A long list of insider trading investigations

The Financial Services Board (FSB) is tasked with policing the entire financial services industry. It regulates collective investment schemes, financial services providers, insurers, nominee companies, retirement funds and friendly societies. It also keeps a close watch on transactions on the JSE. The Directorate of Market Abuse (DMA) is a committee of the FSB, mandated to investigate, and in appropriate instances, take enforcement action in cases of market abuses on the financial markets. Typical abuses include insider trading, market manipulation and false reporting.

Insider trading, notes the Penguin Dictionary of Financial Terms, is the illegal exploitation of information that is known within a company, or among the partners in a particular transaction, but has not been made public, to make a profit or avoid a loss on market transactions. Imagine, for example, you were privy to Kumba Iron Ore’s decision to rescind its ‘cost plus 3%’ contract to supply iron ore to steel giant ArcelorMittal BEFORE it became public knowledge. You could have used this information to generate massive profit by selling (shorting) shares in the steel manufacturer. ArcelorMittal shed almost a quarter of its market capitalisation as investors re-rated its prospects.

Inflating market prices

Market manipulation typically involves the artificial inflation (or deflation) of the value of a particular listed security. In September 2009 the FSB enforcement committee fined Nathan Hittler, chief executive officer of then suspended Corwil Investments (JSE: CRW), R1m for this offence. The committee ruled Hittler had manipulated the price of another security, Marshall Monteagle (JSE: MTE), to boost Corwil’s value. Corwil was a shareholder in Monteagle at the time. Market manipulation cases often centre on portfolio managers who have attempted to tweak the prices of illiquid shares – and thereby the assets under management in their portfolios – at quarter end.

False reporting can include a range of abuses such as late filing of trading updates, hiding financial irregularities in annual statements and failing to disclose events that have significant impact on company performance. Since 1999, the DMA, and its predecessor, the Insider Trading Directorate have investigated 239 cases. In 54 of these cases the DMA proceeded with enforcement action, netting R56m in penalties.

A real-life insider trading hearing

In its latest hearing the enforcement committee of the FSB considered allegations of insider trading against Michael Brown, Rorden McGregor and Andre Cheminais, relating to share transactions in Cape Empowerment Trust Limited and Dynamic Cables RSA Limited shares.

In 2006 Brown was an investment consultant at Lewer & Company Stock Brokers (under licence with PSG Online Securities). He had ‘inside information’ of a deal relating to the repositioning of Cape Empowerment’s casino interests, which were to be held by Dynamic. Armed with this information he purchased Cape Empowerment shares for a number of his clients. “The Committee determined that Brown contravened the anti-insider trading prohibition in the Act and ordered him to pay a penalty to the FSB consisting of the unrealised profits of his clients, plus a penalty of three times such profits.” Brown was ordered to pay R75624 and 75% of the costs of the investigation and the hearing.

As often happens in these cases, Brown received his information from a source at the company. Although McGregor, the financial director of Cape Empowerment at the time, had disclosed the information, the committee found that he did not contravene the anti-insider trading provisions in the Act. It was McGregor’s duty to disclose this information in the course of his duties. Cheminais, the managing director of a subsidiary of Dynamic at the time, purchased both Cape Empowerment and Dynamic shares for his own account. “The committee found that he had contravened the insider trading prohibition in the Act, and imposed a penalty of R50000, also ordering him to pay 25% of the costs of the investigation and the hearing.”

Plenty of ongoing investigations

The DMA is currently investigating a number of ‘possible’ market manipulation cases. It’s insider trading cases include dealings in shares of Africa Cellular Towers, Beige Holdings, Blue Financial Services, Gijima AST Group, Jubilee Platinum, Sentula Mining, Simmer and Jack Mines, Stratcorp, Telkom Limited and Wilson-Bayly Holmes-Ovcon. With the exception of Telkom these companies are mostly in the small to mid-cap space. Market manipulation investigations into trading activities involving Afgri Limited, Argent, Cape Empowerment Trust, Dialogue Holdings, Freeworld Coatings, Huge Group, Metair Investments, Palabora Mining, Pinnacle Point Group and Vox Telecoms are ongoing.

Editor’s thoughts: It’s extremely difficult to prove market manipulation. Large share price fluctuations occur on a daily basis as hundreds of thousands (if not millions) of shares change hands. The definitions of insider trading, market manipulation and false reporting are also fairly broad. Do you believe insider trading and market manipulation is rife in South Africa? Add your comments below, or send them to gareth@fanews.co.za

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