R v De Silva

Judgment 1Oswyn Indra De Silva (the offender) pleaded guilty to an indictment which alleged that: Between about 20 December 2006 and about 26 April 2007 at Sydney in the State of New South Wales, [he] acquired relevant Division 3 financial products namely securities, or contracts for difference ("CFDs") in respect of securities ("the financial products") whilst in possession of inside information concerning those financial products that was not generally available, being information which if it were generally available a reasonable person would expect it to have a material effect on the price or value of the financial products, and being information which [he] knew or ought reasonably to have known: (i) was not generally available, and (ii) if it were generally available, a reasonable person would expect it to have a material effect on the price or value of the financial products. 2The offence to which the offender pleaded guilty is commonly referred to as "insider trading". At the relevant time the maximum penalty for the offence was imprisonment for 5 years and/or a fine of $220,000. [The maximum penalty has now been increased, with effect from 13 December 2010, to imprisonment for 10 years and/or a fine of $495,000 (or three times the value of the benefits obtained from the offence)]. Facts relating to the offence 3An Agreed Statement of Facts was admitted into evidence. I have relied heavily upon its contents in describing the factual background to the offence. On 21 March 2005 the offender commenced employment as a Portfolio Manager with the Macquarie Funds Management Group ("FMG") of the Macquarie Group of Companies ("Macquarie Group"). His position was at the level of Associate Director and was based in Sydney. He held this position until August 2007 at which time he commenced employment in the Macquarie Group's London office where he worked until 30 September 2008. 4FMG was Macquarie Group's principal funds management business. This business was conducted predominantly through Macquarie Investments Management Limited ("MIML"), a corporation formed in Australia which held an Australian Financial Services Licence that was issued pursuant to the Corporations Act 2001 (Cth) . It acted as: (i) the responsible entity for a number of Australian managed investment schemes which had predominantly Australian investors ("Australian Funds"); and (ii) the investment manager of a number of foreign funds which had predominantly foreign investors ("Foreign Funds") (together "the Funds"). 5FMG's business was structured into divisions based around asset classes. One of the divisions was the Real Estate Securities Division ("RES"). The RES was responsible for investment decisions for any investments in real estate related securities made by any of the Funds. The RES, in turn, structured its business into four different geographical locations: namely the United States, Europe, Asia and Australia. 6The offender worked within RES as the Portfolio Manager responsible for Asia. In that capacity the offender had sole responsibility for: (i) determining which real estate related securities in the Asia region were appropriate for MIML to invest in on behalf of the Funds; (ii) determining the model portfolio which involved setting the relative amounts of each Fund's investment that should be invested in each of the securities; and (iii) determining the actual trade orders that should be placed, including the quantity and price at which securities should be traded; and monitoring and reviewing the investments and cash holdings of funds invested in the Asian real estate securities sector. 7RES maintained an electronic spreadsheet, referred to as the "Trade Calculator", into which the following information was entered on a daily basis: (i) any changes to the securities included in the model portfolio as determined by the offender; (ii) any changes to the relative weightings between the securities in the model portfolio as determined by the offender; (iii) details of any trades in the securities by MIML on behalf of the Funds; (iv) any changes to the price of the securities; and (v) any additional money received from the Funds for investment in Asian real estate securities. 8The Trade Calculator showed the difference between the Funds' actual holdings and the model portfolio, and generated the trade orders that needed to be placed by MIML on the Funds' behalf in order to align the Funds' holdings to the model portfolio. The offender had regular access throughout his working day to the Trade Calculator in his capacity as Portfolio Manager. The offender was also primarily responsible for issuing instructions to MIML's two main brokers who were located in Hong Kong in relation to the trade orders which were required in order to align each of the Fund's investments with the model portfolio. Execution of the trade orders resulted in securities being bought and sold by MIML as the responsible entity and investment manager on behalf of the Funds. 9Aligning the Funds' investments to the model portfolio often involved acquiring large volumes of particular securities. That was particularly the case in the period between December 2006 and April 2007. During that period MIML was the investment manager for two Korean funds, the Korean Global Property Securities Fund and the Korean Asian Real Estate Securities Fund (which in combination constituted "the Korean Funds"), which were growing rapidly. The result was that the RES received very large inflows of cash for investment every couple of days. The amounts involved were regularly in the order of hundreds of millions of US dollars per week. 10During this period most of the trading by MIML for which the offender was responsible, was undertaken on behalf of Foreign Funds. By virtue of his position with FMG, the offender routinely gained advance knowledge of proposed trades by MIML on the Funds' behalf in Asia. This included information concerning the proposed acquisitions of large volumes of particular securities on the Singapore Stock Exchange ("SGX") during the relevant period. From his knowledge and experience in relation to financial markets, the offender was aware, at all relevant times, that acquisitions of large volumes of particular securities could have the effect of increasing the market price of those securities within a short time frame. 11The offender was aware of the laws prohibiting insider trading and of Macquarie Group's policies which were designed to prevent insider trading. That awareness extended to the type of insider trading commonly known as "front running". On 11 February 2005 the offender signed an employment agreement with the Macquarie Group in which he stated that "I hereby acknowledge, understand and accept the terms of employment as outlined in this Agreement and related documents which have been provided to me". The agreement included the following paragraphs: Your personal interests must not act in conflict with Employer's best interests (for example, an employee's dealing on personal account in equities and equity derivatives or trading in securities may place them in a position of conflict of interest). This provision is more fully outlined in the Employer's policy known as Personal Dealing ... You must observe the provisions of the relevant legislation relating to securities trading, including insider trading, and will not disclose or use non-public price sensitive information obtained in the course of, or arising out of, your employment to your own personal advantage or that of friends, relatives or other associates. This provision is more fully outlined in the Employer's policy known as Chinese Walls. 12The employment agreement also required the offender to "comply with all employer policies, procedures and guidelines". The offender also signed a separate one-page document entitled "Acknowledgment and Declaration of Secrecy" in which he declared that: I will observe the provisions of the Corporations Act and will not use any non public price sensitive information obtained through my employment with the [Macquarie] Group to personal advantage. I have received a copy of the following documents and policies: Personal Dealing Policy; ... Macquarie Group Chinese Wall Procedures Policy Statement ... I certify that I have read the above documents and I understand the contents. I agree to adhere to the requirements of the documents ... I acknowledge that I have had an opportunity to discuss the content of these documents and any other documents referred to herein with a representative of the [Macquarie] Group. 13The Personal Dealing policy set out the following four principles: (i) An employee must conduct his or her personal investment activity lawfully and in a manner that avoids a conflict of interest; (ii) All personal dealing must be conducted through an approved "Employee Related Account"; (iii) All personal dealing in certain financial products (including listed equities) must be precleared with RMD [Risk Management Division] Compliance, and may only occur if clearance is given; and (iv) All personal dealing positions in a financial product must be held for a minimum of 14 calendar days after the most recent acquisition. 14It also stated that: Employees may be subject to additional divisional and/or regional personal dealing policies. 15The Personal Dealing policy also stated that it applied to "all types of financial product", including "ordinary securities" (also known as "equities") and "all types of derivative". It specifically identified "contracts for differences" (CFDs) as an example of the latter. CFDs are "derivatives" within the meaning of sections 761D and 1042A of the Corporations Act. A CFD is an agreement between an investor and a CFD trader which allows the investor to speculate on future price movements in an underlying security without acquiring ownership of the security. The value of a CFD is determined by the price of the underlying security. Accordingly, rational investors will "buy" a CFD when they expect the price of the underlying security to increase in the future and "sell" a CFD if they expect the price to decrease. CFD trading can multiply gains or losses arising from share price movements in comparison to trading in the underlying security, because CFD investors are required to pay only a fraction of the value of the underlying security but they obtain the full benefit or detriment of changes in the price of the security. Accordingly, for the same amount of money, CFD investors can purchase a larger number of CFDs than underlying securities and can make relatively large profits or losses from relatively small changes in price. 16The Personal Dealing policy also specified that: [I]f an employee possesses non-public price-sensitive information about or affecting a financial product, or the issuer of any financial product, that employee is prohibited from buying or selling such financial product ... Employees are prohibited from engaging in "front running", which means that employees may not buy or sell financial products so as to benefit from their knowledge of the trading positions, plans or strategies of Macquarie, an associated entity or fund . 17The policy set out the following restrictions in relation to investment accounts, including trading accounts, held by employees: All personal dealing conducted by employees and their associates must be through an "Employee Related Account". For financial products traded in Australia and New Zealand, transactions are only to be conducted through Employee Related Accounts held with Macquarie. For financial products traded in other locations, transactions are to be conducted through Employee Related Accounts held with brokers approved by RMD Compliance. Such non-Macquarie accounts are to be opened (or maintained) only with the written approval of RMD Compliance, and employees are responsible for ensuring that copies of all contract notes or confirmations are sent to RMD Compliance ... All non-Macquarie investment accounts must be disclosed to RMD Compliance, with the exception of cash deposit accounts (including CMT accounts) and managed fund accounts . 18The Chinese Walls policy, to which I referred earlier, included a detailed summary of the prohibitions and penalties relating to insider trading that are contained in the Corporations Act. 19In addition to those policies, the offender was also subject to the FMG Staff Trading Policy , the covering page of which contained the following information: In addition to [the Macquarie Group Policy on Personal Dealing], FMG has additional staff trading restrictions because its staff are either trading client funds in financial markets or have access to this trading information ... The underlying principle for the FMG policy is to avoid "front-running". This refers to a situation where a staff member takes advantage of information about FMG's planned trading activities to gain financial advantage. Where staff trading situations arise that are not specifically covered by the groupwide or FMG specific policies, the staff member should seek approval from the head of their division and from FMG's Risk Management team. 20The FMG Staff Trading Policy provided, amongst other things, that all trading in securities or derivatives by FMG staff required the prior written approval of the Risk Management Division. Such trading had to be conducted through Macquarie Group entities or those approved by the Risk Management Division. 21On about 25 November 2005, the offender opened a personal trading account in his own name in Singapore with Phillip Securities Pte Limited ("PSPL"). PSPL is a Singapore-based stockbroking firm and a member of the SGX. PSPL has, since November 1996, operated a web-based trading platform called the Phillip's Online Electronic Mart System ("POEMS"). POEMS is an in-house online trading platform which is only available to PSPL's clients. POEMS allows clients to place orders for the acquisition or disposal of securities on the SGX over the internet from anywhere in the world. It also allows clients to access other financial products offered by PSPL, including CFDs, over the internet. 22Notwithstanding the policies to which I have just referred, the offender did not: