Securities Commission too late to seek penalties in Tranz Rail insider trading case

The Court of Appeal has confirmed that the Securities Commission will not be able to seek penalties in the case against former Tranz Rail Director, David Richwhite, and Midavia Rail Investments as the penalties claims are time-barred under the current wording of the legislation.

Background

The Securities Commission commenced proceedings in October 2004 seeking compensation and statutory penalties against six parties who were alleged to have been involved in insider trading in February 2002 in shares held in Tranz Rail Holdings Limited (now Toll NZ Limited). Four of the original six defendants have since settled with the Commission.

In a preliminary application,  the court was asked to determine whether the Commission was entitled to seek statutory penalties as well as compensation against the defendants. The High Court1 determined that it was not entitled to do so as the Commission's causes of action under section 7 (for insider trading) and section 9 (for tipping) of the Securities Markets Act (the Act) accrued when the alleged insiders sold their shares and thereby "avoided losses". Given that the trades in question occurred in February 2002 this meant that the Commission was time-barred from recovering penalties by the two year limitation period "from the date on which the cause of action accrued" prescribed under the Limitation Act.

The Commission appealed this decision on the basis that:

• whilst it agreed with Williams J's finding that the loss avoided as a result of the insider trading was an element in the cause of action, the Commission was of the view that no loss or gain in fact occurred unless and until the inside information became publicly available. Since this was "an unresolved issue of fact", the Commission argued that the matter should be left for consideration by the trial judge; in the alternative
  
  
• the Commission argued that the doctrine of reasonable discoverability should apply to the causes of action and that since this required "factual evaluation" the claim should be allowed to proceed to trial.

Court of Appeal's decision

The Court of Appeal2 rejected both of the Commission's arguments. In reaching its decision, the court agreed with the respondents' argument that a loss or gain was not an element of the causes of action for the insider trading and tipping. In its view, the causes of action under sections 7 and 9 of the Act were complete when the trades took place. Accordingly, the court held that the Commission was time-barred from pursuing penalties against the respondents.

Position under new insider trading regime

It should be noted that when the new insider trading regime (passed in October last year) comes into force this will no longer be the position. Under the new regime, the Securities Commission will be able to bring an application for a pecuniary penalty at any time within three years after the date on which the matter giving rise to a contravention of the insider trading provisions "was discovered or ought reasonably to have been discovered."

Securities Commission's position

The Securities Commission has indicated3 since that it does not intend to appeal this decision but will continue to pursue its claim for compensation against the two remaining defendants.

Bell Gully is acting for the two remaining defendants, David Richwhite and Midavia Rail Investments.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.