FMA takes further action over insider trading

Management teams should take careful note of the warnings about insider trading and disclosure in the FMA’s case against the CFO of VMob (now Plexure).

The former virtual CFO of VMob, Mark Stephen Talbot, has admitted insider trading conduct and has entered a guilty plea on a representative charge for failing to disclose a relevant interest.  Pursuant to an enforceable undertaking, he will pay $150,000 in lieu of a penalty (in instalments) and is barred from acting as a director or manager of a listed business for 5 years.

This followed an investigation by the FMA in relation to the purchase of VMob shares shortly before an announcement that VMob had been awarded a lucrative contract with McDonald’s Japan.

A link to the FMA media release and Mr Talbot’s enforceable undertaking are available here.

What was the conduct?

  • Mr Talbot had information obtained in his capacity as a senior manager of VMob that VMob was likely to be awarded a contract with McDonalds Japan. The contract was for an app based platform to support McDonald’s loyalty programme and was projected to yield $4.8 million over three years representing significant revenue to the company (compared to $385,000 in total operating revenue for the year ended 31 March 2014). The transaction would also bring value in terms of reputation by showing that VMob was working with a major international company.
  • Mr Talbot held the above information when he purchased 1,000,000 shares in VMob on 24 July 2014.
  • He knew that the information was material and was not generally available to the market.

The share trade was identified by the NZX during routine software checks.  The NZX carries out these checks on share trading which occurs close to price sensitive announcements.  The trading was identified as unusual and was referred to the FMA for investigation.

The FMA then filed criminal charges in relation to offences under the Securities Markets Act 1988:

  • one charge of trading by an information insider in breach of s 8C of the Securities Markets Act 1988 (now section 241 of the Financial Markets Conduct Act 2013); and
  • eight separate charges of failing to disclose a relevant interest.

A likely exacerbating factor appears to be that Mr Talbot was one of the people responsible for ensuring VMob employees knew about the company’s trading policy.  Despite this responsibility, he used insider information to purchase shares.

After Mr Talbot had purchased the shares, he forwarded a copy of the trading policy to the Board Chairman noting that he and another Board member proposed purchasing further shares in VMob.  The Chair stated that “you are insiders and aware of the potential large deal with McDonald’s in Japan.  Given this deal has the potential to close within a couple of weeks, … [I do not] consider it is wise for you to purchase VMob shares until the outcome of the McDonalds Japan deal is determined and (if successful) announced to the market”.  Mr Talbot responded later saying “Understood, thanks”.  He did not disclose that he had purchased one million shares the previous day.

The insider trading charge has been withdrawn but Mr Talbot has accepted that the fact that he purchased the shares through a company for the benefit of his father is no defence.  No further action will be taken by the FMA in relation to the insider trading charge.

Vmob/Plexure was not part of the FMA’s investigation and has not been charged with any offence.  The company co-operated fully with the FMA.

Our view

As we predicted in 2017, insider trading has become one of the key areas of focus for the FMA after the FMA obtained judicial guidance on market manipulation following the Warminger proceedings.

Karen Chang, Head of Enforcement at the FMA, said today that insider trading and market manipulation was “right up there” in terms of priority as it impinges on the integrity of the capital markets.   Since 2017, the FMA has pursued one other insider trading case to date.  In that case (EROAD), an EROAD employee was sentenced to six months’ home detention for insider trading.  See our update here.

The focus on insider trading fits with the FMA’s objective to prioritise enforcement where it is likely to cause harm to investors and where it erodes confidence in the market.  While the FMA is keen to take action on insider trading, this case also shows that it is also willing to reach a proportionate resolution outside court provided it achieves its objectives of censuring misconduct and providing lessons to the market.

One key issue is what can listed companies do to reduce the risk of insider trading.  Here VMob had a trading policy in place but the very person who was required to administer the policy (Mr Talbot) was the very person who breached it.  In speaking to Karen Chang today she said that the key step companies should take is to educate their teams about the lessons to be learned from this case.  Another way to increase safeguards may be to require board approval before permitting the purchase of shares by directors, officers, employees and contractors.  This is not a requirement under the law but can reinforce the importance of ensuring information insiders do not use information improperly.

We predict that the FMA will continue to be active in enforcement in relation to market conduct, in particular under Part 5 of the FMCA which deals with insider trading, market manipulation and continuous disclosure.

We recommend all listed issuers and other capital markets participants refresh their understanding of Part 5 of the FMCA including reconsidering their trading policies and the robustness of the safeguards.

If you have any questions in relation to insider trading or other issues relating to market conduct, please contact one of our experts.

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