At last a journo has the guts to report on the obvious (to traders anyway)

Insider trading by any other name.
August 8, 2005

A study of share-price movements uncovers uncanny coincidences, writes David Elias.

Inside information is being widely used to drive share prices and force shifts of millions of dollars in the market value of public companies.

An investigation in the wake of the Steve Vizard affair amid heightened public perceptions insider trading is widespread, has confirmed behaviour that is too common to be coincidental.

In the days before companies reveal takeover bids, profit downgrades, capital raisings and other price-sensitive events, the sharemarket community will too often take an unexpected interest.

The volume of trades will go through the roof and the price of shares will rise dramatically if it is going to be good news, or tumble if it is going to be bad.

Business reporters have examined the volumes of trade, the movements of share prices and the activities of key players in the period before 50 price-sensitive announcements made to the ASX during the past 12 months.

In 15 instances, the movement in the share price should have been sufficient to ring alarm bells. However, all but three of these escaped scrutiny because it usually takes a 10 per cent one-day price jolt to prompt the ASX to take action.

The response from each of the three companies queried by the ASX was typical of most listed companies that receive "please explain" letters under the stock exchange listing rules.

They said they knew of no information that had not been disclosed to the market and they could offer no explanation.

Shortly afterwards, however, two of the companies announced profit downgrades. The third company, whose share price rose before news it was involved in acquisition talks, said it must have been "positive broker sentiment".

While some sharemarket players can profit from being inside the loop of information that flows in many instances from leaky boardrooms or loose-lipped senior managers, other less well-informed investors stand to lose money.

But there is little the corporate watchdogs appear able to do about it because culprits are hard to pinpoint. Also, many instances of prices nudged by inside knowledge would either not fall within the insider trading laws or the technicalities of the Corporations Act would make prosecution difficult and expensive.

According to the Australian Securities and Investments Commission, 32 individuals have been charged with insider trading since 1985 but only nine have been convicted.

In the public's mind, the Vizard affair has tended to confirm suspicions that misconduct is rampant in corporate Australia, especially the use and misuse of inside information.

Vizard was popular and respected, and the discovery that he had used his position as a Telstra director in 2000 to trade shares in three public companies negotiating deals with Telstra shocked the community.

When it was then learned that the Commonwealth Director of Public Prosecutions had declined to charge the former TV star with the criminal offence of insider trading, the public was outraged.

When the Federal Court last month banned him from managing a company for 10 years and imposed penalties and costs of $590,000, most thought he had got off lightly.

Company directors have expressed their disgust at Vizard's betrayal of trust. Sharemarket operators, most of whom are paid big money to seek information, analyse the numbers and anticipate the rises and falls, were equally affronted. One prominent fund manager complains that ASIC was armed with a tough law that was unenforceable.

The insider trading provisions occupy 10 pages in the Corporations Act. They are tough and cast a broad net but the enforcement hurdles are extremely high.

The fund manager says: "It gets my goat that ASIC's cost-benefit analysis suggested they shouldn't proceed because Vizard's lawyers were going to fight it all the way. That just says to me that ASIC backs down when anyone throws money against it.

"They have cast a huge net over the market to catch insider traders but it's too huge and many get through it.

"It happens, there's too much of it, and the regulator has not been able to instil the level of fear necessary to stop it."

The fund manager, who asked not to be named, explains that it is his job to talk to companies about their prospects but there remains a fine line dividing inside information from public knowledge.

"The law is a bit vague but it is regarded as on the line if you get a private briefing from a company. So we have to be careful about what we talk about."

He says that, in general, company management is much better than it used to be, but there are occasions when indiscretion gets the better of people and they impart knowledge that should have been kept under wraps.

"If, for example, you have a friend who is a research analyst and he tells you casually on the train what he is going to publish in the next few days, that is insider information.

"With a company, when that happens, I tell them I am displeased about having been brought over the wall. If I am in any doubt about whether the information I have has put me over the wall, I get a written opinion from my compliance people.

"If you believe that the information is price-sensitive and not generally available, then you must not deal in that stock."

However, there are many who do. The investigation has revealed a frontier mentality prevalent in Western Australia, where 31 per cent of all public companies are registered. Most of these are resource minnows, and day traders go looking for geologists and others who might hold useful nuggets of information.

Mining companies in WA, and to a lesser extent, small biotech and technology start-ups elsewhere, have a never-ending thirst for capital, and company managers appear vulnerable when approached for information. "They are too frightened to tell people to bugger off," a market analyst says.

The companies most likely to have leaky boardrooms are those with the biggest needs. A broker explains: "Usually, these are companies lacking confidence where any investment is an act of faith. They are living day to day without income, so they do private placements for all their mates."

A fund manager says small companies are easy pickings, especially when they develop close relationships with brokers able to exploit opportunities.

Other fund managers describe a market that works on personal relationships between brokers and clients where information is currency. One describes the frustration of seeing movement in shares that his investment company had put on its temporary blacklist because it had knowledge it dared not use.

"I know that only five people have the inside information and I see the price move and the rest of us are out of the market," he says.

Mike Aitken, a market surveillance expert, says it is easy to spot insider trading and stockmarket manipulation but almost impossible to prove in court.

Dr Aitken, head of the Capital Markets Co-operative Research Centre, did a study that showed the price and volume graphs moving before ASX announcements, but these anomalies were explained as being due to unofficial information releases.

"Most of the information leaked out as part of media activity - often from the key insiders themselves in order to attract other traders into the market as a way of hiding in a crowd," he says. "If others are also trading, it is possible to argue that the information was in the public domain before it was officially released to the ASX."

Some strange share movements
August 8, 2005

There can be many reasons for unusual activity on the sharemarket: unofficial information releases, media activity, astute fund managers and investors, legitimate trading, insider trading.

The following are among a number of cases uncovered during a probe of market-sensitive developments and heightened share prices.

Catalyst Recruitment has a strict confidentiality agreement that prevents it revealing details of negotiations to acquire or be acquired.

But someone seems to have known something. In the week before it notified the stock exchange that a due diligence process was under way, its shares jumped 10 per cent from 71c to 78c on high volume.

On July 25, Catalyst volunteered to the ASX that this might simply be the result of "positive broker sentiment for the company".

The board of Queensland's Sunland Group was over the moon when it announced its inclusion in the ASX 200 index.

On that day, April 29, its shares stood proud at $1.90. The next morning began a price slump that wiped 20 per cent off its market value in three days. On the fourth day, the property developer, to the surprise of relatively few, announced a profit downgrade. Most of the damage had already been done, although another 16 per cent came off the shares that day to bottom out at $1.29.

The traffic camera business Redflex announced an $18.4 million funding facility with Harris Bank last August to cover the cost of a rollout of red-light cameras in the US.

In the month before the announcement, there was a strong run-up in the price of Redflex shares from $2.50 to $3.05. The graph is especially steep, from $2.81 to $3.03, during four trading days in the week immediately before the facility was announced.

The company could offer no reason for it.

Pattern of insider trading shown on ASX
August 6, 2005 - 6:14AM

Dishonest operators in the financial community are using inside information leaked from public companies to skim profits for themselves and clients.

A newspaper investigation after the Steve Vizard affair has revealed a pattern of behaviour that can drive share prices and force shifts of millions of dollars in the market value of public companies.

In the days before companies reveal price-sensitive events such as takeover bids, profit downgrades and capital raisings, the stockmarket community will too often take an unexpected interest, The Age newspaper has found.

The volume of trades will surge and the price of shares will spike up if it is going to be good news and tumble if it is going to be bad.

The newspaper examined price movements and trading volumes in the run-up to 50 price-sensitive announcements made by public companies to the Australian Stock Exchange in the past 12 months.

It found 15 instances where prices went up or down sharply for no apparent reason until the companies made required announcements under ASX listing rules.

It found price rises in the shares of winemaker Southcorp and Queensland tollroad operator Hills Motorway as they were about to become takeover targets despite a lack of media attention or any other market talk to give traders advance warning.

Price movements of up to 25 per cent over three days in foam producer Joyce Corp and Queensland Property group Sunland did not even attract the attention of ASX regulators, the newspaper found.

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