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What Is Insider Trading, & Why Is It Illegal in Australia?

By Will Ellis

Last Updated on January 5, 2024

Buying shares and securities is generally a straightforward process; you find a business you’d like to invest in, do all the necessary research and then decide how many shares you’ll buy depending on the company’s stock price.

Buying shares in Australia isn’t illegal. However, inside trading is illegal. If you commit illegal insider trading, you could be subject to severe consequences from the Australian Securities and Investments Commission (ASIC).

Knowing what insider trading is and the severity of the crime can help you ensure you’re not crossing any lines within your business conduct. In this article, you’ll learn all about insider trading, insider trading laws, and the consequences of participating in illegal insider trading.

Table of Contents:

What Is Insider Trading
What Are Insider Trading Laws in Australia
The History of Insider Trading Laws in Australia
Six Real-Life Examples of Insider Trading
When Is Insider Trading Legal
The Verdict
FAQs

What Is Insider Trading? 🔎️

Insider trading refers to the buying and selling of securities belonging to a publicly traded company by a party that has access to confidential information about the company that isn’t public.

Inside information includes any details, documentation, or anything that isn’t publicly known and would affect the price or value of financial products concerning a business the insider works for or is in close relationship with. The exchange of price-sensitive unpublished information is against the law because it gives an unfair advantage at the expense of others and usually greatly benefits the insider trader who has committed the crime.

An example of insider trading would be if a company’s chief financial officer were to share private insider information with an outside party about the company’s annual turnover and investments that could be impacted by such information. Usually, the insider will exchange commission, and the person will use the information to buy or sell the business’s stock, shares or other securities.

Essentially, when a person possesses inside information about the company that’s not publically available and uses it to profit or avoid losses, this is illegal insider trading. Insider trading is considered a white-collar crime in Australia.

When you join a business that deals with sensitive information, usually you’ll be asked to sign some form of waiver to ensure the information doesn’t leave the workplace. There are penalties for breaking the waiving that extend into the insider trading laws.

What Are Insider Trading Laws in Australia? 🤔️

The definition of illegal insider trading may differ from country to country, but each country will have their own authorities dealing with unlawful insider trading. For example, America has the Securities and Exchange Commission that regulates Insider trading, whereas Australia has ASIC. Insider trading is illegal in Australia under the Corporations Act 2001.

Insider trading is criminalised under section 1043A of the Corporations Act 2001, which states that if a person possesses inside information and knows that the information is not privy to the public, they must not:

Apply for, acquire, or dispose of relevant financial products, or enter into an agreement to use for, receive, or dispose of suitable financial products,
procure another person to apply for, acquire, or dispose of financial products or enter an agreement to use for, develop, or dispose of relevant financial products,
directly or indirectly, communicate the information, or cause the information to be shared with a person the insider knows or ought reasonably to know that the other person would do the actions as mentioned earlier.

The Corporations Act prohibits insider trading in all financial products, such as securities, managed investment schemes, and derivatives. Criminal penalties for insider trading include imprisonment, hefty fines, and disqualification from managing corporations.

In Australia, harsher penalties for breaches of corporate law were introduced in 2019, such as the maximum penalty for a prison sentence of 15 years and a maximum fine of $495,000 for individuals. The maximum penalty for the company is greater than $1.1 million, three times the profit gained or 10% of the company’s annual turnover the year the crime occurred.

ASIC may pursue criminal or civil penalties when investigating insider trading offences. Depending on the severity of the case. The case may be referred to the Commonwealth Director of Public Prosecutions.

The investigation may also include the Australian Federal Police to prosecute insider trading in Australia. The investigation process by ACI will consist of surveillance, data analysis, and interviews with suspects and witnesses. If ASIC are aware of insider trading, they may take enforcement action like prosecuting the companies or individuals involved.

Insider trading is only legal when the trading happens based on publicly available information. Any buying or selling of security using information known to the public isn’t illegal.

The History of Insider Trading Laws in Australia ➡️

The law of insider trading is complex, and each country has its own history of how insider trading laws came about. Insider trading wasn’t recognised, or at least didn’t have a name until the 1970s, and over the years, the term became more clearly defined, and regulations started that are still in place in Australia today.

The key dates of the timeline of Australian insider trading laws are as follows:

1970s: There were instances of extensive insider trading activity found during the mining boom of the 1960s and early 70s. The Rae Report recognised the problem of insider activity in the Australian market and the first known instance of insider activity.
1980: The Commonwealth Government introduced the Securities Industry Act, and the National Companies and Securities Commission (NCSC) was established as the first national corporate regulator.
2001: The Australian Securities and Investments Commission (ASIC) replaced NCSC. ASIC draws regulatory authority from the Australian Securities and Investments Commission Act 2001.
2010: ASIC’s functions expanded to include the supervision of trading on Australia’s licensed equity, derivative and futures markets.

The 1970s: The Rae Report and Insider Trading Illegalities

In the 1970s, the first known insider trading case had been detected. No one had previously been charged for it, as there wasn’t any regulation.

James N. Feros and Richard B.W. Watters published the Rae Report in 1974, a collection of articles on securities and stock exchange in Australia. The report found an instance of extensive insider trading activity during the mining boom of the 60s and 70s.

The report helped develop the basis of state legislation introduced over the following years to regulate insider trading.

1980s: Introduction of the Securities Industry Act

The Commonwealth Government introduced the Securities Industry Act of 1980 as a model for uniform State-based legislation. The NCSC was established as the first national corporate regular.

The NCS commissioned the Anisman Report to research options for further reform. The Anisman report explored and created an outline of the issues and alternatives and began the critical topic of who should be considered an insider. The regulation at the time covered directors, employees, substantial shareholders, and individuals in a professional relationship with a company.

The report includes a scheme recommendation based on the Canadian model and calls for legislation to become much broader. The report assumes extensive regulation is necessary.

In 1989, the Commonwealth Government commissioned an additional inquiry into reforming the insider trading provisions headed by Alan Griffiths. The Griffiths Report made several recommendations, including removing any requirement for a connection with the issuing company, clarifying inside information, and increasing maximum penalties.

1990s: The Year of the Reforms

The policies developed for prohibiting insider trading were broadened during the 1990s, for example, the definition of insider. Previously, an insider had to be someone or a party with a connection within the company. In 1991, the definition of an insider was altered to a person with mere possession of inside information that wasn’t available to the public. The definition changed to someone with access to the data, which is still the standard today.

2001: Out With NSCS and in With ASIC

A new regular took over overseeing inside trading: ASIC, which registers companies, investigates breaches of the law, and enforces the law. ASIC draws regulatory authority from the Australian Securities and Investments Corporations Act 2001. Insider trading provisions remained the same in most material respects since the 1991 reform, so there was little change in the ten years.

The policy is based on the justification of the insider trading prohibition: misappropriation theory, fiduciary duty, market fairness, and market efficiency.

2010: ASIC Expand Regulations

Since the Corporations Act 2001, a lot has stayed the same with insider trading regulation for nine years. In 2010, ASIC’s functions expanded to include the supervision of trading on Australia’s licensed equity, derivative and futures markets. The Corporations Act 2001 is still used today for insider trading cases.

Six Real-Life Examples of Insider Trading 📖️

All insider trading cases in this section are real, public knowledge, and can be easily accessed online. In the following paragraphs, we’ve included summaries of each case.

Example #1 of Insider Trading

Australia’s largest insider trading case occurred in 2014 when two men, Lukas Kamay and Christopher Hill, were charged with insider trading, money laundering and abuse of public office offences. The scheme totalled $7 million, and the illegal insider trading occurred over nine months.

There was a complex investigation by the Australian Federal Police and the Australian Securities and Investments Commission. The investigation began after illegal insider trading was detected in the foreign derivative market.

One of the suspects was an employee of the National Australia Bank and was receiving sensitive information from the Australian Bureau of Statistics employee. They were using insider trading information to enter into foreign exchange and derivative products and profit from favourable movements in stock market prices.

Kamay and Hill were sentenced to jail terms of seven years and three months, and three years and three months, the suspects were charged in 2014. One offender, Kamay, has been banned from providing financial services in Australia since 2017.

Example #2 of Insider Trading

We will be discussing an American example of insider trading in this section.

Directors of companies are not the only people who can be charged and convicted of insider trading. In 2003, Martha Stewart, a businesswoman and media personality, sold 4,000 shares of ImClone stock on December 27, one day before the Food and Drug Administration reduced its review of ImClone System’s cancer drug Erbitius.

The company’s securities plummeted following the announcement. Various bodies within the company had sold shares in the week leading up to the announcement, including the company’s John Landes, Vice President of Marketing Ronald Martell, and other company executives,

On June 12, Sam Waskal was charged with insider trading, obstruction of justice, and bank fraud. Martha Steward denied engaging in improper trading but later discovered that the evidence she provided was false.

After a thorough investigation, the jury found Martha Stewart guilty on four counts of obstructing justice and lying to investigators. She was fined 30,000 American dollars and given months in prison and two years of supervised release. Stewart continued to proclaim her innocence.

Example #3 of Insider Trading

In recent months, there has been a charge over alleged insider trading in Kidman Resources shares. Duncan Stewart of Melbourne appeared at the Melbourne Magistrates’ Court in August of 2023, charged with various insider trading offences concerning share purchases made in Kidman Resources in 2019.

ASIC alleges that Stewart engaged in two occasions of insider trading in April 2019, when he knowingly purchased shares in Kidman Resources whilst, in essence, regarding a proposal by Wesfarmers Ltd, information was not announced to the market.

During the investigation, ASIC alleges Stewart encourages family members to buy shares. When the announcement was released to the market in May 2019, Kidman Resources’ share price jumped from $1.29 to $1.84, which allegedly resulted in profits of $68,114.

The matter is listed for mention at the Melbourne Magistrates’ Court on December 4 2023.

Example #4 of Insider Trading

In 2017, in the US, Brett D. Kennedy, a former financial analyst at Amazon.com, was sentenced to six months in prison, a 2500 American Dollars fine, and two years of supervised release for securities fraud involving insider trading.

The friend, Maziar Rezakhani, paid Kennedy for insider trading information. He pleaded guilty and admitted to providing nonpublic quarterly financial results to Rezekhani, who purchased stock from Amazon and sold it at a profit once the results were public.

The Securities and Exchange Commission (SEC) filed a civil charge against Kennedy, and the friend who bought the insider information is serving five years in prison for defrauding. The SEC detected Insider trading during an investigation against Rezekhani for other defrauding behaviours.

Example #5 of Insider Trading

In 2021, the WA Supreme Court sentenced a man (unnamed) to a 13-month suspended prison term for insider trading.

The man communicated inside information about a discovery at a company’s African diamond mining tenement in 2012. It was that he shared the information with outside parties a day before the company’s shares were on a trading halt and five days before the discovery was publicly disclosed. The public release of the inside information increased the company’s share price.

Example #6 of Insider Trading

In 2012, ASIC commenced civil penalties against Leighton Holdings and two of its former executives for allegedly engaging in insider trading. The pair were aware of the company’s financial performance. The involved parties knew the business was struggling before the information was publically disclosed and sold company shares before the information became known to the public.

When Is Insider Trading Legal? 🕵️

Not all insider trading is illegal; some exceptions are stated under the Corporations Act 2001. However, there is still a legal obligation from all parties within the exemptions.

The Corporations Act states a few instances in which inside trading is legal in Australia, and they include:

It is legal when applying or acquiring securities, managed investment products or foreign passport fund products under an underwriting agreement or a sub‑underwriting agreement.
Insider trading is legal when the acquisition of financial products according to a requirement imposed by the Corporations Act.
Insider trading is legal when information communication is under a requirement imposed by the Commonwealth, a State, a Territory or any regulatory authority.

So, insider trading is only legal when authorised by a governing body, and all parties are informed. You have to be permitted to do insider trading by an official, and it can’t be authorised after the fact.

Insider Trading: The Verdict 💡️

The history of insider trading is quite interesting; through the timeline we shared, it took quite a few decades to define what it is and how it should be regulated. The definition of illegal insider trading may differ from country to country.

Still, it has stayed solid over the last three decades for Australia, with only recent adjustments in 2010 to include more Australian securities. A recent 2022 amendment allowed Australian companies to execute documents digitally using electronic signatures, but the regulations remained the same.

Insider trading is a punishable offence. As seen from the examples we shared, it does still happen all around the world. How insider trading regulations will look in the future is still being determined. Still, from past behaviours, it would be safe to assume that ASIC is looking for more ways to improve regulation and reduce insider trading crimes.

Frequently Asked Questions 📢️

Is Insider Trading Illegal in Australia?

Insider trading is the buying and selling of securities belonging to a publicly traded company by a party that has access to confidential information about the company that isn’t public. Insider trading is illegal in Australia under the Corporations Act 2001.

Why Is Insider Trading Illegal?

The exchange of price-sensitive unpublished information is illegal against the law because it gives an unfair advantage at the expense of others and usually greatly benefits the insider trader who has committed the crime. Insider trading is only legal when the trading happens based on publicly available information.

What Is the Fine for Insider Trading in Australia?

In Australia, the maximum penalty for a prison sentence is ten years, and a maximum fine is $450,000 for individuals. The maximum penalty for the company is greater than $1.1 million, three times the profit gained or 10% of the company’s annual turnover the year the crime occurred.

Does Insider Trading Apply to Private Business in Australia?

The Corporations Act is to be adhered to by all businesses, regardless of whether it is public or private. The Corporations Act prohibits insider trading in all financial products, such as securities, managed investment schemes, and derivatives. Criminal penalties for insider trading include imprisonment, hefty fines, and disqualification from managing corporations.

When Did Insider Trading Become Illegal in Australia?

Insider trading in Australia was recognised as a problem in the 1970s. The Rae Report was published in 1974, a collection of articles on securities and stock exchange in Australia.

From the report’s development, state legislation was progressively introduced to regulate insider trading. In the next couple of decades, more reports helped define insider trading, and then the Corporations Act was passed in 2001. Still, insider trading provisions remained the same in most material respects since the 1991 reform.

Are There Any Exceptions to the Insider Trading Violations in Australia?

Not all insider trading is illegal; some exceptions are stated under the Corporations Act 2001. However, there is still a legal obligation from all parties within the exemptions:

It is legal when applying or acquiring securities, managed investment products or foreign passport fund products under an underwriting agreement or a sub‑underwriting agreement.
Insider trading is legal when the acquisition of financial products according to a requirement imposed by the Corporations Act.
Insider trading is legal when information communication is under a requirement imposed by the Commonwealth, a State, a Territory or any regulatory authority.