The new head of Australia’s financial markets watchdog intends to “crack down” on unfair disclosures that cause sudden changes in stock prices, and require company directors, auditors and bankers to ensure fair and open markets.
“We’re in a stronger position than ever to crack down on leaks,” said Greg Medcraft, 52, who became chairman of the Australian Securities and Investments Commission in May. “We’ve told investment bankers and stockbrokers they need to strengthen their codes of conduct on sharing confidential information. We’re now in charge of surveillance, which also means we’re in a better position to monitor for anything that points to trading on the use of inside information.”
Fund managers say that the nation’s financial regulators haven’t stopped practices that give some investors an advantage over others with market moving information. ASIC says it identified 200 cases of unusual share-price moves in the 10 months to May 31, 42 of which were referred for further investigation; of those, 24 involved possible insider trading.
“Price-sensitive information being dispersed and traded on is a breach of the most fundamental principles of law, and it needs to be dealt with more aggressively,” said Prasad Patkar, who oversees about $1.7 billion at Platypus Asset Management Ltd. in Sydney. “If investors are being ripped off, that's not satisfactory, clearly.”
More than 48,000 trades have triggered the regulator’s surveillance filters since Aug. 1, 2010, ASIC said. New investigative powers -- including phone tapping -- mean ASIC is better equipped to uncover insider trading, Medcraft said in an interview in Sydney.
The regulator has had a busy week: ASIC won a case involving shopping-mall operator Centro Properties Group that it said sent a signal to directors that they will be held responsible for their company’s accounting procedures. It published June 29 a report revealing auditing failures among top accounting firms, and yesterday said companies should provide more clarity on executive pay.
Medcraft, who previously worked as an investment banker at Societe Generale SA in New York, eventually becoming its Global Head of Securitization, is also demanding stockbrokers, bankers and financial advisors improve self-regulation. He became an ASIC Commissioner overseeing investment banking, pension funds and financial advisors in February 2009.
The government has credited the regulator, which imposed a short-selling ban as markets tumbled after the collapse of Lehman Brothers Holdings Inc. in September 2008, with helping to stabilize Australia’s financial system. Medcraft became ASIC’s chairman for a five-year term on May 13, replacing Tony D’Aloisio, who led the regulator during the financial crisis.
Plugging the Leaks
ASIC’s vow to clamp down on leaks comes as regulators worldwide increase efforts to prevent unauthorized dissemination of market-sensitive information. In the U.S., the Securities and Exchange Commission has boosted market supervision since the global financial crisis -- including pursuing a case against Galleon Group LLC co-founder Raj Rajaratnam.
The UK’s Financial Services Authority, which prosecuted its first criminal insider-trading case in 2008, is “determined to take insider-dealing enforcement right into the heart of the city,” its acting head of enforcement, Tracey McDermott, said in May.
Newspapers have this year reported several takeovers ahead of official announcements. Shares in cable operator Austar United Communications Ltd. jumped 18 percent in the four trading days after the Australian newspaper reported Feb. 18 that rival operator Foxtel was considering a takeover bid. The shares rose a further 18 percent until May 26, the day the deal was officially announced.
‘Noticeable Stock Movements’
The Australian reported the planned purchase of broadcaster Seven Media Group by West Australian Newspapers Holdings Ltd. on Feb. 21, before the deal was announced later that day. The U.K.’s Daily Telegraph reported on Dec. 5 that Rio Tinto Group, the world’s second-biggest mining company by sales, was in talks to buy Riversdale Mining Ltd. -- the day before Riversdale disclosed the discussions to the exchange.
“In a handful of situations in the last year we’ve seen the press reporting information, or else noticeable stock movements, ahead of official company announcements,” said Angus Gluskie, who manages about $350 million at White Funds Management Pty. in Sydney. “That’s highly suggestive that information has leaked into the marketplace. Most investors would see this as an area worthy of further regulatory attention.”
ASIC took over direct supervision of the nation’s financial markets in August last year from Australia’s main bourse operator, ASX Ltd. Its role in the nation of 22.5 million people is akin to the UK’s FSA and the U.S.’s SEC. ASIC is responsible for both supervision and enforcement of the laws against misconduct on Australia’s financial markets.
Under Australia’s Corporations Act 2001, listed companies have an obligation to disclose to the market any information not generally available, and that a reasonable person would expect to have a “material impact” on its share price. The law also prohibits people with inside knowledge from trading shares.
An amendment on Dec. 13 gave ASIC the power to request that federal police initiate phone taps on its behalf where it suspects insider trading. Such methods were used by the SEC in the case it built against Galleon’s Rajaratnam.
In a case prosecuted by ASIC, directors of Centro Properties Group this week were found by a federal judge to have wrongly approved financial statements that didn’t disclose all the company’s debt -- a decision ASIC said clarified a board’s duties to shareholders.
“Directors are an important gatekeeper in our system,” Judge John Middleton said in his ruling. “It’s not the responsibility of company boards to just delegate or rubber stamp. They actually have to take responsibility.”
That victory came after high-profile court losses in 2009, including one involving the collapse of telecommunications carrier One.Tel Ltd. ASIC also lost at trial a case in the same year against Andrew Forrest, the billionaire founder of Fortescue Metals Group Ltd., whom it accused of misleading investors over iron-ore project accords with China.
In February this year, ASIC won a reversal at the court of appeal, a decision Forrest has himself now appealed to the country’s top court.
The regulator says it secured 22 convictions in 2009-10, three of which involved market misconduct, manipulation or providing false information. ASIC completed 23 criminal proceedings in that period, resulting in 12 jail sentences, according to the regulator’s latest annual report. ASIC says it achieved an average 91 percent success rate in civil litigation and criminal matters.
Executive Pay Disclosure
Four large accounting firms in Australia didn’t conduct proper audits in 17 percent of the cases reviewed by the country’s regulator, with smaller firms falling short almost a third of the time, ASIC said this week. In an announcement yesterday, the regulator said companies must provide more clarity on the pay their executives and directors receive.
Medcraft also wants improved disclosure of new financial products to ensure investors are fully aware of the risks associated with complex securities. Additionally, he wants funds to detail their assets more regularly and transparently.
“I’d like to see better asset-level disclosure,” Medcraft said in the June 29 interview. In Australia, asset managers aren’t required to disclose their holdings to customers, whereas mutual funds in the U.S. are.
The government has said the transfer of additional supervisory powers to ASIC was aimed at paving the way for the entry of new competitors to ASX, a move designed to help turn Australia into a “global financial hub.”
Chi-X Australia Pty, the Nomura Holdings Inc.-owned stock-exchange operator that is so far alone in winning regulatory approval to enter the Australian market, has said it may start its service as soon as October 31.
That is the date that new trading rules, designed by ASIC, come into effect. Chi-X will be the first foreign-owned market operator since Australia’s original stock market opened in the southern city of Melbourne in 1861.