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Insider Trading Law and Practice

PART 1 - INTRODUCTION

1. The Securities Commission has a function under section 10(c) of the Securities Act 1978 to keep under review practices relating to securities, and to comment thereon to any appropriate body. The Commission is authorised by section 28A of the Securities Act 1978 to publish any report or comment made by it in the course of the exercise of its functions under section 10(c).

2. An important part of the Commission's work consists of conducting investigations and inquiries into specific instances of market practice. The Commission's inquiries may not lead to prosecution or other court action (in particular, the Securities Amendment Act 1988 does not give a prosecution role to the Commission), but do afford us the opportunity to evaluate and comment on market practice and, where appropriate, on the effectiveness of securities law in implementing New Zealand's securities regulatory policy.

3. In May 1999 the Commission learned that a confidential document had been leaked from Fletcher Challenge Limited ("FCL"). This document concerned the then planned merger of the Fletcher Challenge Paper Division ("FCL Paper") with Fletcher Challenge Canada. The Commission also received information to the effect that persons who had access to this leaked document may have traded in FCL shares before and after the release of the information to the market.

4. In June 1999 the Serious Fraud Office ("SFO") advised the Commission that it was conducting a criminal investigation into these events. The Commission decided to suspend its work at that time. In the event the SFO decided not to prosecute any person in relation to these events. The SFO referred the matter back to the Commission to enable it to complete its work. The SFO agreed to release certain information from its files in order to assist the Commission.

The Commission's Inquiry

5. After an initial review of available information the Commission decided to conduct an inquiry under section 10(c) of the Securities Act 1978. Terms of reference were settled on 28 January 2000. A copy of these terms of reference is attached as Appendix A.

6. The inquiry was conducted by a quorum of Members of the Commission comprising Mr Euan Abernethy (Chairman), Mr Falcon Clouston, Mr Ian Farrant and Mr Lloyd Kavanagh.

7. After the Commission had completed its inquiry it circulated relevant parts of a draft report to affected parties and invited comment. The Commission has carefully considered all comments and representations made to it.

8. The Commission considered whether certain people who had access to this non-public information about FCL may have bought or sold FCL shares or advised or encouraged any other person to do so, or passed on this information to any other person knowing or believing that person would act on it. The Commission also considered the potential liability of the persons involved under the Securities Amendment Act 1988 (the "Amendment Act").

9. The Commission's conclusions are that these questions of liability are not clear-cut. The events outlined in this report raise serious questions about the interpretation and application of our insider trading laws. They also give rise to questions of whether we need specific laws targeting market manipulation and other undesirable market practices.

10. The topic of insider trading is very much in the public mind at present. Insider trading and other manipulative behaviour damage confidence in our public securities markets. However, the boundaries of insider trading liability in New Zealand can be unclear. The Ministry of Economic Development has recently released a discussion document on insider trading law reform. That document sought comment on questions of detection of insider trading and enforcement of insider trading law. It also sought comment on other areas where there might be a need for reform of the law relating to insider trading. This present inquiry has therefore been very timely.

11. The Commission has decided to publish this report. We describe the events as we understand them. We raise a number of questions for public discussion on the questions raised by our inquiry. A consideration of these may assist the Ministry in its more general review.

12. After careful consideration the Commission has decided not to identify the parties who were the subject of its inquiry. Particular questions have been raised by this inquiry concerning the circumstances in which a person is, or should be, considered an "insider", and the circumstances in which an insider (or another person who trades on inside information) is, or should be, liable for others' losses. We acknowledge that there might be interest in the identities of the people involved, but we do not recommend action be taken against any person in respect of the particular events. On balance we consider there is a public interest in focussing on the law reform questions raised by this inquiry, and in discussing those questions.

13. The Commission has made privacy and confidentiality orders under section 19(5) of the Securities Act 1978 in respect of this inquiry.

14. As this matter has already been the subject of an investigation by the SFO this report does not comment on matters of criminal liability.

Evidence

15. We have received certain information from the SFO arising from that office's investigation.

16. Certain of the individuals referred to in this report were interviewed by SFO investigators in the course of its investigation. Each of these persons has given their consent to the Commission for their statements to the SFO to be used as evidence by the Commission for the purposes of its inquiry. As such the Commission has not heard sworn oral evidence from any of these people. The Commission received affidavits and submissions from several parties in response to a draft of this report.

17. FCL co-operated fully with the Commission in the course of its inquiry, and provided significant information about its procedures and responses, including information derived from its internal investigation into these events.

18. We are grateful to the SFO, FCL, and the other parties for their assistance and co-operation.