Edition: March / May 2017


Blind spot

It’s relatively easy to track insiders on share trades especially when compared with bond trades.

Solly Keetse, who heads the Directorate of Market Abuse at the Financial Services Board, confirms that an investigation into possible insider trading prior to ‘Nenegate’ is under way (see article below). But he doesn’t sound too hopeful that it will be concluded one way or the other.

When the securities involved are government bonds issued by auction, he explains, it’s much more difficult than with share deals to drill down the trading records for a match between who might have had non-public information and benefited from having transacted on it. In SA there seems never to have been a prosecution for insider trading on government bonds.

This is unlike the situation with shares. Last year, for example, the FSB’s enforcement committee imposed its biggest penalty on an employee of Basil Read. He was shown to have sold Basil Read shares, to a value of some R830 000, at prices between 882cps and 813cps, within two weeks prior to the company announcing a loss that caused an immediate fall in its share price to 700cps. The employee having admitted guilt, a settlement of R467 400 was agreed.

The Financial Markets Act takes a hard line on insider trading. The envisaged penalties include an administrative sanction equating the profit the person made or the loss avoided. In addition, a fine of up to three times this amount can be imposed. However, as if insider trading weren’t fraud, there are no provisions for a prison sentence.

In the UK and US, there are. Last year, following an investigation by the UK Financial Conduct Authority, a BlackRock fund manager was jailed for a year. The London judge stated: “Insider trading is not a victimless crime. I regard the offences as pre-meditated and blatantly dishonest.”

In the US since 2009, the Securities & Exchange Commission has extracted guilty pleas or caused to be found guilty some 60 Wall Street executives and traders. The most high-profile of these was concerned with Rajat Gupta (no relation), a former head of the McKinsey consultancy and main board director of Goldman Sachs.

Passing a sentence of two years’ imprisonment on him, the New York judge noted: “Insider trading cannot be detected, let alone successfully prosecuted, without the aid of wiretaps.”

That’s unnecessary in SA, believes Keetse: “We’re way ahead of the US so far as wiretaps are concerned. There they must go to the Department of Justice for authority. Here, with the settlement period on share trades reduced to three days and likely soon to be reduced to zero, suspicious trades are much easier to track.”

But the identification of suspected insiders on bond trades is apparently a different exercise.