
	Advanced Search

Effects on the Securities Markets of certain statements made in May 2006 concerning telecommunications

25 July 2006

PART II - THE EVENTS OF 3 MAY 2006

Effect on the market

Market data for the trading of Telecom securities in the relevant markets between 3 and 4 May 2006 is set out in Appendix C.
At 4.26 p.m. the Minister's office issued a media advisory announcing the Minister's 5.15 p.m. press conference. This was sent to journalists and posted on the Beehive website³. It was not sent to Telecom, NZX or ASX. There were no apparent irregularities in the trading activity of Telecom securities prior to 4.30 p.m. on 3 May 2006. After 4.30 p.m. there was an increase in trading volume through to the close of the market at 5.00 p.m. compared with the rest of that day's trading activity. However, there does not appear to have been any material price effect. The media advisory was picked up by Reuters and Bloomberg. However, as it was not advised to the NZX it is possible not all market participants picked up the news that the Government was planning an announcement.
The main impact on the markets occurred on the ASX after the Minister's announcement at 5.15 p.m. and before trading was halted at Telecom's request at approximately 5.42 p.m. (NZ time). On the ASX, the share price just prior to the media advisory (2.26 p.m. Sydney time) was A$4.68. For the trading period from 2.26 p.m. through to the Minister's announcement at 3.15 p.m. (Sydney time), the share price dropped to A$4.64 on volume of 364,099 shares. By the time Telecom called a trading halt at 3.42 p.m., a further 1,767,622 shares had traded and the share price had dropped to A$4.43. On the ASX that day 3,043,372 shares were traded.
The information in the Stocktake paper was likely to have caused a decline in Telecom's share price regardless of when or how it was announced. However, the Commission has considered whether the manner and timing of the announcement may have resulted in trading on the ASX on the basis of information that was not equally available to all market participants and investors, and whether anything could or should have been done to prevent that occurring, and whether the media advisory may have created an opportunity for trading by those who saw the advisory or coverage of it.

Findings of the Inquiry

Telecom

Once Telecom became aware of the masked paper, it decided that the proper course of action was to seek confirmation of the authenticity and status of the document from the Government. Telecom sought legal advice both internally and externally. The advice was that Telecom might have continuous disclosure obligations but to avoid misleading the market should not make disclosure without first having the masked paper authenticated by the Government. In this regard, the Commission notes that the copy received by Telecom had a masked front page, and was of the paper that was submitted to Cabinet, and then to the Cabinet Policy Committee which on 3 May 2006 approved the policy with certain changes.
Telecom executives attempted to contact the Minister, the Prime Minister and various officials several times by telephone during the afternoon. Details of the various telephone calls and conversations are set out in the chronology at Appendix B. Some conversations did take place, during which Telecom informed officials that it had a copy of the paper and that it considered that it might be obliged to disclose the information in it if it was genuine and reflected Government policy. However Telecom was not told at any time that the document it had was authentic and contained a near final version of Government policy.
Telecom formed the view that it was reasonably likely that the document it had was a genuine Cabinet paper after the Minister of Communications telephoned Ms Theresa Gattung, CEO of Telecom, at 4.38 p.m. to inform her that he would be holding a press conference about the matter at 5.15 p.m. (although not the content of that press conference nor whether the masked paper was authentic).
Telecom obtained a copy of the Minister's announcement from the Government's "Beehive" website⁴ at approximately 5.20 p.m. Telecom decided that the contents of the announcement warranted a trading halt on the ASX to allow the market time to absorb the information. Telecom requested and received a trading halt from the ASX from 3.42 p.m. (Sydney time) until opening on the following day. Telecom did not approach the NZX because it had already closed by the time the Minister had made his announcement, nor the NYSE since it had not yet opened. In Telecom's view both of those markets would have time to adjust for the information before the next trading day.
In the Commission's view Telecom's actions in relation to handling its disclosure obligations in relation to the information contained in the masked paper were taken in good faith to comply with the law and were understandable in the circumstances. The Commission accepts that Telecom was concerned not to mislead the market by disclosing information that was likely to be price-sensitive but was not verified as to its authenticity or its status as regulatory policy. The Commission also accepts that the steps taken by Telecom to authenticate the paper and to determine its disclosure obligations were timely and appropriate.
However the Commission considers that it would have been appropriate for Telecom to have sought a trading halt on the ASX once Ms Gattung had been informed by the Minister of the fact of his 5.15 p.m. press conference, whether or not they were certain of the content. As the ASX was the only relevant market open at that time, this would have prevented trading in Telecom securities until the markets had full and equal information. The Commission considers that Telecom had sufficient information at that time to draw a reasonable inference that the Minister's announcement would be price-sensitive. The Commission also considers that Telecom had had sufficient time at that point to have contacted the ASX to arrange for a trading halt to be put in place if and when there was sufficient certainty that one was required.
The Commission does not consider that Telecom deliberately withheld material information from the market, or that it acted negligently or in bad faith. As noted above the Commission considers that Telecom's actions were understandable in what were very difficult circumstances. However requesting a trading halt sooner would have been the better course to take.
The Crown made submissions to the effect that the manner in which the confidential Cabinet paper was given to Telecom meant that Telecom personnel who received the paper were under an obligation to return it to the Government and had no right to use or retain the paper. Accordingly, the Crown has submitted that there was no issue of disclosure for Telecom. This is said to be so because of the legal and constitutional conventions surrounding Cabinet documents, and the confidential status accorded to these.
The Commission considers that once Telecom knew of the contents of the masked paper, it possessed that information regardless of whether it returned the document. Accordingly, any issues regarding continuous disclosure would not have been resolved by returning the paper.
The Commission has concluded that the issue does not need to be addressed within the terms of reference of this inquiry because no disclosure was in fact made by Telecom. On 3 May 2006, both Telecom and the Crown received advice that there might have been a disclosure obligation on Telecom. The actions taken by both parties on that day were influenced by this advice.
Notwithstanding that this issue does not need to be determined within the scope of this inquiry, the Commission considers that the Crown's submissions raise important questions about the obligations on market participants who receive confidential material information from an unauthorised source. The Commission intends to look at these questions further with a view to assessing whether the rules applying to market participants in these situations are sufficiently clear.

The Government

The Stocktake paper was intended to be part of the Government's late-May Budget announcements. The Commission was advised that, with the Budget release not occurring for another 2-3 weeks, the Government had not yet turned its mind to formulating a formal disclosure process for the price-sensitive information contained in the Stocktake paper on 3 May 2006.
On the afternoon of 3 May 2006, it seems that the Minister and officials were conscious of the price-sensitive nature of information in the Stocktake paper. Details of the steps taken by the Government on that afternoon are set out in the chronology at Appendix B.
We note that there is a Cabinet Office Circular ("the Cabinet circular") which provides guidance to Ministers for dealing with information relating to publicly listed companies. A copy of Cabinet Office Circular CO (02) 14 is set out in Appendix D.
The Commission considers that the Government acted consistently with the guidelines set out in the Cabinet circular, and with the law. Although the principles in the Cabinet circular were applicable, the Cabinet circular does not expressly provide guidance about making announcements of regulatory policy that might affect the price of specific listed securities. However, the Commission considers that the Government could have taken alternative steps to avoid the risk of asymmetry in the information in the market.
Government responses to Telecom's calls to Ministers and officials were carefully worded so as not to expressly or implicitly authenticate the document. This appears to have been at least in part to avoid triggering Telecom's disclosure obligations. Also, the Government and officials did not at this time know how Telecom had obtained the masked paper, nor whether any other party had also obtained a copy.
After consulting with policy and legal advisers, it was decided that the Minister would release the Stocktake paper at a press conference at 5.15 p.m., which was after the NZX had closed but in time for the 6.00 p.m. television news. At 4.26 p.m. the Office of the Communications Minister issued a brief media advisory to the effect that the Minister would be making a "major announcement" at 5.15 p.m. The Minister left a voicemail message with the Chief Executive of the NZX by telephone. Further contact with the NZX was not pursued. In the event Telecom, the NZX, and the ASX were not advised at the same time as the media were advised of either the 4.26 p.m. media advisory or of the content of the 5.15 p.m. announcement.
We understand that it was decided to release the Stocktake paper so that the Government could manage the disclosure of its policy. The Commission is conscious that the timing and manner of the release of policy decisions is a matter of Government prerogative. However, as noted in the introduction to this report it is important for the integrity of, and investor confidence in, the capital markets that the established procedures for releasing non-public price-sensitive information are followed, including by the Government, while accommodating the Government's other legitimate interests.
In the Commission's view potentially price-sensitive information should not be delivered solely through the media. The recognised source of information about listed companies is the relevant exchange. The exchanges are equipped to decide whether steps such as trading halts should be taken to ensure market participants are equally informed so that prices adjust in an orderly fashion.
In the present case, it would have been appropriate to have advised both the New Zealand market operator, namely the NZX, and issuers affected, particularly Telecom, in advance before any announcement by the Communications Minister was made to the media that there was going to be an announcement of price-sensitive information. This may have enabled a trading halt to be put in place on both the NZX and the ASX, which would have obviated the need to delay disclosure until the NZX had closed, and ensured that trading on both markets resumed on the basis of equal, complete and up-to-date information.
The Commission accepts that the Minister and officials had less than three hours in which to work through the issues and make decisions in difficult and unusual circumstances, and that they took the actions that they believed were appropriate.

Recommendations

The Commission considers that in most circumstances notice of the information, or at least the fact that price-sensitive information is about to be released by the Government, could be given to the NZX or the affected issuer who can then decide under the Listing Rules whether a particular course of action should be taken. It would then be up to the NZX and/or the issuer to consider the implications of the announcement and the appropriate steps to take to ensure market transparency (for example a decision on whether to initiate a trading halt of the affected securities).
The Government is in a different position from listed issuers and others in the markets in that it must consider the wider national interest as well as the interests of the securities markets when deciding whether to make announcements about policy that might affect particular listed issuers.
The Commission recommends that the Government engage with the NZX with a view to developing procedures and guidelines for disclosure by the Government of information which could be price-sensitive to listed securities, while accommodating the Government's other legitimate concerns. It would be appropriate if these procedures made provision for advising the ASX where affected securities are also traded on the Australian market.
The Commission also considers that it may be appropriate to amend the Cabinet circular to include any procedures and guidelines the Government develops with the NZX regarding the dissemination of price-sensitive information to the market.
The Commission refers this report to the Prime Minister, as the person responsible for making decisions regarding Cabinet guidance for Ministers, to consider whether the Government wishes to take any action regarding the development of procedures and guidelines on the release of market-sensitive announcements by the Government.

Footnotes

CONTENTS | ...PREVIOUS | NEXT...