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The Australian Securities and Investments Commission (ASIC) has commenced civil proceedings in the Federal Court against Westpac for insider trading, unconscionable conduct, and breaches of its Australian financial services licensee (AFSL) obligations.
The allegations are related to Westpac’s role in executing a $12-billion interest rate swap transaction with a consortium of AustralianSuper and a group of IFM entities.
The transaction occurred on 20 October 2016, and was related to the $16 billion privatisation of a majority stake in electricity provider Ausgrid by the NSW government.
The transaction has remained the largest interest rate swap transaction executed in one tranche in Australian financial market history, ASIC said.
Background of the Ausgrid transaction
In September 2016, the consortium made an unsolicited bid for a controlling interest in Ausgrid from the NSW government, which the government accepted on 20 October 2016.
The consortium holds a 50.4 per cent stake in Ausgrid, while the NSW government holds 49.6 per cent.
According to ASIC, as part of the Ausgrid transaction, a special purpose vehicle was established to secure $12.77 billion in syndicated debt funding for the acquisition and ongoing funding requirements of Ausgrid.
The consortium also sought to hedge the floating interest rate swaps, which were to amortise over 10 years, in one transaction which had a notional value of $11.93 billion.
ASIC said that this effectively enabled the conversion of variable interest rates for the debt funding to a fixed rate, that is, the price of the swap transaction.
Timeline of events
According to ASIC, at about 7am on 20 October 2016, the consortium signed an agreement with the NSW government for the acquisition of Ausgrid.
ASIC has alleged that by about 8:30am on 20 October 2016, Westpac knew, or believed, that it would be selected by the consortium to execute the interest rate swap transaction on that morning.
ASIC has alleged that this was insider information.
ASIC said that when the market opened at 8:30am, Westpac’s traders acquired and disposed of interest rate derivative products in order to pre-position Westpac in anticipation of the execution of the swap transaction. The corporate regulator added that Westpac did this while in possession of the alleged inside information.
Furthermore, ASIC alleges that Westpac’s trading occurred while it was in possession of information that was not generally available to other market participants, including those traded with Westpac on the morning of 20 October 2016.
“Prohibitions against insider trading are a fundamental tenet of market integrity,” ASIC said.
At 10:27am on 20 October 2016, the consortium executed the interest rate swap transaction with Westpac via a special purpose vehicle, ASIC said.
ASIC has alleged that the major bank trading hundreds of times on the morning of 20 October 2016 had the potential to impact the price of the swap transaction to the “detriment” of the consortium or the special purpose vehicle.
In addition to the insider trading allegation, ASIC has also alleged that the circumstances surrounding the major bank’s trading on the morning of 20 October 2016 (including its failure to provide full and informed disclosure to the consortium about its intention to pre-position its trading books prior to and with notice of the execution of the swap transaction), amounted to unconscionable conduct.
As such, ASIC said that it is seeking declarations and pecuniary penalties for Westpac’s alleged contraventions of section 1043A of the Corporations Act and section 12CB of the ASIC Act, a declaration for Westpac’s alleged contravention of section 912A of the Corporations Act, and ancillary orders.
Who was privy to the information?
In its statement of claim, ASIC has named the parties who knew some or all of the Ausgrid information, including former CEO of Westpac Institutional Bank, Lyn Cobley.
Ms Cobley – who announced her retirement in May 2020 after more than 30 years in the banking and finance sector – had previously spent eight years at the Commonwealth Bank of Australia (CBA), including as executive general manager, retail products, and third-party banking.
Others who were privy to the Ausgrid information include derivatives traders Nicholas Allen, Benjamin Mitchell and Shane Dorman, head of fixed income trading Simon Masnick, and managing director of corporate and institutional distribution and origination in financial markets, Michael Correa.
In the statement, ASIC said: “The Ausgrid information was not generally available, and it was information which, if generally available, a reasonable person would expect to have a material effect on the price or value of the traded products.
“Westpac knew or ought reasonably to have known this.”
Westpac acknowledges ASIC proceedings
The major bank issued a statement acknowledging ASIC’s commencement of civil proceedings but said that it would not be appropriate for it to comment further at this time as the matter is before the court.
It said: “Westpac takes these allegations very seriously and is considering its position, having just received the origination application and concise statement of claim.”
[Related: ASIC grilled over rate-rigging debacle]
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