Editorial Halting insider trades not fully possible

In light of the Ivan Boesky insider trading scandal in the United States which rocked stock markets, the Ontario government — a leader in regulating Canadian securities — is going to tighten up its own laws. Amendments to its Securities Act now being drafted will provide much heavier penalties both for insider trading and other trading infractions.

While insider trading admittedly goes on in this country, it is only rarely that charges have been laid. However, it is highly unlikely that it has been on anything like the scale that is now being uncovered in New York, which has already seen a $100- million fine levied.

It is believed that Ontario’s new law will call for a minimum fine for insider-trading violations equal to the profit gained by the offender, with a maximum of $1 million or three times the illegal profit, whichever is greater. Also, the new rules will expand the definition of insiders to include virtually anyone with privileged information about a publicly traded company — not just its officers, directors and employees. Now it could include lawyers, accountants, bankers, etcetera. And yes, even the printer of any corporate documents. These amendments will be tacked on to a new bill tightening takeover rules which is already before the legislature.

“Under our proposals, we could now prosecute those who receive tips from insiders along with the insiders themselves,” Ontario’s minister of financial institutions, Monte Kwinter, said in the legislature.

This move to put more teeth into the act coincides with Ontario’s recent proposal to open wide the securities industry by allowing brokerage and investment houses to be owned by banks and other financial institutions, including foreign ones. Certainly this could lead to more conflict-of-interest situations, which in turn calls for ever more vigilance in clamping down on share trading abuses.

Computer surveillance has certainly enhanced the securities watchdogs’ ability to sniff out illegal trading, but no matter how sophisticated this has become, it is not the final solution. This will still require a goodly amount of old-fashioned policing with informants. Even then, it is but a pipe dream to think that insider trading, per se, can ever be completely eliminated. Furthermore, there is simply no way that all investors can ever be simultaneously informed of new developments, no matter how important. A tape watcher, for instance, sees an announcement of an important development immediately and acts in seconds, possibly buying or selling the shares from a long-time investor in that particular company who may not get that same information until he gets his evening paper. Is this tape watcher, then, an insider acting on information which is not, in reality, public knowledge?

Even if insider trading were to be eliminated completely (quite impossible), we are still going to see sharp market runups. “We are not able to statistically determine with precision what amount of runup is due to illegal activity and what amount is due to legitimate speculation. I think that’s impossible,” says the chief economist for the U.S. Securities and Exchange Commission. Indeed. Legitimate speculation is very pervasive and is largely responsible for market swings.