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Technically Speaking: More than one way to skin insider traders

Friday 16th June 2000

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Lion Nathan

Fletcher Paper

Fletcher Forests

Fletcher Energy

Fletcher Building

Insider trading on the New Zealand sharemarket has come under the spotlight this year in part because of the government review of relevant laws and also because the Securities Commission found former Fletcher Challenge chairman Kerry Hoggard breached insider trading rules.

Mr Hoggard has met the legal penalty of paying back the difference between pre- and post-announcement share prices - $58,000 - to those who sold him shares ahead of a major company announcement on restructuring he knew about on December 14 last year.

But he is still said to be some $200,000 ahead on the deal, perhaps benefiting in particular from the April announcement that Norske Skog was intending to take out Fletcher Paper at $2.50 a share.

The legal penalty imposed seems most unfair to those who sold their shares because it overlooks that they might not have sold had they known what Mr Hoggard knew.

They have suffered an opportunity cost in unwittingly selling too soon. Simply paying back the difference between trading sessions sounds a bit skimpy as a deterrent.

The charts of Fletcher Challenge letter stocks are marked with a vertical line to show the day, December 15, that Mr Hoggard bought the shares.

Letter share prices jumped the following day: Building by 22c, Energy by 22c, Forests by 3c, and Paper by 13c.

Mr Hoggard has kept his shares and they have been up and down since on prices as at December 16, but on balance the result looks pretty happy for him.

His case - people selling to his advantage - is in some ways the opposite to what happened with Lion Nathan shares when chairman Douglas Myers and related parties - some also on the Lion payroll - sold to the Japanese brewer Kirin and benefited from buying to their advantage over their fellow shareholders.

A vertical line marks their exit on the Lion share chart.

Lion's shares have not traded as high since. There was much ill-feeling at the time about the sellout because it appeared those with inside knowledge had a better opportunity to sell at Kirin's offer price than those outside the loop.

When the hoi polloi rushed to take up Kirin's generous offer, they found a privileged few had already filled most of the Japanese company's order. The entry of Kirin had some characteristics of an ambush.

At the time it was said that international investors looked askance at what happened with Lion, even if it passed legal muster in New Zealand.

Eric Watson - the pied piper of penny dreadfuls - has made something of an industry of buying into cashbox companies before publically announcing their impending change of direction, usually into IT.

A person who knew what Mr Watson was up to before the public did could stand to make a pretty penny on the lemming-like rush of the last on board the bus.

So far the New Zealand Stock Exchange and the Securities Commission have not done much to establish the Watsonmania bandwagon is all strictly kosher.

The government's review of insider trading laws is hampered by its decision not to review the definition of the offence, which sounds like more bad law in the making.

In essence, insider trading is fraud, as is betrayed by the necessity of concealment of the offence.

It is particularly egregious when it is a company officer involved.

The government's flawed review is further hampered by the New Zealand Stock Exchange's announcement that it is looking to merge with another stock market, which could require identical rules.

There is little point reviewing insider trading until the Stock Exchange comes clean on where it is headed on merger.

In the meantime there are some remedies not much pursued.

Shareholders might like to consider suing insiders where there is breach of fiduciary duty.

If they successfully pursued a civil action for fraud, the miscreant could be barred under the Companies Act from being a company director or manager for five years.

Wellington police are reported to be using the Secret Commissions Act to prosecute alleged insider trading involving the Government Superannuation Fund.

The Serious Fraud Office is the logical agency to apply the Secret Commissions Act to insider traders because of the national interest of preserving the integrity of our capital markets.

The same act could be used on suspected cases of investment issuers, promoters, marketers and advisers who concealed or misrepresented their true material interest in an investment product such that customers were misled about how much investment they were actually buying and to what extent they were enriching the insiders involved.

The special powers of interrogation granted the SFO are tailor-made to dealing with investment fraud.

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