Drawing new lines

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The Independent Online
Abank executive uses a Caymans company to deal personally in the shares of firms he advises, just ahead of announcements. A group of City people swap confidential company information picked up during their work, organising a dealing ring to cover their tracks.

Even in the bad old days before insider dealing became an offence, when punting on inside tips was too common to remark, and when running a personal book alongside a bigger one for clients was how some fund managers made money, these people would have been recognised as having criminal tendencies.

Insider trading is destructive, dishonest and - despite claims to the contrary - has many victims among clients, colleagues and shareholders.

The widely made case for decriminalising it and switching to civil court actions and regulatory penalties is wrong, and would never win public or political support. But it nevertheless hides a germ of truth. Look at another range of real cases:

A dinner party guest, the brother-in-law of a chairman, accidentally overhears him talking on the phone about a takeover bid, and buys the shares;

An analyst tells colleagues to sell shares in a company after he has been given an off-the-record profit warning by a director;

Thirteen analysts and four fund managers are given a profits warning by a director;

A shareholder relations executive rings several analysts to steer their forecasts down, and a day later tells a journalist (at this newspaper) to ring the analysts for a story, saying he had heard on the grapevine that they had cut their forecasts.

The first two cases (Keith Robinson, brother-in-law of John Barkshire, the former Mercantile House chairman, in 1988, and Thorold Mackie, the Bell Lawrie White analyst, convicted last month) did in fact lead to the courts.

The third (London International Group) has brought a public censure from the Stock Exchange.

The fourth is no more than routine share price massaging, practised by an army of investor relations advisers. It broke the spirit of the rules, but made sure that the market was not wrong-footed.

To see why people do it, compare what happened to the LIG share price, which moved steadily down from the time of the illicit briefing to the date of the public announcement, with Bass, which failed to prepare the market this week for its disappointing profits and saw the share price plunge on the day. LIG's offence was that it was too blatant, not that it talked to the market.

Investigations continue, meanwhile, into the leaks of British Airways' rights issue and Allied-Lyons' convertible bond. Big institutions are also pressing the Stock Exchange to clarify the borderline between acceptable and unacceptable behaviour in the wake of LIG.

The worst problem for the markets, however, is not deciding where the ethical lines should be drawn along this wide but seamless spectrum between insider dealing and mild massaging of share prices. It is instead how to explain it to the uninitiated - the judges and juries that will be faced with the new insider trading provisions of the Criminal Justice Bill, which reaches its committee stage in the Commons next week. Which way will the courts shift the boundary of criminality?

The clauses have been redrafted by the Treasury and are an improvement on the first draft. But they still display a total lack of clarity where they deal with market-makers, and the use of 'specific or precise' as part of the definition of what constitutes inside information remains so vague that only the courts can give meaning to it.

The courts may be sensible, or they may move further into areas that ought to be the province of regulators. Whatever happens, uncertainty is leading to a natural defensive reaction in the City, an acceleration of a move to the US practice of hardly breathing without consulting a lawyer. American investment banks already apply tough SEC-style rules to their London staff.

Does it matter? Yes, if we get stuck with a costly lawyer-based system in which communications freeze up. But there are ways to avoid it.

The Exchange appears to be tightening up on the unofficial flow of information, not before time, since some selective leaking is bound to be accompanied by insider dealing. But publishing more detailed guidance on how to interpret the rulebooks would be a mistake.

Perhaps a better answer is to build up the regulatory equivalent of case law, by going public far more often on incidents that raise concerns, and saying why, instead of pussyfooting around with private tickings-off. This should still leave room for companies and institutional shareholders to talk to each other. But it is important to have more frequent formal announcements.

At the same time, the borderline of criminality should be shifted much nearer to blatant cases involving private profit and away from market malpractice, reversing the trend set by the Mackie case.

Public opinion is important here: the shift will only be politically acceptable if the regulators have tougher powers, work in public and levy enormously painful fines.

(Graph omitted)

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