Australia has one of the broadest prohibitions on insider dealing in financial products in the world.
The Australian Securities and Investments Commission (ASIC) oversees and regulates activity on the Australian Securities Exchange (ASX). Manipulation in energy and commodities derivatives markets was an ASIC specific enforcement priority for 2023 – earlier this year, a high profile broker was fined for permitting suspicious client orders to be placed on the futures market. Whilst ASIC’s specific enforcement priorities change every year to keep up with the changing regulatory landscape and manipulation in energy and commodities derivatives markets is no longer a specific enforcement priority for 2024, misconduct which damages market integrity (this includes, insider trading, continuous disclosure breaches and market manipulation) continues to be the regulator’s enduring priorities for 2024.[1] Misconduct reports are one of the main ways in which information on possible unlawful behaviour is brought to ASIC’s attention. [2] Each year, ASIC receives around 8,000 to 10,000 misconduct reports from members of the public.[3]
In Australia, market manipulation and other related market misconduct activities like insider dealing are prohibited under the Corporations Act 2001 (Cth) (Corporations Act).
These prohibitions are contained in Part 7.10, Division 3 of the Corporations Act. In particular, section 1041A states that market manipulation occurs when a person takes part in or carries out: (i) a transaction that has or is likely to have, or (ii) 2 or more transactions that have or are likely to have, the effect of:
- creating an artificial price for trading in financial products on a financial market operated in this jurisdiction, or
- maintaining at a level that is artificial (whether or not it was previously artificial) a price for trading in financial products on a financial market operated in this jurisdiction.
On insider trading, the Corporations Act provides that anyone who possesses ‘inside information’ is prohibited from trading or procuring trading, or communicating that information where trading is likely to take place, in relation to relevant financial products, subject to various exceptions and defences. Inside information is defined by section 1042A of the Corporations Act as any information:
that is not generally available [but] if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of particular Division 3 financial products.
Compared to the United States, Australian insider trading law contains a broader prohibition because it operates on an “information connection” rather than a “person connection” – meaning that individuals who possess information that they know, or ought reasonably to know, is both material and non-public are prohibited from trading or from passing the information to others who might trade.
Unlike some other countries, it is not necessary for the prosecutor to prove that the accused has relied on or otherwise used the relevant information in connection with a prohibited conduct: possession of the information (or information they ought to reasonably know) when trading is sufficient. Likewise, it is not necessary to show any connection between the accused and an ‘inside’ or otherwise privileged source of the information, such as the company whose securities are traded. Therefore, misappropriation theory of insider trading does not apply.
Over the years, ASIC has uncovered several notable cases of insider trading or market manipulation that have resulted in penalties for those involved. We set out two notable cases in more detail below.
Cameron Kerr Waugh, a former corporate adviser, was sentenced to two years imprisonment for insider trading with release after nine months, upon entry into a good behaviour bond for 15 months.[4] It was found that he contravened the Corporations Act regarding his trading in Genesis Minerals Limited (ASX: GMD) shares in September 2021. He pleaded guilty to acquiring 747,626 shares in Genesis when he learned about a funding proposal that included a multi-million share placement, and a restructure of the board to include Raleigh Finlayson and Neville Power. He obtained such information through his role at Omnia Company Pty Ltd before such information was publicly made available. The Genesis share price rose by 187% after the information was made public. When he sold the shares in November 2021, he made a profit of AUD$57,256.44 (USD$37,370). Following his conviction, he was also automatically disqualified from managing corporations for five years.
Using an online personality known as ‘Fibonarchery’, Gabriel Govinda became the first person to be convicted of an offence under section 1041D of the Corporations Act. Mr Govinda pled guilty to 23 charges of manipulating shares listed on the ASX and 19 charges of illegal dissemination of information relating to this manipulation of shares. He was sentenced to two and a half years imprisonment (released immediately on a five year good behaviour bond) and fined AUD$42,840 (USD$28,420.06). [5] Mr Govinda manipulated the share price of 20 different listed stocks through his posts on an online forum and trading the shares between various accounts he controlled to drive up the price of the shares. This prosecution formed part of ASIC’s crackdown on individuals using social media to manipulate financial markets, amid a growing number of “finfluencers” online.
The insider dealing prohibition has a reputation for being difficult to follow. In the past, the Australian Government’s Corporations and Markets Advisory Committeehas issued a report[6] on insider trading that set out a number of proposals for reforming the regime including dealing with problems still facing the OTC or other markets. These included tightening the ambit of the insider trading prohibition and introducing a new simplified test of when information ‘is generally available’.
The Australian Senate also published a report[7] criticising ASIC’s investigation and enforcement record noting in particular that ASIC’s own data suggests that only a small proportion of alerts or reports of potential insider trading lead to investigation by ASIC and an even smaller number of reports result in prosecution and conviction. Significant reform could be on the horizon in Australia with the report calling on the Australian government to consider, among other things, separating ASIC’s functions between a companies regulator and a separate financial conduct authority.[8]
Comment: U.S. companies operating in Australia should be particularly mindful of the broader insider trading prohibition. They should also keep a close eye on any future reforms to the Australian insider dealing regime. Enforcement against so called finfluencers is also well known in the U.S. with the SEC having issued multiple warnings against those who perpetrate pump-and-dump schemes on social media.
[1] https://asic.gov.au/about-asic/asic-investigations-and-enforcement/asic-enforcement-priorities/.
[2]https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/ASICinvestigation/Report/Chapter_4_-_Approach_to_investigation.
[3] Ibid.
[4] For further information see: https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-059mr-cameron-waugh-sentenced-to-two-years-imprisonment-for-insider-trading/
[5] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-116mr-gabriel-govinda-sentenced-to-two-and-a-half-years-imprisonment-and-fined-for-market-manipulation-and-finfluencer-conduct/
[6] https://takeovers.gov.au/sites/takeovers.gov.au/files/2021-04/insider_trading_report_nov_2003.pdf
[7]https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/ASICinvestigation/Report/Chapter_5_-_Enforcement_outcomes_and_dispute_resolution
[8]https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/ASICinvestigation/Report/List_of_recommendations