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Mock Exam Q3(a) What are the liabilities of Julius and Anthony? Insider trading is prohibited under Div 3 of Pt 7. 10 of the Corporation Act. Insider trading occurs where a person trades in shares or other financial products while in possession of price-sensitive information that is not generally available. Under s1043A(1)(c), an insider must not apply for, acquire or dispose of, or enter into an agreement to apply for, acquire or dispose of relevant “Division 3 financial products”.

Section 102A defines “Division 3 financial products” to include securities, derivatives, managed investment products, superannuation products and any other financial products which can be traded on a financial market. A person is an “insider” for the purposes of the 1043A prohibition if the person possesses “insider information” and the insider knows or ought reasonably to know that the matters specified in thes1042A definition of “inside information” are satisfied in relation to the information. Section 1043A(2) prohibits an insider communicating or tipping inside information to another person.

To establish a breach of s1043A(2), it is only necessary to show a communication of inside information to the tippee (the person receiving the tip). Julius The news of Ozoil recently engaged in an exploratory drilling program was deemed to be generally available as it has been the subject of much favourable stock market speculation. However, the actual disappointing results of the drilling program which were received by Julius were generally not available and if the information were released, it might cause the share price to fall.

Since the news was price-sensitive information, Julius is considered an insider and must not dispose the shares before the news being announced. Doing so, would contravene s1043A(1)(c). Since Julius immediately sells a large parcel of shares in the company, he has already contravene s1043A(1)(c). Anthony It is stated that Anthony decides not to sell any shares until the news is made public but he does tell a friend Augustus. Since Anthony obtained the prices-sensitive information which was generally not available, he would be considered an insider. When Anthony communicate the inside information to Augustus, it would contravene s1043A(2)

Consequences of breach A natural person who breaches the primary prohibition in s1043A(1) of the tipping prohibition in s1043A(2) is guilty of a criminal offence punishable by a penalty of 2,000 penalty units($220,000) or imprisonment for five years, or both:s1311. The maximum penalty for a body corporate guilty of breaching the insider trading prohibition is $1. 1million:s1312. In the case of a contravention of s 1043A that involves a disposal of financial products by an insider, s1043L(4) enables the acquirer who did not possess the information to recover compensation from the insider.

The amount of the compensation is the difference between the price at which the financial products were disposed of and the likely price for which they would have been disposed of has the information been generally available. Since Julius and Anthony have contravened the act, they might have to face the punishment as spelt out above. Is Anthony liable for shortselling? Short selling in the context of financial markets is the practice of selling securities or other financial products that are not owned by the seller at the time of the sale.

Short sellers sell securities that they do not possess, at current prices, in the expectation that their price will fall. They hope to buy similar securities, or “cover” Their positions, before they are obliged to honour the contract of sale and deliver the securities. As mentioned, Anthony sold his shares which means he actually owns the shares himself. As such, he is not consider a short seller as he merely sold his own shares and buys it back at later time. Since the transaction was done after the disappointing drilling results were announced, he would not even have contravened any prohibited market misconduct.

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