Friday, 11 September 2009
The tide has turned for insider traders
Greed and opportunity ensure that so long as free markets exist, unscrupulous insiders will be tempted to find ways to profit at the expense of honest investors, whatever the risk. But if anyone has yet to get the message that Hong Kong now treats as criminals those who trade with the benefit of inside information, they no longer have any excuse. Yesterday’s conviction of former Morgan Stanley Asia managing director Du Jun should ram it home.
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The tide has turned for insider traders
11 September 2009
Greed and opportunity ensure that so long as free markets exist, unscrupulous insiders will be tempted to find ways to profit at the expense of honest investors, whatever the risk. But if anyone has yet to get the message that Hong Kong now treats as criminals those who trade with the benefit of inside information, they no longer have any excuse. Yesterday’s conviction of former Morgan Stanley Asia managing director Du Jun should ram it home.
In the biggest insider dealing case brought by the Securities and Futures Commission, Du faces up to seven years’ jail for offences involving HK$87 million. His conviction caps a run of successful prosecutions. Five people have been jailed for insider dealing since April, when the first prison sentences were imposed. There has long been a high tolerance for insider dealing in Hong Kong. The tide has now turned - and not before time.
Insider dealing was, until recently, viewed as a matter best kept away from the criminal courts. The theory was that it is such a difficult offence to prove that the criminal standard - beyond reasonable doubt - would rarely be met. The string of convictions this year shows that need not be the case. Persistence, patience and the use of e-mail records as a valuable source of evidence have paid off. It is surprising it has taken this long for jail sentences to be imposed. Insider dealing was, after all, made a criminal offence in 2003. The shift is due largely to a new, more aggressive, approach by the SFC which involves working closely with the Department of Justice and pursuing cases in the higher courts. It has, so far, proved to be successful. There have been 10 convictions. The policy has created a much-needed deterrent for would-be insider dealers.
Du’s case broke new ground, and not just because it involves such a large sum of money. It marked the first time the SFC had moved to freeze the assets of an insider dealer using a provision in the Securities and Futures Ordinance which is becoming an increasingly useful tool in the fight against market misconduct. The case may yet become the first in which the proceeds of insider dealing are distributed to the victims, in this case people who sold the shares to Du. There will, no doubt, be legal issues to resolve. But if profits can be seized in such cases and used to compensate those who lost out, this will go a long way towards removing the perception that insider dealing is a victimless crime.
The reality is that it poses a serious threat to our financial system, tilting the level playing field and causing serious damage to markets and investors. It must be taken seriously.
It is not only the regulators who have a responsibility to ensure insider dealers cannot thrive. Corporations must be on their guard for signs that those with confidential, price-sensitive information are using it for illicit trades. In the case of Du, questions must be asked about the effectiveness of his investment bank’s compliance system. It failed to detect his activities until far too late, even though he informed the control office he intended to trade. Du had access to confidential information about a deal with oil company Citic Resources. He was borrowing large sums of money from his employers to purchase millions of shares in that company. It should not, in those circumstances, have been possible for the crime to be committed.
The judge will decide on the penalty Du must pay for his greed. But his conviction has already helped reinforce the message that insider dealing will no longer be tolerated.
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