MAS’ actions against perpetrators show that insider trading debases capital markets.

​

A NEW year is here but despite heightened corporate governance in many parts of South-East Asia, a continuing issue is when “access persons” (that is, persons that have access to non-public information) abuse their position by trading on inside information.

 

Despite relatively stringent measures regionally, two such ugly cases sent shockwaves through the Asean stock markets recently.

​

The first came earlier this month, when our neighbouring regulator, the Monetary Authority of Singapore (MAS), fined two executives S$110,000 and S$50,000 respectively for insider trading. The duo was the head of the plantation division and the plantation director for Kalimantan and Sumatra for one of the largest agribusiness conglomerates around, which is listed on the Stock Exchange of Singapore (SGX).

​

MAS called the fine a civil penalty enforcement action for an insider trading offence, which it said was committed in 2010.

​

The MAS said that the duo had made profits of S$43,000 and S$2,000 respectively from such trading. The duo admitted that they had contravened Section 219(2)(a) of the Securities and Futures Act.

​

It is interesting that the fines imposed were far heavier than the profits they had made.

​

Following the MAS' action, the company's board stated that they had deliberated on the duo's misdeed and “would reassure shareholders and investors” that it was “committed to upholding high standards of corporate governance”. The board went on to say that the company had measures in place to curb further insider trading, including “reminding directors and employees to observe insider trading laws at all times”.

​

That said, the board added that it had “carefully considered” the duo's positions in the company and had decided that it would be “in the company's interest” to retain their services “in their respective present capacities”. Talk about a slap on the wrist.

​

The board said that it had taken the following factors into account:

​

The duo were based in Indonesia, where their scope of operations encompassed only the company's plantations and not its corporate affairs;

​

That one of them had served the company for 20 years, and the other for eight years, which to the board meant that they had made great contributions to the development of the company's plantation business. It was also the board's view that the duo's extensive technical experience would contribute to the company's continued growth.

​

The duo had cooperated fully with the authorities, leading to their fines. The executive whom the MAS fined S$110,000 was also going to donate S$45,000 to a Singapore charity.

​

The duo had a good record in the company, and so the board saw their insider trading as a one-off, albeit regrettable, incident.

​

In retaining their services, the board also stated that it would review and reinforce the company's internal controls relating to how non-public material information is handled.

​

What is interesting about the above case is first, the speed with which the MAS penalised the duo. That is because, quite often, insider trading cases drag on for years and those involved in insider trading make remarks like “the amounts of profit I made are so small or what I did isn't considered insider trading”.

​

Here is where many people just don't get it the issue is not about how much profit a person makes from such trading, but the very act of breaching confidence by using non-public information illegally.

​

The second insider trading case that grabbed investors' attention also happened in Singapore, earlier this quarter, in September. It was considered a somewhat unusual case as the inside information used related to an overseas deal, with the trading done in a foreign-listed firm.

​

The MAS fined an executive of a mining investment firm for insider trading to the tune of S$100,000. The executive in question was the department manager of the investment arm of China Minmetals Non-ferrous Metals Co (CMNMC), which is the parent firm of Hong Kong-listed Minmetals Resources. The insider trading was on this Hong Kong subsidiary.

​

The executive, however, was a member of a team formed by CMNMC to work on its proposed takeover of Equinox Minerals, whose shares were listed on both the Toronto Stock Exchange (TSX) and the Australian Securities Exchange (ASX).

​

Between March 14 and April 1 last year, while he was in possession of insider information relating to this acquisition which was price-sensitive, the executive traded on various contracts for differences (CFDs), which give investors the option of making huge bets on stock price movements. The executive bought 342,000 CFDs of Equinox, 206,000 from Minmetals and later sold 213,000 CFDs.

​

It was only on April 4 that Minmetals announced its intention to make an all-cash takeover offer to buy up all outstanding common shares in Equinox at C$7 a share.

​

The offer price was a 23% premium on the closing price of Equinox shares listed on TSX on April 1. After the takeover announcement, Equinox shares on both TSX and ASX closed at least 28.7% higher than its April 1 closing share price.

​

The penalty slapped on the executive shows that a regulator such as the MAS is committed to pursuing insider traders, even if they reside overseas, or those who trade in over-the-counter CFDs.

​

In both the above cases, the MAS' actions against the perpetrators showed that insider trading debases capital markets and is clearly unethical.

​

Such trading also violates the transparency principle of capital markets by allowing people to profit from stolen information that is meant to be kept at a specific time, private.

​

Moving forward, those involved in the financial industry, including fund managers, investment bankers, auditors and lawyers, should all have internal policies in place that require all their staff (regardless of seniority) to declare any stocks they own and get their boards or management to sign an approval before they intend to trade any stock.

​

Additionally, such professionals should draw up watch lists as well as blackout lists and notify their staff of these, so that the latter and their relatives would be aware that they are not to trade in stocks on those lists.

​

Too many a time, we are amused when we hear that insiders claim innocence stating that they do not understand what is meant by material non-public information. As more and more companies look to have multiple listings, insider trading enforcement will be stepped up and will see no boundaries.