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Judging the process – prosecuting insider trading

28 March 2015

Globally, we are witnessing that most regulators will come down hard on those who profit from an unfair advantage; chiefly from making money from confidential information or commonly known as insider trading.

In a land far, far away, regulators are prosecuting one of the country’s richest businessman for insider trading. Market observers are following this trial very keenly, if only to see if this country’s judiciary will be able to shake off its notorious reputation for delaying justice and treating white-collar criminals very leniently.

The businessman in question is accused of transacting in his own company’s shares, after learning in advance that one of the company’s key oil fields was not economically viable. At the same time, investigators in his country are probing alleged corrupt links with the country’s national petroleum giant. Other leading corporations in the country may be embroiled in this alleged corruption too.

The judicial system of this country has drawn widespread anger from its citizens, culminating in nationwide protests against it last year. The people simply will not put up with what they call the “impunity of the rich and powerful” much longer.

Now, this country’s regulators are pressing charges that the businessman’s illegal actions led to damage of about US$600mil. The regulators want him to honour the entire sum if the court finds him guilty.

This businessman was known to have the Midas touch. He founded six listed companies and for a period, was worth more than US$30bil. Yet, despite being hailed as a brilliant entrepreneur, the market has since learnt that he was given a head start as the state-owned banks gave his companies US$2.3bil in what is known as “preferential or subsidised loans”.

Investors in his companies soon learnt the hard way that these companies ceased to be sound investments because they either went bust, sold their key assets or changed hands. The big stumble by this supposedly brilliant entrepreneur was when he promised to inject US$1bil into his petroleum company, at any point of time should its management request it. This potential US$1bil capital injection would helped to maintain the company’s stock price for a few months.

Subsequent to this US$1bil pledge, the businessman began to sell off millions of shares in that company. Then, exactly two months after he began selling those shares, that company announced that its key petroleum fields were “economically not viable”. Very conveniently, the businessman then responded to that announcement by declaring that such a change in the company’s circumstances released him from his earlier US$1bil commitment.

True to form, the following month, the company defaulted on its debt of US$5.8bil. It filed for bankruptcy, wiping out its investors in the process.

Transfer ownership

The events leading up to this trial seems somewhat similar to so many stories in the emerging markets. However, this case has certainly gone a step deeper.

The lawyers defending the businessman claimed that the latter had no inside information on the petroleum field and that he sold off so many shares in that company to service a loan that was due. His legal team also said that, when the company filed for bankruptcy, this businessman still owned up to 50% of its shares. Therefore, they argued their client had actually lost more than any other shareholders in the company.

While the company was crumbling, the businessman as part of his routine administration of his estate, transferred ownership in his multi-million dollar homes to his wife and sons. This shifting of assets in an attempt to reduce his personal wealth is definitely nothing new.

Anti-corruption activists pointed out that in such situations, lawyers for such individuals tend to drag their cases out by, say, lodging appeal after appeal to the court, often on technicalities. This is their tactic to defer any final decision for as long as possible. So, even though the court of first instance has handed down its judgment, the law of this country allows for sentencing on that judgment to be suspended until all appeals against the judgment have been heard. If the appeal goes up to the Supreme Court, the wait for justice can be very lengthy indeed. What is more, for white-collar criminals in this country, the courts can allow the prison sentence to be offset by periods of community service.

The courts, however, are now under pressure to buck up and improve their credibility. Many prosecutors as well as groups of minority shareholders are pushing to be heard and for redress for their grievances.

Amid such a push for justice, there was a real twist in the trial of the businessman. The then presiding judge over this very high-profile case was removed. The businessman’s lawyers saw this as their victory as they had been agitating for the judge’s removal on the grounds that he was “biased” against the businessman. This was apparently because the then presiding judge had called the businessman “megalomaniacal”, and had also chided him for his ostentatious lifestyle.

In delivering his criticism, the then presiding judge ordered that the businessman’s possessions, including his many cars, be seized and auctioned. To the amazement of many, the same judge was later seen driving one of the seized vehicles. When questioned as to what he was doing with the car, he admitted that he had moved that car and a second one, as well as a piano belonging to the businessman to his own premises – “for safekeeping”.

The judge driving the seized vehicle became a nationwide joke; especially when he said that he had driven the two cars back to his own home because he did not want the sun to damage them.

Now that the judge has been removed, all his previous decisions with regard to the businessman’s case, including the order to freeze more than US$1bil of the latter’s property, is now up for review by other soon to be appointed judges. The case is now in for more delays, more appeals with even a potential for the statute of limitations to kick in, and, all because of the judge taking a spin.




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