Insider trading is notoriously hard to prosecute
April 26, 2004
In an insider trading case that dragged on for nearly four years, the Financial Services Board (FSB) originally claimed R54 million in civil proceedings against Deutsche Securities in a dispute concerning Datatec. The case was recently settled for R24 million.
A classic insider trading scenario involves making a profit, or avoiding a loss, by a pre-emptive sale on the part of those in the know as to information that causes share-price swings, and resulting in a residual loss to those not informed - usually a lot of shareholders.
Insider trading is the antithesis of the capital market ethos, which is enforced the world over by regulators, notably the US Securities Exchange Commission. It took some time but now South Africa has relevant legislation to curb insider trading.
Temptation and human nature being what they are, there must be some doubt about whether insider trading can ever be stamped out completely. Participants in capital markets, whether as raisers of funding, brokers, underwriters or investors, are highly skilled, both technically and procedurally. Hence, insider trading cases are notoriously difficult to prosecute successfully. Settlements, for better or for worse, are therefore common.
From the point of view of setting a legal precedent, it is a terrible pity that the alleged transgressions (tipping) by Deutsche through its former analyst Chris Veegh were not tested in court, thereby affording the judge an opportunity to make a binding decision.
On April 13 2000 it was reported that when adverse news of Datatec's profit was released to the market, the share price fell a massive 30 percent. It seems that the share was already under pressure because of, among other things, the destruction of "dot bombs" on the Nasdaq US hi-tech index and criticism of Datatec's acquisition strategy.
What caused the steep decline? Was it the action of the informed institutional investors in that it was akin to dumping, or the release of the adverse profit news, or both?
Deutsche told Bloomberg that such profit information was unlikely to have a material effect on price or value.
The stage was therefore set for complex, predictably differing and occasionally esoteric submissions on the dynamics of capital markets.
The FSB was claiming R54 million: R13.4 million (the loss avoided by the institutional investors) multiplied by three as a punitive measure.
Right up to the last moment, even in the face of the R24 million settlement, Deutsche would not admit guilt.
A possible public perception, accidental or otherwise, is that Deutsche was actually innocent but was being forced to make a payment under duress.
The view of the FSB, as conveyed by Rob Burrow on Moneyweb, can be viewed as pragmatic.
The FSB had used a common strategy in litigation, which was to claim the maximum and settle for an amount that, though substantially below what was claimed, would do very nicely, thank you.
Outside of the mysterious assistance that is occasionally sought from a crystal ball, no litigant, unless he or she knows something that others do not, can ever definitively predict the outcome of a complex matter.
Therefore, was the conclusion a win-win, win-lose or lose-lose solution?
Deutsche may well have had some reservations regarding its prospects of success. The settlement, though painful, obviated the need for and risk of probing litigation.
All in all, this was probably a win for Deutsche. Rob Burrow of the FSB, on the other hand, described the settlement as "very reasonable".
Definitely a win.
Bert Chanetsa, a practitioner in finance and law, is chairman of Decathlon Continental, an investment banking advisory concern, and a director of CKP Chanetsa
|
|
