The inside track is getting even faster Law Reporter

When is insider trading permissible – when you learn the information by good fortune

The topic of insider trading has suddenly become very much alive and well. A recent report issued by the Companies and Securities Advisory Committee (CASAC) is calling for changes to the law which has apparently been a very difficult law for the Australian Securities and Investments Commissions to enforce (as was the case with its predecessor organisations – the ASC and the NCSC). Although no one in Australia would genuinely endorse the views of Professor Henry Manne that insider trading is good and will create incentives for the market to become more informed and for investment to occur more readily, there are many others who believe that the current law goes too far. A recent decision of the New South Wales Court of Appeal in R v Firns ((2001) 38 ASCR 223) illustrates just how difficult it can be for the regulator to enforce this legislation and what is genuinely meant by inside information. We take the facts of this case from the Butterworths Company Law Reports. Carpenter Pacific Resources NL (C) was a company listed on the Australian Stock Exchange (ASX). Its main business in 1995 was the holding of certain exploration licences in Papua New Guinea through wholly owned subsidiaries. One of those subsidiaries Matu Mining Pty Ltd (M), had been granted a licence over a large area which it was thought had good gold prospects. The area, however, included a region subject to special mining leases which were held by a company not owned by the C group.

The Government of Papua New Guinea introduced new regulations that effectively divested M of a valuable aspect of its exploration licence. M challenged the validity of that regulation in the courts. It lost at first instance and then appealed to the Supreme Court of Papua New Guinea. At about 9.30am on 28 July 1995 the Supreme Court handed down its decision in which it upheld the appeal and invalidated the regulation. At about 10.08am on that same day the father of the appellant (Firns) who was an executive director of C rang Firns in Brisbane to tell him the result of the appeal. Shortly before 10.27am Firns in turn rang his stockbroker and purchased 400,000 shares in C at 2.5 cents per share in his wife's name. He later purchased a further parcel of 300,000 shares. It was not until 31 July 1995, that the ASX was notified of the judgment of the Supreme Court. Proceedings were brought against Firns for insider trading and he was convicted in the District Court of New South Wales of two charges involving prohibited conduct by a person in possession of inside information (pursuant to the then section 1002G of the Corporations Law – the general details of the provision are not important for our purposes).

Firns appealed his conviction on the ground that the trial judge erred in refusing to direct verdicts of acquittal. The two main issues on the appeal were:

1. whether the information used by First was "generally available" in the sense of being "a readily observable matter" at the time that Firns purchased the shares. This is a critical part of the provision.

2. whether the trial judge misdirected the jury in informing it that the question of whether the decision of the Supreme Court of Papua New Guinea overturning the regulations was readily observable in Australia when Firns acted upon that information.

The New South Wales Court of Appeal upheld Firns' appeal quashing the conviction and entering an acquittal. The decision was a majority decision with Mason P, (the President of the Court of Appeal) and Hidden J in the majority and Carruthers A.A. J being in the minority. The majority held that for the purposes of the insider trading provisions of the Law it did not matter how many people actually observed the relevant information. If information was readily observable, even if no one actually observed it, that fact was beside the point. In this case the decision of the Supreme Court of Papua New Guinea was available – it was a public decision. It was understandable and it was accessible to any member of the public who would be prepared to go about trying to find out about the decision. In these circumstances Firns (and his father of course) were not using inside information. The court also ruled that the judge had erred in his direction to the jury (it is unnecessary for the purposes of this note to go into those details which are matters relating to criminal law). In reaching the decision that Firns was innocent of any breach the court examined the background to the legislation which was introduced after a series of inquiries on how strong Australian insider trading laws should be. In particular it concentrated on the matters relating to information being generally available. The legislation, however, did not define the words "readily observable matter". Here, we had information that was embodied in the judgment that was easily available to any group of the public – certainly the people who were present in the court would have known about it and it was not hidden from the rest of the public. As President Mason said in his judgment, even if "ready observability were to be limited to perceptibility by the unaided human senses, the published judgment of the Supreme Court is readily observable. ... Since the demise of the pony express and semaphore and the advent of telephone, telex, facsimile, television and the Internet we have come to observe information immediately yet indirectly. Our human senses are engaged, with the aid of modern means of telecommunication." (para 78)

Mason P gave another excellent example of how information can be significant and yet some might complain that those who rely on it are using inside information to gain an advantage over others. At para 72 of the judgment he noted: "A sudden crisis in the Middle East may have an immediate impact upon the value of Australian oil shares. That crisis may generate immediate coverage through a cable television provider such as CNN and/or it may be objectively of such a nature that one would expect people to jump on the telephone, facsimile or e-mail to communicate price sensitive information almost instantaneously. If the crisis occurs in the dead of Australian night but during prime time in the United States of America the information is only not readily obtainable if one [were to read into the language of the statute the words 'in Australia'] and then construed those words in a manner divorced from the realities of the modern world of global telecommunication." Clearly we should not have commercial laws which try to treat Australia as though it were divorced from the rest of the world unless those restrictions are absolutely necessary.

Whichever view one takes of this particular case the decision is one which makes damned good sense. It would be a great pity if we started to pass laws which prevented any of our citizens from taking advantage of their ability to examine and analyse particular public information to their advantage. The fact that one person is more astute than another should not lead to that person being penalised if he or she acts using that information to his or her benefit. In many cases that person will analyse the information and make a wrong decision – should he recover from those who gain at his or her expense for the loss suffered? The CASAC report will generate considerable interest and debate and we will hear much more about insider trading in the months ahead with an election just around the corner.

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