Between the lines: Insider trading tilt politically driven

By BRIAN GAYNOR

The insider trading action initiated by Stephen Franks and Roger Kerr against Kerry Hoggard is extremely cynical.

There is little doubt that it is politically motivated.

The two plaintiffs strongly support the country's existing light-handed regulatory regime, the announcement was posted on Act's parliamentary web site and Mr Franks is an Act member of Parliament.

The lawsuit is unlikely to benefit Fletcher Challenge's shareholders.

The problem with the insider trading laws, and other securities regulations, is that they are fine in theory but ineffective in practice.

In New Zealand, the listed company or one of its shareholders must take an insider trading case.

Directors are unlikely to take a lawsuit against another member of the board. Shareholders can either apply to the court for leave to take action on behalf of the company or take the case themselves. If the court grants leave, then the listed company pays for the cost of the proceedings.

The penalty shall not exceed three times the amount of profit made by the defendant.

The only shareholder to have reached first base is Levin businessman Donald Kincaid.

In 1995, he was granted leave to take an insider trading action on behalf of the Bank of New Zealand against Fay, Richwhite, Sir Michael Fay, Robin Congreve and Geoff Ricketts.

The defendants filed an appeal against the leave application before the substantive case reached the High Court.

Mr Kincaid had incurred costs in excess of $600,000 just to obtain leave.

He could have faced additional costs of more than $1 million if the defendants had successfully challenged the leave application and costs had been awarded against him.

At that stage Mr Kincaid had no option but to settle out of court because the defendants had far deeper pockets than his.

Wilson Neill's complainant shareholders incurred costs in excess of $400,000, even though this insider trading case never reached the substantive-hearing stage.

Herein lies the problem with the law: it favours individuals with deep pockets or those who can obtain legal services at a discount.

As Stephen Franks is a highly experienced lawyer who has specialised in securities law, the cost of his proceedings will be relatively low.

His first task is to convince the Court that he should be granted leave to take a case against Mr Hoggard on behalf of Fletcher Challenge.

If this is successful, Fletcher Challenge will have to pay for the substantive hearings, while penalties and costs found against Mr Hoggard will go to the listed company.

The action will probably have a negative financial impact on Fletcher Challenge because the group's legal costs will be more than any extra penalty paid by Mr Hoggard.

Sharemarket investors should not be fooled by the ideologically driven action of Mr Franks and Mr Kerr.

In the longer term, an overhaul of the insider trading laws - which is strongly opposed by the two plaintiffs - is far more important than the promotion of Mr Franks' political career.