'Poor' insider trading record

Global guru on insider trading, Utpal Bhattacharya, is impressed by New Zealand's readiness to wave the flag when it comes to insider trading laws.

When he contacted sharemarket operators around the world asking whether they had insider trading laws and whether there had been any prosecutions, New Zealand was the first country to reply that it did, and had.

''That was 10 years ago, but I still remember that,'' says Bhattacharya. ''It was two ticks for New Zealand.''

He is less impressed with New Zealand's track record since then.

When told New Zealand had yet to see a successful insider trading prosecution, that only four significant insider trading actions have been taken since laws were passed more than 20 years ago, and that no charges have been laid since revised laws came into effect in 2007, he said: ''In my view, that is a poor record.''

Bhattacharya, a professor at Indiana University's business school, will be in New Zealand this week, talking to students and market regulators about what he has learnt from his studies into ''the dark side of finance''.

The benchmark for action on insider trading is the Securities and Exchange Commission in the United States, he says. ''It launches four [market manipulation] prosections a month, and has never lost a case,'' says Bhattachayra. But the commission was in a unique position of being cop, judge and jury when it came to insider trading.

While he admits he does not know New Zealand capital markets intimately, he believes there may be parallels with Canada, where he recently completed an investigation into that country's securities laws after criticism they were inadequate.

''Even most Canadians admit most Canadian crooks are caught by US regulators,'' says Bhattacharya. Like Canadians, he surmised, New Zealanders were not confrontational people, and preferred a softly-softly approach when dealing with market manipulation.

But it is an approach which Bhattacharya believes in not appropriate for dealing with insider trading. ''It's the easiest crime in the world to commit, and you can make a lot of money doing it,'' he says.

And after a decade or longer researching market manipulation, he believes having no insider trading law is better than having laws, even good laws, but not enforcing them.

''It's like the good guys not having guns in a country with gun laws that were not enforced,'' he says. The good guys would be safer were there no gun laws, and they would be impelled to defend themselves.

If securities laws were not enforced, investors would doubt whether they would get their money back with a fair return. So they would either hold on to their money (leading to illiquid capital markets) or demand a higher return for risk (and thus increasing the cost of capital).

Bhattacharya says there is evidence that countries with stricter enforcement of securities laws have a lower cost of capital, ''though that is more clearly the case in emerging markets than in developed countries,'' says Bhattacharya.

His study of 103 countries that have sharemarkets shows 87 have insider trading laws, but enforcement has taken place in only 38. But 82% of developed countries have enforced their securities laws.

Whether successfully not, Bhattacharya didn't ask. ''I feared I wouldn't get replies to my survey so readily from market regulators if I asked that,'' he says.

- © Fairfax NZ News