Insignia investors allege they were misled over insider trading claims

Eight years after news broke that a senior employee with Insignia Financial Limited was allegedly involved in an insider trading plot, hundreds of investors have taken the company to the Federal Court to allege they suffered significant loss and damages.

Represented by Shine Lawyers, investors have alleged share prices declined drastically and impacted their investments after media reported the company’s many misconduct allegations, including insider trading claims, front running and conflicts of interest.

The 2015 investigation by Fairfax Media mastheads, now owned by Nine, uncovered a 2009 internal investigation at IOOF — as it was known then — into head of research Peter Hilton and his “suspicious trades” that had allegedly been occurring over many years.

In early July 2015, IOOF managing director, Chris Kelaher, then admitted to the Australian Senate economics references committee that the company “did not report serious allegations of misconduct by senior staff to the corporate regulator despite the company investigating insider trading and front running six years ago”.

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The class action alleges IOOF neglected its obligations to shareholders by failing to disclose alleged misconduct.

Investors have claimed that had IOOF not engaged in contravening conduct, they would not have bought any shares. They also alleged the share prices were “artificially inflated”, and each shareholder’s loss is the price paid less the true value of the shares at the time.

Shareholders have alleged as part of the class action that they “forewent other investment opportunities that would have proven successful and for which shareholders should be compensated”.

Appearing before the Federal Court on Monday (5 June), barrister Michael Hodge KC said the applicant, John Douglas McFarlane, and the group members “suffered loss and damage” as a result of the misconduct allegations aired during June and July 2015.

“If Your Honour is satisfied there is material information and that material information was disclosed in the media reports, then in our submission it will follow that Your Honour will be satisfied there was some loss that was caused to our client,” Hodge said.

The court heard that the first of the articles was published on Saturday, 20 June 2015, and by the time the markets opened again the following Monday, share prices had fallen by 13.32 per cent.

After Kelaher’s appearance in the Senate’s committee, Hodge alleged the share price fell by 3.27 per cent as a result.

The court was also told there were 58 complaints made to IOOF, with only one falling within the investigation period after 2009. Of the 57 complaints, Hodge alleged only a “handful” were investigated and “nobody has investigated what the bulk of the complaint is”.

“The financial service provider was trusted by investors to advise its clients and manage the funds they had placed with the company responsibly and ethically,” Shine Lawyers’ Craig Allsopp said.

“We claim that the misconduct alleged in this case seriously undermined that trust and damaged the company’s reputation.”

The trial is expected to run for up to five weeks.

The allegations against IOOF

According to the class action’s amended statement of claim, IOOF failed to disclose allegations of insider trading, front running, failure to manage conflicts of interest and issues with the company’s systems, and potentially had a material compromise of its “roll-up” model.

In 2009, Hilton received a “first and final warning letter” after claims were made that he gave “selective and preferential treatment” to some of his planners and clients by providing them with “price-sensitive information whilst leaving others to face known risks”.

There were alleged breaches to password security, and staff, including Hilton, had the complainants use their passwords to sign off on non-disclosure forms for capital transactions.

Shine has also alleged Hilton imposed impractical deadlines for research reports during reporting seasons, which placed client investments at risk, and he allegedly bullied, intimidated and isolated subordinate employees and made them complete his training for him.

The class action has also alleged IOOF had “materially overstated the performance of its model portfolio” as compared with the ASX’s performance in internal and external publications.

IOOF had also allegedly plagiarised third-party research reports and distributed them without attribution or verification, and failed to adequately resource its research department.

A complaint was made by an equities analyst on 4 March 2014, with the class action alleging IOOF “ought to have known there also existed publicly undisclosed information relating to historical misconduct” dating back to the warning letter in 2009.

This article first appeared on Money Management's sister title Lawyers Weekly.