McKenzie v Australian Securities and Investments Commission

[2009] AATA 1003

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 1003

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2009/2293

GENERAL ADMINISTRATIVE DIVISION		)
Re		TNST: Mark McKenzie

Applicant

And Australian Securities and Investments Commission

Respondent

DECISION

Tribunal Mr G. L. McDonald, Deputy President

Date18 December 2009

PlaceMelbourne

Decision The decision under review is affirmed.

…….(sgd G L McDonald)…...

Deputy President

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2009/2293

GENERAL ADMINISTRATIVE DIVISION		)
Re		TNST

Applicant

And Australian Securities and Investments Commission

Respondent

ORDER

Tribunal Mr G. L. McDonald, Deputy President

Date18 December 2009

PlaceMelbourne

Decision

WHEREAS the Tribunal has issued orders dated 14 July 2009, 14 August 2009 and an amended order on 23 September 2009 granting a stay on the operation of the respondent’s decision to prohibit the applicant from providing any financial services for a period of three years including prohibiting it from publishing notification in the Government Gazette and a confidentiality order which, among other things, directed the applicant be known as TNST and prohibited the publication of any evidence or material which would identify the applicant including the names of any witnesses,

AND WHEREAS the Tribunal has published its decision in the case on 18 December 2009 to the parties,

NOW THEREFORE the Tribunal orders that the earlier made orders of 14 July 2009, 14 August 2009 and 23 September 2009 are to cease to have effect 28 days after the 18 December 2009 unless otherwise ordered by the Federal Court of Australia and subject to the parties having liberty to apply to the Tribunal during the abovementioned 28 day period. 

…….(sgd G L McDonald)…...

Deputy President

CATCHWORDS – CORPORATIONS LAW – whether applicant acted on inside information – whether information of a takeover was in the public domain – whether the information concerning a takeover was readily observable – whether the applicant deduced, concluded or inferred from public information there may be a takeover – Tribunal satisfied applicant acted on inside information – decision under review affirmed

Administrative Appeals Tribunal Act 1975 s 37

Corporations Act 2001 ss 920A(1)(e), 1042A, 1042C, 1042D and 1043A

R v Hannes (No 2) [2006] NSWCCA 373

R v Rivkin [2004] NSWCCA 7

Rodrigues v Telstra Corp Ltd (2002) 66 ALD 579

REASONS FOR DECISION

18 December 2009 Mr G. L. McDonald, Deputy President

1. The applicant is a stockbroker. He is seeking review of a decision of a delegate of the respondent made under s 920A(1)(e) of the Corporations Act 2001 (the Corporations Act) banning him from offering financial services, which extends to stockbroking, for a period of three years. The ban was imposed after a finding that the applicant did not comply with the financial services law. The respondent claims that the applicant, being in possession of ‘inside information’, procured others to acquire or agree to acquire securities contrary to s 1043A(1)(d) of the Corporations Act. The applicant denies that he failed to comply with the financial services law and claims that he had no information which could be classified as inside information.

2. Mr Hill QC and Mr Lewis appeared for the applicant. Ms Mortimer SC and Mr Gilbertson appeared for the respondent. The applicant gave oral evidence. The respondent called Mr C Stranger, the head researcher at Austock Research Ltd, (“Austock”) and Mr A Hughes, a journalist for Fairfax media. The Tribunal had before it the documents filed for the purposes of s 37 of the Administrative Appeals Tribunal Act 1975 (“T documents”) as well as various exhibits tendered during the hearing. The respondent also called three stock analysts to give oral evidence (Messrs Mees, Esho and Doherty) and tendered, unopposed, statements from five other witnesses (Messrs Coppleson, Tassone, Valentine, Pizzey and Ms Martin). In all instances unless otherwise indicated the dates referred to in this decision are to 2006.

3.      Since November 2004 the applicant has been a stockbroker employed in the Melbourne office of Citi Smith Barney Pty Limited.  In 2006 the applicant told the Tribunal that while Citi Smith Barney employed a number of analysts, not any of them specialised in the health care sector.  The applicant said he had long had an interest in securities in that sector as he claimed that they had not had the growth rate of other Australian Stock Exchange (“ASX”) securities.  The applicant claimed that in 2006 he was recommending that his clients buy a range of health care securities.  If recommending securities in that sector the applicant stated that he conducted his own research, including reading the reports of analysts from other stockbroking companies, accessing publicly available information from newspapers and newswires, annual reports and other commentaries on ASX listed companies. There was, however, no evidence that the applicant recommended his clients purchase health care securities in the year 2006 before 26 July at which time he purchased, and recommended selected clients to purchase, securities in Visions System Limited (“VSL”).

4.      The applicant claimed to have followed VSL’s progress since 2002 at which time it was predominantly a company involved in fire and security and information technology.[1]  The applicant said he had read and retained a copy of a research note published by Citi Smith Barney in January 2005 which analysed the share price movement of VSL and concluded that there was a “major cycle emerging.”[2]  By 2006 VSL had commenced producing and selling medical instruments and a biotechnology reagent product used in the cure of cancer.  The applicant claimed that prior to undertaking the trades in VSL, in July and August, he had conducted research into the company.  He claimed that this included reference to three research reports from Austock prepared by Mr Stranger and dated 7 March, 16 June and 5 July.[3]  The Tribunal addresses this aspect of the evidence later in these reasons.

[1] Exhibit A1, paragraph 13.

[2] Exhibit A1, paragraph 15.

[3] T documents, T3, Volume 2, Tab 15, pages 364, 384 and 389 respectively.

5.      On 27 July the applicant purchased, on credit, 15,000 shares in VSL at $1.48.[4]  On the recommendation of the applicant the following of his clients purchased shares in VSL on the dates and at the prices outlined:

(a)“MB”: 6,700 shares on 26 July at $1.49;

(b)”AD” (trading as a family trust): 13,500 shares on 27 July at $1.48;

(c)“MM” (trading as a family Trust): 1,690 shares on 27 July shares at $1.48 and on the same day at the same price (to the same client trading as a Superannuation fund) 6,750 shares;

(d)“RO”: on 8 August 6,150 shares at $1.625.

[4] T documents, T3, Volume 3, Tab 31, page 960.

In each case the applicant telephoned the clients recommending the purchase on the day the purchase was made.  In the transcriptions of the telephone conversations between the applicant and the four clients relating to the purchase of VSL shares there is no mention of VSL as a possible takeover target.[5]  On 14 August the applicant telephoned all of the clients who had accepted his recommendation to purchase VSL shares and all agreed to their sale at or about $2.10 per share.  The applicant maintained that the anticipated target price had been reached and in accordance with his advice on purchase the shares ought to be sold.[6]

[5] T documents, T3, Volume 1, Tabs 7.1, 8.1, 9.6 and 10.2 respectively.

[6] Exhibit A1, paragraph 41.

6. The Tribunal has a significant amount of evidence concerning telephone calls made between the applicant and two of his colleagues in the Perth office of Citi Smith Barney – Mr Hebbard and Mr Catena. Mr Catena worked for or with Mr Hebbard and answered his telephone calls when Mr Hebbard was absent from the office and/or unavailable on his mobile telephone. The applicant said he had never met either Mr Hebbard or Mr Catena but had spoken to the former on the telephone on a number of occasions prior to July. Pages 954 and 955 of the T documents[7] is a summary of the dates and times a total of 17 telephone contacts were undertaken between the applicant and Mr Hebbard and Mr Catena between 21 July to 22 August.  Such records relate to calls from both office and mobile telephones which were, as a matter of course, required to be recorded by the employer.

[7] T documents, T3, Volume 3, Tab 29, pages 954 to 955.

7.      The first telephone call on 21 July was from the applicant to Mr Hebbard.  The applicant telephoned to find out more about a small Perth based company (Simitar) in which one of his clients had invested.  After discussing that company and others the following exchange occurred:[8]

[8] T documents, T3, Volume 3, Tab 27, pages 943 to 944.

TNST…Overall it’s pretty difficult in this volatile market

HebbardYeah, yeah it is mate, so you know, I just make sure we keep our powder dry.  One that comes out of, over your way er, we’re getting a bit of a sniff on, is ah, Visions Systems.

TNSTVision Systems, VSL?

HebbardYep, yep.  Aah we think someone, ah, mentioned to us briefly that ah, we think it’s rumoured, but it might be (UNCLEAR) er, er, a takeover bid over $2.00

TNSTOh really, oh okay.  Have you been accumulating it?

HebbardYep, yep, yep

TNSTOkay

HebbardNot a bet a day but we’ve ah, we’ve got it, we asked around, we paid up, we paid 1.50

ApplicantRight

HebbardJust so that we take a bit of an interest in it.. because, we think that maybe, they did return some capital ah, we did set up a dividend ah, um, and we think that ah, management are very good even though the big chief is resigning, to retire but the next underling bloke is pretty good you see?

TNSTright okay

Hebbardso that’s only just a little one that we think is probably happening

TNSTyeah

Hebbardand aah, and I think Anton Tagliaferro, he owns 17 percent of the company right?

TNSTright

Hebbardum, so I think er, you know, well, I mean, this one that – we’re just getting a bit of a sniff of you see

TNSTsniff on yeah, so no that’s all right I may go back and have a look at it

Hebbardyeah have a look and see if you get to see if anyone’s there who’s buying I did see someone oh, someone was selling the other day from over our way bit I didn’t, I didn’t ring him ‘cos I you know, we were on the other side chasing the stock so,

TNSTyeah, yeah.  So no, that’s aah, I’ll have to have a look at that

Hebbardyeah, I think there’s a bit, there may be a bit of potential there so

TNSTyeah, so that’s fine.  Not a problem.

8.      On behalf of the applicant it was submitted that drawing conclusions from the conversation must be approached with caution because of there being an unclear word or words in the second tranch of what Mr Hebbard is recorded as saying.  The Tribunal has taken this into account.  In view of the overall conversation with Mr Hebbard on 21July, the subsequent conversation with Mr Catena on 8 August and the final relevant conversation again with Mr Hebbard held on 22 August the Tribunal is satisfied that the word or words recorded as ‘unclear’ do not detract from the import of the conversation.  The Tribunal is satisfied that reference to ‘a sniff’ is a reference to the obtaining of knowledge.  Bearing in mind the context is a conversation between two stockbrokers, who must have been aware that their conversation may be recorded, it is open to conclude that Mr Hebbard was indicating to the applicant that VSL was likely to be the subject of a takeover at a price greater than that at which it was then being traded in the market.

9.      There is another aspect of the conversation which the Tribunal finds puzzling.  During his conversation with Mr Hebbard the applicant made no mention of undertaking any recent research into VSL.  Indeed quite the opposite.  At the end of the conversation the applicant says that he will have to have a look at VSL.  This does not suggest that he had been following VSL’s progress as he claimed in statement[9] and his oral evidence to the Tribunal.[10]  The first mention of Austock being connected to VSL is in two brief diary notes made by the applicant on 26 July.[11]  This is four days after the first telephone conversation with Mr Hebbard.  By the time of that first entry the applicant had had the opportunity to look for material on VSL – as he said he would do in the first conversation he had concerning VSL with Mr Hebbard.

[9] Exhibit A1, paragraphs 16 to 22.

[10] Transcript, page 25.

[11] Exhibit A2.

10.     Mr Hebbard next attempted to telephone the applicant on 25 July.  The applicant had no recollection of whether there was a message or a telephone recording of what the topic Mr Hebbard may have wanted to discuss.  However, the applicant returned the call later and Mr Hebbard requested the applicant’s mobile telephone number.[12]  A number of unsuccessful calls, initiated by the applicant to Mr Hebbard on 25 and 26 July follow.  The applicant said that he was calling Mr Hebbard to discuss Simitar.  There is no transcript of a three and a half minute conversation between Mr Hebbard and the applicant occurring using their mobile telephones on 26 July.  The applicant told the Tribunal that as far as he could recall the conversation was about Simitar.

[12] T documents, T3, Volume 3, Tab 28, page 953.

11.     On 8 August the applicant telephoned to speak to Mr Hebbard but in his absence spoke to Mr Catena.[13]  The applicant was following up information concerning VSL.  The applicant raised the topic of VSL saying that VSL “… looks very good at the moment” to which Mr Catena replied ”oh did he give you that did he“.  The Tribunal takes in the context of the conversation that the reference was ‘he’ was a reference to Mr Hebbard.  In the course of the conversation Mr Catena reiterated that “…there’s gonna be a takeover” (that is, of VSL) and mentioned a price of $2.20, to which the applicant replied that was what he was also hearing.  In his oral evidence the applicant maintained that in saying this he was referring to what he had been earlier told by Mr Hebbard.  For the first time the applicant mentioned Austock Research to Mr Catena as covering VSL in the September quarterly issue.

[13] T documents, T3, Volume 3, Tab 38, pages 970 to 972.

12.     The mention of the results of research he had undertaken is not consistent with his earlier evidence that he liked to play his cards close to his chest and felt under no obligation to say anything about the research to Mr Hebbard.  This is particularly so in circumstances where the applicant said had spoken to Mr Hebbard on previous occasions, and as is demonstrated in their subsequent telephone conversations they discussed their social and sporting interests indicating they had mutual interests beyond their business association.  This suggests that there was more likely to be a better rapport between the applicant and Mr Hebbard than was likely between the applicant and Mr Catena.  While the applicant appreciated Mr Catena was a fellow employee he told the Tribunal that he had not previously met or spoken to him.  Given those circumstances it is incongruous that the applicant was prepared to mention the research he had been carrying out to Mr Catena, while he was not prepared to do so to Mr Hebbard.  This supports a conclusion that the applicant did not undertake research into VSL in 2004 prior to hearing from Mr Hebbard on 21 July.

13.     Mr Catena requested the applicant to email a copy of the Austock report “for protection.”  There is no elaboration as to what ‘protection’ Mr Catena was referring.  The applicant told the Tribunal that Mr Catena may have been wanting protection from clients Mr Catena had advised to purchase VSL shares in the event that the shares dropped in price.  However, viewed in the context of what Mr Catena had been saying to the applicant about VSL it is more likely that it was a reference to Mr Catena wanting to acquire independent information after the event to use in support of recommending the purchase of VSL and to lessen, or remove, the suggestion that purchases had been advised on inside information that a takeover was likely.  The applicant is not recorded as requesting to know the source of the information about the VSL takeover in his conversation with either Mr Hebbard or Mr Catena.

14.     The day following the discussion with Mr Hebbard on 25 July the applicant purchased shares in VSL and commenced to recommend that his clients also do so.

15.     The final relevant telephone call of note is one between the applicant and Mr Hebbard on 14 August.  After an exchange of pleasantries, the applicant opened by saying he was going to ring later to thank Mr Hebbard (while it does not make sense to say, when already on a telephone call that the caller intended to ring the same person later to thank him that is what the transcription records and the accuracy of the transcript was not challenged).  The applicant then proceeded to say that the “…technicals on [VSL] look good.”  Mr Hebbard proceeded to respond “…I just thought I’d let you know what’s going on there” and “we’d thought there was that rumour was on” and “I had to call it a rumour because it was a rumour.”[14]  The applicant then replied that Austock had “covered it” and mentioned the $2.10 and $3.00 dollar targets.  In the course of the conversation the applicant commented “…its been fantastic in a very…difficult market” before again twice thanking Mr Hebbard.  In his final thankyou the applicant said “…once again thank you for ah Vision.”  When asked why he would ring to thank Mr Hebbard the applicant denied he was ringing to thank him for the information about VSL and told the Tribunal he was a polite man who often thanked people.[15]  He also said he may have been thanking Mr Hebbard for his advice on Simitar.

[14] T documents, T3, Volume 3, Tab 30, page 957 to 959.

[15] Transcript, page 46.

16.     In his oral evidence to the Tribunal the applicant maintained that he may have been thanking Mr Hebbard for the assistance the latter gave in relation to Simitar.[16]  The context and the express mention of VSL make this explanation fanciful, and bring little credit on the applicant.  If the evidence of the applicant is to be believed then he had nothing to thank Mr Hebbard for.  It is an odd notion that someone would profusely thank a colleague for nothing on the basis that the person was merely being polite.  The Tribunal does not accept the applicant's protestations that the conversation did not involve him in thanking Mr Hebbard for the latter giving him information about the likely takeover of VSL at a price higher than that at which VSL securities were then selling.

[16] Transcript, page 47.

17.     Mr Stranger is a lead analyst in the equities research division of Austock.  He had responsibility for researching VSL.  In a report dated 7 March he assessed VSL to a medium to high risk stock then at $2.02 but recommended a ‘hold’ with a 12 month price target of $2.10.  He also reported the sale of VSL’s Fire and Security division and that the company had a cash surplus.  Additionally, he reported the company as developing its biotechnology division.  He foreshadowed a likelihood of modest returns and did not predict any major acquisitions over the next six month period.  There was no mention of VSL as being a likely takeover target.

18.     In April Mr Stranger, along with about 25 others, attended a day of presentations made by VSL.  According to Mr Stranger the presentations were an attempt by VSL to generate more interest in the company so that larger capitalisation could be achieved.  The company produced a 70 page booklet which in addition to being given out at the presentation was lodged with the ASX.  It was Mr Stranger’s evidence that only a small number of sell analysts (five or six) consistently expressed interest in VSL.  The applicant did not suggest that he had seen or relied on the information contained in the VSL published booklet as part of his research into the company even although it was reasonably contemporaneous publication.  The Tribunal is satisfied that if the applicant had read the booklet he would have mentioned it in his evidence.  The Tribunal is satisfied that he did not read the booklet.

19.     On 16 June Mr Stranger again reported on VSL, at which time he assessed it as a medium risk (down from a medium to high risk).  He also reported that VSL had acquired a US based biotechnology company that the target remained $2.10 and that further acquisitions may occur over the following 12 to 18 months.  A third report containing much the same information as that seen in the second report was written by Mr Stanger was published on 5 July.  It was Mr Stranger’s evidence that the next press report concerning VSL was 11 August and that it occurred after a trading halt had been placed on the stock on 10 August.

20.     There is nothing in any of the three above mentioned Austock articles written by Mr Stranger which alludes to VSL being a takeover target by Ventana.  The report dated 7 March mentioned a takeover valuation of $2.43.  It is clear from the report that that figure was estimated before a return of 0.40c to shareholders following funds becoming available from the sale of VSL’s fire and security business.  The report mentions that VSL believed its instruments and reagents business should be valued on the same basis as the valuation used by Ventana (that is, by reference to sales multiples).  It acknowledges that such a valuation methodology would be relevant if VSL was the subject of a takeover bid from US company but it does not refer to Ventana as being likely, or even a possibility, to make a bid.  Under a heading of ‘Comparison with Ventana’ the report compares their market share – 70% for Ventana and rising to 20% for VSL – and proceeds to detail likely sales increases for VSL.[17]

[17] T documents, T 3, Volume 2, Tab 15, page 368.

21.     In his oral evidence Mr Stranger stated that in July he was of the opinion that VSL was a possible takeover target for Ventana.[18]  Mr Stranger told the Tribunal that he had reached this conclusion based on the Ventana’s greater capitalisation and market share as well as VSL having an attractive cash balance.  However nowhere does the report mention Ventana as being likely to acquire VSL.  It is one thing for Mr Stanger to have formed the view that there was a possibility of Ventana making a takeover offer for VSL.  It is quite another to draw that conclusion from the content of any of the three written reports he issued in the period leading up to the halt in VSL trading called on 10 August.  Indeed, contrary to the submissions made on behalf of the applicant, it can be concluded from the articles that Mr Stranger was advising that VSL securities be held for a 12 to 18 month time frame during which he expected the price to rise to $2.10.  In cross examination Mr Stranger said that he expected VSL to become a world class player in cancer diagnostics in the next two to three years.  Nowhere does Mr Stranger mention a price of $2.10 being likely to be attained in the 2006 (calendar) year.  In the most recent report (July), prior to the trading halt of 10 August, Mr Stranger reiterated his recommendation as follows:

The reason we retain our Hold recommendation is because earnings will be negligible for the next two years and we will upgrade when we see tangible signs of the operating leverage expected (likely in 6-12 months).[19]

[18] Transcript, page 66.

[19] T documents, T3, Volume 2, Tab 15, page 384.

This is not evidence suggestive that a takeover bid is likely.

22.     The Tribunal concludes that a fair reading of the three relevant Austock research reports would not leave the reader satisfied that Mr Stranger was stating that Ventana was likely to make, or that there was even a possibility of it making, a takeover bid for VSL.  The Tribunal is satisfied, also from Mr Stranger’s evidence, that there were only a relatively small number (two or three) analysts who took an active interest in VSL securities.[20]  The applicant was not one of those analysts.

[20] Transcript, page 69.

23.     Mr Mees, an analyst at JP Morgan Securities Australia Ltd (“JP Morgan Securities”), published research reports concerning VSL on 6 April and 5 June.  The reports are circulated to hundreds of institutional investors who are clients of JP Morgan Securities who may use the research reports in considering the purchase of shares.  In the earlier report Mr Mees discussed the sale of VSL’s fire and security business and subsequent growth of the company.  He forecast a $2.66 price in 12 months.  He reported VSL’s acquisition of Immuno Vision Technologies Inc in the 5 June report commenting that the purchase was “a good fit” for VSL and that the acquisition made VSL’s biotechnology divisions more attractive to an acquirer.[21]  VSL shares were then (5 June) trading at $1.89.  Mr Mees maintained his earlier target of $2.66 by June 2007.

[21] T documents, T3, Volume 2, Tab 17, pages 455 to 460.

24.     Mr Mees agreed that there was a ‘feeling’ or ‘talk’ in the market among fund managers and investors that following the acquisition of Immuno Vision Technologies that VSL would gain a larger share in the multi national market or itself become the subject of a takeover from an existing multinational biotechnology company.[22]  Mr Mees distinguished a ‘rumour’ from a ‘feeling’ or ‘talk’ by saying he took the former to relate to a specific event or, in the case of a takeover, a specific acquirer whereas the latter two references were to the general strategic direction which the market thought a company may be heading.[23]  Mr Mees said he had not attended, nor spoken to any one who had attended, any information sessions given by VSL.  Further he maintained he had not spoken to any analysts from any other broking firms concerning VSL.  Mr Mees evidence accords with that of Mr Stranger in confirming that there was only a small group of analysts who followed VSL.  This suggests, and the Tribunal finds, that whatever ‘feeling’ or ‘talk’ which was present in the market was likely to be relatively contained among a small group than it was to be widespread.  Since the applicant stated that his comment agreeing with Mr Catena that there was talk around about a likely takeover was restricted to what he had earlier been told by Mr Hebbard, the Tribunal is satisfied that any ‘feeling’ or ‘talk’ in the market place was not something which had reached the applicant prior to the time he arranged for the buying of VSL securities.

[22] Transcript, page 85.

[23] Transcript, page 89.

25.     Huntleys’ Smaller Companies Guide and associated publications provide subscribing investors with independent research information about companies with turnovers capped at $A1B.  Four reports concerning VSL were published between 6 March and 10 August.[24]  The research was based on company presentations (not relevant in the case of the VSL report), ASX announcements, industry analysis, web searches and any other material in the public domain.  The first article of 6 March reported that the sale of the VSL Fire and Security business had placed VSL in a strong financial position.  The report also commented on the potentially strong outlook for VSL’s surgical instruments and biochemical reagents businesses.

[24] Exhibit R5, paragraphs 6 and 9.

26.     The second report, dated 6 June, mentioned the purchase of ImmunoVision Technologies as being “…consistent with VSL’s revised strategy of expanding high value, high margin products in the Histology market.”[25]  There is no mention of VSL being the subject of any potential takeover.

[25] T documents, T3, Volume 2, Tab 21, page 665.

27.     The third report dated 12 July was prepared by Mr Esho.  It was Mr Esho’s evidence that he could not recall speaking to any other industry analysts about VSL prior to the publication of his report on 12 July.  He reported the earlier sale of the VSL fire and security business and that the company was focussing on specialisation of its biosystems development.  The report noted both VSL’s acquisition of ImmunoVision Technologies would complement the production of its UK subsidiary (Novocastra) and that VSL was in competition with Ventana Inc., its largest international competitor.  The report did not comment on the likelihood or otherwise of any takeover bid for VSL.[26]

[26] T documents, T3, Volume 2, Tab 22, pages 687 to 688.

28.     The final report date 14 July largely repeats the content of the earlier reports and does not make mention of any likelihood of VSL being the subject of a takeover bid.[27]

[27] T documents, T3, Volume 2, Tab 21, pages 668 to 670.

29.     Mr Coppleson is the executive director of Goldman Sachs JB Were Pty Ltd (Goldman Sachs).  Mr Coppleson prepares daily reports – the Afternoon Market Report (the afternoon report) and the Australian Newspaper Summary Report (the morning report) for distribution to Goldman Sachs’ clients.  The source of his reporting is the major Australian newspapers (the Australian Financial Review, the Sydney Morning Herald and The Age) as well as other news services (for example, IRESS, Reuters and Bloomberg).[28]  In the trading days 1 to 10 August Mr Coppleson did not find or report any references to potential takeover of VSL.  In the morning and afternoon reports of 11 August Mr Coppleson reported, from the Australian Financial Review of the same date, speculation that VSL was the subject of “M and A” (merger and acquisition) and that the stock had been placed in a trading halt on 10 August.  The publication could not have been relied on by the applicant in his decision to purchase VSL securities as it was published after he had made the purchases and after the trading halt of 10 August had been placed on VSL securities.

[28] Exhibit R6, paragraph 6.

30.     Mr Tassone is a client adviser with Bell Potter Securities Ltd in Perth and previously, in another firm, had worked with Mr Catena.  On 18 July Mr Catena emailed Mr Tassone asking if the latter had any research on VSL.  He replied that his research was only from 2004 and Mr Tassone requested Mr Catena to forward any research reports he may be able to find.  Mr Tassone stated he could not recall either making any further enquiries about VSL or hearing any rumours regarding VSL immediately before or after he purchased the VSL securities.[29]  On 19 July Mr Tassone purchased 6,500 shares in VSL on his own behalf and on the same day a further 9,000 on behalf of a client.  He maintained he made the purchases because he is “often a momentum trader” making decisions to purchase shares by reference to the volume traded.[30]  Mr Tassone stated that trading on 19 July was largest trade of the month and followed trading peaks on 20 and 26 June as well as being more than twice the volume traded in July and twice the volume traded the day before.  Mr Tassone’s approach to the purchase of VSL securities was not apparently based on any factual information or rumour but rather resulted from a methodical approach he had determined for the purchase of securities.

[29] Exhibit R7, paragraphs 11, 23 and 24.

[30] Exhibit R7, paragraph 18.

31.     Mr Valentine is a stockbroker for Patersons Securities Ltd (Melbourne).  He previously lived and worked as a stockbroker in Perth and came to know Mr Catena “reasonably well” over a seven year period.[31]  On 18 July Mr Catena emailed him asking for information on VSL.  Mr Valentine, who thought it was likely that he was visiting Perth on 18 July, was unable to access the research requested.  Mr Valentine was at the time he prepared his statement of evidence unable to recall who prepared the research report or if he forwarded it to Mr Catena and has been unable to locate a copy of the research.  The evidence is such that the Tribunal is unable to draw a conclusion that the source of Mr Catena’s advice to the applicant regarding VSL their telephone conversation of 8 August arose from any information provided by Mr Valentine to Mr Catena.

[31] Exhibit R8, paragraphs 4 and 5.

32.     Ms Martin, the manager of the Information Resource centre within the respondent’s office, stated that she caused a number of searches to made from different media monitoring outlets for entries referring to ‘Vision Systems Limited VSL’ and ‘Vetana Medical Systems or VMSI’ covering the period 1 April 2006 to 31 August.  The results were printed out and examined by Mr Claridge, the Assistant Director of the respondent’s markets division, and are as follows:

(a)Media Monitors, covering Australian and New Zealand broadcast media – a total of four references were returned;

(b)Factiva, world wide coverage including 10,000 sources (of which more than 370 are from continuously updated newswires) from 152 countries in 22 languages.  In case the words ’merger’ may have been a descriptor that worded was added to the search.  A total of 111 references were returned; and

(c)‘AFR’ (Australian Financial Review) a total of 23 references were returned.[32]

[32] Exhibit R9.

There were no references to takeovers or mergers in any of the three searches abovementioned prior to the trading halt called on VSL on 10 August.  The Tribunal is satisfied that there were no media reports from early 2006 making comment of a likely takeover bid by Ventana for VSL in the period leading up to 10 August.

33.     Mr Pizzey was the company secretary for VSL from 1993 to 28 February 2007.  It was his evidence that he became aware of Ventana making approaches to merge with Vision in mid 2006.  Mr Pizzey was a signatory, in his capacity as company secretary, to a confidentiality agreement dated 12 July between Vision and Ventana.  Administrative steps were also put in place to ensure that information about the discussions between VSL and Ventana remained confidential.[33]

[33] Exhibit R10, paragraphs 8 to 12.

34.     The evidence above leaves the Tribunal satisfied that VSL’s profile in the period leading up to August had been raised as the result of the media reports.  There was information in the public domain which focussed on VSL’s strong financial position and its likely increasing importance in the American market selling in particular cancer reagent technology.  The advice from analysts in that period was that VSL was a ‘long term’ (that is, more than a 12 month) hold prospect.  The Tribunal accepts Mr Mees’ evidence of there being a distinction between a ‘rumour’ and a ‘feeling’ or ‘talk’ which may arise in the market place.  The former is based on some concrete evidence whereas the latter is based on a less tangible belief that something may possibly occur and is more akin to intuition than it is founded on fact.

35.     The evidence leaves the Tribunal satisfied that while VSL was experiencing a positive change in its business endeavours that this did not amount to a rumour of there being a likely takeover.  In this case information conveyed by Mr Hebbard and Mr Catena to the applicant was more concrete in that it identified a rumour of a likely takeover.  This conveyed something more definite than information of improving strength in the stock because of it undertaking new and/or more active business initiatives.  Additionally the rumour placed a likely price at which the takeover bid would be likely to be made ($2.20).  Not any of the above mentioned reports, including those prepared by Mr Stranger for Austock, predicted a takeover prior to the halt in trading on VSL shares was called on 10 August.  The Tribunal is unable to accept the applicant’s evidence that his purchase of, and the recommendations he made to his clients to purchase, VSL securities relied on either the Austock reports and/or any other generally circulating ‘feelings’ in the market place to conclude that VSL was likely to be the subject of a takeover bid.  The Tribunal is satisfied that he relied on the information conveyed by Messrs Hebbard and Catena that there was rumoured to be a takeover of VSL at a price of above $2.00.  The question then is whether that information amounts to ‘insider information’ as that term is defined in the Corporations Act.

The Corporations Act

36. Section 1043A(1) is in the following terms:

(1) Subject to this Subdivision, if:

(a)        a person (the insider) possesses inside information; and

(b)the insider knows, or ought reasonably to know, that the matters specified in paragraphs (a) and (b) of the definition of inside information in section 1042A are satisfied in relation to the information;

the insider must not (whether as principal or agent):

(c)apply for, acquire, or dispose of, relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products; or

(d)procure another person to apply for, acquire, or dispose of, relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products.

Section 1042A defines a number of terms used in s 1043A(1) which relevantly are as follows:

information includes:

(a)matters of supposition and other matters that are insufficiently definite to warrant being made known to the public; and

(b)matters relating to the intentions, or likely intentions, of a person.

inside information means information in relation to which the following paragraphs are satisfied:

(a)the information is not generally available;

(b)if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of particular Division 3 financial products.

material effect, in relation to a reasonable person’s expectations of the effect of information on the price or value of Division 3 financial products, has the meaning given by section 1042D.

Division 3 ‘financial products’ includes ‘securities’. Section 1042D defines ‘material effect’ as follows:

For the purposes of this Division, a reasonable person would be taken to expect information to have a material effect on the price or value of particular Division 3 financial products if (and only if) the information would, or would be likely to, influence persons who commonly acquire Division 3 financial products in deciding whether or not to acquire or dispose of the first-mentioned financial products.

Section 1042C defines for purposes of when information is ‘generally available’ and is as follows:

(1)       For the purposes of this Division, information is generally available if:

(a)       it consists of readily observable matter; or

(b)       both of the following subparagraphs apply:

(i)it has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in Division 3 financial products of a kind whose price might be affected by the information; and

(ii)since it was made known, a reasonable period for it to be disseminated among such persons has elapsed; or

(c)it consists of deductions, conclusions or inferences made or drawn from either or both of the following:

(i)        information referred to in paragraph (a);

(ii)       information made known as mentioned in subparagraph (b)(i).

(2)None of the paragraphs of subsection (1) limits the generality of any of the other paragraphs of that subsection.

37. On behalf of the applicant it is submitted that the allegation that he acted contrary to s 1043A(1) cannot succeed for any the following reasons:

(a)the information allegedly in the applicant’s possession was not material or price sensitive in the sense that it was not information which a reasonable person would expect to have a material effect on the price of VSL shares;

(b)the information was generally available because it was either in the public domain or because it consisted of deductions, conclusions or inferences from information in the public domain;

(c)the applicant could not be said to be ‘in possession’ of the information because he paid no regard to it and traded for reasons wholly unrelated to the vague, non-specific and unsubstantiated information he received from Messrs Hebbard and Catena.

38.     The information conveyed by Mr Hebbard to the applicant on 21 July clearly contained the proposition that there was likely to be a takeover offer for VSL at a price higher than the then market price.  Information in that form which was too indefinite to convey to the market as there was no timeframe, insufficient certainty about the takeover offer price or information about who was proposing to make the takeover bid.  It was as Mr Hebbard described it a ‘sniff’.  It conveyed the intentions of a person to make a takeover offer.  The definition of ‘information’ does not require that the person whose intentions are conveyed to be identified.  It was maintained for the applicant that the lack of a source for the information conveyed by Messrs Hebbard and/or Catena resulted in that information lacking reliability and that this, combined with a lack of surrounding detail (for example who was the party interested in making the takeover offer as well as the timing of the takeover) as matters which should govern the Tribunal’s determination of the following two questions:

(a)whether the information is material or price sensitive, in the sense that a reasonable person would expect it to have a material effect on the price of the shares; and

(b)whether the information is not generally available.

39.     On behalf of the applicant it was submitted that there was a lack of expert evidence addressing whether a reasonable person would expect the information to have a material effect on the price of the shares.  It was submitted that ascertaining the effect of the information on an investor is beyond the common knowledge of a Tribunal of fact.[34]  In support of this proposition two cases are relied on R v Rivkin[35] and R v Hannes (No 2)[36]  It is submitted that in both cases it was evident that the Crown relied on expert evidence to determine the ‘materiality’ of the information.  Both cases were defended criminal prosecutions undertaken before a jury.  In criminal cases there is both an onus of proof on the Crown and the need for it to prove every element of an offence beyond reasonable doubt.  The instant case is before the Tribunal which stands in the place of the original decision maker to determine administratively whether the decision reached is the correct or preferable decision.  No party bears any onus of proof and the standard of proof is determined on the balance of probabilities.  The proceedings in this Tribunal are clearly distinguishable from those undertaken in a court – more particularly a court conducting the hearing of a criminal prosecution.

[34] Outline of Applicant’s Closing Submissions, paragraph 18.

[35] [2004] NSWCCA 7 at [50]-[51].

[36] [2006] NSWCCA 373 at [152].

40.     The original decision maker in this case was a delegate of ASIC.  It would be an extraordinary proposition if an ASIC delegate was expected to call expert evidence in order to determine whether a reasonable person would expect information to have a material effect on the price such that it would or would be likely to influence a person operating commonly in the market place to acquire or dispose of a particular financial product.  The Tribunal stands in place of ASIC and, unlike the situation in a criminal court, carries out an administrative function.  The Tribunal is a ‘Tribunal of fact’.  It must be recognised however that it does not operate in a contextual vacuum as seems to be asserted on behalf of the applicant.  The Tribunal, despite the fact of its generalised jurisdiction, is in a position, if the need arises, to determine issues such as that posed in the definition of ‘insider trading’.  However for the reasons expressed hereunder it has not been necessary for the Tribunal to rely on its own assessment of what a ’reasonable person‘ may do in such circumstances because, in the Tribunal’s view, in this case the evidence points to the answer.

41.     On behalf of the applicant reference was made  to comments by Kiefel J, as she then was, in Rodrigues v Telstra Corp Ltd[37] in which Her Honour says:

The drawing of an inference without evidence is an error of law …

That case involved a claim for compensation.  The Court found that the Tribunal could not validly make a psychiatric diagnosis in the absence of expert psychiatric evidence.  Her Honour went on to state:

It may be said that expert evidence is sometimes over-utilised and is called in situations where an arbiter of fact is in a position to determine the matter for itself.  Sometimes all that is necessary is for a method or process to be explained, so that the Court or Tribunal can then apply it to the facts it finds.  On the other hand, there are cases where a whole question is, in effect, relegated to experts to give evidence upon it.  This was such a case.[38]

[37] (2002) 66 ALD 579 at [25].

[38] (2002) 66 ALD 579 at [26].

42.     In the instant case the Tribunal is not without evidence.  The evidence which can be taken into account is limited to events occurring before the suspension of trading in VSL securities occurred.  There is evidence of:

(a)an increase in the volume of sales in VSL securities in the period leading up to its suspension of trading (as demonstrated by Mr Tassone’s purchase of VSL securities);

(b)purchases of VSL stock made by the brokers (Mr Hebbard and the applicant) and on behalf of the clients of the applicant including willingness of the applicant to borrow money in order to make the purchase;

(c)VSL and Ventana regarded the information surrounding the takeover negotiations as being highly confidential and a confidentiality agreement was between the two companies was signed.[39]  Additionally other administrative measures were taken to ensure that security of confidentiality was maintained.[40]  Mr Pizzey, at the time the VSL company secretary, stated that the proposal was ‘market sensitive’[41] and that market analysts, including Mr Stranger, had been contacting him in order to try and obtain information before the official release;[42]

(d)the increase in trading in VSL stock prior to the trading halt almost ‘derailed’ the acquisition because, according to Mr Pizzey, Ventana perceived that VSL was engaging in share ramping in order to obtain a greater price than that offered by Ventana;

(e)that Messrs Hebbard and Catena were accurately informed of the proximate likely takeover price offer for the VSL securities, which allowed them and the applicant, and the applicant to recommend to his clients, to purchase VSL securities on the open market at a sum less than that which would be offered when the takeover was announced.  According to Mr Pizzey the takeover offer from Ventana commenced at $1.80 in mid July but subsequently rose.[43]

[39] Exhibit R10, paragraphs 8 to 10.

[40] T documents, T3, Volume 3, Tab 25, pages 891 to 894.

[41] Exhibit R10, paragraphs 12 and 18.

[42] Exhibit R10, paragraphs 36 and 37.

[43] Exhibit R10, paragraph 39.

43.     The above evidence the Tribunal is satisfied to draw an inference that if the information known to Messrs Hebbard and Catena and the applicant was generally available a reasonable person would expect it to have a material effect on the price of VSL securities.  The fact that Mr Hebbard and the applicant, who must be taken by virtue of their occupations to be people who ‘commonly acquire’ Division 3 products (being securities or shares) and also to be ‘reasonable people’ were influenced to purchase VSL securities results in the conclusion that the information has influenced them in the purchase of VSL securities.

44. It is also necessary for the Tribunal to address s 1042C to determine if there was information concerning a takeover offer for VSL could be categorised as being ‘readily observable’. The word ‘readily’ has several meanings ascribed to it in the Shorter Oxford English dictionary, the most apt of which, in the context of the section, is ‘without difficulty’. Clearly the information was not observable without difficulty. Mr Stranger’s report of evidence concerning Mr Tassone for instance did not say he traded in VSL in reliance on any information but on a pre-planned methodology which did not rely on the provision of information concerning a particular company.

45. Section 1042C(1)(b) requires two conditions before it can be said information is generally available. The first is that the information must be made known in a manner that would or would be likely to bring it to the attention of persons who commonly invest in securities of a kind whose price might be affected by the information. The information about the bid was confidential and neither VSL or Ventana had made it known that there were even discussions occurring between them, let alone discussions concerning a possible takeover. The interest of the analysts in trying to ascertain the information from Mr Pizzey was so that they could report any development. If they had obtained the information from Mr Pizzey or some other source or if it had become public in another manner for example in a newspaper or from a wire source, prior to the suspension of trading, then it would have been known in a manner that would bring it to the attention of those who invest in securities. Dealers in securities knowing of a likely takeover bid higher than the then quoted open market price would clearly apprehend that the price would be affected. It is only necessary to pose the question to see the answer. Additionally, there is no evidence that any such information, even it had it been made known, was disseminated among investors for a reasonable period (prior to the suspension of VSL from trading). Accordingly the Tribunal is not satisfied that the provisions contained in s 1042C(1)(b) apply.

46. Section 1042C(1)(c) applies if a deduction, conclusion or inference is made or drawn from either or both of sub-s (a) or (b)(i) of s 1042C(1). It was submitted on behalf of the applicant that he deduced, concluded or inferred from information in the public domain that VSL was a possible takeover target by Ventana.

47.     In his statement prepared of 7 April 2008, prepared for purposes of the hearing before the delegate Mr Stranger comments:

Comments not referring to documents in particular.

In the June to August 2006 timeframe there was press both domestically and offshore suggesting VSL was a takeover candidate given its large cash balance and exposure to medical diagnostics (considered one of more attractive areas in health – particularly by US investors).

Most of the press, some listed below, commenced after the company went into a trading halt on 10 August 2006.[44]

[44] Exhibit R1, paragraphs 17 to 18.

Mr Stranger does not refer to any such reports in period preceding 10 August and the evidence of Ms Martin and Mr Claridge leaves the Tribunal satisfied that there was no press speculation of such a takeover prior to the suspension of trading on 10 August.  In his oral evidence to the Tribunal Mr Stranger confirmed that he had spoken to a small number of other analysts who were interested on the ‘sell’ side of health securities.  He estimated the total number of such analysts to be about five.[45]  There is an appreciable difference between Mr Stranger holding an opinion that Ventana was the ‘standout candidate’[46] to make a takeover bid for VSL and that information being able to be concluded, deduced or inferred from ‘readily observable’ matters.  If the applicant had concluded, deduced or inferred as much from his investigations, including reliance on the Austock reports, the last of which was relevantly dated 5 July, then he would not have needed to wait until after his conversation with Mr Hebbard on 21 July, at which time he was first told of the rumour of the takeover, to commence purchasing VSL securities.  More than a fortnight elapsed between the third report from Austock and the time the applicant commenced purchasing VSL securities.  If, as he claimed, he relied on the Austock report then there was a risk that the price of VSL securities would increase in that period if in fact there had been a general market perception of an impending takeover offer.  It seems more likely, and the Tribunal is satisfied that, the applicant relied on the information conveyed by Mr Hebbard to purchase the VSL securities than he did any information conveyed in the Austock reports.

[45] Transcript, page 69.

[46] Transcript, page 72.

48. Section 1042C(1)(a) and (c)(i) are based on the existence of ‘readily observable’ information. The Tribunal does not regard the type of information referred to in the evidence of Mr Mees as a ‘feeling’ or ‘talk’ in the market place as being consistent with something which is ‘readily observable’. Those expressions do not, as Mr Mees said, relate to specifics but to a general strategic direction in which a company may be heading. It follows that a ‘feeling’ or general ‘talk’ in the market place are too ill defined to fall under the description of ’readily observable’.

49. In the end the Tribunal is satisfied that there is no sufficient cogent evidence from those who prepared research reports (being Mr Stranger, Mr Esho, Mr Coppleson and Mr Mees), from newspapers, news broadcasts or the wire, despite the wide ranging search carried out by Ms Martin and Mr Claridge, or from information which may have obtained and sent to Mr Catena by his friend or acquaintance, Mr Valentine, which was ’generally available’ as that term is defined in s 1042C(1)(a)-(c) on which the applicant could have relied in deciding to purchase and recommend the purchase to his clients of VSL securities.

50.     It is evident from the evidence of Mr Pizzey that part of the sensitive information was the price at which Ventana would pay for VSL shares.  This too was not generally available even although Messrs Hebbard and Catena were aware, prior to any public announcement, of what transpired to be the proximate accurate takeover offer figure.  The fact of having that information led to Messrs Hebbard and Catena and the applicant acquiring shares in VSL, as well as, in the case of the applicant advising clients who commonly dealt in ASX stock, to acquire the stock.  While there is no evidence that the applicant told his clients of the likely takeover bid, they relied on his recommendation to purchase the VSL securities.  In the circumstances outlined the Tribunal is satisfied that the possession of the information conveyed by Messrs Hebbard and Catena to the applicant influenced not only his purchase but also his recommendation to his clients to purchase the VSL securities.

51. For the reasons expressed the Tribunal is satisfied that the applicant acted on inside information in purchasing and arranging for selected clients of his to purchase securities in VSL in the period between 21 July and 8 August. In undertaking those trades the applicant participated in prohibited conduct for the purposes of s 1043A of the Corporations Act.

52.     Despite the Tribunal’s invitation to do so, no submissions were made on behalf of the applicant as to the length of the banning period imposed should the Tribunal conclude to affirm the decision under review.  It is trite, but nevertheless true, to state that the purpose of a banning order is not to punish the person concerned (although it may have that affect).  It is to maintain the integrity of the operation of the financial market thereby maintaining investor and general public confidence, to deter both the person concerned and others who may be minded to do so from failing to comply with the law and to protect the public.  Trading in ASX listed securities is supposed to occur on the basis of all interested parties having access to equal information.  The aim is to ensure fairness in the market place.  Clearly trading relying on inside information stands to defeat this purpose.  In order to achieve a fair and open market insider trading is banned.  The applicant as an experienced stockbroker is, or ought be, well aware of both the law and the reason for it.  It is, in the view of the law and public policy, appropriate to consider a ban along with other remedies which may also be open, for instance, having the applicant enter into an enforceable undertaking.

53.     As well as the factors outlined above the personal circumstances of the person found to have committed a breach should also be considered.  The applicant had a successful career in sport and apparently in his family business before becoming a stockbroker.  He is relatively young (39 years of age), is married and supports his wife and two young children.  Citi Smith Barney has promoted him twice in the course of the six years he has been with the firm.  He has transpired to be successful in his employment advising a list of over 300 retail clients as well as institutional clients, superannuation funds and non profit organisations.  The Tribunal accepts that given the industry in which he works a banning order, which is required to be publicly recorded, would more likely than not permanently and detrimentally affect his career as a stockbroker.  The consequences to him and his family will be clearly very damaging – both as to his reputation as well as financially.  The Tribunal has taken this into account when considering the form of penalty to be imposed.

54.     In order to encourage consistency in the application of banning orders ASIC has published Regulatory Guide 98: Licensing: Administrative action against Financial Providers.  The applicant does not have any prior breaches.  No client has ‘lost’ money as the result of his advice or actions.  However his actions have the highly undesirable effect of undermining public confidence in the maintenance of the integrity of the market.  His actions must be regarded seriously.  Bearing in mind the protection of the public from such conduct, which by its nature is patently invidious, the breach is too serious to permit the imposition of a lesser penalty such as an enforceable undertaking.  However taking into account that the applicant embarked on a course of conduct effectively suggested to him by another and allegedly more senior stockbroker in the employer’s firm the Tribunal is satisfied that a three year banning term imposed is justified.

55.     For the above reasons the decision under review is affirmed.

I certify that the 55 preceding paragraphs are a true copy of the reasons for the decision herein of
Mr G. L. McDonald, Deputy President

Signed: …...(sgd D De Andrade).....................
  Personal Assistant

Date/s of Hearing  21, 22 and 23 September 2009,
  12 November 2009
Date of Decision  18 December 2009
Counsel for the Applicant         Mr I Hill QC and Mr A Lewis
Solicitor for the Applicant          Mr J Podmore, James Dowsley & Associates
Counsel for the Respondent     Ms D Mortimer SC and Mr D Gilbertson
Solicitor for the Respondent     Ms J Birch, ASIC