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Insider Trading Crackdown

Are Prosecutors Running the Country?


With prosecutors aggressively clamping down on financial irregularities, Taiwan's corporate world is beginning to panic. Will these crackdowns restore order and promote fairer competition? Or are they an impediment to business?



Are Prosecutors Running the Country?

By Scott Wang
From CommonWealth Magazine (vol. 378 )

To former Fubon Financial Holding Company chief investment officer Daniel Chiang, August 3 must have seemed like the day the roller coaster he had been riding for a week came crashing down.

Prosecutors had suspected Chiang, once a dominating presence in investment management and insurance circles, of being involved in an insider trading case related to Standard Chartered Bank’s acquisition of Hsinchu International Bank. On July 26, Taipei prosecutors raided Fubon Financial’s headquarters and nine other locations in search of evidence and brought Chiang in for questioning that night. A day later, Chang Chieh-chin, a prosecutor with the Taipei District Prosecutors Office’s anti-corruption task force, asked that Chiang be detained, but the Taipei District Court rejected the request and allowed Chiang to be released on NT$5 million bail. As he left the prosecutors’ office, the Fubon Financial executive wore a wry smile on his face.

But the team headed by prosecutor Chang, which had planned the raid for more than half a month, was not about to give up, even after the court rejected its request to detain Chiang a second time. Chang and his team investigating the insider trading case continued to analyze documents seized during the raids and found evidence that Chiang had bought a large volume of Hsinchu International Bank shares through proxies prior to the announcement of Standard Chartered’s acquisition.

Undaunted by previous rejections, Chang filed a third request with the court to detain Chiang, and this time, on August 3, the panel of judges agreed to taking the suspect into custody.

“He spoke in even tones, without any notable emotion. During the hearings, even though he kept saying he didn’t know anything, you could tell he was thinking things over, seemingly secure that he would be okay. He was perfectly calm,” Chang recalls.

Although the insider trading case targeted Chiang and not his company, shares in Fubon Financial plummeted on July 27, the day after the raid. To stop the bleeding, Fubon Financial relieved the executive of all his formal duties and designated him as a “consultant.”

The Insider Trading Blaze Burns On

On August 8, another insider trading case made the headlines. Nine senior executives of cell-phone maker Inventec Appliances Corp. (best known for its OKWAP brand), including chairman Jackson Chang, president Daniel Lee, and chief financial officer Ivan Tseng, were indicted on insider trading charges. Prosecutors accused them of notifying employees by e-mail to unload NT$739.9 million in Inventec shares before planned layoffs and Apple’s decision to reduce its iPod orders with the company became public knowledge. The move saved the executives NT$100 million in losses on their holdings, said prosecutors, who asked the court for sentences ranging from 3 1/2 to 7 1/2 years.

Targeting Corporate Corruption

Minister of Justice Shih Mao-lin declared at the end of last November that rooting out corporate corruption would become one of the top priorities for anti-corruption task forces. Shih said five areas would be targeted in the crackdown: illegal securities transactions, embezzlement or breach of trust in handling a company’s assets, illegal mergers or takeovers, illegal private placements (where companies offer securities privately to large investors), and illegal raising of capital. He also demanded that the country’s prosecutors prosecute 30 large-scale financial crime cases by the end of 2007, 10 of which were to be landmark cases that would send a convincing warning that financial crimes would not be tolerated.

Once prosecutors began wielding their arsenal against corporate irregularities, suspicions of insider trading at many prestigious high-tech and financial companies cropped up and led to searches of their premises. And with the Financial Supervisory Commission announcing that it had handed over 159 cases of financial wrongdoing – including 30 involving insider trading – to prosecutors over the previous three years, businessmen are beginning to panic. Companies in manufacturing, finance and high-tech, enterprises with controversial reputations and squeaky clean images alike, all have high-ranking executives suspected of insider trading who have unintentionally fallen afoul of the law.

Now, recognizing and understanding insider trading has become as critical a priority for company owners as the day-to-day management of their businesses.

“In the past, whenever the Taiwan Stock Exchange Corporation offered seminars to company chairman and supervisors on the Securities and Exchange Law and how to prevent insider trading, 30 to 40 people at most would sign up. Today, top board members have to fight for openings. Every seminar draws the maximum 150 people,” says Su Song-chin, acting president of the Taiwan Stock Exchange Corporation. Understanding insider trading has clearly become the new “in” course of study for board executives.

Going after the Innocent

While public opinion is generally supportive of prosecutors’ aggressive crackdown on insider trading, the business community sees things differently. Many executives accuse government agencies of “going for the kill without giving guidance,” and complain that prosecutors are unfamiliar with the inner workings of the market. Instead of apprehending criminals, prosecutors’ high-profile activities tarnish the innocent and inflict heavy damage on stock prices, businessmen believe.

A high-ranking executive at one financial holding company angrily denounces what he feels is the heavy hand of the law.

“Do you really believe the Financial Supervisory Commission doesn’t use intimidation tactics? I’d be willing to debate them in court on it. They launch large-scale probes whenever they feel like it,in our case seven times in one year. But then after investigating the cases for a long time, they don’t indict anyone. We are really the innocent ones,” the executive says.

“Prosecutors shouldn’t be so subjectively selective in pursuing cases, and the Financial Supervisory Commission and the Bureau of Investigation shouldn’t launch high-profile searches for evidence every time they get a tip. What they’re doing constitutes harassment,” the executive adds.

The CEO of another financial holding company attributes some of the problem to the constant changes made to laws related to the financial sector. He complains that the laws guiding financial reform, such as the Financial Holding Company Act and subordinate statutes such as the Insurance Act and Banking Act, are often amended in a vacuum, without consideration of how a change in one law would affect the others. It is difficult to adhere to laws that point in different directions, he contends.

The CEO also suggests there were better ways to crack down on insider trading.

“You can use more open mechanisms to monitor insider trading, such as the Taiwan Stock Exchange. You don’t have to allow prosecutors to pursue cases selectively, because that gives the appearance of political interference in the justice system,” the CEO remarks.

Executives in the financial sector are not the only ones with a litany of complaints over the system. If anything, the high-tech sector is even more up in arms over the judicial process. Many leaders in the industry believe prosecutors do not understand how the market works and cannot appreciate the global competition high-tech companies face that makes offering stock bonuses necessary to attract the best talent from around the world.

“Conducting searches and detaining people for questioning at the drop of a hat constitutes harassment of board directors and supervisors and white collar workers. The prosecutors are running the whole country,” charges one high-tech company’s CEO, who himself has been indicted.

In response to the criticism, prosecutors have changed the way they handle cases. They now try to schedule raids and the summoning of witnesses or suspects on weekdays after the stock market has closed or on Friday afternoons.

“The goal is to reduce the psychology of anticipation and lessen the impact of the moves on companies’ stock prices,” Justice Minister Shih asserts.

Shih and chief prosecutors cannot understand, however, why corporate leaders have reacted so vehemently to the crackdown on financial irregularities.

“If they haven’t engaged in insider trading, what’s there to fear?” Shih asks.

Lin Chin-chun, deputy chief prosecutor with the Taipei District Prosecutors Office, has handled many high-profile financial crimes cases and rejects criticism that prosecutors abuse their power in detaining and questioning suspects.

“According to the Code of Criminal Procedure, only if a strong suspicion of crime exists can prosecutors request that individuals be detained. Also, a judge has to approve the request. If there is no crime, prosecutors can’t simply detain people whenever they want to,” Lin stresses.

Rampant Insider Trading

In defending the Ministry of Justice’s crackdown, Shih cites statistics comparing Taiwan with other countries, which showed that corporate corruption in Taiwan is becoming increasingly serious.

How rampant is insider trading in Taiwan? The World Competitiveness Yearbook published by the Lausanne, Switzerland-based International Institute for Management Development (IMD) compares the level of insider trading in over 60 countries, and Taiwan regularly ranks in the 40s or 50s (the lower the ranking, the worse the country’s insider trading).

According to a report on economic crimes prepared by the Ministry of Justice’s Department of Prosecutorial Affairs, cases of embezzlement, falsifying financial statements, insider trading and other financial crimes for which prosecutors have indicted local businessman over the past five years account for more than NT$100 billion in unlawful gains – an amount equal to the construction costs of five Taipei to Yilan expressways (Table 1).

With evidence that financial crimes are rampant in Taiwan, it should be no surprise that the business community is panicky over the crackdown on insider trading. But there are three other factors behind the anxiety.

1. The business community underestimates the seriousness of insider trading.

Ding Kung-wha, chairman of Taiwan’s Securities and Futures Institute, says the punishment for insider trading in the past was little more than a slap on the wrist. Violators were almost never sent to jail. As a result, the big players saw insider trading as a common practice without realizing how serious it was.

Ding estimates that from 1988 to the present, only 51 indictments have been handed down for insider trading against only 38 defendants. Of those, only 20 cases resulted in a conviction, with around 15 people given prison sentences of between four and six months.

That started to change when an amendment to the Securities and Exchange Law that took effect on April 30, 2004 mandated a minimum sentence of three years for anybody involved in insider trading, with stiffer penalties for those who made more than NT$100 million in illegal gains. With fines or probation no longer sentencing options for those convicted of insider trading, indicted businessmen have suddenly realized the seriousness of the offense.

2. Many executives are poorly versed in the law, and ignore advice from their legal departments.

Ding says that if brokers or private equity or asset management firms engage in insider trading, it’s more than likely they know they’re breaking the law. But the specialized knowledge many high-tech entrepreneurs have in their own realms does not extend to the Securities and Exchange Law. If they ignore the advice or the function of their internal legal departments, it’s easy for them to unwittingly break the law, leaving them to complain, “Everybody does it, so why can’t I?”

James Lee, an attorney-at-law with Fang & Lee Associates, has intimate knowledge of the intricacies of insider trading, having acted as the public prosecutor in two high-profile insider trading cases in 2006. Lee says that many high-tech bosses defend insider trading transactions as necessary to reward their employees with stock dividends and insist they have not pocketed a penny of the benefits.

But Lee says they’re missing the point.

“The real goal of preventing insider trading should be to prevent unfair transactions on the stock market,” he argues. “It’s wrong for companies to think that as long as people on the inside don’t buy or sell stocks, it doesn’t constitute insider trading. Thinking that, they can easily break the law.”

3. Some companies believe that forging strong ties with the government means they can skirt the law with impunity.

Jack Huang, an attorney with international law firm Jones Day, observes that some companies engaged in insider trading believe that as long as their enterprises are big enough and they make substantial political donations, they can get their political connections to pull strings and have prosecutors and judges look the other way.

But Huang said that in today’s social, political and economic environment, it’s hard for people to intervene in the judicial process and make cases go away, regardless of their intentions.

Letting Enterprises Know Where the Lines Are Drawn

“I think it’s a good thing that prosecutors are cracking down on insider trading, because that will challenge the bad practices companies see as routine and force them to discover for themselves where the legal boundaries are drawn,” says National Taiwan University EMBA program executive director Ji-Ren Lee.

Of the more than 100 credits business school students take, at most four are dedicated to studying the law, and students usually end up forgetting what they’ve memorized. But understanding the law is critical to them as they enter the professional world.

“Lacking knowledge of the law is detrimental for overall business management development,” Lee says. Prosecutors’ high-profile actions will compel business schools to review their curriculums and give more emphasis to the study of law.

Corporate Self-discipline + Judicial Discipline

Aside from relying on corporate governance and self-discipline to prevent insider trading, administrative agencies and prosecutorial units need to provide external discipline by helping build healthier corporations and steering markets toward greater order.

Ding says that in the past, after regulatory agencies handed over financial crimes cases such as insider trading to judicial units to prosecute, it would take seven to ten years on average from the time the indictment was handed down to the time the appeals process was exhausted. That’s too long, insists Ding, who blames the cumbersome process on both prosecutors who drag their feet in building a case and the courts that move at a snail’s pace. Not only do such long trials leave society hanging, they also deliver a wrong message to the private sector that the government is lax in its oversight.

Now with the government suddenly taking action to rectify the situation, companies are left pondering different questions: Do the many cases that have been dredged up from the past to be prosecuted mean that politics have infiltrated the judiciary? Is it a hint that the government wants more political donations from us?

Ultimately, shortening the amount of time it takes to prosecute a case is the one way the public can have its trust in the judicial system restored.

Only with sound corporations can there be a healthy environment for economic development. Many hope that the crackdown on insider trading will lead to greater market order and provide momentum for economic development, instead of being all bark and no bite, and an impediment to corporate growth.

Translated from the Chinese by Luke Sabatier