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[2015] ZAGPPHC 651
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Zietsman and Another v Directorate of Market Abuse and Another (A679/14) [2015] ZAGPPHC 651; 2016 (1) SA 218 (GP) (24 August 2015)
THE HIGH COURT OF SOUTH AFRICA
GAUTENG DIVISION, PRETORIA
CASE NUMBER: A679/14
DATE OF HEARING: 28 MAY 2015
DATE OF
JUDGMENT: 24 AUGUST 2015
In the matter between:
ZIETSMAN,
GAVIN LYONEL
First
Appellant
HARRISON
AND WHITE INVESTMENTS (PTY) LTD
Second
Appellant
and
DIRECTORATE
OF MARKET ABUSE
First
Respondent
FINANCIAL
SERVICES BOARD
Second
Respondent
CORAM:
Tuchten
J
et
Avvakoumides AJ
J U D G M E N T
AVVAKOUMIDES,
AJ
INTRODUCTION
1.
This
is an appeal from a determination (“
the
determination
”)
of the enforcement committee established in terms of section 10(3) of
the Financial Services Board Act 97 of 1990 (“
the
enforcement committee
”
and “
the
FSB Act
”),
dated 5 August 2014.
2.
The
appeal is brought in terms of
section 6F
(1) of the
Financial
Institutions (Protection of Funds) Act 28 of 2001
, read with
rule 51
of the rules regulating the conduct of civil proceedings in the
Magistrates’ Courts of South Africa.
3.
The
case came before the enforcement committee in the form of a referral
(“the referral”) by the respondents in terms
of
Section
6A
-D of the Financial Institutions (Protection of Funds) Act, 28 of
2001 (“the PFA”).
THE
CHARGES
4.
The
charges against the appellants were that the first appellant
contravened the provisions of Section 73(2)(a) of the Securities
Services Act, 36 of 2004 (“the SSA”), that the second
appellant contravened the provisions of Section 73(1)(a) of the
SSA
and that as a result, the appellants ought to receive an
administrative sanction including payment of penalties in terms of
Section 77(1) and (2) read with Section 77(5) of the SSA.
JUDGMENT
OF THE ENFORCEMENT COMMITTEE
5.
The
enforcement committee determined that information pertaining to the
amount of the IDC loan facility constituted inside information
as
defined in the SSA and that the appellants were guilty of insider
trading as charged.
ADMINISTRATIVE
SANCTION
6.
The
enforcement committee, after taking all the facts into account, fined
the appellants in the sum of R1 000 000.00 and ordered
the appellants
to pay the costs of the case, all jointly and severally.
IDENTIFICATION
OF ISSUES ON APPEAL
7.
The
appeal is against the determination and the appellants submitted that
the referral should have been dismissed with costs.
8.
The
respondents submitted that the enforcement committee was correct in
its finding and in issuing the administrative penalty.
GROUNDS
OF APPEAL
9.
The
grounds of appeal relied upon are the following:
a.
The
enforcement committee erred in rejecting the version of the
appellants on the affidavits before it.
b.
The
enforcement committee erred in deciding the matter against the
appellants in light of the material disputes of fact which were
present in the affidavits and which ought to have been resolved in
the appellants’ favour.
c.
The
enforcement committee ought to have found that, factually, the
appellants were not aware at the time of the trades in question
that
a loan had in fact been granted to AC Towers, but only had limited,
vague and unreliable information in respect of a possible
future
loan.
d.
The
enforcement committee ought to have found that the information
available to the appellants at the time of the trades in question
did
not constitute “inside information” as defined in Section
72 of the SSA, because:
(1)
the
information was not “likely to have a material effect” on
the price or value of the AC Towers shares;
(2)
the
information was not “specific or precise”;
(3)
there
is no material difference between the information available to
the appellants at the time of the trades in question
and information
that had already been “made public” prior to the trades;
(4)
the
appellants consequently did not believe or “know” that
they had inside information as required by Sections 73 and
77 of the
SSA.
ARGUMENTS
ON APPEAL
10.
The
appellants argued that, in establishing that the IDC had approved of
a loan to Africa Cellular Towers Ltd (“AC Towers”),
a
company listed on the alternative exchange of the Johannesburg Stock
Exchange (“the JSE”), in the sum of R99 million,
the
appellants were not possessed of knowledge that would affect the
trading price of the shares in AC Towers. The appellants submitted
that at the time that they came to know about the loan, there were no
details of the loan to show whether A C Towers would be able
to pay
the loan and neither were the terms of the loan were known.
11.
During
the middle of 2010 the second appellant initiated a strategy to
commence operating in the renewable energy sector. On 28
August 2010
the first appellant opened an FNB share trading account. On 30 August
2010 the first appellant purchased the first
acquisition of 15000
shares in a company called at regular intervals from 31 August 2010
with the intention of retaining the shares
in pursuance of a strategy
to acquire a controlling share in AC Towers and access certain
operational capabilities within AC Towers.
12.
From
31 August 2010 to 4 November 2010 the first appellant purchased more
shares in 23 trades via the FNB account totalling 835805
shares. The
appellants continued to acquire AC Towers shares up to and including
14 March 2011. In pursuit of the plans to acquire
a stake in AC
Towers, DP Cohen Consulting (Pty) Ltd (“DPCC”) was
instructed to compile a valuation on the business
of AC Towers.
13.
On
24 January 2011, the Industrial Development Corporation (“the
IDC”) addressed a letter to AC Towers (“the approval
letter”) which stated as follows: “…
the
IDC has agreed to make available to your organisation a total funding
package of R99 000 000 (Ninety Nine Million Rands). The
funding has
been approved substantially on the terms and conditions as discussed
with you. Agreements are being prepared which
will contain all the
terms of the facilities and which will, when duly signed, form the
agreement between the IDC and yourselves
…”
14.
Attached
to the approval letter was a terms sheet setting out the details of
the finance which had been approved and certain conditions
precedent
which the IDC required to be included in the agreement which would
ultimately be concluded between the IDC and AC Towers.
Neither the
approval letter nor the term sheet was provided to the appellants
prior to the referral. On 26 January 2011, a meeting
was held between
the respondents and members of the board of AC Towers, including Mr
Jacques De Villiers (“De Villiers”).
15.
The
appellants argued that what occurred at this meeting is central to
the appeal and a dispute exists in this regard.
16.
The
respondents argued in turn that the appellants were aware that the
IDC and AC Towers were in the process of negotiations which
contemplated a loan of moneys by the IDC to AC Towers. The appellants
understood that there had been an “approval in principle”,
but loan agreements had not been finalised.
17.
At
the meeting of 26 January 2011 De Villiers alleged that AC Towers had
secured a possible loan facility of R99 million from the
IDC on an
“approval in principle basis”, but in the same breath the
AC Towers representatives indicated that contracts
had not been
concluded for the facility, and no substantiating information was
made available in support of the granting of such
funding. At that
meeting, De Villiers also disclosed that the IDC had commenced, or
was in the process to commence a due diligence
of AC Towers.
18.
During
the meeting of 26 January 2011 nothing in writing was presented in
confirmation of the alleged funding. During the meeting
of 26 January
2011 De Villiers did not inform those present when requested what the
conditions precedent were, whether AC Towers
was capable of complying
with any conditions precedent, what the repayment terms were and what
any of the other terms of the alleged
funding were.
19.
On
28 January 2011 a Stock Exchange News Service announcement (“SENS”)
(“the first SENS announcement”) was
published by AC
Towers in which shareholders and the market were informed that:
“
the
company was successful in securing debt funding and is in the process
of finalising the terms of the debt facility with the
potential
funder which, when successfully concluded, could affect the price of
the company’s shares”
20.
The
first SENS announcement did not disclose the amount and other details
of the facility to the market nor the details of the funder
as a
decision was taken by the board of AC Towers that, although AC Towers
had received the approval letter, those details ought
not to be
disclosed before the agreements with the IDC were concluded. The
publication of the first SENS announcement had no effect
on the share
price of AC Towers.
21.
Subsequent
to the meeting of 28 January 2011, the appellants continued to
acquire shares in AC Towers pursuant to the aforesaid
strategy to
acquire a controlling share therein. The agreements with the IDC were
signed around March 2010. On 11 March 2011, AC
Towers published a
further SENS announcement (“the second SENS announcement”),
advising shareholders that:
“
AC
Towers is pleased to announce that an agreement has been entered into
with the Industrial Development Corporation (IDC) in respect
of a R99
million funding facility, staggered over the next six years at market
related rates to assist with capital expenditure
and working capital
requirements of the group”
22.
On
11 March 2011, after to the second SENS announcement, the AC Towers
share price increased by 54% from 11 cents to 17 cents.
23.
The
respondents argued further that Zietsman was the principal person in
charge of a strategy by H & W (the second appellant)
to acquire a
significant interest in AC Towers. In November 2010 Zietsman was
authorised and instructed by H & W to acquire
AC Towers shares on
behalf of H & W. Ralston was also authorised and instructed
by H & W to acquire AC Towers shares
on behalf of H & W.
24.
Between
26 January 2011 and 9 February 2011 Zietsman and Ralston came to know
that the IDC granted AC Towers a loan facility in
the amount of R99
million. The amount of the loan and the fact that the lender was the
IDC were details which were not known to
the public until AC Towers
disclosed those details on SENS on 11 March 2011. The disclosure of
the amount of the IDC loan facility
had a material effect on the
price of AC Towers securities.
25.
The
information pertaining to the amount of the IDC loan facility
constituted inside information as defined in the SSA.
26.
The
Appellants, during the period 15 February 2011 to 10 March 2011,
whilst in possession of this inside information and being insiders,
purchased 19 491 977 AC Towers shares at a total price of R2 096
517.00.
27.
The
potential profit that H & W would have made is R1 203 819.00. The
respondents argued further that the appellants should
be have been
held jointly and severally liable for the potential profit of R1 203
819.00, together with a penalty calculated at
3 times the potential
profit, amounting to R3 611 457.00, as well as interest and costs.
28.
The
respondents relied upon the founding affidavit by Cuthbert King
Chanetsa (“Chanetsa”), a supporting affidavit by
Erris
Edmond van Kerken (“Van Kerken”), a confirmatory
affidavit by Peter George Redman (“Redman”), a
confirmatory affidavit by Kevin Michael Algeo (“Algeo”)
and an affidavit by Carin Meyer (“Meyer”).
29.
Although
it is common cause that the appellants acquired 19 491 977 AC Towers
shares at a total price of R2 096 517.00 during the
period 15
February 2011 to 10 March 2011, the appellants maintained that they
did not, at the time, know that AC Towers and the
IDC had concluded a
loan agreement. The appellants explained that the information
available to them at the time did not amount
to inside information
and merely revealed that possible funding by the IDC, which would in
any event have been insufficient to
satisfy the requirements of AC
Towers, had been approved in principle.
30.
The
appellants argued further that they did not believe or know that the
information available to them constituted inside information
as
defined in Section 72 of the SSA. Furthermore the appellants argued
that the respondents had limited their case against the
appellants to
specific trades during the relatively short period of 15 February
2011 to 10 March 2011. In focussing on that period
only the
respondents had effectively disregarded the fact that appellants had
commenced acquiring AC Towers shares at regular intervals
from 31
August 2010 (long before the 15th of February 2011), not with the
intention of selling the shares to make a profit, but
with the
intention of retaining the shares in pursuance of a strategy to
acquire a controlling share in AC Towers and access certain
operational capabilities within AC Towers.
31.
The
appellants continued to acquire AC Towers shares up to and including
14 March 2011. The appellants did not acquire AC Towers
shares in
order to speculate with such shares, and the shares acquired by
Zietsman on behalf of H & W were not sold.
Thus, the AC
Towers share trades did not amount to insider trading on the
appellants’ part.
32.
Furthermore
the appellants argued that:
a.
factually,
the appellants were not aware at the time of the trades in question
that a loan had in fact been granted to AC Towers,
but only had
limited, vague and unreliable information in respect of a possible
future loan;
b.
the
information available to the appellants at the time of the trades in
question did not constitute “inside information”
as
defined in Section 72 of the SSA, since:
(1)
the
information was not “likely to have a material effect” on
the price or value of the AC Towers shares;
(2)
the
information was not “specific or precise”;
(3)
there
is no material difference between the information available to
the appellants at the time of the trades in question
and information
that had already been “made public” prior to the trades;
c.
the
appellants consequently did not believe or “know” that
they had inside information as required by Sections 73 and
77 of the
SSA;
d.
the
appellants had not contravened a law and are not liable to pay any
penalty, and they furthermore disputed the penalty calculations
relied upon by the respondents.
33.
The
appellants lastly argued that the procedure adopted by the
enforcement committee was flawed in that:
1.
A
referral under Section 6A(1) or (2) of the PFA must be accompanied
by:
a.
a
notice setting out the details and nature of the alleged
contravention; and
b.
an
affidavit by or on behalf of the respondent setting out the facts and
documents supporting the notice. (See
Section 6B(1) of the PFA).
2.
Therefore,
in terms of Section 6B(1) of the PFA the respondents were obliged to
articulate and make out their case in their notice
of referral,
supported by evidence contained in affidavits delivered on behalf of
the respondents. The procedure prescribed
by Sections 6A –
D of the PFA is similar to the motion court procedure provided for in
the Uniform Rules of the High Courts
of South Africa, more
specifically Uniform Rule 6.
3.
The
appellants argued that the legal principles that have crystallised
out in case law relating to the High Court motion procedure
should
have found application in the enforcement committee proceedings.
EVALUATION
ON MERITS
34.
In
November 2010 the Board of the second appellant authorised the first
appellant to purchase a majority interest in ACT, which
interest was
to be held in one of the second appellant’s subsidiaries,
namely AJP Investments (Pty) Ltd (AJP), of which company
the first
appellant was also Board Chairman. This is common cause as is
the fact that the first appellant was the Chairman
of the Board of
Directors of the second appellant, and he was the principal person in
charge of the strategy of the second appellant
to acquire a
significant interest in ACT. The Board of the second appellant
also instructed its MD, Mr Ralston, to acquire
ACT shares on behalf
of the second appellant in pursuance of the aforesaid acquisition
strategy.
35.
ACT
had a significant need for funding and had reported a loss of
approximately R85 million during 2010. In the course of
negotiation of a takeover with ACT directly, a due diligence was
commissioned by AJP and a non-disclosure agreement was concluded
with
ACT in December 2010.
36.
On
24 January 2011 the IDC approved a loan of R99 million to ACT and
such approval is reflected in a letter to ACT. The terms
were
still to be finalised. On or about 26 January 2011 the
appellants had a meeting with ACT and were notified that ACT
had
secured debt funding from the IDC (Industrial Development
Corporation) in the amount of R99 million and that agreements were
in
the process of finalisation regarding such funding. The amount
of the loan and the identity of the lender was not known
to the
public until ACT disclosed these details on the Stock Exchange News
Service (SENS) on 11 March 2011.
37.
On
28 January 2011, ACT published a SENS bulletin, advising that it had
secured debt funding but without disclosure of either the
identity of
the lender or the amount of such funding. The first
appellant and the second appellant acquired ACT shares
on the open
market, as set out in Table A and Table B of Count 1 and Count 2.
These acquisitions were made during February
and up to 10 March
2013. On 10 March 2013, a day before the SENS publication made
public the amount of the loan and the identity
of the lender, the
second appellant transacted a share acquisition far in excess of any
prior ACT share acquisition, namely for
14 131 977 shares with a
value of R1 554 517.00 at a share price of 11c.
38.
On
11 March 2011, following the SENS bulletin referred to supra, the
share price increased from 11c to an average of 17c, an increase
of
54.5%. The appellants did not sell their shares and suffered a loss
by virtue of ACT subsequently being placed in liquidation.
39.
The
enforcement committee heard argument based on the affidavits filed
(which included a fourth set of affidavits which was permitted
by the
EC). The proceedings are governed by
Sec 6C
and
6D
of the
Financial Institutions (Protection of Funds) Act, 28 of 2001
.
40.
The
enforcement committee found that the amount of the loan (R99
million), and the identity of the lender, constituted inside
information,
that the respondents had established the elements of the
transgression of insider trading as set out in Sec 73(1)(a) and
73(2)(a)
of the Securities Services Act, 2004 (which applied at the
time of the offences). The appellants were convicted and an
administrative
penalty of R1 million was imposed upon them jointly
and severally on 5 August 2014.
41.
The
appellants contended that the disclosure of the amount of the IDC
loan during January 2011 was not specific or precise information.
The appellants contended further that the information was vague since
no loan agreement had been concluded in writing, there were
conditions precedent and there was uncertainty whether ACT would be
able to access the funds. The appellants further contended
that
the approval of the loan was merely provisional, or an approval in
principle. The appellants finally contended that the information
that
the appellants had did not differ in any material respect from
information that had already been made public in the 28 January
2011
SENS Bulletin.
42.
The
appellants’ contentions fall to be rejected on a balance of
probabilities, as they were rejected by the enforcement committee.
The mere fact that final loan agreements had not been signed is not a
reason why the information known to the appellants cannot
be
described as specific and precise. The prospect of the
conclusion of a loan agreement with the IDC for R99 million describes
a set of circumstances which would realistically or on the
probabilities materialise.
43.
The
SENS Bulletin of 28 January 2011 does not disclose the amount of the
loan or the identity of the lender, being information which
the
appellants had at the time they dealt in the ACT securities. The
letter approving the loan dated 24 January 2011 makes it clear
that
the R99 million loan by the IDC had been approved and that the
agreements pertaining to it were in the process of finalisation.
44.
The
enforcement committee EC found that on the probabilities, Mr de
Villiers of ACT would have conveyed this information to the
appellants at their meeting on 26 January 2011. The contentions by
the appellants to the contrary in the record do not bear scrutiny.
The approval of the loan was, although subject to finalisation of
agreements and signature, a final approval. This is borne
out
by the evidence at the proceedings.
45.
The
appellants do not dispute knowing since 26 January 2011 of the IDC’s
approval of a loan to ACT in the amount of R99 million.
The approval
of a R99 million loan to ACT by the IDC was not known publicly until
the SENS Bulletin of 11 March 2011.
46.
De
Villiers, of ACT, says that the information was given to AJP at the
end of January 2011. There was a further meeting at which
information
was clarified on 1 February 2011. The first appellant was
present at those meetings. Mr Rembe, who was part of
DJ Cohen
Consulting and who attended the meeting of 26 January 2011, confirms
that the amount of the loan was disclosed.
He however regarded
it as a disclosure “in principle”. He attached the same
qualifications to the disclosure as the
first appellant. The dispute
seems to relate not to what was disclosed, but to the interpretation
thereof.
47.
The
Cohen Valuation Report dated 9 February 2011 refers expressly to an
IDC loan of R99 million. The Cohen Valuation Report
was sent by
Mr Rembe to Zietsman and Mr Ralston and copies thereof were sent to
Ms Myburgh and Mr Cohen. Mr Collins
confirms that such
information was disclosed, at least at the 1 February 2011 meeting.
Mr Sithole of the IDC testified that
once the IDC Credit
Committee had approved the structured funding to ACT on 24 January
2011, he closed his file. The matter
would then be transferred
to the legal department of the IDC for purposes of drafting an
agreement in accordance with the approval.
48.
Mr
Sithole confirmed that the IDC had given its first and final approval
of the loan facility in the amount of R99 million on 24
January 2011.
Zietsman admitted that he knew of the IDC as lender and the amount of
the R99 million, as he was told of this during
the meeting of 26
January 2011. He contended that it was only an “in
principle” approval. He however knew
of the breakdown of
the R99 million and in which tranches it would be advanced.
49.
Mr
Zietsman, however, contends that the information disclosed to him on
26 January 2011 was echoed in the 28 January 2011 SENS Notice.
This cannot be correct and should be rejected on the probabilities.
The SENS Notice does not disclose the identity of the lender,
the
amount of the loan or the breakdown of the funding package. There is
therefore an inherent flaw in Zietsman’s evidence.
50.
In
respect of the Cohen Valuation Report of 9 February 2011, which
expressly refers to the amount of the loan and the IDC as lender,
together with its breakdown, Zietsman testified that he couldn’t
remember reading the report but then contends that he was
“extremely
dissatisfied with the outcome and its inconclusive content”.
This is a clear indication that he in fact
read it, otherwise he
could not be dissatisfied with its content.
51.
The
information contained in the letter of 24 January 2011 must have been
disclosed to the appellants, and that meets the requirements
for
precise and specific information as contained in the definition of
“inside information” in Sec 72 of the SSA.
52.
Inside
information, as defined under Sec 72(b) of the SSA, refers to
information which, if it were made public “would be likely
to
have a material effect on the price or value of any security listed
on a regulated market.”
53.
The
word “likely” has been interpreted to mean “less
than a probability but more than a mere possibility.”
See
Tshishonga v Minister of Justice and Constitutional Development
2007
(4) SA 135
(LC) at paragraph 180 pages 167 to 168.
54.
In
the Australian case of Boughey v R
[1986] HCA 29
;
[1986] 65 ALR 609
, the Court
considered the degree to which likelihood of an occurrence must be
proved. The Australian High Court found “likely”
to
be synonymous with “probable”. There meaning of the
term “probable” is usually plain, but it means
“more
probable than not” in contrast to any lesser contingency, such
as “possible”.
55.
The
fact that the IDC was the lender and that the loan was for R99
million was only disclosed to the public in the SENS Bulletin
of 11
March 2011. What was known to the appellants, on the probabilities,
was what is contained in the IDC letter of 24 January
2011, as
conveyed by Mr de Villiers at a meeting of 26 January 2011, and
further clarified on 1 February 2011. Mr Cohen and
Mr Rembe,
who were present at such meetings, recorded their understanding of
what was disclosed on 26 January 2011 in the Cohen
Valuation Report
of 9 February 2011.
56.
While
it was apparent that final loan agreements had not yet been
concluded, there is no suggestion of the uncertainty and vagueness
about the loan as contended for by the appellants. The
conditions precedent were not difficult to comply with. The IDC was
after all not a commercial bank and the conditions were far less
onerous than the conditions attached to a normal commercial loan.
57.
The
information had the capacity to materially affect the share price.
The loan represented a significant lifeline to the
embattled ACT and
the amount of R99 million would be viewed by the reasonable investor
as sufficient for a small company requiring
funding. Further,
the fact that the lender was the IDC would mean to the reasonable
investor that terms less onerous than
those of a commercial bank
would probably be imposed. This would therefore have a positive
effect on the share price.
58.
Mr
de Villiers of ACT said that the loan enabled ACT to tender for large
power line projects. The price sensitivity of the information
is
confirmed by Mr Engelbrecht of the sponsor Vunani. At the
relevant time Mr Engelbrecht was the JSE approved designated
advisor
for ACT.
59.
Mr
Engelbrecht said that he had known in January 2011 of the IDC loan of
R99 million, having attended the meetings, and he regarded
these
developments as price sensitive. In fact, he advised ACT to
publish a cautionary notice based thereon.
60.
The
11 March 2011 SENS Bulletin which put the information regarding the
IDC loan of R99 million in the public domain, in fact had
an impact
on the share price by increasing it from 11c to an average of 17c per
share. This in itself is an ex post facto
indicator that the
information was price sensitive. It confirms what Mr Algeo, an
asset manager, had said in this regard.
61.
Therefore
the information was price sensitive. Not only did it have the
capacity to materially affect the share price, but the spike
in the
share price after disclosure of the information confirms that the
information was price sensitive. The appellants
had knowledge
of the identity of the lender and the amount of the loan and the
breakdown of the funding package. Zietsman contended
that he and
Harrison and White (the second appellant) did not believe the
information to constitute inside information because
it was only an
in-principle approval which, in their minds, was vague and uncertain.
62.
The
appellants were, however, warned at the relevant time by a number of
persons not to deal in ACT shares after learning of the
IDC loan.
They were warned by Mr Sher of Nedbank not to buy ACT shares.
This was because the information was price sensitive
and also because
it was acquired in the course of negotiations that were covered by a
non-disclosure agreement between AJP and
ACT. Mr Sher warned Mr
Zietsman in this regard on 21 February 2011.
63.
Mr
Engelbrecht also warned ACT that its information was price sensitive
and that a cautionary notice had to be published. Turning
a blind eye
to such repeated warnings establishes mens rea in the form of dolus.
Nedbank played a role through its acquaintance
with Fidelity in
securing the significant block of shares which the appellants
acquired on 10 March 2011. Nedbank had warned, however,
of the risk
of such an acquisition.
64.
Zietsman’s
belief that the information was not price sensitive is not based on
reasonable grounds. The provisions of Sec 73(2)(a)
of the SSA, merely
require knowledge of the insider information at the time of dealing
in the relevant shares. The appellants ignored
the warnings. The
appellants, knowing of the inside information regarding the IDC loan
of R99 million, dealt in ACT shares, thereby
committing the offence
of insider trading.
EVALUATION
ON ADMINISTRATIVE PENALTY
65.
Legislative
reforms regarding insider trading were brought about due to a history
of non-prosecution of the offence under the former
Companies Act, 61
of 1973. From 1989 till 1998 the offence of insider trading was
dealt with by the Securities Regulation
Panel in terms of Sec 440F of
the former Companies Act 61 of 1973. That provision was revoked
by the Insider Trading Act,
135 of 1998 from 17 January 1999.
66.
The
monitoring of insider trading was, thereafter, transferred from the
Securities Regulation Panel to the FSB’s Directorate
of Insider
Trading. The Insider Trading Act introduced a civil action in
respect of insider trading and governed the issue
of insider trading
until it was repealed by the Security Services Act 36 of 2004 (SSA).
67.
Chapter
VIII of the SSA introduced administrative sanctions in respect of
capital market contraventions in addition to existing
civil and
criminal sanctions. In 2008 the new Enforcement Committee regime was
introduced, with an increased jurisdiction including
all financial
services offences – including insider trading.
68.
The
FSB’s former Directorate of Insider Trading, which operated
under the Insider Trading Act, is now known as the Directorate
of
Market Abuse. The case of Pather v FSB
[2014] 3 All SA 208
(GP)
par [29] – [55] contains an extensive legislative history.
69.
The
SSA was the operative statute on insider trading relevant to the
charges against the appellants and was operative in 2010 and
2011.
The offence of insider trading is contained in Sec 73 of the SSA.
70.
The
relevant provisions of Sec 73 read as follows:
“
1(a) An insider who
knows that he or she has inside information and who deals directly or
indirectly or through
an agent for his or her own account in the
securities listed on a regulated market to which the inside
information relates or which
are likely to be affected by it commits
an offence.
(b) …
2(a) An insider who
knows that he or she has inside information and who deals, directly
or indirectly, for
any other person in the securities listed on a
regulated market to which the inside information relates or which are
likely to
be affected by it commits an offence.”
71.
The
term “inside information” is defined in Sec 72 of the SSA
and means “specific or precise information, which
has not been
made public and which:
(a) is obtained or learned as an
insider; and
(b) if it were
made public would be likely to have a material effect on the price or
value of
any security listed on a regulated market;”
72.
The
term “insider” is also defined in Sec 72 of the SSA and
means “a person who has inside information:
(a) through:
(i) being a director,
employee or shareholder of an issuer of securities listed
on a
regulated market to which the inside information relates; or
(ii)
having access to such information by virtue of employment, office or
profession;
or
(b) where such
person knows that the direct or indirect source of the information
was a person
contemplated in paragraph (a).”
73.
The
term “regulated market” means “any market, whether
domestic or foreign, which is regulated in terms of the
laws of the
country in which the market conducts business as a market for dealing
in securities listed on that market.”
74.
It
is a defence to an insider, if he proves on a balance of
probabilities that he “
was
acting in pursuit of the completion of an affected transaction as
defined in Sec 440A of the Companies Act
.”
75.
An
affected transaction is defined in Sec 440A of the Companies Act as:
“
Any transaction (including a transaction
which forms part of a series of transactions) or scheme, whatever
form it may take, which:
(a) Taking
into account any securities held before such transaction or scheme,
has or will have
the effect of:
(i)
Vesting control of any company (excluding a close corporation) in any
person,
or two or more persons acting in concert, in whom control did
not vest prior to such transaction or scheme; or
(ii)
Any person, or two or more persons acting in concert, acquiring, or
becoming the
sole holder or holders of, all the securities, or all
the securities of a particular class, of any company …;
or
(b)
Involves the acquisition by any person, or two or more persons acting
in concert, in whom
control of any company vests on or after the date
of commencement of Sec 1(c) of the Companies Second Amendment Act,
1990, of further
securities of that company in excess of the limits
prescribed in the rules; or
(c)
Is a disposal as contemplated in Sec 228
.”
76.
A
similar defence was contained in Sec 4(1)(d) of the repealed Insider
Trading Act. In respect of such defences, and more
particularly
Sec 4(1)(d) it was held that it can only constitute a valid defence
to actions or conduct of the accused in pursuit
of the completion or
implementation of an affected transaction that was lawful. See:
S v Western Areas Limited and Others
2004 (4) SA 591
(W) at par 40.
77.
From
the defences raised before the enforcement committee and from the
notice of appeal, it is apparent that a core issue in this
appeal is
whether the appellants had “inside information” on ACT
and whether they knowingly dealt with ACT shares.
The respondent drew
the court’s attention to the fact that there is a dearth of
South African authorities on the topic, and
consequently it would be
necessary to refer to foreign law.
FOREIGN
LAW ON INSIDER TRADING
78.
The
similarity between legislation in the EU, the United Kingdom and
South Africa on the issue of “inside information”
appears
from the following table:
Europe
UK
South Africa
“
Inside
information”
is
defined by Article 1 of EU Directive 2003/6 as
Section 118C of FSMA defines inside information as
In relation
to qualifying investments, which are not commodity derivatives,
inside information is
Section 72 of the SSA, provides that “
inside information”
means
Information of a precise nature
Information of a precise nature
Specific or precise information,
which has not been made public
Which –
(a)
is
not generally
which has not been made public
available,
relating to issuers of financial instruments or to financial
instruments
(b)
relates,
directly or indirectly, to one or more issuers of the qualifying
investments or to one or more of the qualifying
investments, and
and which –
(a)
is
obtained or learned as an insider
and which, if it were made public, would be likely to have a
significant effect on the prices of [the] financial instruments
[concerned] or on the price of related derivative financial
instruments.
(c)
would,
if generally available, be likely to have a significant effect on
the price of the qualifying investments or on the
price of related
investments.
if it were made public would be likely to have a material
effect on the price or value of any security listed on a regulated
market;
79.
There
is a close link between the prohibition on insider dealing and the
concept of inside information. “Inside information”
is defined by Article 1 of EU Directive 2003/6 as “information
of a precise nature which has not been made public, relating
to
issuers of financial instruments or to financial instruments and
which, if it were made public, would be likely to have a significant
effect on the prices of [the] financial instruments [concerned] or on
the price of related derivative financial instruments.”
80.
In
order to strengthen legal certainty for market participants, EU
Directive 2003/124 specifies the definition of two key elements
of
inside information, namely the precise nature of that information and
the extent of its potential impact on prices.
81.
Article
1(1) of that directive thus provides that information “[is to]
be deemed to be of a precise nature if it indicates
a set of
circumstances which exists or may reasonably be expected to come into
existence or an event which has occurred or may
reasonably be
expected to do so and if it is specific enough to enable a conclusion
to be drawn as to the possible effect of that
set of circumstances or
event on the prices of financial instruments.”
82.
Article
1(2) of that Directive defines information likely to have a
significant effect on the price of financial instruments as
information which “a reasonable investor would be likely to use
as part of the basis of his investment decisions.”
83.
Owing
to its non-public and precise nature and its ability to influence the
prices of financial instruments significantly, inside
information
grants the insider in possession of such information an advantage in
relation to all the other actors on the market
who are unaware of it.
It enables that insider, when he acts in accordance with that
information in entering into a transaction
on the market, to expect
to derive an economic advantage from it without exposing himself to
the same risks as the other investors
on the market. The essential
characteristic of insider dealing thus consists in an unfair
advantage being obtained from information
to the detriment of third
parties who are unaware of it and, consequently, the undermining of
the integrity of financial markets
and investor confidence. See:
Spector Photo Group NV, Chris Van Raemdonk v Commissie Voor Het
Bank-Financie- En Assurantiewezen
(CBFA)
[2009] EUECJ C-45/08
(23
December 2009) at para 50-52.
84.
In
Geltl v Daimler AG
[2012] EUECJ C-19/11
(21 March 2012) the Court of
Justice of the EC stated the following:
“
The fact that, in order for information
to be regarded as inside information, it must be possible for it to
be considered precise
and, in addition to it not having been made
public, it must be capable, if disclosed, of significantly affecting
the prices of
financial instruments or the prices of related
derivative financial instruments
”.
85.
The
fact to be disclosed need not be the concluding fact:
“…
.
The
importance of sets of circumstances which came about in the course of
a process involving several temporal phases cannot be
ruled out a
priori. What is required is simply that the public be informed
of any fact which – clearly even in the
case of a protracted
process – is precise in nature and capable, if disclosed, of
significantly affecting the prices of financial
instruments or the
prices of related derivative financial instruments
.”
86.
As
to the question whether or not a fact must be disclosed, significance
must be attributed, not to its chronological location in
a process
giving rise to an event, but to its precision and, in addition to its
not having been made public, its ability significantly
to affect
market prices.
87.
It
is not necessary, in order to determine whether information is inside
information, to examine whether its disclosure actually
had a
significant effect on the price of the financial instruments.
It is the capacity of such information to have a significant
effect
on prices that must be assessed in the light of the content of the
information at issue and the context in which it arises.
However, exposed information may also be used in order to check the
presumption that the ex-ante information was price sensitive.
88.
In
Daimler supra, the Court concluded as follows:
“
Where the potential of the information
for affecting share prices is significant, it is sufficient that the
occurrence of the future
set of circumstances or event, albeit
uncertain, be not impossible or improbable.
The
consequences for the issuer will be of relevance inasmuch as that
will form part of the information available ex ante, while
ex post
information may also be used in order to check the presumption that
the ex-ante information was price sensitive
.”
89.
The
EU Market Abuse Regime regulates the misuse of non-public price
sensitive information, which is of a “precise nature”
(inside information). To be “precise” information
must:
(i)
indicate that circumstances exist or that an event has occurred (or
may reasonably
be expected to come into existence or occur);
and
(ii) be
specific enough to enable a conclusion to be drawn as to the
“possible effect”
of those circumstances or that event on
the price of the relevant investments.
90.
In
FCA v Hannam
[2014] UKUT 0233
, the UK Upper Tribunal held that, for
information to meet the second part of the precise test, one would
need to be able to draw
a conclusion as to the possible direction of
any price movement.
91.
However,
the EU Court of Justice has now rejected that approach in its
decision in the case of Lafonta v ANF (case C-628/13).
The EU
Court of Justice held in Lafonta as follows:
“
[36]
The
increased complexity of the financial markets makes it particularly
difficult to evaluate accurately the direction of a change
in the
prices of those instruments ... In those circumstances –
which can lead to widely differing assessments, depending
on the
investor – if it were accepted that information is to be
regarded as precise only if it makes it possible to anticipate
the
direction of a change in the prices of the instruments concerned, it
would follow that the holder of that information could
use an
uncertainty in that regard as a pretext for refraining from making
certain information public and thus profit from that
information to
the detriment of the other actors on the market
.
[37] …
the answer to the question referred to
is that, on a proper construction of point (1) of Article 1 of
Directive 2003/6 and Article
1(1) of Directive 2003/124, in order for
information to be regarded as being of a precise nature for the
purposes of those provisions,
it need not be possible to infer from
that information, with a sufficient degree of probability, that, once
it is made public,
its potential effect on the prices of the
financial instruments concerned will be in a particular direction
.”
92.
In
Singapore in the matter of Public Prosecutor v G Choudhury, the term
“specific information”, as referred to in its
insider
trading legislation was held to refer to information which has an
existence of its own quite apart from the operation of
any process of
deduction. The “specific information” must be
capable of being pointed to and identified, and
had to be capable of
being expressed unequivocally.
93.
In
the Choudhury-matter, the concept of “specific information”
was decided with reference to the Australian case of
Ryan v Triguboff
(1974 –
1976) 1 ACL R337.
In that matter the Court, with
reference to Sec 75A of the Australian Securities Industry Act, 1970
said the following:
“
The information which he has thus
acquired must not be generally known but must be of such a nature
that if it were generally known
it might reasonably be expected to
affect materially the market price of the shares
.”
94.
In
the United Kingdom matter of David Massey v The Financial Services
Authority
[2011] UKUT 49
(TCC) the Tribunal had to decide on whether
information relevant to a charge of insider trading was precise and
whether it had
the capacity to affect the share price. To
satisfy the statutory definition of being “precise”, the
Tribunal
held that the information must:
(a) Indicate circumstances that
exist or may reasonably be expected to come into existence
or an
event that has occurred or may reasonably be expected to occur; and
(b) Be
specific enough to enable a conclusion to be drawn as to the possible
effect of those
circumstances or that event on the price of the
shares.
95.
The
Tribunal thus held that the phrase “likely to have a
significant effect on the price” bears an extended meaning
and
refers to information “
of
a kind which a reasonable investor would be likely to use as part of
the basis of his investment decisions
.”
96.
On
the question whether inside information was knowingly used, Massey
contended that he had persuaded himself that the circumstances
were
such that he was entitled to trade as he did. The Court
accepted that his belief was genuine, but found that “
wishful
thinking is not the same as having a belief on reasonable grounds
that his behaviour did not fall within the definition
of market
abuse
.”
97.
The
Tribunal found that a reasonable market professional, even without
having in mind the precise wording of the statutory test
for market
abuse, would have appreciated that the transaction at least risked
constituting market abuse, and would therefore have
either drawn back
from implementing it or sought appropriate advice to confirm that it
was legitimate before proceeding.
If Massey had considered the
matter dispassionately and objectively, he should have appreciated
the existence of each of the elements
of market abuse that was found
to be present.
98.
An
exercise to compare what foreign jurisdictions did in relation to
comparable cases must be undertaken with caution. See: Pather
v FSB
[2014] 3 All SA 208
(GP) at par 200, p251 at G. Although one must be
sensitive to the differences in wording of empowering provisions in
foreign jurisdictions
when comparing them with South African Law, the
principles emerging from foreign case law confirms universally
accepted propositions
regarding insider trading. The respondent
submitted that, in the context of this matter, it is not only
instructive but necessary
to do such comparison. The following
emerges from such comparison:
98.1
For information to be specific or precise does not require the
circumstances
or event to which it relates to be in final form.
Information relating to circumstances or an event in an intermediate
phase
could still be specific and precise and constitute inside
information;
98.2
A genuine and bona fide belief that known information was not inside
information, will not found a defence where such belief is not based
on reasonable grounds;
98.3
Whether the information is price sensitive is determined with
reference
to the reasonable investor and whether he would regard the
information as relevant to a decision to deal in such securities or
not.
CONCLUSION
99.
Having
heard and considered the arguments raised and considered the papers
before me I am persuaded that:
a.
the
enforcement committee is an administrative tribunal that determines
the probabilities on documents serving before it. In this
regard I am
of the view that the rule in Plascon Evans does not apply to the
proceedings before the enforcement committee.
b.
the
information that the IDC had approved a loan of R99 million to ACT
was specific and precise.
c.
the
information was not available to the public and was price sensitive.
d.
the
appellants knew they had inside information on ACT when they dealt in
ACT shares between 26 January 2011 and 11 March 2011.
e.
there
is no basis for setting aside the determination.
THE
ADMINISTRATIVE PENALTY OF R1 MILLION
100.
In
determining an appropriate administrative sanction, the EC may have
regard to the factors listed in Sec 6D(3)(a) to (i).
The
penalty imposed was informed by, but not equal to, the potential
profit arising from the insider trading as evidenced by the
increase
in the share price by 54.5% on 11 March 2011. The reliance on
the potential profit is sanctioned by Sec 77(2), read
with Sec 77(5)
of the SSA.
101.
Since
the appellants made no profit, in that they did not dispose of their
shares while the company went into liquidation, the enforcement
committee made a globular assessment based on a conspectus which
included potential profit, but did not impose in addition thereto
a
penalty.
102.
The
enforcement committee exercised a judicial discretion as envisaged by
Sec 6D(3), based on a multifactorial evaluation of circumstances.
I
am unpersuaded that the committee misdirected itself in the exercise
of such discretion.
103.
Ralston
(who also bought shares on behalf of the second appellant, and was
found guilty of insider trading), sold all the AC Towers
shares on 24
June 2011 at 11c per share, as opposed to the 10c per share for which
he had bought them. A profit was thereby
made for the second
appellant. Further, between 24 June 2011 and 29 July 2011 the
first appellant sold a total of 3 694 336
shares out of the Nedbank
account at an average price of 11c per share.
104.
The
subsequent losses are in my view irrelevant. In formulating this view
I rely on the case of The Insider dealing Tribunal v Shek
Mei Ling
[1999] HKCFA 30
;
(1992) 2 HKCFAR 205
where this approach was succinctly explained by
Lord Nichols of Birkenhead in the matter of as follows:
“
The approach is to treat the relevant
profit as that gained by the insider dealer when the information was
made public and the market
had had a reasonable opportunity to digest
the information. The gain is to be measured by reference to the
market value of the
shares at that date. At that date, the amount of
the inside dealer’s profit, whether realized or not, was fixed
once and
for all. Subsequent changes in market prices are
irrelevant
.”
105.
In
Dura Pharmaceutical, Inc. v. Broudo,
[2005] USSC 3253
;
544 U.S. 336
, 343 (2005) the
following was stated:
“
For one thing, as a matter of pure
logic, at the moment the transaction takes place, the plaintiff has
suffered no loss; the inflated
purchase payment is offset by
ownership of a share that at that instant possesses equivalent value.
Moreover, the logical link
between the inflated share purchase price
and any later economic loss is not invariably strong. Shares are
normally purchased with
an eye toward a later sale. But if, say, the
purchaser sells the shares quickly before the relevant truth begins
to leak out, the
misrepresentation will not have led to any loss. If
the purchaser sells later after the truth makes its way into the
marketplace,
an initially inflated purchase price might mean a later
loss. But that is far from inevitably so. When the purchaser
subsequently
resells such shares, even at a lower price, that lower
price may reflect, not the earlier misrepresentation, but changed
economic
circumstances, changed investor expectations, new
industry-specific or firm-specific facts, conditions, or other
events, which
taken separately or together account for some or all of
that lower price. (The same is true in respect to a claim that a
share's
higher price is lower than it would otherwise have been—a
claim we do not consider here.) Other things being equal, the longer
the time between purchase and sale, the more likely that this is so,
i.e., the more likely that other factors caused the loss
.”
106.
In SEC
v. MacDonald (1983) 699 F.2d the court stated that:
“
we see no legal or equitable
difference….between an insider’s decision to retain his
original investment with the hope
of profit and a decision to sell it
and invest in something else. In both cases the subsequent profits
are purely new matter. There
should be a cut-off date
.”
107.
In
United States v. Mooney the court held that:
“
The offense is not the purchase, but the
deception. The "gain resulting from the offense" is not the
gain resulting from
the purchase. It is, rather, the gain resulting
from the deception. The gain resulting from the deception stops when
the deception
stops, though there may be later gain (or loss) as the
stock market gyrates along, unmolested by any deception. If someone
buys
stock illegally on the basis of insider knowledge, there may be
an increase in the stock's value when the insider knowledge is made
public. That increase is illicit, resulting from a kind of deception
to the other buyers and sellers of the stock. After the market
adjusts to this information and the deception is ended, the value of
the stock will, of course, continue to fluctuate according
to the
ordinary, legitimate vagaries of the market—with no
deception—and thus, no offense…
”
108.
In
the light of the above circumstances and the approach of the foreign
courts to this issue I find that there is no basis for setting
aside
the administrative penalty. A possible defence of prior acquisition
is afforded to a party in terms of Sec 73 of the SSA
to the effect
that if the person concerned only became an insider after he or she
had given the instruction to deal to an authorised
user and the
instruction was not changed in any manner after he or she became an
insider, there is no inside information. I am
unpersuaded on the
facts that this defence finds application, particularly because of
the evidence of Zietsman when he contended
that he did not know about
the amount of the IDC loan until 11 March 2011. This was
clearly untrue and does not accord with
Mr Zietsman’s further
affidavits filed before the enforcement committee.
109.
Consequently
I am similarly of the view that there is no basis to set aside the
administrative penalty.
ORDER
110.
In
the premises I make the following order:
The appeal against the conviction and the
administrative penalty is dismissed with costs.
_______________________________
G. T. AVVAKOUMIDES
ACTING JUDGE OF THE HIGH COURT
GAUTENG DIVISION, PRETORIA
DATE
:
24
AUGUST 2015
I agree:
________________________________
N. B. TUCHTEN
JUDGE OF THE HIGH COURT
GAUTENG DIVISION, PRETORIA
DATE
:
24
AUGUST 2015
Representation for Appellants:
Counsel:
J. J. Brett SC
D.
Mahon
Instructed by:
Faber Goertz Ellis Austen Inc.
Representation for the Respondents:
Counsel:
E. Labuschagne SC
Instructed by:
Rooth & Wessels