The Taiwan Development Corp's insider trading case, which has been in the news for weeks, is still far from a conclusion. It is ironic that this insider trading scandal, and with it the demand to impeach President Chen Shui-bian (陳水扁), comes at a time when new provisions of the Securities and Exchange Law (證券交易法) to prevent insider trading and market manipulation are in the process of being implemented.
Former chairman of Taiwan Development Corp Su Teh-jien (蘇德建) has admitted his willing disclosure of insider information to third parties, such as the company's planned disposal of bad loans and an anticipated syndicated loan, over a dinner date. Chen's (陳水扁) son-in-law Chao Chien-ming (趙建銘), detained last month on suspicion of using insider information to buy shares in Taiwan Development from state-owned Chang Hwa Commercial Bank, admitted his attendance at that dinner but denied any wrongdoing.
The new insider trading provisions, which will take effect this month, are better late than never. They will help prosecutors and investigators clarify future cases and establish new supervision procedures to improve the health of the nation's financial system.
Pursuant to Article 157, Section 1 of the law, insiders -- ie, including a company's directors, supervisors, managers and their close relatives -- are prohibited from buying or selling stocks of their company before, or 12 hours after, important news that affects the company's stock price is made public.
The provisions have also refined and expanded the scope of the term "insider information" to a much broader range, while at the same time listing clearly what information needs to be included in the company's periodic announcements to the public -- as this information is likely to significantly affect the company's share prices. Companies must ensure their insiders are made aware of the new regulations and establish any necessary internal mechanisms to ensure compliance.
While the new law is a step in the right direction, many difficult problems remain to be solved and one of the more difficult issues is how to decide the "timing" on which the action of insider information leakage is established.
Take a publicly-listed company's decision to revise its earnings forecast given a change in market climate. The decision on that revision is important information to both the company and its shareholders, but just when does it become "public"? Should it be viewed as inside information after the revision is certified by the company's accountants or after it has been approved by the company's board? Or should it only be considered public information once it has been introduced at a formal press conference or filed with the stock exchange?
Revelations about company misconduct and insider trading are not particularly new in Taiwan. In the past, financial regulators and judicial authorities have had trouble nailing down offenders because of the difficulty in uncovering evidence to substantiate the alleged breach. It may be unethical for people, especially those who have access to the company's management, to gain profit from information they obtained in advance from the company. But at some level, all information is privileged and those who uncover it may be justified in receiving a high return for their efforts -- this is the substance of the fundamental research that investment companies aim to provide. A heavy burden of proof should be required to establish criminal charges against an alleged inside trader.
With the implementation of the new provisions, however, the financial regulators have taken a step forward in drawing the line on this issue. The provisions will strengthen corporate governance in this country and put genuine inside traders on notice.
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