The New Zealand financial market regulator has finally had its first successful prosecution of an insider, but what can we take away from this case?
New Zealand has had an extremely poor history when it comes to the issue of insider trading.
READ MORE: • Insider trader gets home detention
Despite the FMA having the power to sue insiders since 2002, and the introduction of criminal sanctions in 2008, there have been few cases and fewer 'successes' (the Transrail settlement, which saw the defendants avoid losses well in excess of their fines, and failure to get guilty pleas can hardly be classed as a win).
Studies have found that the key component for deterring insider trading is successful prosecutions. In a study of over 100 countries, Bhattacharya and Daouk (2002) concluded that enacting laws is less important than the first win.
And in fact, in a follow up study, countries that failed to get a win wound up in a worse position. Therefore, the first successful prosecution of an insider, and the first successful criminal prosecution, represent significant landmarks for the NZ capital markets.
However, it has taken 15 years for that all important first win for the regulator.
This raises the question of whether other insiders will see this as a turning point, representing an increased focus on insider trading enforcement by the regulator, or as a lucky one-off.
If it is the latter, then it is unlikely to improve market confidence and integrity.
An interesting aspect is that Jeffrey Honey was convicted on passing on inside information, rather than trading on it himself. This is also significant as detecting and prosecuting these types of situations, where the direct insider hasn't traded themselves, is far harder.
However, there was still a relatively close relationship between the person trading (against whom the case continues) and Eroad. And as Eroad is a relatively illiquid company, suspicious trading volumes before major announcements would have been reasonably obvious. It will be interesting to see what information becomes available regarding how this was detected and what lessons can be learnt from the prosecution.
Of concern is the relatively light sentence given for the first prosecution. In this respect it appears the FMA lucked out: an individual with a previously spotless record, a very small amount of trading (15,000 shares representing a loss avoider to the trader of $6500), and an early guilty plea. While the FMA pushed for 12-18 months, and the law allows for a maximum of 5 years and/or a $300,000 fine for individuals, the judge came down with just 6 months home detention.
While the conviction will undoubtedly have an impact on Honey's prospects moving forward, the punishment can hardly be considered the deterrent needed to send a strong signal to other insiders, who are still perceived as being rampant in the local market. One can only hope, for the sake of the message it will send, that the case against the individual who conducted the trades is also successful, and that their punishment will be much stronger.