19 November 2012

Insider trading, without the inside knowledge...

Can you be convicted of the following, when the "information" is actually false? In other words, perhaps false information is not information at all, and therefore you can't be convicted of insider trading...
Trading in securities by persons who possess information that is not generally available and know, or ought reasonably to know, that, if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of the securities.
The answer is "yes, you can be convicted of insider trading when the information is false."

This was established by the little known judgement handed down by the High Court of Australia on 14 November 2012 in Mansfield v The Queen, and Kizon v The Queen, [2012] HCA 49, 14 November 2012, P60/2011 & P61/2011

If the alleged conversations took place, each appellant possessed information about AdultShop that was information not generally available. Mr Day communicated knowledge about a subject (the expected profit and turnover of the company or a particular shareholding in the company) and what Mr Day communicated was not generally available. That the knowledge communicated was not true does not deny that it is "information". (HAYNE, CRENNAN, KIEFEL AND BELL JJ)
Valuable-seeming material may be true or false or partly true – which of these it is cannot be known until a time after it is acted on. But the legislation proceeds on the basis that "insiders" should not be allowed to use that material when it is not publicly available. A key element in the prohibition on insider trading is that which is indicated by the words in s 1002G(1)(a) – information which "a reasonable person would expect ... to have a material effect on the price or value of securities". "Untrue" information can have that effect as well as "true" information. As Buss JA said in the Court of Appeal, "untrue" information may influence people who acquire securities in deciding whether or not to acquire or dispose of them if the untruthfulness is unknown to them. Or if the untruthfulness is known to them, those people can use this knowledge in deciding whether or not to acquire or dispose of the securities.
The insider trading provisions, read as a whole, catch conduct by those who trade on the basis of untruths.