Why the stony silence in insider trading probes

Any premature disclosure may compromise ongoing probes, jeopardising their outcome

There was a predictable outcry of foul play recently when Osim International made a privatisation offer just after its share price suddenly shot up by 10.5 per cent in a day.

It drew angry reactions from market pundits, who felt that the Singapore Exchange (SGX) could have done a better job than just issuing a standard query to Osim to explain the surge in its stock price.

Surely, in a market that prides itself on being well-governed and strongly regulated, the SGX should get to the bottom of things to find out if there was a leakage of material price-sensitive information on Osim, one writer argued.

But from the studied silence of regulators on the subject, if they are doing something about it, they are not telling the investing public - and for good reasons.

It's not that the SGX doesn't have a formidable arsenal at its disposal to track down fraudulent trading activity: the sophisticated electronic automated system it uses to monitor the market on a real-time basis triggers alerts when trading irregularities are encountered.

Osim's recent privatisation offer just after its share price suddenly shot up by 10.5 per cent in a day drew angry reactions from market pundits, who felt that the SGX could have done a better job than just issuing a standard query to Osim to explain the surge in its stock price. PHOTO: OSIM

The system also allows for an audit of all the orders and transactions executed in the market and identifies trades that may require further investigation.

And the SGX has demonstrated many times how it has used its surveillance system to devastating impact, with its cautionary statements on counters where suspicious trading activities were encountered.

These included CEFC International, International Healthway Corp, Koyo International and Zhongmin Baihui, where the SGX said it had traced the trading volumes to small groups of individuals and accounts.

Now if the SGX can be upfront about these counters, why isn't it as forthcoming about other cases where there might be fraudulent trading activity?

In cases of possible "market misconduct", it hands over the investigation to the Monetary Authority of Singapore (MAS) and Commercial Affairs Department, which set up a joint team to probe the matter further.

To these investigators, keeping a stony silence is necessary as "market offences are often complex and difficult to establish", according to an MAS report on capital markets enforcement.

That may explain why despite the hue and cry each time there are unusual trading activities, such as a share price inexplicably shooting up before a takeover, nothing is heard from them despite the public outcry for action.

As the MAS report explains: "Any premature disclosure may compromise ongoing probes and jeopardise its outcome, for instance, by allowing suspects to destroy documentary evidence or tailor their oral evidence when questioned."

In some cases, the process can drag on for years as investigators gather evidence from multiple sources, including trading and phone records, to build up a strong case that can withstand challenges in court. Sometimes, they also need to review huge volumes of data.

But since the investing public is unaware of what is going on, this may lead to a misunderstanding that law enforcers are sleeping on their watch. One example was the $9.6 million fine paid last year by a company director, Lim Oon Cheng, and a separate fine of $2.24 million paid by his niece Lim Huey Yih, for insider trading. Both had used price-sensitive information in 2009 to buy shares in Singapore Petroleum Company (SPC), then listed on the SGX, just before the company was sold to mainland oil trading giant PetroChina.

Some would argue that the length of six years - the period between the time when the offences were committed and the civil penalty were handed out - is too long to wait before the investing public gets to know that there was an insider trading probe on the case and that justice was being meted out to the offenders.

When the wrong-doers were finally punished, most people would have already forgotten about the SPC privatisation deal.

What can be done? MAS has noted that there may be instances where it issues statements about an ongoing investigation when it is in the public interest. But before it does so, it needs to weigh the pros and cons of allaying public concern and promoting investors' confidence against the risk of jeopardising the outcome of the investigation.

One example that comes to mind was the statement it issued 2½ years ago that, together with the SGX, it was conducting an "extensive review" into the activities of the infamous stock trio - Asiasons Capital, Blumont Group and LionGold Corp - whose plunge had wiped out more than $8 billion in market value in days.

In hindsight, the MAS statement probably saved lots of retail investors from rushing in to snap up these three counters in the mistaken belief that they were cheap after the collapse of their share prices.

It also had the effect of reassuring investors that the regulators were taking steps to rectify any wrongdoings that might have occurred.

Listed companies are now required to keep a privy list of staff and other parties who have knowledge of "material transactions", such as takeovers or major acquisitions that would have an impact on their share prices.

Keeping the investigation under wraps so as not to jeopardise its outcome is well and good. But any insights into an ongoing probe, once the initial investigation is completed, will serve to remind insiders in possession of market-sensitive information to keep such details to themselves and not try to profit from it.

In turn, this would provide a big morale booster to investors that the regulators are paving a level playing field for them.

A version of this article appeared in the print edition of The Straits Times on March 21, 2016, with the headline 'Why the stony silence in insider trading probes'. Print Edition | Subscribe