A recent High Court of Australia decision has held that conduct with a dominant purpose of maintaining a price level of public securities constitutes unlawful manipulation. It sheds potential light on how the New Zealand courts may interpret market manipulation prohibitions as they apply to on-market trades.
That guidance may be timely as the Financial Markets Authority has just filed its first market manipulation case.
Price rigging on the ASX
The alleged manipulative conduct in Director of Public Prosecutions (Cth) v JM,1 was a family affair. The defendant’s daughter was alleged to have purchased, at her father’s behest and through her husband’s company, shares in an ASX listed company in which the defendant father owned shares.
The alleged purpose of the purchase was to prevent the closing price falling below the point at which the defendant would have to provide additional collateral to the lender that had funded the acquisition of his shares.
The High Court of Australia had decided in 19812 that buying shares in order to set or maintain a market price was unlawful.3 So far, so easy. However the charges in JM were not brought under the successor provision to that considered by the High Court in 1981 but under section 1041A of the Corporations Act 2001 (Cth). This prohibits trading which is or is likely to have the effect of creating or maintaining “an artificial price” for financial products.
The defendant contended, successfully in the Victorian Court of Appeal, that the concept of an artificial price was to be understood by reference to case law developed in respect of commodity futures markets (primarily in the United States), typified by practices involving a “squeeze” or “corner”.4 Accordingly, the conduct allegedly engaged in was excluded.
The High Court rejected this argument, and allowed the appeal. The Court noted that the United States jurisprudence did not limit market manipulation and artificial prices to squeezes or corners. Rather, it involved any conduct engaged in with the intention of creating a price that does not reflect the forces of supply and demand.5
As stated in the leading US case of Cargill Inc v Hardin, “[t]he methods and techniques of manipulation are limited only by the ingenuity of man.” 6
The High Court considered the price must reflect the forces of genuine supply and demand as created by buyers wishing to buy at the lowest available price and sellers wishing to sell at the highest realisable price in an open, informed and efficient market. A price that resulted from a transaction entered into for the dominant purpose of maintaining the price at a particular level did not reflect those genuine forces of supply and demand, and therefore could form the basis of a charge of market manipulation.
The High Court emphasised that its decision was limited to price rigging behaviour, and did not address how the concept of an “artificial price” was to be interpreted in other contexts, including futures markets. The High Court therefore did not address the Court of Appeal’s description of market manipulation in cases involving futures markets as involving “the misuse of monopoly or dominant market power”. 7
Market manipulation in New Zealand
In New Zealand, offences of market manipulation in relation to securities of a public issuer are defined with some specificity in terms of false or misleading information and conduct.8 However, room for judicial interpretation remains.
Given the potential scope for the “ingenuity of man” to indulge in manipulative conduct, there is equally scope for judicial creativity in response. The High Court’s judgment illustrates this – the fact that charges had been brought under a different legislative provision were clearly not going to prevent the Court from continuing to hold conduct which it plainly regarded as inconsistent with effective market operation unlawful. Given this, a New Zealand Court can be expected to be sensitive to the forms of manipulative activity prohibited in other jurisdictions, in particular Australia.
In New Zealand, no equivalent provision to s1041A of the Corporations Act exists following a deliberate decision not to introduce the concept of an “artificial price” into New Zealand securities law. Instead, behaviour of the sort considered by the High Court in JM would have to be addressed by section 11B(a)(ii) of the Securities Markets Act 1988, which creates an offence for an act or omission that will have, or is likely to have the effect of creating, a false or misleading appearance with respect to the supply of, demand for, price for trading in, or value of those securities.
The difference is likely to be minor. The New Zealand s11B is broadly equivalent to the provision considered by the High Court in 1981 and an artificial price caused by price rigging will, almost by definition, have a false or misleading appearance: on-market transactions that do not reflect genuine supply and demand will be false or misleading because it is expected that transactions will reflect this.
More generally, the High Court’s emphasis on genuine supply and demand in an open, informed and efficient market as features of effective and lawful market operation is consistent with judicial statements in this country.9 No one should be surprised if behaviour by market participants which causes the market to deviate from these conditions stimulates sceptical scrutiny from our regulators and courts.