Al Berzins

'Seven-year sentence for insider trading unlikely to deter others.'  'Of course it won't ... getting caught is the last thing on a criminals mind.' ' They are part of the unlucky 1-2% to get caught.' '5% of trades on the share market are due to insider trading.' These are just some of the reactions to this bizzare case. More to the point I believe is: 'to what extent did exhuberence and greed make things worse for them.'


NAB banker Lukas Kamay and Australian Bureau of Statistics employee Christopher Hill had been involved in the worst case of insider trading to come before the courts in Australia, said Supreme Court Justice Elizabeth Hollingworth. 

Justice Hollingworth said Kamay had first floated the insider trading idea, which was embraced by Hill. Hill deliberately accessed the ABS database, copying highly confidential information and then passed it on to Kamay.

The pair had decided to set up the scheme during a meeting at a Fitzroy North pub in 2013 with the aim of making a $200,000 profit in a year to split between them. Hill used his position at ABS to send Kamay employment, trade and retail figures moments before they were released to the market.

Kamay used the data to make trades on currency markets based on which direction the Australian dollar was expected to go.

Kamay's original investment was a mere $1000 which ballooned to $7M via the insider trades.

The plan went awry. Kamay began making so much money he decided to set up three secret trading accounts without telling Hill.

Hill pocketed just $19,500 in cash. Kamay successfully bid $2,375,000 at auction for the three-bedroom featured on the TV show The Block, on April 8, 2014.

Kamay and Hill were arrested in May after a four-month joint Australian Federal Police and ASIC investigation following a tip-off from a stockbroker about the link between the pair.

A psychological report for Kamay revealed he felt driven to succeed in a highly competitive work environment to impress family and friends and had displayed some symptoms of inflated self-esteem or narcissistic personality traits.

Over the last 20 years, the majority of people caught for insider trading have not made much money out of the transactions and have been accidentally investigated by a tip-off or as part of a broader investigation. Before 2000 only 17% of insider trading cases in Australia were successful. This rate rose to 65% between 2001 to 2013. Only 3% of convictions led to a sentence exceeding three years and 27% of convictions resulted no jail time at all. Other high profile cases have included Steven Xiao with 104 charges netting A$1.4 million; John Gay in 2013, netting $800,000 and John Hartman in 2010, who made A$1.9 million.

In 1999, the author and finance professor, Mark Freeman published findings that 5% of all trades on the stock market are tainted with insider trading.

Are penalties severe enough? Or as perhaps in Kamay/Hill case, too severe?

In practice, it is very hard to obtain a conviction, unless the defendant pleads guilty, as Kamay did.

On the question of whether this maximum penalty and the sentence imposed on the particular facts of Kamay and Hill would have any impact on other potential insider traders, the judge said:

“The crimes were motivated by pure greed and the DPP was right to describe the conduct as the ‘worst instance of insider trading to have come before the courts in this country’."

However, it is unlikely to really deter future insider traders. They will either not evaluate the risks of being caught or think they are smarter than the regulators.

The use of technology is making it easier and quicker to identify suspicious transactions.

An interesting aside for this writer (as an experienced Risk Manager) is that despite admitted guilt by Kamay and Hill, I am left wondering to what extent their large profit was due to Pure Luck. One could apply Monte Carlo Simulation Techniques to their trades and come up with an estimate of the extent that Luck alone could have played in their result.