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Fitzsimons, Peter --- "Enforcement of Insider Trading Laws by Shareholders in New Zealand" [1995] WkoLawRw 6; (1995) 3 Waikato Law Review 101


ENFORCEMENT OF INSIDER TRADING LAWS BY SHAREHOLDERS IN NEW ZEALAND:

AN ANALYSIS AND PROPOSALS FOR REFORM

BY PETER FITZSIMONS[*]

There is no point whatever in having legislation dealing with insider trading and corporate abuse unless it is enforced.[1]

I. INTRODUCTION

In general, insider trading refers to persons buying or selling shares in a company when they possess information about the company which is not publicly available. In 1988, New Zealand acquired a statutory prohibition against insider trading with the enactment of Part I of the Securities Amendment Act 1988 (“the Act”).[2]

In terms of the Act, members and former members of a public issuer, and a public issuer itself, were given the right to commence an action against a person who is an insider of the public issuer either for trading on the basis of inside information, or for tipping (or encouraging) others to trade.[3] The public issuer also acquired a right to apply to the court for the insider to be liable for a pecuniary penalty.[4] In addition to these personal rights of action, Part I also introduced two important provisions, sections 17 and 18. Section 17 allows a barrister to be appointed, with the prior approval of the Securities Commission (“the Commission”), to examine whether or not there are grounds for an insider trading action, and the public issuer is liable for the cost of the opinion.[5] Section 18 is a form of statutory derivative action for insider trading which allows a member or former member to apply to the court for its approval to commence an action against an insider in the name of the public issuer and at the expense of the public issuer. Section 18 requires the court to grant approval for the application unless there is “no arguable case” or there is “good reason” not to do so.[6]

This article analyses the background to the enactment of Part I of the Act and in particular the discussion surrounding the enforcement provisions. It also discusses the two cases dealing with Part I that have come before the courts in the six and a half years since it was put in place, the role of the Commission in attempting to deal with insider trading, and suggested proposals for reform.

II. BACKGROUND TO THE ENACTMENT OF PART I OF THE ACT

Unlike overseas jurisdictions New Zealand did not have specific statutory provisions dealing with insider trading until the Act was passed in 1988. The move to provide statutory remedies was prompted by the Government’s concern about the state of the securities markets during the mid-1980s, which followed on from the deregulation of the New Zealand economy. The Minister of Justice had requested the Commission to consider insider trading and takeover law reforms in 1986, and when the Commission presented its report soon after the stockmarket crash in 1987 the Government was quick to take up its recommendations.[7]

The Securities Commission’s report recommended that legislation should be introduced to provide for civil remedies against persons who engage in insider trading, and suggested that “the best method of preventing insider trading is to equip companies and shareholders with the legal rights and powers to detect and deal with it”.[8] It was less enthusiastic about the introduction of criminal provisions in relation to insider trading, as overseas experience had indicated that prosecutions were difficult in the face of the “right to silence” and could interfere with any attempt to take civil actions.[9]

In the absence of a state agency to undertake civil actions for insider trading (which existed in overseas jurisdictions such as Ontario and Quebec in Canada, and the United States), the conduct of these actions would necessarily fall either to the companies or to the shareholders in those companies.[10] The Commission recognised that actions by shareholders might be limited and that there was a need to provide for the companies concerned to have appropriate causes of action.[11]

The Securities Commission, however, realised that reliance upon companies to bring these actions, and therefore to control insider trading, had its limitations as a result of the connection that often exists between those who engage in insider trading and those who determine whether or not an action is commenced:

The power to bring an action for the benefit of a company is usually vested in the directors of the company. The occasions on which a shareholder may bring a “derivative” action [at common law] are quite limited. There is, therefore, a problem where the directors (who may in some way be beholden to the insider) do not wish to sue the insider. That could deprive the shareholders of relief. We think that the bringing of responsible claims against insiders is a proper corporate function to be carried out at the expense and for the benefit of the company concerned. If the directors let the matter go by default, we think a shareholder or former shareholder should be entitled to intervene and take the conduct of the proceedings out of their hands, and to do so at the expense of the company.[12]

The Securities Commission also recognised that allowing some shareholders to engage in this type of action at the company’s expense where the directors and other shareholders were “bona fide” against the action was a difficult point. The Commission suggested that a Queen’s Counsel provide an opinion as to whether or not there was an arguable case of insider trading, the cost of which would be borne by the company, and if counsel found a cause of action the company would be required to commence an action.[13]

The Securities Commission expressed reservations about allowing contingency fees, and described the class action procedure as it is practised in the United States as “a terrifying instrument”.[14] As a result, the Commission decided against providing any concrete recommendations on the issue of derivative, representative, or class actions, and instead suggested that this matter should form part of the general company law review that was in progress at that time.[15]

The Government received the Commission’s report in December 1987, by 31 March 1988 it had indicated it would implement the proposals, and by 21 July 1989 it had introduced the Securities Law Reform Bill for its first reading.[16] A significant amount of the discussion in Parliament centred on the corporate climate that had prevailed during the mid-1980s, and the necessity of dealing with insider trading in the New Zealand context.[17] The Securities Commission’s rationale for the legislation was generally accepted by Parliament, as was its argument that the criminalisation of insider trading would not be appropriate in the light of overseas experience.[18]

However, the introduced Bill changed the Securities Commission’s suggested approach.[19] The opinion obtained from the Queen’s Counsel would not be binding on the company, and if the company refused then a complaining shareholder (or former shareholder) would need to commence an action in order to obtain court approval for the taking of the company’s action. There was also a further requirement before the opinion could be obtained - that is, that the Securities Commission approve the obtaining of an opinion. In effect the Bill moved from a two stage approach (obtaining a favourable opinion and commencing an action) to a four stage approach (convincing the Securities Commission that an opinion was warranted; obtaining the opinion; if the public issuer did not commence an action, applying to the court for approval to take the action in the public issuer’s place; and, if approval was obtained, commencing the action). No mention was made of this significant change in the Commission’s suggested approach.

The reliance upon shareholder litigation by the legislature misread the New Zealand position compared with overseas jurisdictions. These jurisdictions combine civil remedies with criminal prosecutions, or provide for a state agency to intervene and either take an action in the company’s name or obtain civil penalties which may or may not be paid to the company or shareholders.[20] New Zealand did not have a strong regulatory agency in the securities markets, and the lack of such a body required the encouragement of shareholder litigation. The introduction of the derivative action was a positive step, necessitated by the absence of a state agency, but the introduction of multiple steps into the process worked against its effectiveness.

There was also a failure seriously to address the fundamental issue as to whether or not there was a need for a state regulatory agency to have power to take proceedings. The Securities Commission referred briefly to the fact that such a body would need adequate funding, but declined to put itself forward for such a role.[21] This failure perhaps resulted from two factors. The first is that New Zealand, unlike Australia, had never had a state regulatory agency. This was principally because New Zealand did not have the major frauds or scandals in its securities and financial markets during the post-war period that Australia experienced.[22] The problems New Zealand experienced were limited mainly to the primary securities market which was the original rationale for the Securities Act 1978 and for the creation of the Securities Commission.[23] The second is that the Securities Commission saw its role at this stage as a law reform body, not as a regulator. In the early 1980s it had been frustrated in its attempts to promote reforms to the secondary securities markets, but in the middle to later part of the 1980s it was at its zenith as a law reform body and obviously preferred to maintain this position rather than undertake a major regulatory role.[24]

When the Bill came back from its second reading the only substantive change that had been made was to alter the requirement for a Queen’s Counsel to provide the opinion so that a barrister and solicitor could now provide an opinion. The lack of analysis of the substantive enforcement provisions was evident on the Government’s side. In the second reading only Munro picked up the point that perhaps reliance upon shareholder driven litigation was not a substitute for state involvement.[25]

A commentator, Cox, considered the regime in New Zealand to be more coherent than that of Australia.[26] However, he noted that actions by shareholders in their own name as well as the derivative actions in New Zealand still created obstacles to the control of insider trading. He pointed out that the New Zealand regime only required an insider to disgorge the amounts of the profits when an action was taken by a person who has traded with an insider, with the result that:

...the insider is hardly worse off by failing to trade on his confidential information than if he trades and is reprimanded by having to disgorge what he would have lost had he not traded.

Moreover, there are several reasons why the actions by contemporaneous traders will likely prove ineffective. First, the amount of such recoveries under the Australian and New Zealand provisions for contemporaneous traders cannot exceed the insider’s illicit trading profits. Thus, if the private attorney is to be compensated by the plaintiff in such actions, it may well be that the costs of the proceeding will overwhelm the expected recovery. Second, no individual investor may have lost a sufficient amount to make such litigation worthwhile. This problem is exacerbated in both countries by the absence of class action suit devices. A third problem is that investors, faced with uncertainty in initiating the suit’s action and facing a small recovery, will be most reluctant to incur ex ante substantial attorney’s fees. This problem is overcome in America by the contingency fee device which permits the private bar to be less risk-averse than their class of clients.[27]

Cox noted that a well-designed deterrent against insider trading would result in an insider facing greater losses or costs than the “illicit gains”. In this regard he felt that the New Zealand provisions better fulfilled this aim as they allowed not only a recovery of:

...insider-trading profits ... but also the public issuer may recover a fairly sizeable penalty, up to greater of either the price of the securities traded or treble the insider-trading profits.[28]

He thought that this aspect was enhanced by the ability of the shareholders to stimulate the public issuer into action by obtaining a barrister’s opinion under section 17, and because the shareholders could, with leave of the court, take over the public issuer’s action against the insider.[29] However, he pointed out that these aspects might not be realised in practice as:

...the protracted litigation in the Wilson Neill case demonstrates how a procedure whose main appeal in theory, is its efficiency, becomes cumbersome and expensive when the issuer resists the ‘outsider’s’ prosecution of its officers. That is, the deterrence that may be possible through the issuer’s cause of action is greatly eroded by the tendency of boardroom colleagues to rush to the support of one another.[30]

In America, the instances in which the board of directors resists the attempts by derivative suit plaintiffs to redress wrongs committed by high-ranking officers are very much the rule, and place a good deal of strain on the derivative-suit court in resolving who (the derivative suit plaintiff or the board of directors) truly speaks for the corporation on the question whether the suit’s continuance serves the corporation’s interests. Only if the supervising court acts resolutely in judging the propriety of the action proceeding can the full promise of this enforcement mechanism be achieved. The lesson from the American experience in this area is that the New Zealand supervising court must be prepared to view critically claims that continuation of the action against the insider harms the corporation because of its impact on employee morale, adverse publicity, and anticipated deflection of officers from their work. In the end, the New Zealand court must place its faith in the strong enforcement of Parliament’s insider-trading proscriptions.

III. ACTIONS BASED ON SECTIONS 17 AND 18

The legislature put in place the Securities Amendment Act 1988 without a significant discussion of the ability of the Act’s procedures to enforce the rights of shareholders and public issuers effectively. Since Part I came into effect in 1989, there have been three principal developments. No actions were commenced under sections 7 or 9 by shareholders in their own right, two actions were commenced by shareholders attempting to rely upon section 18, and the Commission took a more active role in the regulation of insider trading than had been foreseen by either the Commission or the legislature.

1. The Wilson Neill decisions[31]

The first application to be brought under section 18 was in relation to sales of shares by interests associated with a director and a substantial security holder of Wilson Neill Limited.[32] The aggrieved shareholders were successful in petitioning the New Zealand Securities Commission to appoint a barrister under section 17 to consider insider trading allegations. Mr Young QC found that there were arguable cases against a number of the directors and a case which was not as strong against a substantial security holder, Magnum Corporation Limited. The public issuer had already commenced an action against some of the alleged insiders, but the applicant shareholders commenced a section 18 application seeking to take actions against other persons under section 18(1), and to take over the proceedings already commenced by the public issuer (under section 18(3).[33]

In the section 18 application Heron J decided under the “good reason” limb of section 18(2) that the company should control any proceedings against the insiders, primarily on the basis that the costs of the litigation could be significant, that Wilson Neill was in a difficult financial situation which could be exacerbated by an order requiring it to fund the litigation to be controlled by the complaining shareholders, and that the complaining shareholders could take action in their own right as they were “substantial investors in the marketplace and can foot it with the others”.[34] A significant concern was whether the complaining shareholders would “conservatively manage” the proceedings “in the interests of all shareholders”, as they wished to extend the action to Magnum Corporation Ltd (against whom Mr Young QC had indicated he saw only a marginal chance of recovery) and other parties. Heron J held that any concern about the potential conflicts of interest on behalf of those who were directing the company’s proceeding could be dealt with by the complaining shareholders commencing their own actions and having those actions joined to the public issuer’s proceedings.[35]

The complaining shareholders unsuccessfully appealed Heron J’s decision to the Court of Appeal. Two factors which clearly weighed on the Court of Appeal’s mind in upholding Heron J’s decision were that the complaining shareholders included institutional shareholders who were well able to afford their own insider trading actions, and that the potential expense of an insider trading action should not have to be borne by the other 14,000 shareholders of a company which was already experiencing a difficult financial situation.[36]

As a result, the complaining shareholders’ first attempt to invoke section 18 was unsuccessful. As Cox had noted, the proceedings were protracted and became cumbersome and expensive.[37] It is doubtful if the legal costs involved would have justified the applicants commencing their own actions, despite the comments of the Court of Appeal.

2. The Kincaid Case[38]

The second decision on section 18 dealt with trading in shares of the Bank of New Zealand (BNZ). Fay, Congreve, Ricketts and Richwhite were directors of Capital Markets Limited (CML). The first three were also directors of the BNZ. Fay Richwhite was contracted to manage CML’s investments, and it was also employed as an adviser to the BNZ. In July 1990, CML sold 10 million shares in the BNZ to the National Provident Fund at a price of 90.5 cents per share. This was at a time when the allocation price was 85 cents per share and the market price approximately 95 cents per share. These shares had been taken in lieu of a dividend which had been announced in May 1990.

The BNZ was taken over by National Australia Bank in 1992 and political pressure led to an enquiry by the Securities Commission, which published a report in 1993.[39] Two items were highlighted by the Securities Commission Report (the BNZ Report) which raised questions as to the veracity of the BNZ’s accounts in 1989 and 1990.[40]

After the Securities Commission’s BNZ Report was published, Mr Kincaid, a former shareholder in the BNZ, wished to commence proceedings against Fay, Richwhite, Congreve, Ricketts, and CML. However, unlike the complaining shareholders in the Wilson Neill case, he could not personally rely upon sections 7 or 9 because he had sold his shares to National Australia Bank in 1992 pursuant to its takeover of the BNZ. He decided instead to apply for approval under section 18 to exercise the public issuer’s right of action under sections 7 or 9 against the alleged insiders. Mr Kincaid did not first apply to the Securities Commission for approval to have a barrister prepare an opinion under section 17, which further distinguished this case from that of Wilson Neill. Instead, he attempted to obtain information by interlocutory applications, and then he relied upon the Securities Commission’s BNZ Report as the basis of his application under section 18.[41]

Like Wilson Neill, the Kincaid decision had one preliminary hearing to determine procedural and evidential matters, and one section 18 hearing. The first decision was brought down by Henry J. He held that the Securities Commission’s BNZ Report was admissible as evidence for the section 18 application.[42] In the second decision Henry J considered the section 18 application. The defendants opposed the application on the basis that there was no arguable case, and that there was good reason for the application not to be approved. After a detailed consideration of the arguments of both sides, Henry J found in favour of Kincaid.[43] Capital Markets considered an appeal to the Court of Appeal, but the matter concluded in a settlement between the parties.[44]

This was the first successful application under section 18, but its value as a precedent and as an incentive to other complaining shareholders is somewhat limited. In the first place Kincaid appeared to have very little to gain personally from the action as he did not deal with CML. As Henry J noted, Kincaid showed “no compelling personal reason [for the application] other than an expressed desire to see that the statutory provision prohibitions against insider trading are observed”. Henry J was of the view that the mere fact that a person did not have a financial interest in the application did not prevent the application since such a person had been included by the legislature as a person entitled to apply.[45] However, it is unlikely that many other shareholders would be prepared to undertake such an action for altruistic motives.

A second reason why this decision does little to encourage shareholders applying under section 18 is that, apart from having very little to gain personally from the application, a shareholder potentially faces a significant liability if the section 18 application failed. In this case Kincaid retained two counsel, while the various defendants had retained eight counsel in total, including one Queen’s Counsel. He was faced with one preliminary hearing, and then a section 18 application, which was to have gone on appeal prior to the matter being settled. It has been estimated that his costs up to and including the second High Court hearing were in the region of $200, 000, and that an appeal to the Court of Appeal, and possibly the Privy Council, could have pushed these costs up to $500,000, while the costs of the other parties could have been as high as $1.5 million for the High Court hearings alone.[46] In addition to these costs Kincaid also faced a potential liability for the costs of expert witnesses called by the defendants.[47] While Henry J clearly made an effort to be supportive of the section 18 application by placing the onus of proof on the defendants,[48] it is unlikely that many shareholders would be prepared to take such an action unless the case was very clear (in which case the insider would probably attempt to settle the matter with the public issuer before the matter was pursued by the shareholders).

These two decisions, while clarifying procedural issues, do not appear to provide much hope that shareholder-driven litigation, even taking into account section 18, will act as a significant deterrent to insider trading. In particular, private (non-institutional) investors are unlikely to be able to use the procedures for a number of reasons. As Mulholland points out, private investors do not have the market expertise and knowledge of market transactions that institutional investors possess. He commented:

An investor who trades in small volumes on the market would rarely perceive when trading has occurred based on inside information. If any investor was aware of insider trading, proceedings under section 17 and 18 are of little use. Private investors ... who do not have the funds available to pursue an action would conclude that it is not financially viable to first petition the [Securities Commission] for approval, obtain a barrister’s opinion, and then apply to the court for leave. Shareholders are likely to be further deterred as under section 7(4)(b) and section 9(4)(b) of the Securities Amendment Act 1988 the pecuniary penalty is only available in an action brought by or through the public issuer. A successful application by a shareholder would only recover the amount of the insider’s illicit gains or the losses incurred by the shareholder. In the case of small investors, the losses incurred may be insufficient to make such litigation worthwhile.[49]

After the Wilson Neill decision Mulholland pointed out that:

...the legislation in its present form is impractical. The costs involved and the chances of success are likely to deter investors from utilizing these procedures, even those with deep pockets. It is difficult to pursue insiders given the costs involved and difficulties of proof.[50]

The Kincaid decision, while allowing the section 18 application for the first time, is unlikely to lead to shareholders using this provision extensively without changes to the Act.

IV. THE SECURITIES COMMISSION’S ROLE IN INSIDER TRADING AFTER 1988

1. The nature of the Commission’s role

The Securities Commission did not envisage a significant role for itself in relation to insider trading. It indicated that it felt that the most effective means of dealing with insider trading was for civil rights of action to be granted to public issuers and shareholders.[51] However, once Part I of the Act came into effect in 1989, the Securities Commission found itself playing an increasing role in the regulation and detection of insider trading, in the almost total absence of shareholder and public issuer actions.

In the years prior to the passing of the Act the Commission had carried out informal investigations into a number of matters affecting public issuers, including issues related to insider trading.[52] After the Act came into effect the Commission carried out more investigations into insider trading than for breaches of Part II, where it had a formal enforcement role.[53] Most of these investigations continued to be informal with no details released as to the public issuer or the persons involved.[54] However, the Commission also carried out a number of investigations that led to the publication of formal reports, and which either suggested, or provided evidence of, insider trading.[55] It was as a result of these investigations and reports, and the realisation that the insider trading provisions were not being enforced that prompted the Commission to suggest reforms to the Part I so that it would be more effective.

2. The Commission’s suggestions for reform

In 1994 the Securities Commission published a Practice Note, which described the Commission’s policies and procedures in relation to insider trading actions,[56] and a review document of the insider trading laws.[57]

The first document set out the Commission’s view as to how insider trading actions could be brought. These included an action commenced by an aggrieved party after that party had accumulated the necessary evidence (or after obtaining leave of the court for a section 18 application), an action commenced after obtaining an opinion under section 17 with the approval of the Securities Commission, and an action commenced after the Securities Commission had obtained information by using its statutory powers.[58] The Commission indicated that its practice:

...has been to endeavour to assemble at the outset the information which may be material not only to a decision on the request at the outset for a notice of approval [for the appointment of a barrister under section 17] but also to the preparation of the opinion [under section 17].[59]

The Commission indicated that it saw it had a further role to play in the effectiveness of the insider trading regime by the use of its broad general powers. The Court of Appeal in the Wilson Neill case had commented favourably on the Securities Commission’s approach on this issue,[60] although the use of these powers had not been foreshadowed in the Securities Commission’s Insider Trading Report.[61] The Securities Commission had substantially changed its position since that report. Combined with its practice since the early 1980s of making informal enquiries into allegations of insider trading,[62] the legislature had possibly accelerated this change in approach by requiring the approval of the Securities Commission before a section 17 opinion could be obtained. This requirement meant that the Securities Commission would have been exposed to more complaints of insider trading than perhaps would otherwise have been the case. This exposure obviously led it to realise that reliance upon shareholders to initiate actions, and the provision of a favourable opinion by a barrister appointed under section 17, was insufficient to regulate insider trading adequately.

The second document indicated that the Commission considered that the current role it played (including the use of its broad general powers) was insufficient to control insider trading.[63] It included a number of suggestions for reform of procedures for insider trading actions. Minor reforms included providing the Commission with the power to require the lawyer to consult the Commission, and providing for the court to have the ability to order any person to reimburse a public issuer for the costs of obtaining a section 17 opinion.[64] A more fundamental change the Commission suggested was for the Commission to have standing to apply to the Court to take action where it was alleged that there had been insider trading. The Commission’s rationale for this fundamental change was:

The Commission has observed the often understandable reluctance of public issuers to instigate proceedings for insider trading where the costs of bringing proceedings are borne by the public issuer itself. It seems likely insider trading laws would be more likely enforced if the Commission had standing to bring proceedings.[65]

The Commission envisaged that it would be able to commence proceedings in the name of the public issuer without the leave of the court, and with the leave of the court would be able to intervene in existing proceedings “for the purpose of continuing, defending, supporting or discontinuing proceedings on behalf of the public issuer”.[66]

The suggestion that the Commission should have an enforcement role (even if only a subsidiary role) clearly represented a significant alteration in the stance of the Commission from its 1987 proposals where it did not foresee a role for itself in the enforcement of insider trading remedies, nor did it even consider a role for itself in relation to the collation of information for a section 17 opinion.[67] It also represented a recognition that what had been seen as an “exciting development” in 1988 had in fact turned out to be of less value than originally envisaged.[68]

3. The Tyler Review of the Securities Commission

The Securities Commission’s proposals for an increased role in insider trading actions met with opposition in the securities industry. This opposition was translated into criticisms of its general role in the securities market in a review that took place in 1994.[69] Tyler, a former Auditor-General, was appointed by the Government to review the funding base of the Securities Commission. This led him to consider the role of the Securities Commission in the light of its statutory functions and to solicit comments not only from members of the Commission, but also from other persons who were involved in the industry.[70]

Tyler received both favourable and unfavourable comments about the enforcement role of the Securities Commission. The favourable comments noted that, although the Securities Commission has only a limited enforcement role, it had used this power:

...in cases where for one reason or another (often a question of costs and knowledge) individuals are unwilling or unable to pursue courses of action on their own behalf even in conjunction with other investors or affected persons. Such enquiries represent a major effort on the part of the Commission, the recent Regal Salmon enquiry being a case in point.

This is a most valuable function of the Commission. Publication of such reports, especially where they identify unacceptable behaviour, can be most important to investors in considering future investments and the persons to whom they entrust their funds. Publication in itself can act as a sanction against unacceptable behaviour even if the Commission cannot exercise formal powers of imposing penalties.[71]

The Commission itself argued that it was able to investigate only “the most flagrant cases of suspected insider trading”, and that it was unable to be proactive in this area. It pointed out that with increased funding it would be in a position to identify suspected cases of insider trading more readily.[72]

The unfavourable comments received by Tyler were, in the main, threefold. The first criticism was that the overall nature of market supervision should be reviewed and determined before any steps were taken to consider the specific role and funding of the Securities Commission.[73] The second criticism was directed at the combination of an advisory role to government with a regulatory/enforcement role. Most of the participants viewed this as an unfavourable proposition, and preferred the limitation of the Securities Commission to a role of promoting disclosure and educating the investing public.[74]

The third criticism related to whether or not the Securities Commission should have an enforcement role in the market. The Stock Exchange was the most strident in its criticism of the Securities Commission as an enforcement body and it commented that “[t]he Commission’s lack of visible results ... indicates that it should not be given any enforcement capability”.[75]

As Tyler noted, the question as to whether or not the Securities Commission should play a role in enforcement was in reality a philosophical issue as to whether the appropriate mechanism for enforcement was by way of provision of private remedies, or whether there existed a need for a state regulatory agency. Those who opposed the Securities Commission having an enforcement role relied upon the report of the Ministerial Working Group (Roche Report), which had favoured private enforcement in the securities market.[76]

Tyler recommended that the Commission’s funding should be increased so as to enable it to employ more staff, and that it should also be provided with a specified sum for the purposes of litigation.[77] However, the opposition to these proposals appears to have been successful, and the Commission has shelved plans for a greater enforcement role. The proposals set out in the Review of the Law of Insider Trading (1994) were produced while Peter McKenzie was the chairperson. By contrast, the new chairperson, Euan Abernethy, was reported as saying that the main role for the commission was in “supporting laws that make it easier for transgressions to be detected and dealt with, either by an individual, or by some arm of the state”.[78] He did not favour the Commission having the power to bring actions because in his view this might create difficulties if the Commission was to act as “both an advisory arm of the Government and as a prosecuting agency”.[79] This appears to be a change in his position from the previous year as Tyler credited him as being one of a number of respondents who viewed the work of the Commission:

...particularly in the areas of enforcement and disclosure, [as being] of great significance in maintaining the credibility and integrity of our financial markets in the eyes of both domestic and international investors.[80]

4. The Securities Commission Discussion Paper 1995

The Commission released a further discussion paper on insider trading in September 1995.[81] The paper commented on a number of issues, including three issues relevant to this article. The first is that the Commission confirmed that it would not propose any increase in its enforcement powers, although it raised the issue of what role the state or a state funded agency should have in enforcing securities laws.[82] The second issue dealt with the issue of awarding costs against an unsuccessful section 18 applicant. The Commission recommended that:

...section 18 be amended more generally to exclude the power of the Court to award costs against a person who has applied for leave under the section where the person is seeking to advance a cause of action identified in a section 17 opinion.[83]

This recommendation, while removing one potential source of costs for an applicant, would force an applicant to go through the section 17 process in order to obtain immunity from a costs award. This would potentially eliminate an application of the kind made by Kincaid, where he had relied upon the Commission's own report. Henry J accepted Kincaid's approach as legitimate as clearly section 18 does not require such a report.[84] Requiring an opinion could have two effects. The first is that it would require submission of a request to the Commission and entrench its role within the process. The second effect would be to slow down the section 18 application by requiring the applicant first to go through the process of obtaining a barrister's opinion, rather than allowing an applicant to proceed on the basis of other evidence (for example, a report of the Commission). It would be preferable for the proposal that there be a costs award indemnity not to be limited to section 17 opinions, but rather it should be extended to other applications where there are sufficient grounds. What are sufficient grounds could be left to the discretion of the court and could encompass the point made by Henry J in Kincaid No 1, where he stated that he would receive and consider evidence provided that “it came from a source in which the Court [could] have an acceptable degree of confidence”.[85] The extension of the Commission's proposals to applications based on evidence other than a section 17 opinion would be consistent with attempting to strengthen the ability of shareholders to institute actions against insiders.

The third recommendation was to allow the court to approve insider trading claim settlements.[86] This approval would be available notwithstanding the lack of a section 17 opinion. If court approval was not obtained then any settlement would not be final and binding on the parties and a shareholder would still be able to commence a section 18 application. This proposal was obviously aimed at preventing settlement of disputes between the alleged insider trader and the public issuer which occur without the involvement of shareholders (as happened in the cases of Regal Salmon, Wilson Neill, and Tasman Properties).[87] This proposal has an advantage in that it requires public notification of settlement terms, although persons accused of insider trading and public issuers are unlikely to welcome this suggestion, both because of the costs involved in a High Court application and because of the publicity attached to the suggested process. This proposal, however relies upon information of alleged insider trading and the resulting settlement. In addition, it makes the process relating to section 17 opinions even more important. The Commission has indicated that it generally informs both the company and the insider about allegations of insider trading and allows both to respond prior to the approval of a request for a section 17 opinion to be obtained.[88] Clearly both parties will be concerned to refute allegations of insider trading at this early stage so as to avoid the prospect, and expense, of a section 17 opinion,[89] and the possible need for a public settlement.

V. SUGGESTED REFORM OF INSIDER TRADING ACTIONS

There need to be changes to the enforcement regime that provide an enhanced role for private actions and also allow appropriate public enforcement. In general terms the insider trading regime should encourage compliance with the prohibition on insider trading and, in the event of insider trading taking place, facilitate the attainment of effective sanctions and compensation.[90] For effective sanctions and compensation what is needed is a reduction in the expense and risk of litigation for shareholders, increased shareholder access to information, increased incentives for shareholders (rather than public issuers) to take actions, and a more clearly defined role for the Commission.

The Commission’s 1995 proposals are unlikely to overcome the significant difficulties that shareholders face in attempting to take an action against an insider. The removal of costs for the respondents under a section 18 application does not remove the cost factor that shareholders will face for their own counsel, nor does it alleviate the information asymmetry that shareholders face. To reduce the expense and risk of litigation one obvious reform is to allow contingency fee litigation, perhaps combined with a rule that prevents cost recovery by a person who successfully defends an action. The United States experience, as Ramsay points out, is that this has not resulted in excessive shareholder litigation.[91] However, given that New Zealand, like the majority of the Commonwealth, has not previously ventured down this track, the success or otherwise of a contingency fee system on its own cannot be determined at this stage.[92] As a result it would be unwise to rely upon this procedural change alone.

A further reform is to increase shareholder access to information. This, however, is a difficult issue. In addition to the fact that directors of public issuers exercise control over corporate information,[93] private investors are unlikely to have the expertise to be able to evaluate the information (particularly the extent to which information was “publicly available” and whether or not it was “material”) and determine whether or not to commence an action. Perhaps contingency fee litigation may encourage professionals to evaluate such information and promote insider trading actions. However, it is arguable that it is more likely that a state agency, charged with a regulatory mandate, would be in a better position to access the information and evaluate its significance. The Commission has suggested that the court should be able to order any person to reimburse a public issuer for the costs of obtaining a section 17 opinion.[94] This proposal could be extended to enable the state agency to recover the costs of investigating allegations of insider trading from any person (subject to reasonableness of costs, and an appeal to the court).[95]

Further reforms are needed to increase the incentives for shareholders to take actions in their own names. Under the current insider trading regime the public issuer supposedly has an incentive to take an action against an insider for the recovery of a pecuniary profit under section 7(2)(c)(ii). This approach could be varied by granting shareholders the right to apply for a pecuniary penalty in the same way as a public issuer, with the civil standard of proof. This would increase shareholders’ likely return, and improve their incentive to take action.[96] This would be more likely to increase the deterrence aspects of the insider trading laws than the current provisions which, as Cox noted,[97] only penalise the insider to the extent of the profit made or loss avoided when a shareholder takes an action. Providing shareholders with the right to recover a pecuniary penalty would be consistent with a continued condemnation of insider trading, without the difficulties which were identified by the Commission in criminalising this type of behaviour.

Allowing shareholders to bring an action for a pecuniary penalty in their own names would also reduce the need for a section 18 application. This would relieve the courts of the task of having to weigh up legislative rights granted to minorities against the legitimate concern to protect majorities. This was a significant factor in the refusal by the Court of Appeal to grant the application in the Wilson Neill decision, as it took into account the potential effects of the litigation on the financial viability of the company, and also the potential impact of the litigation on 14, 000 other shareholders.[98] As Ramsay noted, allowing minority shareholders rights to commence litigation on behalf of the company is not necessarily the most appropriate approach, since they have “very little incentive to consider the effects of the litigation on other shareholders who are the supposed beneficiaries”.[99] A move to provide shareholders with the incentive to bring an action in their own names would help to reduce the need for section 18 applications.

Even with these amendments I would suggest that there is still a need for a state agency to have a role in the gathering of information, and to take actions to supplement private enforcement. This point was recognised by the Ministerial Working Group. Although it strongly advocated a private enforcement regime, it also stated that:

The Securities Commission could only take enforcement action if there is no other adequate avenue of remedy available to the complainant or if the matter affects a significant number of participants in the market.[100]

The difficulty lies in determining the appropriate line between supplementing private actions and excessive actions by the state agency. The Commission suggested the occasions when it would use the power to commence actions, if it had an enforcement role.[101] With appropriate guidelines and controls on funding it is possible that a solution between the present system of almost no private enforcement and excessive regulatory intervention could be found.[102]

A further development which should be considered is explicitly to provide the Commission with the power to facilitate administrative settlements. As Dellit and Fisse noted, regulatory enforcement can be viewed as not unlike a pyramid, with the apex composed of the severest forms of sanctions moving down through decreasingly drastic measures to the most often used and mildest enforcement mechanisms of warnings, censures, advice and guidance.[103] In the securities markets one of the useful instruments that can be employed by regulators is that of settlements. Dellit and Fisse pointed out that the Securities and Exchange Commission in the United States uses settlements extensively and overtly in a number of areas, including insider trading.[104] The Trade Practices Commission in Australia also uses this strategy, as does the Commerce Commission in New Zealand.[105] They argued that such settlements, while having disadvantages, have a number of benefits including saving time, financial costs and court resources, allowing compromise, encouraging learning, helping self-regulatory organisations towards regulatory cooperation, and allowing compensation for investors and cost recovery for the regulator.[106] The ability for the Commission formally to use settlements as a regulatory instrument would not entail a radically new approach as it has engaged in brokering settlements since early in its life.[107]

The usefulness of settlements is predicated on their place in the “regulatory pyramid”, below that of the criminal and civil enforcement powers of the regulator.[108] Assuming that the Commission would not become a regulator with significant criminal prosecutory powers, what would be needed for the effective utilisation of settlements would be for the Commission to have at least a civil enforcement role, which could include the ability for it to be able to obtain the pecuniary penalties that are available to a public issuer under section 7(2)(c)(ii), and to obtain full cost recovery for the costs of taking action.[109] This would align Part I with Part II where the Commission has the power to apply to the court for pecuniary penalties to be levied against a security holder who fails to comply with the relevant disclosure provisions.[110]

A combination of the above approaches would clearly take the law regulating insider trading closer to the ideal than does the present regime. They would not be without cost, and with the experience of time they would almost certainly need amendment. However, they would certainly improve the current position of almost no shareholder enforcement and a state agency which is excluded from the formal enforcement process, yet plays a central role in a regime that is largely ineffective.

VI. CONCLUSION

The statutory insider trading regime introduced into New Zealand in 1988 was predicated on shareholders playing a significant part in either taking actions, or encouraging public issuers to take actions, against insider traders. The means by which this would be accomplished were not adequately considered by either the Securities Commission or the legislature at the time the Act was passed. The attempt to rely upon a statutory derivative action, with shareholders taking action against an insider in the public issuer’s name and at its expense has failed. The history of this provision has shown that the procedure to enforce these rights is inadequate and needs reform.

At the same time the analysis shows that the Commission played an increasingly significant role in attempting to control insider trading, a role which was in excess of that originally contemplated. This role, because of a lack of formal enforcement powers, has been inadequate to enable the effective enforcement of the laws relating to insider trading.

Current proposals for reform are aimed at enhancing shareholder enforcement of the rights in Part I. The reforms will be unlikely to have any major impact upon the regulation of insider trading without further, more substantial reforms. Further reforms should encompass improving the incentives for shareholders to take actions in their own names, and the formal recognition of the role of the Commission in the enforcement of these laws. The Commission should have the ability to obtain pecuniary penalties, take action against an insider on behalf of a public issuer, and obtain settlements between insiders, affected shareholders and public issuers. Unless serious consideration is given to enhancing the ability of shareholders and the Commission to take action against insider trading, it is likely that New Zealand will continue to have laws that prohibit insider trading, but which are unenforced and therefore ineffective.


[*] BCom LLB (New South Wales), MComLaw (Hons) (Auckland), Lecturer in Law, University of Waikato.

[1] Burdon, NZPD Vol 490, 1988: 5300.

[2] For an overview of the Act see Van Schie, A Insider Trading, Nominee Disclosure and Futures Dealing: An Analysis of the Securities Amendment Act 1988 (1994).

[3] Sections 7(1) and 9(1). Section 3 defines a person as an “insider” if he or she has received inside information in confidence or is connected in some way to a person or corporation who is defined as an insider. Section 2 defines “inside information” as information which is not publicly available and which would be likely to “affect materially the price of the securities of the public issuer if it was publicly available”. Section 2 defines “public issuer” as a listed company (or one which was previously listed).

[4] Sections 7(2)(c)(ii) and 9(2)(g). The pecuniary penalty is the greater of three times the profit made or loss avoided by the insider, or the total consideration paid or received by the insider (sections 7(4) and 9(4)). Section 19 empowers the court to determine how the penalty will be distributed.

[5] Section 17(1) and (5).

[6] Section 18(2)(a) and (b).

[7] Fitzsimons, “The New Zealand Securities Commission: The Rise and Fall of a Law Reform Body” [1994] WkoLawRw 5; (1994) 2 Waikato Law Review 87, 104.

[8] NZSC, Insider Trading - Report to the Minister of Justice (1987), (Insider Trading Report) Vol. 1, 95 and 74.

[9] Ibid, Vol. 1, para 10.6.

[10] Ibid, Vol. 1, 71.

[11] Ibid, Vol. 1, 89, para 11.9.7.

[12] Ibid, Vol. 1, 90, para 11.10.4 - footnotes in the text are omitted.

[13] Ibid, Vol. 1, 90, para 11.10.5.

[14] Ibid, Vol. 1, 91, para 11.10.6.

[15] Ibid, Vol. 1, 91, para 11.10.8, and also 95.

[16] NZSC, Annual Report (1988) 4 and NZPD Vol 490, 1988: 5280.

[17] See generally the debate in NZPD Vol 490, 1988 and NZPD Vol 495, 1988 and in particular Kyd, NZPD Vol 490, 1988: 5298, and Burdon, ibid, 5299.

[18] NZPD Vol 490, 1988: 5281, 5285.

[19] Ibid, 5282.

[20] Insider Trading Report, supra note 8, vol 1, 71.

[21] Ibid, vol 1, para 10.7.4.

[22] Fitzsimons, “Australia and New Zealand on Different Corporate Paths” [1994] OtaLawRw 6; (1994) 8 Otago Law Review 267, 283 and 292.

[23] Fitzsimons, supra note 7, 89; and Fitzsimons, supra note 22, 274

[24] Fitzsimons, supra note 7, 98-107.

[25] NZPD Vol 495, 1988: 8559.

[26] Cox, “An Economic and American Perspective of Insider-Trading Regulation in Australia and New Zealand” in Walker, G and Fisse, B (eds), Securities Regulation in Australia and New Zealand (1994) 637.

[27] Ibid, 634.

[28] Idem.

[29] Idem. As he noted, this overcame the lack of significant monitoring of the securities markets.

[30] Ibid, 635. Mulholland also notes the conflict of interest between shareholders and directors. The reasons for this include “boardroom bias” where directors support their fellow directors, and a desire to oppose proceedings as quickly and cheaply as possible. See Mulholland, “Insider Trading in New Zealand: Aspects of the Wilson Neill Case” in Walker and Fisse, supra note 26, 656.

[31] Colonial Mutual Life Assurance Society Ltd v Wilson Neill Ltd [1993] NZHC 2107; [1993] 2 NZLR 657 and [1993] NZCA 288; [1994] 2 NZLR 152. For a detailed analysis of this action and the various hearings see Mulholland, supra note 30, 641, and for a view of the process from one of the complainants see Gaynor, “Bad Handling Marked Wilson Neill Insider-Trading Case”, National Business Review, June 2, 1995.

[32] Section 2A defines a substantial security holder as a person “who has a relevant interest in 5 percent or more of the voting securities of that public issuer or body”.

[33] Mulholland, supra note 30, 644-649.

[34] Ibid, 658-659, and [1993] NZHC 2107; [1993] 2 NZLR 657, 679.

[35] [1993] NZHC 2107; [1993] 2 NZLR 657, 679, 681.

[36] [1993] NZCA 288; [1994] 2 NZLR 152, 161-2. See Mulholland, supra note 30, 663-667.

[37] Cox, supra note 26, 656

[38] Kincaid v Capital Markets Equities Ltd [1994] 3 NZLR 738, and Re Bank of New Zealand; Kincaid v Capital Markets Equities Ltd (No. 2) (1995) 7 NZCLC 260,718.

[39] Report of an Enquiry into Certain Arrangements Entered into by Bank of New Zealand in March 1988 (1993) (BNZ Report).

[40] (1995) 7 NZCLC 260, 718, 260, 726 and 260, 731.

[41] Mulholland, supra note 30, 655. Kincaid’s use of the Commission’s Report for the section 18 application had a number of advantages including avoiding the costs associated with persuading the Commission to appoint a barrister under section 17, avoiding the time delays associated with obtaining that opinion, and providing the information necessary to mount a section 18 application.

[42] [1994] 3 NZLR 738. For a discussion of this decision see Fitzsimons, “Statutory Derivative Actions and Insider Trading” [1994] NZLJ 440.

[43] (1995) 7 NZCLC 260, 718.

[44] “Fay Richwhite to Appeal”, National Business Review, April 21, 1995; and O’Sullivan, “Settlement Brings an End to Fay Richwhite Insider-Trading Case”, National Business Review, October 6, 1995.

[45] (1995) 7 NZCLC 260, 718, 260, 738.

[46] O’Sullivan, “Parties Faced Prospect of Costs Being Exorbitant”, National Business Review, October 6, 1995.

[47] Ibid, 260,728.

[48] Ibid, 260,725.

[49] Mulholland, supra note 30, 661-662.

[50] Ibid, 666.

[51] Insider Trading Report, supra note 8, vol 1, para 10.7.6.

[52] Patterson in an address in 1984 indicated that the Commission had become involved in investigating insider trading claims when they were reported to it, or when there was a takeover and insiders have been known to deal in shares during this time. From Patterson’s comments it appears that the Commission would summon the “offenders” and admonish them. He commented: “we have asked those people to see us. I believe it has not been a comfortable experience for them”. See Patterson, “Insider Trader and Business Ethics” [1984] NZLJ 369, 371. See also NZSC, Annual Report (1987) 6; NZSC, Annual Report (1988) 5; and NZSC, Annual Report (1989) 5.

[53] NZSC, Annual Report (1990) 9-10; NZSC, Annual Report (1991) 16; NZSC, Annual Report (1992) 14; NZSC, Annual Report (1993) 10; NZSC, Annual Report (1994) 10; and NZSC, Annual Report (1995) 9.

[54] NZSC, Practice Note on the Administration of the Rules of Law About Insider Trading (1994) (Practice Note), para 3.3, and para 3.22. See also “Insider Insiders Out to Keep Outsiders Outside”, National Business Review, April 3, 1992.

[55] NZSC, Report on Enquiry into Dealings in the Voting Securities of Gulf Resources Pacific Limited (Formerly City Realties Limited) during the period November 1989 to January 1990 (1992); NZSC, BNZ Report, supra note 39; and NZSC, Report of An Inquiry into Aspects of the Affairs of Regal Salmon Limited Including Trading in its Listed Securities (1994). The latest report is NZSC, Report of an Inquiry into Aspects of the Affairs of Fortex Group Limited (in Receivership and Liquidation) including Trading in its Listed Securities (1995) (Fortex Report) which also deals with alleged insider trading (see ibid, Part IV).

[56] Practice Note, supra note 54.

[57] NZSC, Review of the Law of Insider Trading: A Discussion Paper (1994) (Insider Trading Discussion Paper 1994).

[58] Practice Note, supra note 54, 4-5.

[59] Ibid, 8. The Commission indicated that it was desirable for it to obtain the evidence for three reasons. These were that it possessed explicit statutory powers that were more suitable than those of the lawyer, that the crystallisation of issues before the lawyer commenced work should mean that the lawyer encountered less difficulties in dealing with interested parties, and that the greater the definition of the issues before the lawyer started work the sooner the opinion would be completed (ibid, 9).

[60] Supra note 31, 159.

[61] Insider Trading Report, supra note 8.

[62] Patterson, supra note 52, 371.

[63] Insider Trading Discussion Paper 1994, supra note 57.

[64] Ibid, paras 2.2 and 3.1.

[65] Ibid, para 6.1.

[66] Ibid, para 6.2, suggested clause 18A(a)(b). The Commission indicated that the circumstances when it would seek to utilise this power included where the public issuer was in receivership and unable to fund the action, where there were complex issues and the resources had been used to assist in the preparation of a section 17 opinion, and where there was no shareholder willing to fund a section 18 application and the company was unwilling to commence proceedings against an insider (ibid, para 6.4). There appeared to be no limitation on this third ground that the Commission would not take action against the wishes of the public issuer and the shareholders, although the action would be at the expense of the Commission, not the shareholders or the public issuer.

[67] Insider Trading Report, supra note 8, vol 1, 90, para 11.10.5.

[68] Woollaston, NZPD Vol 495, 1988: 8551. To overcome the stigma attached to taxpayer-funded litigation for the benefit of private parties, the Commission also suggested that the Act be amended to enable the court to award “quite full recovery of costs incurred by the Commission in respect of any proceedings brought under Part I, also Part II, of the Amendment Act” (Insider Trading Discussion Paper 1994, supra note 57, para 7.1). Such a power would be necessary given the ambivalent attitude of the judiciary to the Securities Commission’s applications to enforce Part II of the Act (which deals with substantial security holder disclosure) (see Fitzsimons, “Securities Commission v. R E Jones[1993] WkoLawRw 9; (1993) 1 Waikato Law Review 165, 170, where the awarding of costs to, and against, the Commission by the courts under Part II of the Act is discussed).

[69] Tyler, Securities Commission Funding Review (1994) (Tyler Report).

[70] Ibid, 4-7.

[71] Ibid, para 3.10.

[72] Ibid, 30.

[73] Ibid, section 4.

[74] Ibid, paras 4.4 and 4.8.

[75] Ibid, para 4.8.

[76] Report of the Ministerial Working Group on Securities Law Reform (1991) (Roche Report) Executive Summary, 6, 10.

[77] Ibid, para 6.48.

[78] Stride, “Abernethy seeks ‘investor comfort’”, New Zealand Herald, December 13, 1994.

[79] Idem.

[80] Tyler Report, supra note 69, paras 6.5-6.6 and footnote 3 (emphasis added).

[81] NZSC, Review of the Law on Insider Trading: A Discussion Paper (1995) (Insider Trading Discussion Paper 1995).

[82] Ibid, para 10.1-2. This change was foreshadowed in its 1995 Annual Report (NZSC, Annual Report (1995), 14; see also Hart, “Insider Trading Switch - Securities Commission Retreats on Enforcement”, New Zealand Herald, August 26, 1995).

[83] Ibid, para 7.3.

[84] See Kincaid No 1, supra note 38.

[85] Ibid, 741.

[86] Insider Trading Discussion Paper 1995, supra note 81, para 6.1ff.

[87] Wilson Neill eventually settled its action against Herbert for an undisclosed amount (“Herbert Payment Settles Case”, New Zealand Herald, September 15, 1993). In relation to Regal Salmon see “Regal Rules Out Action on Trading”, New Zealand Herald, December 15, 1994, and Hart, “Regal Dips Out of Legal Fight”, New Zealand Herald, December 17, 1994. For Tasman Properties see Sullivan, “Jones Insider-Trading Case Fades Away”, National Business Review, September 30, 1994.

[88] Practice Note, supra note 54, para 3.5.

[89] The Commission also suggested that the court be given the power to order any person (apart from a shareholder who requested the opinion) to pay for the preparation of the section 17 opinion (Insider Trading Discussion Paper 1995, supra note 81, para 8). For an example of a prompt reaction to inquiries into insider trading by the Commission see the comments made in relation to the Fortex Report: “Fortex Inquiry Slammed”, National Business Review, October 20, 1995.

[90] For a general discussion of private versus public enforcement, see Dugan, “Insider Trading and Trade Practices: Private versus Public Enforcement of the Law” in Gorringe, P and Dugan, R Fairness and Incentives: Economics and Law Reform (1990).

[91] Ramsay, “Enforcement of Corporate Rights and Duties by Shareholders and the Australian Securities Commission: Evidence and Analysis” (1995) 23 ABLR 174, 176. See also Roche Report, supra note 76, 14.

[92] See McDermott, “Contingency Fees and the Law of Champerty” [1993] NZLJ 253 for a discussion of the New Zealand position on contingency fees. In 1995 the United Kingdom decided to introduce contingency fee (or conditional fee) litigation. The merits of this move have been strongly debated. See Zander, “Well Anyway, Conditional Fees Should be a Bonanza for Lawyers” [1995] New Law Journal 920.

[93] See Fitzsimons, supra note 22, 292, for a brief discussion of shareholder access to corporate information.

[94] Insider Trading Discussion Paper 1994, supra note 57, para 3.1; and Insider Trading Discussion Paper 1995, supra note 81, para 8.

[95] To a certain extent this would mirror the arrangement that the New Zealand Stock Exchange has with listed companies where they are charged with the costs of investigations, and they are required to post a bond as security (NZSE Listing Rules, Rules 2.8.1 and 2.8.2). See Fitzsimons, “The New Zealand Stock Exchange: Rights and Powers” in Walker and Fisse, supra note 26, 551.

[96] Section 19 would have to be amended to give the court the power to distribute any pecuniary penalty awarded after a shareholder’s application. The bulk of the penalty could be awarded to the applicant shareholder with the balance payable to persons who traded with the insider during the relevant time.

[97] Cox, supra note 26, 634.

[98] Supra note 31, 161. This approach would also overcome the problem where the public issuer is unable to fund an action due to its insolvency as has happened in the Fortex case (see Fortex Report, supra note 55).

[99] Ramsay, supra note 91, 178-179.

[100] Roche Report, supra note 76, 23. For a discussion of the use of civil remedies by state agencies in place of criminal sanctions see Duns, “A Silent Revolution: The Changing Nature of Sanctions in Companies and Securities Legislation” (1991) 9 C&SLJ 365.

[101] Insider Trading Discussion Paper 1994, supra note 57, para 6.4.

[102] Tyler discussed ways that the Commission’s litigation fund could be controlled (see Tyler Report, supra note 69, para 6.36). Tyler had suggested that the court should be able to award it full recovery of costs in order to overcome the stigma attached to taxpayer funded litigation for the benefit of private parties (see Insider Trading Discussion Paper 1994, supra note 57, para 7.1.

[103] Dellit and Fisse, “Civil and Criminal Liability under Australian Securities Regulation: The Possibility of Strategic Enforcement” in Walker and Fisse, supra note 26, 584.

[104] Ibid, 581, 583, 596-99.

[105] Ibid, 600. The Commerce Commission uses settlements as an alternative to taking proceedings against persons who breach the Commerce Act 1986 or the Fair Trading Act 1987. See Commerce Commission, “Commission Settlements”, Fair’s Fair, August/September 1995, 8; and Commerce Commission, A General Guide for the Business Community (1991), 7.

[106] Ibid, 602-611.

[107] See Patterson, supra note 52, 371; and NZSC, Annual Report (1992), 10.

[108] Dellit and Fisse, supra note 103, 584.

[109] Section 19 could be amended to allow the court to determine how any pecuniary penalty will be distributed (after the payment of the Commission’s costs) so that insider trading litigation does not create a windfall situation for the Commission but rather benefits the affected shareholders and the market.

[110] S 31(a). It should be noted that, although a number of parties have the power to apply for an order against a security holder who fails to disclose relevant holdings, all the actions under Part I, with the exception of one case, have been brought by the Commission (see Fitzsimons, supra note 68)


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