The former chairman of Gunns Ltd John Gay has received a $50,000 fine for insider trading but will not serve time in jail. Will such a sentence really deter others who might be tempted to engage in insider trading?
Earlier this month, Mr Gay entered a guilty plea to charges of insider trading resulting from the sale of 3.4 million Gunns’ shares for about $3 million in late 2009. At the time he sold the shares Mr Gay was aware of a private management report which indicated an expected drop in Gunns’ profits. When the report was later released, Gunns’ share price dropped significantly. This means that Mr Gay avoided a significant loss by selling the shares when he did.
Insider trading is a threat to the integrity of our securities markets, because it reduces investor confidence and discourages participation in our securities markets. The perception that insiders have access to information not available to the wider market or the general public can be a significant obstacle to investment. Accordingly, insider trading laws prohibit any person from trading in shares or other financial products while they possess price-sensitive information which is not publicly available.
General deterrence – the desire to deter others from engaging in similar conduct – is an important consideration when sentencing convicted offenders. The majority of cases concerning convicted insider traders address the need to impose an appropriate sentence in order to deter others from engaging in insider trading in the future.
This is particularly important for insider trading, because it is an offence which is extremely hard to successfully prosecute, mainly because of the difficulties in detecting when insider trading has occurred and proving it beyond a reasonable doubt. Not to mention the fact that insider trading laws are complex and overly legalistic.
It is important to acknowledge that there is a very wide variation in the sentences imposed on convicted insider traders – sentences have varied from small fines to up to three years imprisonment, with many variations in between.
Some convicted insider traders are sentenced to full-time imprisonment, while others receive periodic detention or suspended sentences. At the time Mr Gay sold the Gunns’ shares, the maximum sentence for insider trading was five years’ imprisonment and a fine of $220,000, but the maximum sentence has now been increased to ten years’ imprisonment and a fine of $765,000.
Despite this, the greatest custodial sentence ever imposed for insider trading in Australia was Sydney stockbroker John Joseph Hartman’s sentence of four and a half years jail in 2010 (which was reduced to three years on appeal). Regardless of the precise lengths of the various sentences, the vast majority of convicted insider traders in Australia have been sentenced to some period of time in jail.
Whilst the Commonwealth Crimes Act prescribes certain matters that judges should take into account when sentencing, the general deterrence of other potential offenders is actually the most consistently applied factor in insider trading cases.
For example, when stockbroker Rene Rivkin was convicted of insider trading in 2003, the judge in that case emphasised that it is important to send a strong message to the wider community that insider trading is unacceptable and will not be tolerated (Mr Rivkin received a sentence of nine months periodic detention).
When sentencing Aristocrat Leisure’s Margot McKay for insider trading in 2007, the judge in that case stated there can only really be general deterrence for insider trading where a custodial sentence is imposed (Ms McKay received a sentence of fifteen months’ periodic detention). In 1991 when Kian Lang Teh, the first person to be convicted of insider trading in Australia, was being sentenced, the judge in that case acknowledged that convicted insider traders cannot be treated as scapegoats, but acknowledged a need to fix a sentence to deter others (Mr Teh received a sentence of three months full-time imprisonment and a fine of just over $36,000).
Mr Gay has not been sentenced to any term of imprisonment and will pay a fine of $50,000. Will this really deter others from engaging in insider trading?
The judge, His Honour Justice David Porter of the Tasmanian Supreme Court, stated in his sentencing remarks that Mr Gay’s conduct was not “in the serious category of insider trading”. One of the reasons he gave for this statement was that Mr Gay’s motivation to sell his Gunns’ shares resulted from a desire to reduce his debts after receiving a diagnosis of prostate cancer, rather than an intention to profit from inside information.
While this may be true, insider trading laws still prohibit a person from trading in shares when they possess inside information, regardless of the reasons why they might do so. Mr Gay’s late plea of “guilty” and his ill-health and remorse were also factors taken into account. It has also been reported that the prosecution did not press for a sentence of imprisonment.
The fact remains that Mr Gay is the most senior executive in Australia ever to have been convicted of insider trading, yet has received one of the lightest sentences. Coupled with his close connection to the company in whose shares he traded and the large amount of money involved, a much higher sentence might have been expected. Indeed, the fine imposed is much less than the amount realised on the sale of the shares.
It is to be hoped that Mr Gay’s sentence will not give rise to a belief that “insiders” are able to engage in insider trading with relative impunity, or create a perception that ASIC’s improved track record in connection with the pursuit of insider traders is all for nought.
Juliette Overland is a senior lecturer in corporate law at the University of Sydney Business School at University of Sydney