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Jakarta Post

Act against insider trading: Going nowhere

Michel A. Rako (The Jakarta Post)
Jakarta
Tue, January 17, 2017

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Act against insider trading: Going nowhere A trading floor of Indonesia Stock Exchange (IDX) building. (JP/Wienda Parwitasari)

T

he Indonesia Stock Exchange (IDX) has implemented its electronic trading activities for 22 years, but there is no single insider trading case that has been prosecuted or brought to justice.

The stock market watchdog, the Capital Market and Financial Services Supervisory Agency (Bapepam-LK), and now the Financial Services Authority (OJK) have conducted multiple investigations into several listed companies and securities firms allegedly involved in insider trading in 2002, 2005, 2007 and 2010.

The authority has encountered difficulties in investigating alleged perpetrators of insider trading, which is a crime according to Law No. 8/1985 on Capital Markets.

After completing an investigation Bapepam-LK discovered minor violations and ironically decided to suspend the probe, only to raise many eyebrows.

The authority only slapped a penalty against the directors or employees of listed companies and securities firms found guilty of irregular transactions.

A former head of the examination and investigation unit of Bapepam-LK acknowledges the difficulties in investigating and prosecuting insider trading cases due to numerous phases of examination the watchdog has to go through and the complexity facing it in finding evidence, which takes longer than any probe into other securities fraud.

The most arduous task in unveiling insider trading is to prove the source of confidential information given by the alleged perpetrator within a listed company to a securities firm or investor, or vice versa, concerning the company’s plan or maneuver, which is yet unknown by the public in order to gain illicit profits in the stock market.

This information most of the time is delivered and exchanged verbally between them, rather than in the form of documents, and therefore the alleged perpetrator may freely engage in this illegal transaction without fear of being charged of a criminal offense.

It is no surprise that the OJK has been unable to prosecute insider trading in the past 22 years and has not done enough to improve law enforcement in the stock market. Worse still, the OJK as both the regulator and law enforcer under Law No. 21/2011 on Financial Services Authority has limited power in prosecuting securities fraud.

In the United States, the Securities and Exchange Commission (SEC) together with the US Attorney’s Office, which is under the Department of Justice, successfully discovered in 2012 the biggest insider trading practice in American history and convicted Raj Rajaratnam, a founder of Galeon Group, a hedge fund based in New York, and Rajat Kumar Gupta, a former CEO of McKinsey & Company who was also a board member of Goldman Sachs.

During the trial of the two defendants, the prosecutors divulged wiretap recordings that indicated that Gupta had shared the discussion of Goldman Sachs’ boardroom meeting to acquire a commercial bank to Rajaratnam, information which was highly classified at that time.

Based on the tip-off, Rajaratnam gained illicit profits of more than US$23 million. The court then declared them guilty of conspiracy and securities fraud, and sentenced Gupta to two years’ imprisonment and Rajaratnam to 11 years in prison. The latter had been implicated on 11 counts related to insider trading.

American law enforcers are able to prosecute insider trading practices due to its authority to wiretap. As such they can trace securities fraud much more effectively compared to their Indonesian counterparts who are not granted the power.

Transactions in the stock market are indeed prone to manipulation and vested interest among the players to manipulate the value of shares of listed firms offered through Initial Public Offerings (IPO), rights issues, divestments and other corporate actions.

Strengthening law enforcement in the capital market world is a must to gain confidence in investors and must be supported with a clean and impartial judiciary system.

Article 49 of Law No. 21/2011 stipulates that the police and civil servant investigators are authorized to investigate alleged financial services crimes. But both the law and the Criminal Procedure Code Law do not say anything about the authority to wiretap.

Only the Corruption Eradication Commission (KPK) holds the wiretapping power. The privilege has helped the KPK to ensnare those known as the untouchables.

The draft bill of the Criminal Procedure Code initiated by the government specifically awards the power to bug to the police and state prosecutors. But unfortunately there has been no progress in the deliberation of the bill. Sadly, it is clear that the House is not interested in toughening law enforcement in the financial sector.

Without the power to wiretap, the OJK will remain toothless in prosecuting securities fraud, while in the future insider trading practices will definitely mushroom unchecked.

Insider trading will continue to go unpunished, putting the credibility of the Indonesian stock market at risk.

Conversely, if the authorities manage to prosecute and convict insider trading perpetrators, public trust in the equity market will strengthen. In addition, it will encourage more companies to go public and more people to invest in the stock market. 

 

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