Insider Trading: A fool-proof system just does not exist as yet
PRETORIA – It is said that a listed share price, at any given time, correctly reflects the opinion/value of buyers and sellers based on all publicly available information regarding that particular share.
It is no wonder, then, that passive asset management has gained the upper hand compared to actively managed funds.
The latter charges higher fees by comparison, due to the higher cost associated human resource fees charged by their counterparts.
A passive asset manager does not try to out-perform the market through a selection process, which is based on a consideration that at a given time some shares are under-valued while others may be over-valued.
It is, however, a well-known fact that just because the vast majority holds a specific view it does not mean they are right. Many shareholders in Steinhoff, Tongaat, VBS clients, Resilient Property Fund, African Bank, Regal Bank, Saambou, Enron and a host of other companies over many years have collectively been very wrong. Any market trader will tell you that you better believe: “The trend is your friend.”
If there is no way to beat the market it takes a lot of fun out of investing/trading for profit. However, accepting mediocrity just does not appeal to all people.
Any decent optimist will believe that there must be a way to beat the market. It is clear that if the share price reflects all publicly available information relating to a company, material information prior to it being publicly available would bring a distinct advantage to someone with such knowledge.
Such a person could either buy or sell a share, trading with knowledge not available to the counter-party. Such activity is prohibited by the Insider Trading Act, No 135 of 1998.
A host of bodies, acts and regulations all attempt to curb the abuse of insider trading such as the Financial Markets Act 2012, section 3, of the JSE Listings Requirements, in particular the Surveillance division of the JSE and also the TRP Merger and Takeover Code – and no doubt the Companies Act of 2008 that all provide an outline of the legal framework.
Also relevant is the King 4 Report on Corporate Governance. The Financial Securities Authority (previously known as the FSB), the Public Prosecution Authority and the South African Police force and its various divisions (SIU, Hawks, etc) all have a role to play. In addition there are various publications from authors in the academic world that have contributed literature relating to the evil of insider trading.
As far as I know the Insider Trading Act is the only Act that has not one successful prosecuted case in the 21 years of its existence.
It should also be pointed out that, globally, criminal prosecution of insider trading is rare.
The inadequacies of the legal framework, particularly regarding the onus of proof in a criminal trial and the absence of a civil remedy, played a large role in the drafting of the Insider Trading Act (1998).
The question must be asked if our authorities are serious enough about curbing this practice. Does the host of institutions that monitor these transgressions have the required human capital resources to match with the transgressors?
The JSE market regulation division uses electronic surveillance systems. However, the potential pool of persons who could become insiders is large, and relates not only to directors, employees and advisers, but could also include advertising and production companies employed to compile and produce confidential information, such as newspaper advertisements announcing company results, cautionary announcements and other price-sensitive notices.
A fool-proof system does not exist as yet.
It is now common knowledge that Markus Jooste sent a text message to at least two people stating there were serious problems within Steinhoff.
I have no doubt a lot of people (outsiders), wish they were on that WhatsApp list.
Corrie Kruger is an independent analyst. The views expressed here are his own.