10 years for guilty executives, the FSB has not sought a criminal conviction against any insider traders, preferring to settle.

“The civil provisions of the Act have been the main tool utilised by the FSB, resulting in 17 settlements in the past five years,” says the report.

“These settlements involved eight corporate insiders and 16 listed entities.

“It is difficult to convict inside traders on a criminal charge, as it is onerous on the prosecuting authority to demonstrate beyond reasonable doubt that the defendant traded because of the inside information and not for some other reason,” says the report. “Civil actions, on the other hand, allow for a decision on the basis of a balance of probabilities.”

The report says that respondents to its survey were very concerned about how settling would be perceived in the marketplace.

Seventy-five percent said their biggest concern was damage to their career, 12% said it was the shame of being caught and 4% said it was getting their name in the paper.

Ninety percent of respondents said their most pressing concern if a colleague settled would be the damage to the company’s reputation. A secondary concern, for 36% of respondents, was their colleague’s employment future.

“The reputation effects of insider trading on firms are significant,” says the report. “When officers of companies are involved in insider trading it is a clear signal to the market that they lack integrity.”

The report says 68% of respondents and 80% of traders and asset managers reported that the insider trading regime had been a success.

Ninety-three percent of market participants became more aware of insider trading rules, 80% felt it was less acceptable and education had increased at 82% of listed companies.