How New Zealand plugged the leak on insider trading

Gossip Week: Insider trading and the sharing of sensitive financial information is a big no-no in New Zealand. However, there was a time when it was all part of the game.

All week, The Spinoff is taking a look at the role of gossip in Aotearoa’s past, present and future – read more Gossip Week content here.

On knowledge, US Circuit Court Judge Irving Kaufman once said, “nowhere is this commodity more valuable or volatile than in the world of high finance, where facts worth fortunes while secret, may be rendered worthless once revealed”.

With millions of dollars and the interests of so many at play, one stray comment, piece of gossip or insider tip has the power to impact a company’s share price, and create or remove a lot of wealth – sometimes in the space of a few hours.

Which is exactly why New Zealand has such stringent laws and regulations to prevent certain financial information from being shared. Since 2011, the Financial Markets Authority has been responsible for enforcing these rules, which prohibit an “information insider” from disclosing information when they know or ought reasonably to know that the person receiving the information will trade products, or advise others to trade (tipping).

With offenders facing up to five years in prison or a fine of up to $500,000, the regulations have evidently been effective. According to Chapman Tripp partner Rachel Dunne, the only criminal prosecution brought by the FMA to date was a case where EROAD shares were traded by a former employee and tipped by a then-current employee. Otherwise, she says, the FMA has opted not to prosecute in favour of enforceable undertakings out of court. Other times it simply acts as watch dog, reminding businesses of the requirements.

Chapman Tripp partner Rachel Dunne (Photo: Chapman Tripp)

In early 2021 during the My Food Bag IPO, CEO Kevin Bowler told media the company was likely to outperform the growth targets outlined in its initial public offering documents. While My Food Bag’s chairman subsequently clarified the comments, the FMA told the NZ Herald it had contacted the company and that prospective issuers were required to ensure that any comments they made in relation to their offer were materially consistent with their PDS.

The gossipy 80s

However, such vigilance and scrutiny is relatively recent in New Zealand. In the 80s and 90s, prior to the establishment of the FMA and the NZX’s continuous disclosure rules in 2002, New Zealand’s capital markets were far more indiscreet.

“It was all gossip in those days,” says veteran business and investment columnist Brian Gaynor. “There was information passed at social events, racing, rugby games, sporting events. 

“People used to come into the office on a Monday morning and say something like, ‘I was at the races on Saturday, and I met the chairman of Lion Brewery and he said the company is doing very well and they’re expecting to report a higher profit than most people are anticipating.’” 

Prior to the market crash in 1987, New Zealand’s listed companies were seeing unprecedented levels of market participation and activity triggered by finance minister Roger Douglas’s deregulatory programme in 1984. Insider trading became commonplace as more companies engaged in mergers and acquisitions.

Around 40% of New Zealand adults held shares, and the intensity of the bull run led to an explosion in the number of brokers employed, many of them inexperienced, resulting in errors, missed transactions and more margin trading.

A number of publications began circulating, offering advice, tips and insider information to investors, feeding the hype. Local newspapers ran “tipster sheets” on weekends, which would often have an impact on share prices on the Monday.

Gaynor says the activity, along with the relatively toothless New Zealand Security Commission – the predecessor of the FMA – combined to make an environment where people could and would share information with impunity. He likens it to how drink-driving was perceived in those days – frowned upon, but generally not enforced.

“There were no rules around insider trading,” he says. “People just operated that way. If you happened to know the right people on the right boards of companies, they just told you what they thought the company was doing.”

“We had very weak regulators at the time, to the extent that the Securities Commission really didn’t have any statutory powers in terms of prosecution. They could write reports and make recommendations about new laws that should be introduced. But they had no statutory power like the FMA does, to actually investigate something, and to prosecute someone.”

In the 1980s, the NZSC’s funding was around $327,000, increasing to over $1.3million by the end of the decade in response to the market crash and 1988 Securities Amendment Act. Conversely, the FMA’s funding in 2021 was around $60m.

However, the lack of regulation came to a head at the end of 1987. In the five years since the bull market began, the New Zealand market rose about 600% and in September 1987, New Zealand share prices were at an all time high. On 20 October, later known as “Black Tuesday,” the New Zealand stock market crashed. Billions of dollars was wiped of the boards in a matter of hours and investors fled the market en masse. The massive reduction in the number and value of listed companies meant regulation started to receive a lot more scrutiny and the NZSC was given more responsibilities.

While Gaynor says it took another 12 years before insider trading started to be truly quashed, the fallout of the crash meant overseas firms acquired large parts of New Zealand companies, making it harder for individuals to access information. By the time of the NZX continuous disclosure requirements in 2002, the flow of sensitive financial information had all but been stemmed.

“If you look back to New Zealand in the 70s and 80s, the major shareholders of companies were all individual shareholders. There was nothing like you have today where often some of the companies are 50 or 60% owned by BlackRock or Prudential in Australia. The shareholders meetings were packed with individuals. It’s all changed dramatically,” says Gaynor.

Investment columnist Brian Gaynor (Photo: Supplied)

“But secondly, [many] New Zealanders now buy their shares through fund managers with the fund managers being the ones who are doing the investments on behalf of individuals. The fund managers are pretty much aware of the rules and regulations, and they’re highly regulated by the FMA.”

The news cycle

Naturally, the proliferation of information sharing and gossip in the 80s and 90s would have had a massive impact on the business news cycle. Social events with verbose investors and insiders were a major source of ideas and scoops for journalists, who were able to break stories by following up on passing remarks and rumours. 

One such journalist was the current editor of BusinessDesk, Pattrick Smellie, who wrote that the pub was once a valuable source of story ideas and information. “It wasn’t uncommon to hear a wealthy finance type describe having ‘a bit of good luck’ and getting into a listed security just ahead of some value-enhancing event,” he wrote.

“Everyone kind of knew it was wrong, but nothing was provable and the rules against it were featherweight.”

However, Smellie wrote that by 2008, the free and easy culture of tips and leaks was gone.

“It was a shock to discover that the well-spring of market-moving gossip had dried up so long ago that market participants reacted to requests for a chat about ‘the real oil’ with a combination of horror, bemusement and occasional disdain. It just doesn’t happen anymore.”

But there were other journalists who made names for themselves throughout pre-regulation era by leveraging the convivial atmosphere within the finance community to break stories on an ongoing basis. Consultant Geoff Senescall is frequently touted as one of the most tenacious business journalists of the 90s. He wrote for both the NBR and the NZ Herald, but began his career writing a sharemarket column through which he came to know a lot of the brokers personally.

“I think more of it came from brokers; knowing the brokers and just asking questions and seeing price movements and looking for reasons and angles and making inquiries and cold calls and finding out what was going on.” 

Senescall recalls breaking a story about Auckland International Airport’s forthcoming float. “That was just something I picked up at a function. I was just listening to a couple of people talking about it. And I can’t remember if I was eavesdropping, or whether I was just in the right place at the right time. But yeah I broke that story in the Herald.”

However, despite the relatively open nature of the investment community at the time, the threat of litigation was still very real, and Senescall was sued after writing a story exploring why Brierley Investment’s sale of Air NZ didn’t eventuate.

Brian Gaynor says legal implications and the financial frailty of media companies today is a reason why New Zealand business journalists don’t produce the same volume of  scoops that gossip and leaks would have once yielded.

In the 80s, he says, media companies were some of the most powerful and profitable entities in New Zealand, who made a fortune from classified advertisements, and could easily go toe-to-toe with other corporations in the event of legal action. This financial firepower enabled journalists to doggedly pursue wealthy figures and companies and hold them to account. These days however, New Zealand’s wealthiest individuals have far more money and resources than even the largest media companies, creating a real risk in the event of litigation.

“It’s very hard for somebody to write something negative about Graeme Hart or Allan Gibbs or any of these kinds of guys. You’ve got to be so careful these days because they’ve got deeper pockets than the media companies that are writing about them,” says Gaynor.

“There’s not as many people breaking stories. You are penalised more these days for making mistakes, than rewarded for being innovative. Which is unfortunate, but that’s the way the world is.”

Street talk

While investment gossip and leaks may be a thing of the past in New Zealand, it’s alive and well at the Australian Financial Review, which runs a market gossip column every morning called Street Talk. Not only does the column reveal forthcoming and unofficial deals about Australian companies, but it also routinely discusses developments in the New Zealand market – much to the consternation of the FMA and NZ RegCo – New Zealand’s listed market regulator.

In April 2021, Street Talk reported that a Canadian pension fund called CDPQ was behind a rival takeover bid for NZX and ASX-listed Tilt Renewables. In response, NZ RegCo chief executive Joost van Amelsfort told BusinessDesk the Australian culture of leaking information threatened market integrity and should not be tolerated.

Although Australia’s rules against insider trading are just as prohibitive as New Zealand’s, Rachel Dunne says it’s a dilemma for regulators as the rules don’t impose a blanket ban on disclosing material information – even to media. Instead, she says, it only prohibits disclosure where the information insider has the intention of encouraging trading or tipping. “That’s unlikely to be triggered with disclosure to or by the media,” she says.

“That’s why New Zealand regulators are in a fairly tricky position when it comes to leaks of material information, which are rife in the Australian financial media.”

While Street Talk certainly makes for entertaining and informative reading, Dunne acknowledges that such leaks do undermine the market and, more importantly, put the growing number of retail investors at a disadvantage. While both NZ RegCo and FMA are working together on the issue, so far there is little they can do about the gossip, which is still finding a way to move markets.




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