Relying on fact or fiction - Court finds insider trading

The Full High Court has recently handed down a judgment (unanimous save for the fact that Heydon J. provided a separate judgment), concerning insider trading, in the matter of Mansfield v The Queen; Kizon v The Queen  [2012] HCA 49. 

In this Bartier Bulletin, we look at the parties’ attempts to defend ASIC’s charges, on the basis of inaccuracy or falsity of the information supplied prior to their illegal share trading activity.

The Facts

• In January 2002 one of the appellants, Mansfield, had a conversation with Malcolm Day, the managing director of a listed public company, AdultShop.com Ltd (AdultShop).  Day informed Mansfield that AdultShop expected profit for that year to increase more than threefold, as would its turnover.  Mansfield passed on this information to the other appellant, Kizon. 

• In subsequent conversations Day had with Mansfield, Day gave further optimistic assessments of the financial performance of AdultShop, which information Mansfield again passed on to Kizon.

• In a conversation between Day and Kizon in June 2002, Day told Kizon that “Packer had bought 4.9% of AdultShop”, and that the projected revenue for AdultShop for the following month would exceed what had any earlier been forecast.  Kizon passed on this information to Mansfield.

• Following the conversations which Mansfield and Kizon had with Day, they purchased shares in AdultShop.

• As it turned out, the information which Day gave to the appellants as to the performance of AdultShop was very wrong; the profit and turnover of the company did not increase anywhere near as he forecast.  Also, “Packer” (whom one would assume in 2002 to be Kerry Packer) had not, nor had any company associated with him, purchased a 4.9% stake in AdultShop, although before the conversations with Day occurred it appeared that Packer interests had for a very short period held a 1.5% interest in AdultShop, which shareholding had long since been sold. 

• Mansfield and Kizon were prosecuted by ASIC for insider trading as prohibited by the then current provisions of the Corporations Act.

The Issue

The central question considered by the Court was: did the appellants possess “information” that was not generally available.

In defending the charges, the appellants contended that, to establish contravention of the Corporations Act, the prosecution had to prove that the “information” which the appellants possessed was a “factual reality”.  They submitted that Day had told them lies about AdultShop, and that “a lie cannot constitute information”. 

Course of the Litigation

The trial judge in the Western Australian District Court acquitted Mansfield and Kizon of the insider trading charge. 

The judge found that the relevant provisions of the Corporations Act were contravened only if the “information” was not generally available, and if it was a “factual reality”.

The prosecution appealed to the Western Australian Court of Appeal, which set aside the acquittals, and ordered a new trial.

By special leave, the appellants appealed to the High Court. 

High Court Judgment

In dismissing the appeals, the High Court found as follows:

• At the time the alleged offences were committed in 2002:

  • the prohibitions on false and misleading conduct in relation to securities were covered in Division 2 of Part 7.11(ss995-1001D) of the Corporations Act; and

  • insider trading was covered in Division 2A of Part 7.11(ss1002-1002U).

These provisions are presently covered respectively in Division 2 Part 7.10(ss1041A-1041S) and in Division 3 of Part 7.10(ss1042A-10430) of the Act.

• It appears not to have been in dispute that the information supplied by Day was insider information, that he was an “insider”, and that Mansfield and Kizon knew that the information imparted was “inside information”.

• In considering in detail the meaning of “information”, and in particular the definition of that term in the Act, the Court unanimously found that the fact that information turns out to be incorrect, and even if it is based upon lies, does not for the purposes of the Act detract from its character as “information”.

• The Court rejected submissions by the appellants that:

  • “information” in its ordinary usage was confined to some particular “fact subject or event”, and

  • that if what is communicated is not fact but fiction, the material imparted is not properly described as “information”.  The Court considered that, in ordinary usage, “information” may be accurate or false, factual or non-factual.

• As a matter of statutory interpretation, the Court held that “information” can include false information.

Based upon its interpretation of “information” the High Court dismissed the appellants’ appeal, thus finding that their actions had breached the insider trading prohibitions of the Corporations Act.

Conclusion

The judgment appears to raise the bar in defending alleged breaches of the insider trading provisions of the Corporations Act.

It would seem to indicate that, no matter how false and spurious is the information provided by the “insider” to the share trader, if that information was not generally available, the share trader will be in breach of the Act if the share trader proceeds to act upon that information by trading in the subject shares.

If you have any questions regarding this article, please contact Michael Cossetto.

Author: Chris McCaffery