Edition: February/April 2018
Editorials

INSIDER TRADING

Light shone on Steinhoff

Frankfurt listing will not make the investigation by SA regulators any easier.

Like the huffing and puffing in Little Red Riding Hood, each time there’s a stink of corporate scandal the regulators of insider trading spring into action. Sometimes the big bad wolf succeeds in blowing down the houses of the JSE’s Market Regulation Division (MRD) and the FSB’s Directorate of Market Abuse (DMA). Sometimes he doesn’t.

Where he doesn’t, at the level of the silly, it’s with the hefty fine imposed on a broker for a fun exercise in “market manipulation” of the Gupta-related Oakbay Resources share price. Where he does, at the level of the serious, it’s illustrated by the frustrations of the Trillian investigator (senior counsel Geoff Budlender) to nail down possible shorts of the rand on international bond or futures markets that preceded “Nenegate”.

With the latter, there could be means employed by an astute trader to evade suspicion or perhaps systemic limitations in the legal definition of an insider (TT March-May’17). A bond through London, on advance knowledge of a SA cabinet reshuffle, would be more difficult to track or explain for abnormal activity than an equities trade in Johannesburg.

Of passing interest, by comparison, are the MRD and DMA investigation into trades related to the tanking of the share price in technology company EOH. Of much graver interest, because of its wide ramifications, is retailer Steinhoff whose Top 10 market capitalisation on the JSE (with a primary listing in Frankfurt) caused its automatic inclusion in local institutional portfolios.

With both, the regulators will face the defence that the trades of insiders (as defined) were motivated by margin calls (which arise when there’s a fall in the prices of shares used as security for loans). These would offer a justification by Christo Wiese, then the Steinhoff chairman, of his sales as the share price entered its downward spiral. When he should have been the first to suspect irregularities, he was a buyer. The same cannot necessarily be said of other sellers.

Keetse . . . many successes

As matters stand, the MRD and DMA have their hands full. As at end-November the DMA had seven ongoing investigations into insider trading, six into market manipulation and four into false or misleading reporting. Over the past 18 years an average of little over R1m has been levied in penalties for 91 cases.

More often than not, conviction relies on admissions of guilt. Unlike the US, rarely if ever in SA have there been criminal trials in open court; let alone any that result in prison sentences.

MRD director Shaun Davies points out that this JSE division performs a market-surveillance function. It’s responsible for monitoring trades in JSE-listed securities in order to identify potential market abuse including insider trading and market manipulation. Once identified, the matter is referred to the DMA.

“We use sophisticated electronic surveillance systems to detect abnormal trading activity and are able to identify the investors responsible for each trade,” says Davies. “But proving insider trading can have its challenges as all the elements of an insider-trading offence must be proven. For example, being able to prove that the person actually possessed inside information that had not been made public or had received the information from an insider.”

Only the DMA and the Financial Services Board have regulatory jurisdiction and legislative powers to prosecute market abuse. Most cases are received from the MRD.

DMA head Solly Keetse notes that, once its investigation reveals market abuse, the matter is referred to the FSB’s enforcement committee for administrative action. Over the past three years the committee has had 21 successful prosecutions (three for insider trading, 16 for price manipulation, two for false and misleading reporting) for which administrative penalties were imposed.

Amongst other things, proof of insider trading requires that the alleged perpetrator possessed inside information; knew that he/she was an insider, and dealt in securities on a regulated market to which the information relates.

“Legislative changes to the Financial Markets Act are often necessitated by gaps identified in the market-abuse provisions during the investigations and enforcement actions,” says Keetse. “The FSB strives to make necessary changes to the Act each time such gaps are identified.”

This implies identification after a horse has bolted. Another gap was shown with stockbroker Trillian where it’s known that certain executives had advance knowledge of a finance minister’s dismissal. But it remains unknown whether they acted on this market-sensitive information and, if they did, whether they fell within the legal definition of an insider.

May no similar gaps be revealed on Steinhoff.