Markets
SC in overdrive mode
Cheah Chor Sooi 
Besides criminal and civil prosecution, the SC has also in recent years obtained regulatory settlements relating to insider trading
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The Securities Commission (SC) has revved up enforcement action to clamp down on market manipulators.

The market regulator recently closed a landmark case with the conviction of APL Industries Bhd’s former CEO Datuk Seri Stanley Thai Kim Sim and former remisier Tiong Kiong Choon for insider trading offences.

In what is reputed to be the first insider trading criminal case to complete full trial, Thai was on Nov 24 sentenced to a five-year jail term and a RM5 mil fine, while Tiong was sentenced to five years' jail and a RM10 mil fine.

This is also the first time where a custodial sentence has been applied for an insider trading offence. The other severe case but without custodial sentence was in June 2001 when Kim Hin Industry Bhd managing director (now executive chairman) Chua Seng Huat was slapped with a fine of RM1.2 mil (in default 12 months imprisonment).

Insider trading offences under section 188 of the Capital Markets and Services Act 2007 (CMSA) carry a mandatory punishment of imprisonment not exceeding 10 years and a fine of not less than RM1 mil.

Thai was convicted for communicating non-public information between Oct 26 and 29, 2007 to Tiong who was convicted for two counts of disposing a total of 6.21 million APLI shares while in possession of the same non-public information via accounts belonging to his mother-in-law and his mother.

In the interest of good governance, insider trading is a sickness which has to be eradicated, says Lya

Minority Shareholder Watchdog Group (MSWG) general manager Lya Rahman describes a deterrent sentence – including a custodial sentence – as necessary to curb insider trading and any form of market manipulation activities.

“In the interest of good governance, insider trading is a sickness which has to be eradicated,” she tells FocusM. “This is even more relevant and compelling where insider trading offences involve the honchos and company directors who not only have fiduciary duties to carry out but are in a privileged position, often having possession of material market sensitive information.”

They can ill-afford to abuse their positions by leveraging such information to their advantage at the expense of investors who might incur enormous losses from their action, she adds.

 

Upholding confidentiality

Depending on the degree of evidence made available, the SC tends to initiate either criminal or civil action on offenders of insider trading which currently tops the list of market manipulation activity.

The market regulator will resort to criminal action should there be high standard of proof (beyond reasonable doubt), a legal process that would lead to imprisonment and fines. On the other hand, it will resort to civil action on normal standard of proof (balance of probability) which leads to disgorgement, director removal and injunction orders, among others.

The decision to try an offender either under criminal or civil action often hinges on the intended outcome, level of evidence and strategic manoeuvres (ie to recover the lost money versus barring the offender from the capital market).

A recent successful civil suit filed by the SC was that against three defendants for insider trading involving the shares of Axis Incorporation Bhd.

Koh Tee Jin, a former director of Axis, was declared to have breached section 188 (3)(a) of CMSA 2007 when he communicated inside information to his father, Koh Thiam Seong and sister, Koh Hui Sim.

Both Thiam Seong and Hui Sim were declared to have breached section 188(2)(a) of CMSA 2007 by disposing a total of 244,000 and 739,800 of Axis shares respectively between July 9 and 30, 2008 while in possession of material non-public information.

The material information referred to in the action is related to unresolved issues in relation to Axis’ financial statements for financial year ended March 31, 2008. This resulted in Axis not being able to submit its audited financial statement for that financial year.

Besides criminal and civil prosecution, the SC has also in recent years obtained regulatory settlements relating to insider trading.

Against the backdrop of technological advancement which brings about more potential channels of communication than ever, directors may choose to re-visit and clarify boardroom confidentiality policies, according to the Malaysian Alliance of Corporate Directors (MACD) president and founding board member Paul W Chan.

Chan says that a lack of clear board governance policy is a weak defence at best

“Often companies do not articulate boardroom confidentiality agreements as confidentiality is implied in a director’s duty of loyalty,” he says. “It is an inherent role in fiduciary duties that a director cannot use confidential information for his or her own benefit, or to the benefit of a person or entity outside the company.”

Regulatory settlements with the SC (2015 till year-to-date)


Corporate governance principles

To Chan, confidentiality encompasses proceedings and deliberations of the board and its committees, with each director having to maintain the confidentiality of information received in connection with his or her service as a director.

He further opines that a lack of clear board governance policy is a weak defence at best, given that it is clearly defined in corporate governance principles what a boardroom confidentiality policy entails.

Pointing to the two recent high-profile cases involving APLI and Axis, he cites Sessions Court judge Zulqarnain Hassan who regards insider trading as a modern white-collar economic crime – one which is serious and is in a category or class of its own – to describe the severity of such market violation.

“It is incumbent on the boards to resolve the issue by including a code of conduct or other confidentiality agreement in the company’s corporate governance principles to mitigate any future breaches,” stresses Chan.

Malaysian Investors’ Association (MIA) president Datin Ho Choy Meng highlights the need to recruit a pool of judges who are conversant in both the Securities Industry Act (SIA) 1983 as well as the CMSA 2007 (CMSA) to preside over capital market-related offences.

“This should complement efforts by the prosecution’s team of legal counsel to prepare very water-tight briefs to ensure the defence could not easily exploit any loophole to get their client/s scot-free on points of technicalities,” she suggests.

“MIA would like to see the day when it would not require long intervals of eight or more years between the dates when the offence was committed and the conviction meted out.”

What constitutes insider trading

INSIDER trading is one of the most commonly known forms of securities fraud. This illegal practice occurs when individuals who possess confidential information about a company take advantage of that knowledge by buying or selling stocks to reap profits or avoid losses.

Notably, such practice can directly harm other investors who buy or sell stocks without the advantage of “inside” information. 

The usual culprits are often:

▶ Corporate officers, directors, and employees who traded their company’s securities – either using their personal account/s or those of third parties – after discovering important and confidential corporate developments;

▶ Friends, family members, and other “tippees” of company officers, directors, and employees who traded specific stocks after receiving material and non-public information;

▶ Employees of law, banking, brokerage and printing firms who were privy to confidential information;

▶ Government employees who learned of such information because of their position; and

▶ Other individuals who took advantage of confidential information about securities.



This article first appeared in Focus Malaysia Issue 262.