In a landmark case that has reached the Australian national tabloids, a young broker charged with multiple counts of insider trading has received a four-and-a-half year jail sentence, the highest sentence on record for that offence in Australia. The severity of the sentence provoked expressions of surprise from parts of the court hall given the severity of the sentence for a young man with no previous convictions.
On December 2, John Joseph Hartman, 25, a former employee of Orion Asset Management, of Mosman, New South Wales was sentenced to four years and six months imprisonment on 25 charges related to insider trading brought by the Australian Securities and Investments Commission (ASIC).
By the age of 25, Joseph Hartman was earning $350k a year as a share broker and spending his huge salary on expensive cars and gambling trips to Las Vegas. In particular, supreme Court Justice Peter McClellan held the former private school student’s downfall from grace to a desire to live ‘a high life’. The court heard Hartman’s crimes started in 2006, just after he was employed at Orion Asset Management as an securities dealer.
Justice McClellan noted past evidence that John Hartman had suffered from developed depression and gambling addiction after his brother, Alex, who was the winner of a young Australian of the year award in 2001 had been diagnosed with bipolar disorder. The young man’s gambling addiction had eventually led John to ‘steal’ his father off $70,000, the judge heard.
‘His behaviour might be explained by those problems but it cannot be excused,’ stated Justice McClellan, and sentenced John Hartman to a minimum of prison-term of three years.
Justice McClellan said the financial industry had to consider the repercussions of handing young men such large salaries for what he referred to as a senior clerical position was good for society.
‘Paying $350,000 to a recent graduate of young age fulfilling a task of modest responsibility underlines the extent to which the values which underpin our society can be compromised,’ the judge said.
‘The temptations are so great and the potential rewards so significant that the fall into criminality of individuals is a significant risk. Justice McClellan said the financial industry had to consider the consequences of remunerating young men with such large salaries. Hartman had not had any real supervision as an ‘securities dealer’.
‘It must be remembered that his crimes were not victimless. Each illegal transaction was likely to have a cost to someone who either traded or held their position without the benefit of the knowledge available to the offender.’
Hartman made his money by using insider information to trade margin traded products known as CFDs through an IG Markets account before trades he was supposed to make in his role with Orion Asset Management. This, despite Hartman signing Orion’s trading policy detailing his irresponsibility to avoid insider trading, and twice responding ‘no trading’ to questions from Orion’s compliance department, Hartman was busy using inside information to trade contracts for difference.
In particular, Hartman admitted guilty to establishing trade positions in a number of stocks through his CFD account at IG Markets prior to Orion trading in the same stocks on the open market. According to ASIC, he was then able to exit his CFD positions and profit from the effect of Orion’s trading on the underlying stock price. The practice is commonly known as ‘front running’ and apparently the abuse is ubiquitous in broking and funds management circles – and often as simple as one dealer around a trading desk knowing that another dealer has a large client order in a share. He then proceed to buy some for himself and, if ever reproached, says: ‘Okay, I did know you were a buyer of XYZ stock but, hey, I also thought it was a good investment’. Hartman utilised the gearing of contracts for difference to take large positions over the underlying securities, so he could profit amply on even small movements in the stock price.
‘On the course of buying and selling in significant volumes, the offender realised that large-volume trading could have the effect of raising or lowering the price of a stock within a short time frame,’ the court heard.
The 19 counts of front running charges between June 2007 and January 2009 included Oxiana, Transpacific Industries, Alumina and OZ Minerals.
Hartman also received additional sentences for six counts of the insider trading offence of ‘tipping’. He passed inside information about the purchase and disposal of shares to his childhood friend Oliver Peter Curtis, 25 whom Hartman had first met when he was about 13. Hartman was however given a 25% reduction to one of his sentences since he agreed to give evidence in future court proceedings against Curtis. In particular, John Hartman was given a discount for co-operating with ASIC from his first interview and he also received another discount for his co-operation in detailing six offences of ‘tipping’, or passing inside information to Oliver Curtis whose charges, the judge admitted, wouldn’t have been discovered without Hartman’s cooperation. Mr Curtis happens to be the son of Nicholas Curtis, the founder of Sino Resources and the executive chairman of rare earths miner Lynas Corp.
John Hartman netted $1.9 million from his activity, $1.59 million of which he has repaid. The tipping was a very simple process. The court learnt that Hartman and Curtis communicated, using BlackBerrys purchased by Mr Curtis, to allow Mr Curtis to also trade in CFDs. Curtis would typically respond with short messages like ‘can’t do it’, ‘done’, or ‘I’m finished.’ Mr Curtis would send this message so that the offender would know when to start trading on behalf of Orion in the shares. A few of Hartman’s communications to Curtis revealed the seeds of juvenile enthusiasm. ‘Wow, the price is going up,” he sent to Curtis after one of the trades’.
The 25-year-old man happens to be the son of obstetrician to the stars Dr Keith Hartman who described the world his son had entered as ‘plastic’. ‘This seems to me to be an appropriate description,’ Justice McClellan remarked ‘It is plain the world into which he entered while still at university corrupted his values.’
The harsh reality of Joseph Hartman’s new life involved an application from his defence team for him to be put under special care – a special unit for informers.
The judge adjudicating the case blamed the financial services industry for creating an environment of temptation for a young person. ASIC however acknowledged Orion’s full cooperation and assistance in this matter.
Comments: As CFDs continue to soar in popularity, inevitably some bad apples start to appear. Unfortunately, CFDs have somewhat built a reputation for attracting disreputable financial types, even though they are also widely used for legitimate trades. Remember that to make $1,9 million dollars, someone has to lose $1.9 million.
Just out of interest, earnings would total 350k and that’s only because he is a trader making dividends from clients investment money. He would have been hired at 70k plus commissions. That’s how it works. He just knows the art of being a scam artist and the law always catches up with you in the end. He was young and naive in his actions and left a trail. Insider trading being mainly tipped by by ‘word of mouth’ is hard for regulators to prosecute and police in a general sense.
This guy had a lot going for him. On $350K a year the lifestyle you lead is very comfortable. He already came from a wealthy background, why did he feel the need for more money? His depression and gambling addiction are merely mitigating circumstances. Many people have far bigger problems and don’t commit frauds to fund their problems. Lord knows my problems far exceed his.
Reminds me of Gekko, Gordon Gekko: It’s not a question of enough, pal. It’s a zero sum game, somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another.
