April 30, 2007
We write with reference to the Special Report in your front page of April 30, 2007 regarding our insider trading investigation on Miss Yingluck. The writers unfortunately failed to separate between what the public perceives to be an insider trading and indecent practice, and whether the case can be prosecuted under the law.
In a common sense, a person is perceived to commit an insider trading if he or she possesses material information, and trades before such information is disclosed to the public. In that sense, Miss Yingluck’s sales of AIS shares may seem to meet the test of both elements, i.e. she should be in the position to know the information about the upcoming sale of Shin shares because she apparently was one of the sellers, and she did sell her AIS shares.
However, there are discrepancies between what constitutes an insider trading under the law and the public perception. Under Section 241 of the Securities and Exchange Act B.E. 2535, it is just not enough to prove that the person possessed the information and executed the trades. Rather, the law enforcement agency has the onus to further prove that the person did ‘use the information’ in his or her trading decision and that such information was obtained from his or her ‘use of position’.
Our ruling on Miss Yingluck's case was based on the fact that she had been selling the shares she exercised from her employee option continuously over the period of 2 years. The pattern of her past trading, rather than where she got her shares from, gave her a strong argument that her sale of AIS shares was not based on the information of the Shin deal. Hence, it did not meet the ‘use of information’ test, and we do not have any other evidence to prove otherwise. Without sufficient evidence to prove each and every element of the law, a case cannot be prosecuted despite the public perception.
However, we would welcome any suggestion from the writers or any person on how such ‘use of information’ can be proven under a similar circumstance.
For the future, in this type of share deal, minority shareholders will definitely be better protected if the law requires all shareholders with major stakes to publicly declare their intention to sell out beforehand. So far, we have found one country, Canada, that demands this. But no other regional countries have this rule. We shall later open it to a public debate whether Thailand should adopt something similar. It must be thoroughly examined, however, to make sure that such a rule does not do more harm than good.
Should we finally decide to proceed with any law reform in this regard, we hope to receive support from you and the public to ensure that minority investors will not be disadvantaged in their investment trading.
(Mr. Thirachai Phuvanatnaranubala)
May 2, 2007
Dear Khun Teerachai,
Pursuant to your letter to The Nation Editor on May 2, 2007, in response to our article on your investigation of Yingluck Shinawatra, we feel compelled to write a response to further explain some of our points raised in that article (which we actually wrote in Thai, and The Nation kindly translated and summarized in English, so it was not actually in ‘our’ words, but the gist remained more or less the same).
We do understand that before the SEC can prosecute insider trading cases, such cases must pass the ‘use of information’ test. The difference is that we thought the ‘regularity’ of trading patterns is not a factor in this test, because if that were the case, insider trading in Thailand would be very difficult to prosecute at all, because shrewd insiders certainly would want to make their trades look as ‘regular’ as possible to avoid prosecution.
For this reason, we thought that if the SEC can prove that the insider 1) possessed material inside information, and 2) traded shares before such information became public, that would be enough ‘evidence’ to pass the ‘use of information’ test. We believe this is the typical way stock market regulators elsewhere in the world conduct their insider trading investigations as well. Please correct us if we are wrong. Your response indicates that we were perhaps misguided, and that Thailand’s insider trading regulations are far less rigorous than we thought they are (let alone should be).
But even if the ‘irregularity’ of insider’s trading pattern is indeed a prerequisite for ‘use of information’ test, the ‘irregularity’ in this case is apparent to us. We illustrated the data in our book “25 Questions : Behind the SHIN Corp. Takeover Deal,” but we will elaborate it here again in greater detail.
Monthly number of shares sold by Yingluck Shinawatra, May-Dec 2004 vs. 2005
Source: SEC website (http://capital.sec.or.th/webapp/corp_fin2/find59.php)
As you can see from the above chart, which we compiled from the SEC’s public database of insiders’ stock trades, Yingluck sold 208,400 ADVANC shares in December 2005, one month before Temasek made a public announcement that it would buy the majority stake in SHIN and launch a tender offer for ADVANC. The number of shares Yingluck sold in December 2005 is 74% higher than the 120,000 shares she sold in December 2004. She didn’t ‘have to’ sell any of those shares. She could have waited until after SHIN share sale and ADVANC tender announcement became news.
Most listed companies and financial intermediaries who pride themselves on meeting high corporate governance standards have internal rules that prohibit top executives and anyone close to the company’s inside information from trading shares of the company at all during a certain period before material inside information becomes public (for example, 1 month before the release of quarterly financials). One of the SET’s disclosure rules (Por 23-00) even advises insiders to wait a certain period after material inside information becomes public, in order to “give investors sufficient opportunity to digest that information.” As ADVANC routinely states in its annual report that it tries to adhere to world-class corporate governance standards including OECD and COSO in addition to SET guidelines, we would think that Yingluck’s sale of ADVANC shares prior to Temasek deal announcement on 23 January 2006 may not have breached just the securities law, but even her company’s internal rules as well.
We would like to help the SEC find evidence as you invited us in your response, but if all the aforementioned facts together are not enough ‘evidence’ to pass the ‘use of information’ test you claim Thai law requires, then we are at a loss as to how the SEC can prosecute most insider trading cases at all, since as we said earlier, insiders are probably smart enough to make their trades appear as ‘regular’ as possible. What kind of trading pattern will you deem ‘irregular’ enough to pass the ‘use of information’ test? If Yingluck had sold 500,000 shares in December? 1 million shares? 2 million shares? 20% of her portfolio? 5 times more than the number of shares sold during the same month in the previous year?
Since this line of reasoning is clearly quite subjective, we believe it’s why the regulators in most stock markets we have seen typically err on the side of caution: if they can prove that the insider had inside information at the time of making profitable stock trades (the two proven facts in this case), then that’s enough proof for ‘use of information,’ and enough evidence for prosecution. We have no idea Thai securities law is so difficult to enforce.
After looking at insider trading cases in the past in which insiders were found guilty and fined by the SEC, we wonder whether Thai law has become more difficult to enforce, or whether the SEC’s enforcement of the law has become more lax. To cite just one old example from 1999: a former Chairman of the Executive Board and Managing Director of now-defunct Nava Finance & Securities PCL (NAVA), was fined 500,000 Baht for selling 23,300 NAVA shares in 1997 before worsened financials became public information. The executive was fined for selling ‘only’ 23,300 shares, and the ‘inside information’ he had was about the company’s annual financials. In comparison, Yingluck sold 208,400 shares, and the ‘inside information’ she had was about the largest takeover deal in Thai history and a subsequent tender offer at 72.31 Baht per share, a price that is more than 55% lower than the last price she sold her ADVANC shares at on 10 January 2006 before resigning from the top executive post at the company. All these facts do not constitute enough ‘evidence’?
Your decision in this case and your message to The Nation Editor seem to send a worrisome signal to all insiders which says “go ahead and do all the insider trading you want if all your trades in the month before the inside information becomes public amount to no more than 174% of the number of shares you traded during the same month of the previous year.” We would have thought the SEC’s job is to discourage insider trading at all, not to outline circumstances in which insider trading is permissible or admittedly non-prosecutable.
Your response is alarming in that it seems to imply that Yingluck did engage in insider trading, but you don’t have enough ‘evidence’ to prosecute her under Thai law. If that is truly the case, it seems that we are a long way from a genuinely fair and transparent stock market in this country.
Lastly, you mentioned in your letter that minority shareholders will be better protected “…if the law requires all shareholders with major stakes to publicly declare their intention to sell out beforehand” like in Canada, the only country that requires this. We don’t think Thailand needs to go that far, because investors will already be much better protected by a more rigorous enforcement of existing securities law, at least to the standard that the SEC in the past has shown itself capable of enforcing.
Ma Nok & Dek Nok Krob