Insider trading bill ‘self-defeating’

Press, 23 September 1988, Page 4

Insider trading bill ‘self-defeating’

PA Wellington Proposed legislation which would ban insider trading is unnecessary and could make it more profitable than in the past, a big sharebroking firm says. There was no evidence of significant insider trading on the New Zealand market, Mr Bryce Wilkinson, research director for Jarden Morgan New Zealand, Ltd, told a select committee examining the Securities Law Reform Bill. The bill would introduce civil laws against insider trading,, allowing companies and individuals to sue insiders for losses resulting from use of inside information. “I have not seen evidence that insider trading is worse than at any other time in the last 30 years,” Mr Wilkinson said. There had been much publicity given to problems in the share market and business. These included "creative accounting,” inadequate disclosure of big transactions, inadequate protection for minority shareholders and claims of fraudulent and unethical management practices. “It is important to note, in the context of this bill,

that none of these concerns are necessarily directly concerned with insider trading,” Mr Wilkinson said in his written submission to the committee. Perversely, the legislation could have the effect of making insider trading more worth while, he said. It could inhibit the flow of information between companies and analysts and investors about issues which were too sensitive to talk about publicly. This would include dispelling rumours, foreshadowing redundancies and providing other information it would want investors, but not competitors, to know about.

Often a company would give analysts and investors, in confidence, information of a commercial nature about their business strategy to encourage investment in the company while trying to prevent competitors finding out what they were doing. The legislation could significantly impair the “subtle communication flows” between the company and investors because the company could be accused of providing price-sensitive or inside information.

The result could be a poorly informed capital market leading to discrepancies between share prices and the real value of a company. This could mislead investors and result in inferior investment decisions, which would hurt the whole economy. “The proposed legislative measures have a serious self-defeating element in that, by increasing the profits from undetected insider trading they may actually promote unethical behaviour,” Mr Wilkinson said.

The bill’s provisions under which companies have to bear the costs of unsuccessful legal actions against alleged insider traders could encourage “opportunistic, frivolous or malicious,” complaints. A person could watch for instances where shares were traded before a major price movement. They could then buy a small holding in the company and use the legislation to require the company to employ a Queen’s Counsel to investigate the transaction for insider trading. Complainants could impose substantial costs on the affected parties even if they were innocent.