SUBJECTS: Strengthening of ASIC'S investigative powers, increased penalties for market misconduct offences.
HELEN DALLEY:
Minister, thanks for joining us. Why the need to push for much greater weapons and penalties to fight insider trading and market manipulation?
CHRIS BOWEN:
Well Helen, I think there are a number of indications that insider trading is a significant issue in Australia. I'd point to two things in particular. The number of referrals from the Australian Securities Exchange to ASIC for further investigation is significant – it's a small proportion of the total number of trades in the Australian market, of course – but nevertheless significant and warranting concern.
And secondly, as ASIC and a number of other commentators have pointed out, there's a substantial increase in share prices just before market significant announcements, too often to indicate it's just a coincidence. Now ASIC, in receiving those referrals, have indicated to me that there are a number of cases where they do believe insider trading has almost certainly occurred.
DALLEY:
So there is evidence?
BOWEN:
There is evidence that there is a insider trading issue in Australia to be dealt with. The other issue is, of course, that ASIC have advised me that in a number of cases they do believe that there's significant evidence of insider trading in some instances, but they do not have enough evidence for a successful prosecution. Hence the increase in investigatory powers announced yesterday, which include the power to ask the Australian Federal Police to intercept telephone calls and other electronic communications which ASIC have lacked up until now.
DALLEY:
So you acknowledge, like most people in the market, that insider trading and white collar theft is happening and going on unchecked?
BOWEN:
Well yes, I acknowledge that the laws have not been significant enough to deal with it. I acknowledge that ASIC's powers have not been strong enough and the deterrent of the penalties has not been strong enough. So yes, I do acknowledge and embrace the fact that there have been issues that need to be addressed and we're addressing them.
DALLEY:
Well, not to put too fine a point on it, Minister, but the Rudd Government has been in power for more than two years. Why are these changes only coming now, when we've had corporate collapses and problems of director misconduct since at least early 2008?
BOWEN:
Well, these laws have been in place for a long time, Helen, and it's now time to review them and we're acting. Helen, these issues aren't related to the global financial crisis or corporate collapses, these are matters of good corporate governance and ensuring that Australia's corporate governance is as good as it possibly can be. And so we make no apologies for these changes, which I accept are tough, an increase in ASIC's powers I accept are significant, but this is an appropriate measure.
DALLEY:
From ASIC's own report, they achieved just one criminal conviction for insider trading and two for market manipulation last financial year, despite 39 potential insider trading cases referred to it by the ASX and 13 potential cases of market manipulation. Not a record to be proud of, is it?
BOWEN:
It's not a record that ASIC is happy with. It's not a record that I'm happy with, and it underlines the need for these changes. As I say, Helen, there are a number of occasions that ASIC tells me they do believe there is evidence of insider trading but they do not believe they have enough evidence to secure a successful prosecution.
Helen, I think you'd agree that insider traders go to great lengths to cover their activities. They go to great lengths to hide what they're up to, hence the need to ensure that ASIC have all the powers that are prudent and necessary at their disposal. By giving ASIC these powers, we're bringing them into line with the SEC in the United States, and the SEC have pointed out that in their recent high profile insider trading cases, telephone tapping has been vital to prosecuting those cases. So this is necessary to ensure that ASIC is not fighting with one hand tied behind its back as they have been, quite frankly, doing up until now.
DALLEY:
Minister, I guess the other question the market wants to know is with these stronger powers and tougher penalties, will ASIC perform greater enforcement? Will it move on these?
BOWEN:
Well, I guess the first point, Helen, is I hope nobody gets prosecuted because I hope that the deterrent effect of the doubling of the jail terms and the significant increase in fines are enough to deter people from undertaking insider trading. But certainly, I expect that ASIC will use these powers and will pursue prosecutions, where appropriate, very vigorously.
DALLEY:
Okay. On the other hand, the Stockbrokers Association and some hedge funds are saying that the $500,000 fines for individuals, firstly that there will be no discretion for the judge to set fines at a lower level than that, and also that for rumourtrage, that those bodies say that the whole market is a rumour, and how do you fine someone for a rumour? Now, are they fair criticisms?
BOWEN:
Well, rumourtrage is a separate process. ASIC has a discussion paper out on its approach to rumourtrage and they'll be issuing regulatory guidance in due course. Helen, as I said at the outset, these increases and penalties are significant, but so is the potential payoff from insider trading. You need significant penalties to dissuade people from undertaking this sort of behaviour. When they know that the potential financial benefit of engaging in insider trading is very large, they need to weigh that up against the possibility of being caught and against the possibility if this legislation's passed, which I very much hope that it is, of going to prison for 10 years and a very significant fine. I make no apologies for that.
DALLEY:
Now, as I mentioned in the intro, ASIC starts this year pretty bloodied and bruised after failing to win some high profile cases last year. Doesn't it need a big win to regain not only internal morale, but external credibility as a strong corporate policeman?
BOWEN:
Look, I have a few comments to make on those high profile cases, Helen.
Firstly, ASIC have reserved their right to appeal in two of those cases. In the third case, they'll be making their announcement in the not too distant future as to their intentions, so I think I need, as Minister, and we all need to withhold judgement until that process is complete. Appeals are very important in our process and both parties, both the regulator and the private sector, are perfectly entitled to appeal after a defeat in court.
The other point I would make is that regulators should not just take slam dunk cases, should not just take the easiest cases. They also need to take cases which are difficult. I'd be disappointed if the regulator only took cases which they're certain to win.
And my third point would be I know and expect ASIC has been and will be reviewing the conduct of those cases and learning any lessons that are appropriate.
DALLEY:
Chris Bowen, we'll leave it there. Minister, thanks for joining us.
BOWEN:
Great pleasure, Helen.