SINGAPORE Dec 21 When South Korean automaker
Hyundai Motor Co announced last month it had
overstated the fuel efficiency levels on around one million of
its cars in the United States and Canada some investors were
left fuming more than others.
Some had already sold their shares before the announcement
on Nov. 2. The stock fell 4 percent on Nov. 1 with about 2.2
million shares changing hands, the highest trading volume of the
year at that point.
"This smells pretty bad," said Robert Boxwell, director of
consulting firm Opera Advisors in Kuala Lumpur who has studied
insider dealing patterns.
"It would have fallen into our suspect trading category," he
Boxwell spots suspect trading by looking at how much the
volume diverges from the average level in the days before a
market moving announcement. In the Hyundai instance, the volume
was more than five standard deviations, a measure of variation,
away from the daily average of 598,741 shares over the past
A Hyundai spokeswoman declined to comment.
Research from the Capital Markets Co-operative Research
Centre (CMCRC), an academic centre in Sydney that studies
financial market efficiency, found that 26 percent of
price-sensitive announcements in Asia Pacific markets showed
signs of leakage in the first quarter of this year, the most
recent period for which data was available.
That compared with 13 percent in North American markets.
The CMCRC says it looks for suspected information leaks by
examining abnormal price moves and trading volumes ahead of
Investors say one reason for leaks in Asia has been low
enforcement rates for insider trading and breaches of disclosure
rules. Enforcement in some markets is virtually non-existent.
There are also misconceptions about whether trading on
non-public information is a crime.
"The idea that insider trading is wrong rather than smart is
only being ingrained in the current generation of Asian players,
not the older generation who are often still in the driving
seat," said Peter Douglas, founder of GFIA, a hedge fund
consultancy in Singapore.
LOSS OF CONFIDENCE
Japan's largest investment bank Nomura Holdings was
embarrassed this year after regulatory investigations found it
leaked information to clients ahead of three public share
Nomura has acknowledged that its employees leaked
information on three share issues it underwrote in 2010. In
June, it published the results of an internal investigation that
found breaches of basic investment banking safeguards against
leaking confidential information and announced a raft of
measures to prevent recurrence.
The bank was also fined 200 million yen ($2.37 million) by
the Tokyo Stock Exchange and 300 million yen by the Japan
Securities Dealers Association.
Such leaks hurt companies' share prices in the long run
because investors put in less money if they feel they are not on
a level playing field.
"It is very damaging. You may not know how much money you've
lost but if there is not confidence that the regulators are
prosecuting and enforcing the rules on this then it undermines
investor confidence and liquidity," said Jamie Allen, secretary
general of the Asian Corporate Governance Association.
The issue isn't being ignored. Many Asian markets such as
Hong Kong and China have tightened their rules on insider
trading over the past decade.
Indeed some investors feel that while leaks and insider
dealing are unfair, regulators in the region have more serious
issues they should be tackling.
"I would like to see the regulators spend more resources on
investigating and prosecuting fraud against listed companies,
which severely damages shareholder value," said David Webb, a
corporate governance activist in Hong Kong, arguing insider
dealing as less of an impact on a company's long-term share
HTC AND APPLE
A week after Hyundai's announcement about its problems in
the United States, there was an unexpected move on the Taiwan
Shares in smartphone maker HTC Corp jumped almost
seven percent on Friday, Nov. 9, hitting the daily upper trading
limit. On Sunday came the surprise announcement that the company
was ending its long-running patent dispute with Apple Inc
, a move seen as a positive for the stock.
The Taiwan bourse announced it was investigating the trading
patterns to see if there was a possible leak.
When asked for comment, HTC referred back to a Nov. 13
statement in which the company said it had kept the Apple
settlement process confidential and has strict controls on
Michael Lin, a spokesman for the Taiwan Exchange, told
Reuters on Friday that the bourse is still working with the
regulator on the case.
Michael Aitken, who oversees research at the CMCRC, said
many other Asian markets lack tough enough rules to force
information to be released as efficiently and timely as
possible, a primary reason for the prevalence of leaks.
"Poor regulation hampers enforcement efforts," he said
pointing out that few markets have the "continuous disclosure"
rules used in Australia which require listed companies to
release material information as soon as possible.
In Korea, when Hyundai shares started to fall, rumours began
swirling that news about a problem with some of its cars was on
its way, but investors say it took the company too long to
disclose what exactly was happening.
"Hyundai at that time did not confirm the rumours. We
suffered enormous losses because of this," said one fund
manager, who declined to be named because he was not authorised
to speak to the media.
An official from Korea Exchange declined to comment on
whether it was investigating this case, saying only that the
exchange looks carefully into possible cases of insider trading.
Across Asia, regulators concede that many company executives
and insiders still do not appreciate that leaking or trading on
material, non-public information is an offence.
"People don't even know they are engaging in insider
trading, for example if their friends are talking about it on
the golf course," said Tong Daochi director-general for
international affairs at the China Securities Regulatory
Commission, during a regulation conference last month.
"We try to tell society, what are the criminal issues, what
are the insider trading issues? For example we have held 27
press conferences to tell the public what kind of activities are
involved in insider trading and to let people know that this is
an active crime."