The accidental insider trader: Haylock v Southern Petroleum

Susan Watson, New Zealand Business Law Quarterly, November 2003

This article considers the decision in Haylock v Southern Petroleum1 (referred to in the Spring 2003 issue of Financial Services Quarterly)and suggests that the interpretation of the Securities Markets Act 1988 by the Court of Appeal in that case is unlikely to achieve the purpose of the legislation.

What does the legislation provide?

The relevant provisions of the Securities Markets Act 1988 are summarised in the article as imposing liability on the insider's company for information:

• that is viewed as belonging to the company; and
  
  
• that the insider obtains about another listed company, independently of his or her position in the company to which the individual is an insider.

Why prohibit insider trading?

There are two rationales for the prohibition of trading in shares about which a person has "inside information":

• the information belongs to the company and should not be used to the insider's personal advantage (based on the common law principles of breach of confidence); and
  
  
• all participants in a publicly traded securities market should have access to the same information (based on market fairness).

Use of inside information is not necessary for liability to arise

The main issue considered by the court was whether the insider trading legislation in New Zealand gives rise to liability merely through being in possession of inside information, even when that information is not actually used for dealing or tipping. The court decided that it does, noting that if the intention was that liability would be imposed only if the person who "had" the information used or took advantage of it, then the legislation would have been worded that way.

It would therefore seem that the element of "moral fault" has no place in the legislation, despite the rationale of the Securities Markets Act being to enforce principles of equity and fairness, which, in the author's opinion, creates inappropriate outcomes.

However, the author noted that, as of August 2003, no successful actions against insider traders had been brought, suggesting that the legislation has not succeeded in its purpose of catching intentional wrongdoers. The government proposes to counter this by making insider trading a criminal offence with lengthy prison terms for offenders.

1 (2003) 9 NZCLC 262,209; [2003] 2 NZLR 175

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