Focus: Tipped off: the stockbroker, the client and their phone conversations
28 August 2013
In brief: A recently released Supreme Court of Western Australia judgment illustrates the role that recorded telephone conversations can play in the investigation and prosecution of insider trading offences. Changes to telecommunications interception legislation in 2012 increased the scope for the use of recorded conversations in the enforcement of the insider trading law. Partner Matthew McLennan and Lawyer Roslyn Stein look at the case that flags a number of issues for companies that operate recording systems.
How does it affect you?
- Recent case law and changes to the Telecommunications (Interception and Access) Act 1979 (Cth) (the TIAA)1 illustrate the increased scope for the use of recorded conversations in the enforcement of the insider trading law.
- Given the expanding potential for such records to be used in both investigations and prosecutions, being able to prove the operation of internal systems and controls is of increased importance.
This case concerned the admissibility of recorded telephone conversations in the prosecution of two stockbrokers and one of their clients, all of whom had been charged with insider trading offences under the Corporations Act 2001 (Cth).2
The Crown case was that in July 2006, one of the accused stockbrokers obtained information from an unidentified source about a potential takeover or merger involving Vision Systems Limited (VSL), a publicly listed Australian company. This information was then communicated by the accused stockbrokers to a number of clients. The clients purchased shares in VSL for around $1.73. The merger was subsequently announced and immediately after that announcement, shares in VSL traded at between $2.10 and $2.12.
The Crown contended that the information about the merger was 'inside information'. The two stockbrokers were charged with insider trading and communication of inside information (also known as 'tipping') under section 1043(A) of the Corporations Act. One of the stockbroker's clients was also charged with insider trading. The Crown sought to lead as evidence 76 separate recordings of telephone conversations between the accused stockbrokers and certain clients.
The telephone conversations between the accused stockbrokers and their clients were not recorded subject to a warrant under the TIAA. They were recorded in the ordinary course of business by the employer's electronic recording system, called 'NICE'. This system was used to monitor a range of everyday matters, including buy and sell orders and instructions received from clients. It was also used to monitor employee conduct, to ensure that it complied with the various statutory obligations of the employer. An important element of the NICE system was the installation of a 'beep box' on each stockbroker's phone. This beep box would sound a 'beep' at intervals during phone conversations, which indicated the call was being recorded. There was no evidence that there had been a notice or warning at the start of each telephone call that it was being recorded.
The accused claimed the recordings were inadmissible as evidence at trial because they had been made in contravention of the TIAA. The TIAA prohibits the interception of a communication passing over a telecommunications system. Section 6(1) of the TIAA states that interception involves listening to, or recording, a communication without the knowledge of the person making the communication.
In a judgment concerned solely with the admissibility of the recordings (a 'voir dire'), the court considered three key issues:
- whether the stockbrokers knew that their phone conversations were being recorded;
- if so, whether that knowledge was sufficient to prevent the recordings from being an interception (in other words, it did not matter that the client was unaware of the recording); and
- irrespective of the stockbrokers' knowledge, whether the conversation was 'intercepted' for the purposes of the TIAA.
The Crown relied on the stockbrokers' signing of documents such as a corporate telephone and electronic communications policy and the presence of 'beeps' during recordings as evidence that they knew that their conversations were being recorded. The stockbrokers questioned whether the 'beep boxes' on their phones were always in use and whether the beeps were audible. They did not give evidence but put the Crown to proof. This made evidence of their employer's systems and practices pivotal. The court was satisfied that it could infer that the stockbrokers knew of the recordings because there was evidence:
- that the stockbrokers had signed policy documents that provided for phone recordings; and
- of the installation and use of beep boxes on stockbroker's phones and of internal IT support employees, who were responsible for tasks including auditing recorded calls, maintaining the beep boxes and sending periodic emails to the stockbrokers about their obligations in relation to the installation of beep boxes on their phones.
The accused client did give evidence. He said that he was not aware that telephone conversations with his brokers were being recorded. He had, however, signed engagement documents which referred to the possibility of communications being recorded and the Crown relied on this as evidence of the client's knowledge. The court did not accept that argument, drawing a distinction between the contractual effect of the engagement documents and the question of whether the client was in fact aware that his conversation was being recorded. The client may be bound as a matter of contract law even if he had not read fully or carefully the documents he had signed. That did not mean that he had actual knowledge. Bearing in mind the client's testimony and the evidence that the 'beep boxes' were not always connected or audible, the court found that the client was not aware of the recordings. This factual conclusion did not, however, affect the legal outcome. Relying on earlier appellate authority, the court ruled that knowledge of one party to a conversation that it was being recorded was sufficient to prevent it from being an interception prohibited by the TIAA.
Finally, the court held that, even if the stockbrokers had been unaware of the recordings, the recordings were not interceptions for the purposes of the TIAA. The stockbrokers, acting in the ordinary course of their employment, were agents of their employer. There could be no privacy as between the stockbrokers and their employer because the employer was considered to be a party to the conversations. (It is worth noting that the court did not need to consider whether the result would be the same if the stockbrokers had been using their work phones for 'personal purposes', such as tipping off a family member with inside information about an imminent but unannounced takeover.)
This case provides a rare insight into the use of recorded telephone conversations in prosecuting insider trading offences. Given the myriad technologies used in offices today, there is expanding potential for such records to play a central role in both investigations and prosecutions. From a corporate point of view, the case is also a reminder of the importance of being able to prove the operation of internal systems and controls. Questions about the reliability of the 'beep boxes' appears to have made proof more difficult. On the other hand, the employer was able to produce a considerable amount of circumstantial evidence about how its systems worked.
- From December 2013 interception agencies such as the Australian Federal Police may apply for a telecommunications interception warrant under the TIAA in relation to insider trading investigations.
- R v Catena (2012) 273 FLR 469 (published in August 2013). Although the decision was made in April 2012, it was subject to a suppression order by Justice Corby which was lifted at the conclusion of the criminal trial. At trial, one of the accused stockbrokers pleaded guilty to one count on the indictment, while the other stockbroker and client were jointly tried and acquitted of most of the charges against them. The Crown discontinued the remaining charges against these two. In separate proceedings in the Federal Court, one of the accused stockbrokers was banned from providing financial services for a period of five years.
- Ross DrinnanPartner, Practice Leader, Disputes & Investigations,
Ph: +61 2 9230 4931
- Geoff RankinPartner,
Ph: +61 7 3334 3235
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