Other publications: Insider Trading Law and Practice

Insider Trading Law and Practice

REPORT ON QUESTIONS ARISING FROM AN INQUIRY INTO TRADING IN THE SHARES OF FLETCHER CHALLENGE LIMITED IN MAY 1999

SECURITIES COMMISSION
WELLINGTON, NEW ZEALAND

PART 2 - REVIEW OF EVENTS AND SHARE TRADING (Cont...)

Effects

The leaked page was faxed to the sharebroking firms between 2 pm and 2.20 pm on 7 May. Some firms, when the fax came to the attention of principals, informed the Exchange. The Exchange halted trading in FCL shares at around 3.07 pm.

At around 5.30 pm on 7 May FCL made the following announcement to the share market:

"A document purporting to represent initiatives by Fletcher Challenge Limited appeared in the market today.

In response, the Company confirmed that the Board of Directors of Fletcher Challenge Limited has authorised management to examine alternatives for the reorganisation of the Paper Division. This process has extended to discussions with the Board of Fletcher Challenge Canada Limited.

No decisions have been reached, and further announcements will be made when appropriate.

The Company said the other initiatives referred to in the document were speculative, and it declined to comment further."

Trading in FCL shares recommenced at start of trading on Monday 10 May.

It appears that the release of this information (both the leaked page and the forced announcement by FCL) materially affected the price of FCL Paper shares.

There had been heavy trading in FCL Paper shares throughout April 1999, accompanied by steady price rises. There appears to have been some speculation in the market, as can be seen from the news articles on 30 April and 1 May. The week of 26 to 30 April saw FCL Paper share prices rise on very heavy trading from around $1.43 at the start of the week to close the week on $1.67 (a rise of around 17% in 5 days). The following week the price rose to $1.75 before falling back to around $1.72 at 2 pm on Friday 7 May.

After the release of the leaked page to stockbrokers at 2 pm on the Friday the price of these shares began to rise further. The price peaked at $1.94 at around 10 am on Monday 10 May (a rise of about 13% in a little over 2 trading hours) before dropping to close at $1.82 (up 6% on the 2 pm price for 7 May). The price continued to drop sharply on 11 May, closing at $1.68.

Share trading

To some degree all three persons who played a role in these events also acquired FCL Paper shares during the period under review.

AB's husband bought a relatively small number of FCL Paper shares on 3 May in the joint names of AB and himself. AB told SFO investigators that her husband had not seen the leaked page and did not know what was in the document. AB added that she was not aware that her husband intended to purchase FCL Paper shares until after he had done so. AB told the SFO that her husband purchased these shares after seeing the Herald article on 30 April. She said that the purchase was made with money originally put aside to subscribe for shares in the Contact Energy float, but that the ABs were put off this by reports that subscribers would not receive many shares.

AB informed the Commission that she was aware of the proposed sale of FCL Paper approximately 6 weeks prior to these events, having been told of the matter in confidence by a co-worker who had learnt of it in confidence from an FCL employee.

CD also purchased shares in the week following receipt by him of the leaked page. CD purchased shares on 3 May at $1.65, and further shares on 7 May at $1.72. He continued to purchase following the release of the facsimile to brokers, taking more on 11 May at $1.75. His purchases on 3 and 7 May totalled around 150,000 shares. We were informed by CD that he held these shares until the sale of FCL Paper to Norske Skog early in 2000.

CD told SFO investigators that when he received the facsimile from AB this prompted him to ring his broker and purchase some FCL Paper shares. However in an affidavit later given to the Commission he stated:

"In deciding to purchase shares I disregarded the contents of the press release and relied only on my own background knowledge of Fletcher Paper, the Article in the Herald and the reported market sales on the Thursday and Friday."

CD informed us that he believed the information in the facsimile to be "in the public domain" because it seemed to contain information that had already appeared in the newspaper.

We note again here that CD has acknowledged to the Commission that he received the telephone call from AB and that she told him the release was a mistake and that he should destroy his copy of the facsimile. He received this call on 30 April, very shortly before he contacted his sharebroker. CD has stated to the Commission that Mrs AB did not tell him the information was confidential or that it was a draft.

EF was already interested in FCL Paper shares. He purchased around 100,000 FCL Paper shares shortly before the leaked page was sent to CD.

EF bought and sold further FCL Paper shares on 6, 7, 10, and 11 May. EF's trades appear to revolve around the timing of the facsimile to brokers.

EF purchased almost 300,000 FCL Paper shares on 6 May and on the morning of 7 May. The order placed on the morning of 7 May was accompanied by an express instruction that the purchases were to be made before 2 pm on that day.

On the morning of 10 May EF again contacted brokers, this time to request that they sell almost all his FCL Paper shares. Around 350,000 were sold in a number of transactions on 10 May for between $1.82 and $1.85. EF informed the Commission through his counsel that he sold the remainder over the next 10 trading days.

We have noted that EF had purchased a number of FCL Paper shares on 30 April. He acquired these at $1.69. There is no evidence that he was in possession of confidential information at the time of this purchase.

EF advised the Commission through his counsel that his transactions during this period produced a gross profit of around $40,000 (around $30,000 after deduction of brokerage fees).

PREV | CONTENTS | NEXT