The Financial Markets Authority (FMA) has achieved a successful outcome against Mark Talbot in what was a straightforward insider trading case, but its decision to settle rather than prosecute was a line call deserving of some scrutiny.
It makes practical sense, and generally we agree with it, given the relatively small sums attached to the offending and the FMA’s recent failure to achieve a conviction in the Sansom litigation – with a hung jury at the first attempt and acquittal at the second.
But it is out of step with the Hayne Royal Commission view that regulators should use the courts, rather than enforceable undertakings, as their primary enforcement tool.
Talbot, a former Deloitte partner, operated as “virtual CFO” to VMob from 2011 to 2014, a role which (ironically) made him responsible for ensuring awareness of VMob’s trading policy and its application to all staff, contractors and directors.
In July 2014, VMob was awarded a contract with McDonald’s valued at $4.8m over three years. Immediately after the deal was agreed, but before it was concluded and announced to the market, Talbot put in a request through one of his investment companies, MST Holdings Limited, to the Chair of VMob to buy shares in VMob.
This was refused on the basis that Talbot, and another unnamed Director making a similar request, were “insiders and aware of the potential large deal with McDonald’s in Japan” with “the potential to close within a couple of weeks”.
Talbot replied “understood” but failed to disclose that one day earlier, he had purchased 1,000,000 VMob shares for $10,000 through Blumau Finance Limited (Blumau), another investment company of which he was sole director.
On Friday 8 August 2014, VMob’s share price closed at $0.012. On Tuesday 12 August 2014, the day after the announcement, VMob’s share price closed at $0.017. On 31 October 2014, Blumau transferred all of its VMob shares to Talbot’s father (with whom ownership remains today).
Talbot said Blumau was a vehicle through which he purchased shares in NZX listed companies for the benefit of his father.
He stated that he had been advised by VMob directors in relation to a previous share purchase in 2013 that a disclosure notice was not required for Blumau purchases as the shares were held non-beneficially, and he relied on that information in the conduct of the VMob purchase.
Admissions, Undertakings and Payment
Talbot accepted he was required to comply with the Securities Markets Act 1988 (SMA) in his capacity as an information insider and/or officer of VMob and that he traded, by purchasing, 1,000,000 VMob shares on 24 July 2014.
He made a series of admissions, including that:
- he had information that VMob was likely to be awarded the McDonald’s Japan contract when he traded VMob shares on 24 July 2014
- this information was, and he was aware that it was, Material Information not generally available to the market
- trading the VMob shares on 24 July 2014 was a contravention of section 8C of the SMA (which prohibits insider trading), and
- it is no defence that the shares purchased by Blumau were for the benefit of his father.
Pursuant to section 46 and 46A of the Financial Markets Authority Act 2011 (FMA Act), Talbot offered and the FMA accepted the following Undertakings:
- Talbot will not be a director or promotor of, or in any way (whether directly or indirectly) be concerned or take part in the management of, a listed issuer, for a period of five years, and
- Talbot will pay $150,000 to the FMA in lieu of a pecuniary penalty.
The Undertakings are legally enforceable by the FMA in accordance with section 47 of the FMA Act. In agreeing these admissions, Undertakings and payments, the FMA has agreed that, unless otherwise required by law, it will not take any further action against Talbot on relation to the insider trading.
Chapman Tripp comments
In October 2017 the FMA’s head of enforcement, Karen Chang, said:
“The integrity of New Zealand’s licensed markets is a key strategic priority for the FMA. The insider trading prohibitions are one of the key mechanisms for ensuring licensed markets remain fair and transparent. The FMA will take enforcement action where it finds evidence of insider conduct.”
She reinforced this sentiment in today’s press release, saying:
“Maintaining market integrity is core for the FMA. Unethical trading and a disregard for disclosure obligations erode investor confidence in our markets at a fundamental level.”
But should the FMA have settled a criminal prosecution for a serious criminal offence? And are the sanctions still fit for purpose?
Section 8C of the SMA has been carried over to Part 5 of the Financial Markets Conduct Act 2013 (FMC Act) with the same five year maximum prison term and with the maximum fine for an individual raised from $300,000 to $500,000 ($2.5m for a corporate). Interestingly the Australians have recently ramped up their maximum term from five years to 15 years.
Insider trading can also be brought as a civil action, with the FMA able to seek a civil penalty of the greater of (a) the consideration for the transaction (in Talbot only $10,000), (b) three times the amount of the gain made (in Talbot $7,000, so $21,000) or loss avoided and (c) $1m for an individual, or $5m for a corporate.
Between 1988 and 2002 the SMA had provided only for private enforcement rights, with the potential, with leave of the Court, to take legal action at the listed company’s cost. Then, from 2002 to 2008, the Securities Commission (FMA’s predecessor organisation) was allowed to take civil action in its own right.
But the private action rights were removed in the 2008 reforms. As former Chapman Tripp partner, Stephen Franks has recently commented, this may have been a mistake.
As a civil matter the burden of proof is lower (balance of probabilities), compared to the crime (beyond reasonable doubt) but, perversely, the financial penalties are much higher. And, as in the Sansom case, a criminal conviction can be difficult to achieve even in apparently clear cut situations.
The FMA has justified its decision to withdraw the Talbot criminal charges, stating that it is satisfied with the agreed resolution as being a “proportionate and appropriate” response to Talbot’s misconduct, on the basis of being able to achieve FMA objectives without spending time and public resource in court proceedings.
We accept that there is logic in this position. And, as we set out in our recent note on the Hayne Report, we don’t think the Hayne prescription should be adopted in NZ without modification – in our view enforceable undertakings and other tools in the FMA toolbox such as non-action letters and reprimands have their place.