It's A Shame About Ray - And All The Other Ones

Sydney Morning Herald

Friday April 25, 2008

Stuart Washington

When the Herald highlighted a series of trades made by Ray Schoer, the former head of the companies regulator, as a director of junior explorer Pluton Resources, the HotCopperites leapt to his defence.

The day-trading HotCopper crew quite like Ray, and they especially like his son, Tony - also known as "The Showman" - who is the managing director of Pluton Resources.

Schoer junior frequently spends his "off" time on the day-traders' chatroom, giving his views on the pressing issues of the day-trader community.

The HotCopper argument in favour of Ray went broadly: he has only been buying the shares, showing his support for the company, so where is the problem?

This is pretty much Ray Schoer's view as well. And Schoer senior carries some weight. After all, he is the guy who was responsible for what is regarded as the landmark legislation aimed at insider traders in 1985.

He was head of the National Companies and Securities Commission, the forerunner of the Australian Securities and Investments Commission, for 10 years. Of anyone in the market, he is aware of his obligations when it comes to trading in shares with "inside" knowledge.

However, look a little deeper at the nature of Schoer's trading and the problems it creates are clear.

For starters, Schoer was trading outside the company's published share-trading policy, and had done so 18 times. Six of those trades were within seven days of a market-sensitive announcement.

A share-trading policy is an important company document. It often gives "windows" after results when directors are allowed to trade, giving investors some additional confidence its directors are not relying on "inside" information for their trades.

Rob Fowler, the executive manager for investments and governance for the superannuation fund HESTA, speaks to the principle of a share-trading policy: "If directors do not follow their own policies, investors are obliged to question the ability of the company to do what it says it will."

Worse still, as Fowler points out, is the perception that poorly timed directors' trades can create for a company.

"Where it is perceived that director and executive share trades are lacking in governance, it can appear that the director or executive is placing their own interests ahead of the owners of the company. This amounts to a fundamental breach of trust."

Now there are special pleadings in Schoer's Pluton Resources trading. The share-trading policy was formally changed on October 31 last year, although no one was notified of this amendment.

But even on this change, Schoer's trading was outside the published policy 15 times, with four of those trades within a week of a price-sensitive announcement.

And it was not just Schoer's trading in Pluton that fell outside published share-trading policies.

As director of the recently acquired Gujarat NRE Resources NL, Schoer's trading fell outside its share-trading policy four times over 18 months, with two of those trades occurring in the week before a price-sensitive announcement. These trades included three buys and a sell - somewhat undermining Schoer's buys-supporting-the-company argument.

Schoer's response is that at all times the chairman or managing director was contacted about his trading, to ensure it was not done when the company was in possession of market sensitive information.

Unfortunately, in the case of Pluton, this does not look too flash: the person approving the trading was Ray Schoer's son. Both the current chairman, Neville Wran, and the former chairman, Albert Wong, said they had never been contacted about the trading.

Even ignoring the father-son conflict of interest, the perceptions created by Schoer senior's trading is hardly the high-watermark of good governance around directors' trading.

Several large institutional investors including HESTA are, to use Mike Smith's phrase, pissed off about directors' lack of regard for the proprieties surrounding their trading.

Last month they released a discussion paper that warned poor governance around directors' trading could undermine the perception there was a level playing field for all shareholders, ultimately contributing to share prices falling.

This was off the back of research from the governance lobbyist Regnan that found 23 out of the top 200 companies had directors who actively traded in their own company's shares within the black-out period: between accounts closing and results being announced.

The research picks up on institutional frustration that the Australian Securities Exchange has done little on the issue of directors trading in their shares willy nilly.

For the first time after the most recent profit-reporting season, the ASX conducted a sweep of all directors' trades in the black-out period.

And guess what? The ASX has referred at least one case to ASIC for consideration under the notoriously difficult to prove insider trading legislation.

So, to answer the HotCopperites, why pick on Ray? He is hardly the only one.

But that is just the point. If people like Ray Schoer can trade seemingly without regard for share-trading policies or the perceptions the trading creates, then anyone can.

And, eventually, that is no good for anyone on the market - including those apologists on HotCopper.

© 2008 Sydney Morning Herald

Back to News Index | Back to Home