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• Insider Trading
• 7. Criminal Offences

• Financial Sector Policy

• Securities Law, Securities Markets Law and Settlement Systems

• Review of Securities Legislation

• Discussion Documents

• Introduction
• Should there be Criminal Penalties for Insider Trading?
• Should Criminal Penalties Replace, or be Added to, the Existing Civil Remedies?
• Who Would Conduct Prosecutions?
• What Penalties Should be Imposed?
• Should a Criminal Offence be a Summary or Indictable One?
• Questions for Submissions

Introduction

7.1 At present New Zealand's insider trading law is enforceable by civil action taken either by the public issuer or by a shareholder or previous shareholder who has been disadvantaged by the insider trading. The penalty for which an insider may be liable is an amount of money equal to the gain made or loss avoided by the insider and a pecuniary penalty of an amount determined by the court.

7.2 In addition to these civil remedies, the Commission has the power of investigation and public comment. The Commission has on many occasions published its views about unacceptable market behaviour, including in cases where allegations of insider trading have been made. As a result of its investigations, the Commission makes available to the wider public information on which insider trading claims can be pursued by individual shareholders. The Commission's powers are wide enough to allow it to make public comment about market practices, including suggestions of insider trading, without having to necessarily decide that a particular practice is illegal, or gives rise to a civil claim. Damage to reputation as a result of public comment by the Commission can be a powerful incentive to good market behaviour.

7.3 It has been suggested that criminal offences should be introduced into insider trading law. The following issues are relevant to this suggestion:

• Should there be criminal penalties for insider trading?
• Should criminal penalties replace, or be added to, the existing civil remedies?
• Is knowledge by the insider a pre-requisite?
• Who would conduct prosecutions?
• What penalties should be imposed?
• Should a criminal offence be a summary or indictable one?

Should there be Criminal Penalties for Insider Trading?

7.4 Opponents to criminalising insider trading argue that making insider trading a criminal offence will necessarily impose a higher standard of proof which will make it more difficult to prove a breach. In criminal proceedings the standard of proof usually required to convict is "beyond reasonable doubt". In civil cases a party succeeds on the "balance of probabilities". Proving insider trading activity beyond a reasonable doubt could arguably be an insurmountable task in an area of the law where the conduct in question is necessarily secret and detection is difficult. However, this objection does not apply if civil remedies are retained in addition to criminal penalties.

7.5 There is also the potential difficulty that adding criminal offences to the SA Act could impede both the ability of a public issuer or other person to take civil proceedings and the ability of the Commission to investigate and make public comment. This is because of the rule against self incrimination - "where the plaintiff's case rests wholly on the proof of matters that might be the subject of criminal proceedings, discovery cannot be compelled in any form". When insider trading was made a criminal offence in England, the self regulatory disciplinary procedures of the stock exchange were brought to a standstill in insider trading cases on account of the rules against self incrimination.

7.6 Another matter that may weigh against adding criminal penalties to the SA Act is that it is possible that the Act would need significant amendment. This is because the SA Act is presently structured to create civil remedies and it may need restructuring and, possibly, tightening to make it satisfactory for criminal prosecutions.

7.7 Criminal convictions are, however, generally regarded as resulting in more "stigma" than an adverse judgment in civil proceedings. The fact a prosecution is brought may even, in itself have significant reputational effects. The consequences of a conviction may be quite broad-ranging, for instance, criminal convictions can result in an inability to obtain a visa to enter a foreign country, be considered for some kinds of employment or positions, or take part in the management of a company.

7.8 The deterrent effect of criminal liability is therefore likely to be more significant than the possibility of a civil action. While an insider may be prepared to risk the consequences of civil liability, they may be less prepared to risk the reputation and other broad-ranging effects of a criminal prosecution or conviction.

Should Criminal Penalties Replace, or be Added to, the Existing Civil Remedies?

7.9 In a number of jurisdictions, for example Australia and USA, insider trading is subject to both criminal penalties and civil remedies. There is accordingly precedent for adding criminal penalties to the existing New Zealand regime. Further, it may seem inappropriate to replace civil remedies by criminal penalties and thus deny individual shareholders the opportunity to recover from an insider a gain made by the insider through the use of inside information.

Is knowledge by the insider a pre-requisite?

7.10 Offences can be divided into three different classes relating to the state of knowledge required -

• the first class is those in which mens rea (knowledge by the accused) is an ingredient of the offence and the prosecution is required to prove it;
• the second class is those that do not require the prosecution to prove mens rea. However it is a defence for the accused to prove total absence of fault on the balance of probabilities (these are called strict liability offences);
• the third class is offences of absolute liability, where it is not necessary for the prosecution to prove mens rea and total absence of fault is not a defence.

7.11 There is a presumption that, unless there is a good reason to the contrary, the prosecution should have the onus of proving mens rea. However, a strict liability offence may be created if the offence involves a protection of the public from those undertaking risk-creating activities, the threat of criminal liability supplies the motive for persons in those activities to adopt precautions in order to ensure that mishaps and errors are eliminated, and the accused is best placed to establish absence of fault because of matters primarily within the accused's knowledge. Absolute liability offences have been the subject of critical comment on the basis that it is completely inappropriate to subject citizens to the criminal process in any circumstances if they can demonstrate absence of fault.

Who Would Conduct Prosecutions?

7.12 Prosecutions for criminal offences are usually undertaken by the Police. However, the Registrar of Companies also conducts prosecutions for offences under companies and securities legislation. Using the Registrar of Companies to prosecute insider trading breaches could be a potential option.

7.13 A further possibility is to empower the Commission to take prosecutions for insider trading offences. However, this could involve a significant departure from the present role of the Commission and the Commission would require additional resources to perform it.

What Penalties Should be Imposed?

7.14 The usual penalties for criminal offences are imprisonment and fines. However, imprisonment is not regarded as an appropriate penalty for a strict liability or absolute liability offence.

7.15 If a fine is to be imposed, the usual practice is to set a maximum fine and leave it to the court to determine the actual fine within this limit. A maximum fine should be set at a realistic level in relation to the gravity of the conduct which it is intended to punish. In the case of insider trading, the fact of a criminal conviction and possible liability under a civil action may be a more important deterrent than the amount of the fine. Nevertheless the maximum fine should be set at a sufficiently high level to deter potential insider traders.

Should a Criminal Offence be a Summary or Indictable One?

7.16 If an offence is proceeded with on indictment, the defendant cannot elect to have the offence tried summarily (in other words, the offence will almost always be tried by a jury rather than a judge alone). On the other hand, if the offence is a summary offence, it will be tried in the District Court, unless it is punishable by more than three months imprisonment and the accused elects jury trial.

7.17 On this basis, the questions for consideration in the case of an insider trading offence are whether such an offence should be tried by a judge alone or a jury, and whether it should be tried in the High Court or a District Court.

Questions for Submissions