Director who engaged in insider trading walks free

LEONIE WOOD

April 17, 2010

JOHN Francis O'Reilly, a former director who pleaded guilty to insider trading, has averted jail after a judge said the businessman's judgment was ''clouded'' at the time and the nature and value of the shares he traded did not mark the offence as particularly serious.

In sentencing O'Reilly, Justice Terry Forrest of the Victorian Supreme Court said the former Lion Selection director had obtained only a ''modest'' $29,045 profit from his purchase and sale of 50,000 Indophil Resources shares in mid-2008.

The judge said that while the most troubling aspect of O'Reilly's conduct was that he traded shares as a ''true insider'' - from inside the boardroom - he acknowledged that O'Reilly conducted only one trade and did not embark on a sustained course of trading.

O'Reilly was convicted of one count of insider trading. Justice Forrest imposed a jail sentence of 10 months and then wholly suspended the term, allowing O'Reilly to walk free. Justice Forrest said that but for the guilty plea, O'Reilly would have been sentenced to 13 months' jail and ordered to serve a minimum of five months.

O'Reilly must be of good behaviour for 18 months and pay a $500 bond. The court also imposed a $30,000 pecuniary penalty on top of the $61,600 that O'Reilly must forfeit under the Proceeds of Crime Act. O'Reilly bought $38,880 of Indophil shares in May 2008, when he was privy to confidential information as Lion negotiated to sell its 25 per cent Indophil stake to Xstrata - a move that would trigger a takeover of Indophil and send its shares higher.

''By your conduct you have misled your fellow directors, acted in contravention of Lion's security trading policy, misled your shareholders and the Australian Securities Exchange, and undermined the integrity of the securities market,'' Justice Forrest said yesterday.

He said the ''objective gravity'' of O'Reilly's offence emerged after considering that, as a director, O'Reilly was a ''true insider'', but he did not try to conceal the trading through secret or nominee accounts. This ''relative lack of sophistication'' suggested ''that your judgment was clouded at this time'', the judge said.

''Thirdly, I do not regard the nature of the trade, the amount invested or the anticipated profit as falling into a particularly grave or serious category. You did not seek to multiply your anticipated profit by choosing an exotic method of trading, nor did you invest a really large sum of money.''

Justice Forrest said he considered it a ''mid-range example of a serious offence'' and accepted O'Reilly's conduct was ''an aberration''.

Ian Ramsay, director of Melbourne University's Centre for Corporate Law and Securities Regulation, suggested the sentence appeared ''relatively modest'' considering several earlier insider trading cases had attracted jail or periodical detention sentences.

Professor Ramsay argued that the number of insider enforcement actions in Australia and the penalties tended to be ''relatively light'' compared with overseas.

''I actually think the Australian insider trading law is a mess in some respects,'' he said. In some ways it was too broad, he said, adding: ''You could be an insider by picking up a piece of paper on Collins Street.''

And in other areas, the legislation was too proscriptive.

''What you do come to quickly, though, is the realisation that courts typically do not impose terms of imprisonment for offences under the Corporations Act,'' he said.

Source: The Age

http://www.smh.com.au/business/director-who-engaged-in-insider-trading-walks-free-20100416-skmy.html

Primary patience tested over Bateman's millions

GREG HOFFMAN

March 10, 2010

Primary Health Care owns the nation's second-largest pathology business and a growing collection of medical centres. These should be good businesses, enjoying the twin tailwinds of an ageing population and growing healthcare expenditure.

Yet Primary, when we first analysed it in detail in early May last year, failed to pass muster on two important points. First, it had an uncomfortably high debt level - $1.5bn, in fact. Second, our analysis revealed several aggressive accounting treatments; nothing illegal, just things that could have been couched more conservatively.

But another more alarming red flag was about to surface.

In early May the company undertook a large share placement of $315 million. Another occurred in September, infusing an additional $180 million of much-needed cash into the company. Both raisings helped reduce Primary's debt, which was fine as far as it went.

Until I read the second page of September's two-page announcement, that is. It revealed that Primary's founder and managing director, Dr Edmund Bateman, “intends to sell down approximately 11.6 million shares ... in conjunction with the placement.”

Bateman took more than $70 million off the table (the final placement price was $6.08 per share) - about 30% of his stake in the company. The timing proved fortuitous.

Profit shock

On 16 February, less than six months after the share sale at $6.08, Primary reported a half-year profit that fell well short of investor expectations. Primary's share price is now languishing close to $4.

There's nothing necessarily wrong with sales such as Bateman's. Occasionally we get lucky, at other times less so. As with John Gay at Gunns, Bateman may have had his own reasons for cutting his stake. Given subsequent events, though, shareholders could be forgiven for feeling apprehensive about his behaviour.

At the November annual meeting, Bateman revealed some disturbing news from the September quarter (bear in mind his share sale was announced on 15 September, towards the end of that period).

“Reduction in the rate of GP bulk billing throughout Australia has already started to occur with a >1% reduction in the September 2009 quarter (the greatest fall in 6 years)”, the announcement said.

Could Bateman have known about this at the time of the share sale? And if not, why not? Bateman is managing director after all.

November a key month

It then eventuated that, following Primary's introduction of co-payments, revenue in its key pathology business fell sharply in November.

This was the month of the annual meeting and about six weeks after Bateman's share sale.

Primary's 6,750 shareholders didn't find this out until February 16 when the official results were released. Cast in this light, shareholders could be forgiven for thinking twice about the timing of Bateman's September share sale.

There are two immediate questions. Firstly, when did Bateman find out that Primary's profit performance was declining markedly? And secondly, if it wasn't until just before shareholders were told mid-last month, three months after the business started to suffer, why did it take so long?

If this isn't a regulatory issue, then surely it must be a managerial one. Either way, it appears that Primary shareholders have an issue to grapple with.

This article contains general investment advice only (under AFSL 282288).

Greg Hoffman is research director of The Intelligent Investorwhich provides independent advice to sharemarket investors.

http://www.businessday.com.au/business/primary-patience-tested-over-batemans-millions-20100310-pym9.html

What to do when insiders sell

GREG HOFFMAN

March 22, 2010 - 1:19PM

CSL's McNamee sells down. Should you?

Last week, CSL chief Brian McNamee announced the sale of $8.4 million worth of his shares in the company, amounting to about one sixth of his total holding. There is no doubt that this is a significant sale. How CSL shareholders interpret its significance is less certain.

At times I have regretted not following the insiders' moves after holding on to my stock. Equally, there have been occasions where the share price has surged after sales like McNamee's. There is simply no clear-cut rule to follow when an insider in a stock you own disposes of a large parcel of shares.

But there are two key questions to ask when considering such sales, the answers to which might provide some guidance for you:
1. Is the stock expensive?
In January 2008 The Intelligent Investor published an analysis of then-darling stock Reverse Corp (which offers the 1800-REVERSE service). Our analyst noted the combination of an expensive-looking stock price and sales by founder and executive director Richard Bell. We suggested investors steer clear and shareholders follow Bell's lead. The stock price is now down 95%. But how does CSL fare on this score?

Coincidentally, the same analyst who pulled apart Reverse Corp also covers CSL for The Intelligent Investor. Almost two years to the day after issuing his negative view of Reverse Corp, he recommended CSL to our members at $31.30 per share.

That price, Nathan Bell explained, was ''reasonable for such a high quality business''. Even though CSL shares have risen by 15% since January, we don't believe the overpriced condition applies in this case.

2. Is this a series of sales by the same director or, more importantly, sales by multiple directors?
Between October and December 2007 we noted nine sales by six individual directors of Roc Oil, at prices between $2.95 and $3.43. The share price today stands at 36 cents.

In CSL's case, the previous director sale came from Ian Renard in August last year. To find the next most recent sale, you have to go back to McNamee's previous sale in April 2007.

To me, this record is clean enough. McNamee is not a serial seller (at least, not yet) and nor are his fellow directors.

When looked at in this light, McNamee's sale shouldn't send waves of panic through CSL's share register.

But insider sales should always be taken seriously, even if they don't necessarily prompt a sale in your own portfolio. Director sales are not always a bad sign but they're never a good one. To wit, if you've had your CSL shares in the bottom drawer for a few years, it may be time to move them a little closer to hand and follow the story a little more carefully.  

If you're interested in following share purchases and sales, the free site Directors' Transactions (run by The Intelligent Investor) is designed to help you do exactly that.

Greg Hoffman is research director of The Intelligent Investorwhich provides independent advice to sharemarket investors

http://www.smh.com.au/business/what-to-do-when-insiders-sell-20100322-qq13.html