Defences to Charges of Insider Trading

Insider trading offences are difficult to prove. Regulators may be able to identify a person with inside information, a person who used that information, a relationship between the two people and even evidence of communications between them, but this may still not be enough to prove an offence. It is usually necessary to establish what was said to identify it as price-sensitive information.

Common statutory defences

There are a number of statutory exceptions to insider trading law under the Corporations Act 2001 which relate to specific types of financial products. These include exceptions for insurance underwriters and the revealing of information under legal obligation.

Underwriter defence

Section 1043C provides an exception for underwriters applying for or acquiring securities or managed investment products under an underwriting agreement and disposing of securities or managed investment products acquired under and agreement.

Chinese wall defence for body corporate

Section 1043F provides an exception for body corporate that enters into a transaction or agreement merely because of information in the possession of an officer or employee of the body corporate provided the following three factors are present:

• The decision to enter into the transaction or agreement was taken on its behalf by a person or persons other than that officer or employee; and
• It had in operation at that time arrangements that could reasonably be expected to ensure that the information was not communicated to the person or persons who made the decision and that no advice with respect to the transaction or agreement was given to that person or any of those persons by a person in possession of the information; and
• The information was not so communicated and no such advice was so given.

Chinese wall defence for partnerships

Section 1043G provides an exception for partnerships who enter into a transaction or agreement merely because one or more (but not all) of the members, or an employee of the partnership, are in actual possession of information if the following three factors are present:

• The decision to enter into the transaction or agreement was taken on behalf of the partnership by any one or more of the following persons:

(i) a member or members who are taken to have possessed the information merely because another member or other members, or an employee or employees of the partnership, were in possession of the information;
(ii) an employee or employees of the partnership who was not or were not in possession of the information; and

• The partnership had in operation at that time arrangements that could reasonably be expected to ensure that the information was not communicated to the person or persons who made the decision and that no advice with respect to the transaction or agreement was given to that person or any of those persons by a person in possession of the information; and
• The information was not so communicated and no such advice was so given.

Knowledge defence

Section 1043H of the Corporations Act provides that a person does not commit the offence of insider trading by entering into a transaction or agreement in relation to financial products issued by another person merely because the person is aware that he or she proposes to enter into, or has previously entered into or proposed to enter into, one or more transactions or agreements in relation to financial products issued by the other person or by a third person.

Section 1043I provides an almost identical defence for a body corporate

There is also an exception where the communication of the information is done by a publisher in their usual course of business, with no intent to contravene this law. (Section 1044A of the Act)