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David Jones directors exploit information asymmetry, ASIC does nothing

Imagine you are a long-suffering David Jones (ASX: DJS) shareholder who bought shares any time from July 2009 to July 2011. You’re seriously underwater, and since 2011, quarterly like-for-like sales figures have always been negative. Finally, in late October this year, prior to the release of the September figures, you decide to sell your shares.

You would have felt pretty silly when, two days later, David Jones finally released some positive sales figures. You would have felt worse still as the share price bounced over 14% in a week. I imagine your despair would turn to anger when you realised that the person you sold your shares to already knew about the positive sales figures.

Something like this actually did happen. Some unfortunate souls did sell their David Jones shares right before the long-awaited positive results. Not only that, but the David Jones insiders they sold to are directors of the company. Directors Steve Vamos and Leigh Clapham bought shares in the company just a few days before the public release of the retailer’s quarterly sales numbers.

Appallingly, this behaviour is considered legal. The chairman of the company also endorses it. Peter Mason (the esteemed chairman) said, ”Both directors obtained my prior approval to their share purchases,” according to the Sydney Morning Herald. In response to this, ASIC spokesman Matthew Abbott said he could not comment. Some might say ASIC wouldn’t comment because it’s investigating the issue, but I doubt it.

As I wrote in this article, the outgoing CEO of David Jones, Paul Zahra, has done well in the last few years, especially in comparison to shareholders. He has received over $4.5 million in remuneration over the last two years. His predecessor, who resigned after a sexual harassment scandal, was also very well paid. With this latest stunt, the board of David Jones has once again demonstrated their idea of what constitutes good corporate governance.

Foolish takeaway

This apparently legal behaviour is just the tip of the iceberg in Australia. The proportion of illegal insider trades resulting in conviction by ASIC in unknowable but surely miniscule. The conviction of Gunns director John Gay demonstrated that the penalties for directors are unlikely to be severe. John Gay was fined just $50,000 and Justice Porter described him as being of exemplary character, after he was convicted of insider trading.

ASIC also failed to act against construction giant Leighton Holdings (ASX: LEI) after the company admitted that it may have breached bribery laws. On that subject, the Australian Shareholder Association has recommended that Leighton shareholders remove Bob Humphris (the current chairman) because “Leighton needs a new independent chair not associated with past controversies to steer it forward.”

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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. .

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