The meaning of "information" for the purposes of the Australian insider trading offence

Elizabeth Macknay and Matthew J. Keogh review the High Court of Australia's recent decision, Mansfield v the Queen [2012] HCA 49 regarding the meaning of "information" for the purposes of the Australian insider trading offence.

Key points

• The High Court of Australia has handed down a decision dealing with the meaning of information for the purposes of the Australian insider trading offence under s 1043A(1) of the Corporations Act 2001:Mansfield v The Queen [2012] HCA 49.
• The High Court has ruled that information can be wholly true, wholly false, or a mixture of the two. This is a new position that had not been considered prior to this case.
• The offence of insider trading in Australia prohibits trading in securities by persons who: (1) possess information that is not generally available; and (2) know, or ought reasonably to know, that if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of the securities.
• The legislation provides that for the purposes of the insider trading offence, ‘information’ includes:
  • matters of supposition and other matters that are insufficiently definite to warrant being made known to the public; and
  • matters relating to the intentions, or likely intentions, of a person.
• The High Court’s decision means that the above definition of information now includes information that is not true.
• The Court of Appeal position that information is not generally available if it is of a nature that it should be widely published in the media or announced to the ASX and it has not been was not subject of the High Court appeal.

Background

The Commonwealth Director of Public Prosecutions indicted Mr Mansfield and Mr Kizon for their early 2002 trading of shares in Adultshop.com and My Casino (later Euraust), which was alleged to have constituted insider trading. The accused were charged with a total of 52 counts, including:

• 9 common charges of conspiring to insider trade (contrary to s 11.5 of the Criminal Code (Cth));
• 28 alternative individual charges of insider trading (contrary to s 1002G(2)(b) and s 1043A(1)(d) of the Corporations Act 2001);
• 13 separate individual charges of insider trading; and
• one charge of communicating inside information to a person likely to purchase shares (contrary to s 1002G(3) of the Corporations Act, now contained in s 1043A(2)).

The relevant insider trading provisions in Australia essentially prohibit trading in securities by persons who possess information that is not generally available and know, or ought reasonably to know, that if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of the securities: s 1043A.

Trial

At the trial in the Western Australian District Court in early 2010, after the closing of the prosecution’s case, the defendants sought a finding from the judge that each of the accused were not guilty because there was no case to answer, as:

• the information alleged to be inside information was not "truthful information" or "a factual reality";
• the prosecution had not proved that the ‘inside information’ was not generally available;
• the prosecution could not prove that each accused held the same specific knowledge in order to establish the conspiracy counts; and
• the telephone intercept warrants used to obtain much of the evidence against the accused were invalid and therefore the evidence obtained under them was inadmissible.

At the trial, the judge accepted the first argument of the accused in relation to all but four of the charges. The trial judge said in his reasons that counsel has been unable to identify any relevant authority "where a falsehood [had] been accepted as information for the purposes of an insider trading offence" and that "all the reported material deals with information that was factually correct." The trial judge also said that it was "difficult to conceptualise how a falsehood could meet [the relevant] test, or how a jury would be instructed to approach its task where the information was false."

The jury found the accused not guilty of the remaining four charges.

Intermediate appeal

The prosecution appealed the decision of the trial judge to the Western Australian Court of Appeal: R v Mansfield [2011] WASCA 132. The accused also filed notices of contention seeking to uphold the trial judges no case decision on the basis of each of the points 2 to 4 above.

The Court of Appeal allowed the prosecutions appeal, finding that:

• inside information does not have to be reliable or have a sound factual foundation, can be false or a lie;
• the prosecution had proved beyond reasonable doubt that the inside information was not generally available;
• the elements for proving a conspiracy had been properly articulated by the prosecution; and
• the telephone intercept warrants were valid.

Of note, the Court of Appeal determined that in relation to proving that inside information was not generally available, it was sufficient that the information was of a nature that it would have been announced to the market or widely published by traditional media or mainstream online publications so as to make it either:

• a readily observable matter, within s 1042C(1)(a); or
• made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in such securities whose price might be affected by the information: s 1042C(1)(b).

Where the prosecution established the information was of such a nature and it had not been so published then it had established, at least sufficiently that the charges should proceed to be determined by a jury, that the information was not generally available.

This aspect of the Court of Appeal decision was not appealed to the High Court.

Each of the accused appealed the decision of the Court of Appeal in relation to the question of whether inside information may include falsehoods or lies to the High Court.

High Court decision

The High Court considered whether the appellants possessed information that was not generally available. The appellants argued that in order to prove an offence of insider trading, the prosecution must establish that the information the appellants possessed was "a factual reality". The appellants alleged in their defence that the alleged inside information that they had been provided by the managing director of Adultshop.com were lies and that "a lie cannot constitute information".

The High Court rejected the appellants’ arguments and concluded that for the purposes of the insider trading provisions, information includes false information. The Court reasoned that knowledge can be conveyed about any subject matter and properly be described, where wholly accurate, wholly false or a mixture of the two, as information.

The Court noted that there may be cases where a person conveys information to another person that is not true on the basis that the recipient will trade in the relevant shares. In such a circumstance two offences are committed: the person supplying the information may contravene market misconduct provisions and the person receiving the information may contravene the insider trading provisions. The Court said that such a result is consistent with the purpose of the prohibitions. Further, the operation of the market would be adversely affected by trading that was founded on information not generally available and that would reasonably be expected to materially affect the price of such shares, even if the information, unknown to the recipient of it, was false.

The decision also considered the Australian insider trading provisions in comparison to those in operation in the United States, the United Kingdom and the European Union, amongst others. The High Court noted that, in contrast to many of those jurisdictions, the Australian insider trading provisions do no refer to who provided the information or what connection that person had with the corporation in question. In Australia it is not necessary that the inside trader be linked to or connected with the company whose shares are being traded or that the inside information emanated from within such company.

The appeals were therefore dismissed and the High Court concluded that it would remain to be decided at any new trial of the appellants whether the information was material (i.e. whether if it had been generally available, a reasonable person would have expected it to have a material effect on the price or value of the shares).