Franks Stephen: Securities Legislation Bill — First Reading 
Franks Stephen: Securities Legislation Bill — First Reading 
[Volume:622;Page:18044] 
STEPHEN FRANKS (ACT) 
: 
 It is quite sad for me to be looking at this legislation which covers areas that I have spent so much of my working life working in. I think I was probably the most determined as a practising commercial lawyer to uphold and improve enforcement of securities law in this country. I spent 9 years putting hundreds of unpaid hours into the surveillance functions of the market surveillance panel and I spent many many hours making submissions and encouraging people to bring proceedings against insider traders. I spent a long time on policy issues to understand the securities laws of Australia the United States and the United Kingdom. 
When I look at this bill and see the primitive aping of Australian law I am really sorry for New Zealand. One of the advantages that this country should be exploiting is the ability to avoid some of the stupid political solutions that the Australians inflict on themselves as a result of having too many layers of politicians with too much influence after the occasional moral panic and the political hysteria that follows from their crashes and panics. 
I look at what we have done with for example insider-trading law and I see it going wrong in two ways. Firstly it is not very complex. Insider trading needs a clear conceptual foundation. We deliberately did not adopt one in 1988 and we deliberately are now moving even further away from a clear principle. Insider trading has resulted in a number of proceedings. I know of proceedings that have resulted in the payment of millions of dollars by the offenders. I know of the proceeding that I prosecuted in the name of my wife Roger Kerr’s wife and Roger Kerr against Kerry Hoggard. Hoggard paid many times the value of what he made. The only reason that it did not proceed to a conclusion was because of a law that meant that if we had gone further and taken the case right through the court would have held that his offer precluded us from recovering our costs. I believe that that is probably the case with a number of these proceedings. If we had refused his offer to settle the court would have said not unfairly when it reached an eventual outcome that because he had offered to settle for an amount that was in the order of the penalty that the court might order it would not award costs. The costs were so big that we settled. What I can say is that we were not alone. There are cases still trundling through the courts where insider traders will pay very heavy penalties. 
I then look at the dishonesty in this law—and it is dishonest. It refers to civil pecuniary penalties as if there is some magic in those words. I think what it really means is penalties that can be levied on the balance of probabilities. The standards that are set out are standards that no politician would tolerate such as absolute liability or liability for being inadvertently misleading. The legislation includes liability of up to a $5 million fine for something that is not even defined. There is liability for breaches of regulations that have not been written. I think it is very sad to see this House adopting the sanctimonious hysteria mode of saying that there must be badness out there because we have not seen prosecutions and we should therefore throw away longstanding principles. The State must not use its coercive powers to punish people until there is proof beyond reasonable doubt. 
I think it is sad also because we will inevitably achieve the Australian culture. I have worked on both sides of the Tasman on fundraisings takeovers and securities and I believe that the New Zealand market was far more intrinsically honest than the Australian market. I believe that this is partly a result of this kind of law. The Australians have an insider-trading law that everyone knows cannot be used because honest people will be put behind bars. So they have a set of understandings that mean people know the law is never actually applied the way it reads and now we are adopting it. 
We are saying that if someone has information that the market would like to have even if that person acquired it perfectly honestly had spent a lifetime in that business and understood the significance of a Government announcement of a change of policy before anyone else did and was making sure that the business trades on the investment subsequently made—and he or she knows that—and the information has not been derived from anywhere except by a public announcement that person is still an insider trader. That is absolutely what happens. 
New section 8A(1) which is proposed to be inserted into the Securities Markets Act by clause 21 states that a person is an insider trader if that person: “(a) has material information relating to the public issuer that is not generally available to the market; and (b) knows or ought reasonably to know that the information is material information; and (c) knows or ought reasonably to know that the information is not generally available to the market.” That person is an insider trader and cannot trade. 
What is “material information”? The information that is material will be a person’s knowledge of the significance. That is that person’s own proprietary information. For example a person may have spent a lifetime as a scientist understanding the next cure for  
Dothistroma pini 
 for trees and will know the moment it becomes evident that there is a genetic test for that disease. He or she will have the ability to increase the value of the entire forest estate of New Zealand. But this bill would say that until that person has explained it so that everyone in our market understands it that person cannot use his or her own knowledge—even though that person did not get it from anyone within the company. It was not obtained illegally—the information was drawn from the person’s own research. 
We know that that will happen. This market is given a feeble exception whereby the bill provides that it is not inside information if it is obtained by independent research and analysis. Well what is “independent research and analysis”? It means “planned investigation to gain new knowledge and understanding”. I would think that would be a phone call. Clearly someone has to plan to make a phone call which seems to me to be a planned investigation undertaken to gain new knowledge. In other words there is a set of slogans as the standard for an insider and then because that is completely unrealistic there is a set of exemptions that mean the law is actually mocked. Anyone faced with a potential $5 million fine in any court will lean over backwards to find that a person can fall within a planned investigation undertaken to gain new knowledge and understanding. In other words this law is simply a charade. 
We had a rational—or semi-rational—test before which said that if someone had information that is not that person’s property and that person has misused it that person would be liable. That was rational because it was upholding the ethical standards of those who acquire information in circumstances where they should not use it. 
That is only a part of this law. I have looked through it and I know that people will not invest the time in protesting because they know that the market in Australia gets around it and works. I am not surprised by the statistic of one secure prosecution given by Mr Jones from New Zealand First. It is really hard because often markets can work only when informed traders participate. As an uninformed trader I want the market price to be set by a whole lot of people who know more than me. I want the market price to be set by those who know that the new disease can be cured. I do not want a market that will adjust its price only when everyone understands it. That ruins markets. 
It has been known for years that the Australian test is illogical and is a joke but the Australians have enough clout to be able to persuade a weak Government and feeble Ministers. They are like kids sitting on a bulldozer. They do not know how to drive it but they can do damage and make it make a good noise. So every other kid on the block is admiring them. Others who would love to have the controls of the bulldozer are saying: “Yes we’ll pretend that you can drive if you pretend that we can.” That is what this Government is in a securities market.