The point at which insider trading occurs is not necessarily as clear cut as most might think.

One academic study has dispelled the myth that insider trading most often occurs when directors trade before a price-sensitive announcement is due to be released.

It’s not to say it doesn’t happen…

One example was former Hanlong boss Steven Xiao. He got his wife to buy shares in Hanlong while knowing a takeover offer was looming and before it was disclosed.

Xiao copped Australia’s largest penalty for insider trading – eight years and three months in prison.

Another case before the courts involves ex-Sirtex CEO Gilman Wong, who sold more than $2m in shares a few weeks before a hefty earnings downgrade. Wong has pleaded guilty and is awaiting sentencing.

‘Creative and criminal’

But one academic believes there’s more to it than that and, in fact, there are more instances of directors selling on good news and buying on bad.

Australian National University (ANU) finance professor Dean Katselas analysed directors trades immediately after good and bad news for 10 years from 2005.

“It was the exact opposite of what you’d expect to see after either kind of news,” he said. “If the news had potential to boost the share price, I found the directors were selling their shares, when normally, this was the time you’d expect them to be buying.

“In the safe knowledge of what is coming in the future for their firms, these company directors and many of their associates are confidentially trading in the opposite direction, which ultimately helps tip the share price back again.

“This practice is both creative and criminal”.

According to Katselas, this kind of trading is harder to identify as insider trading and would often “fly under the radar” because the buying happens after the news is out as opposed to before a big announcement.

“This indirect insider trading is quite difficult to identify and therefore to prosecute, because the ASX and ASIC are effectively looking in the wrong place,” he said.

According to RBA economist John Simon, this practice was most common in mining — the industry that led to insider trading’s criminalisation after episodes such as Poseidon NL.

In 1970 Poseidon NL rose as high as $280 after “insiders” became aware of positive drilling results and bought in ahead of the company announcing the news.

But it happened across all sectors including healthcare, pharmaceuticals, consumer and other services.

Stockhead has contacted Katselas for further comment.