The High Court (Court) decision in Financial Markets Authority v Warminger is being read with interest by capital market participants as the first case on market manipulation decided in New Zealand.
The Court found that Mr Warminger acted in a way that gave or was likely to give a false appearance of trading in 2 of 10 claims made by the Financial Markets Authority (FMA).
Market manipulation through trading (as opposed to where false or misleading information is disseminated about a security so that a trader can take advantage of an artificially high or low price) can take many forms, including trading where there is no change in beneficial ownership, placing contemporaneous buy and sell orders to create a misleading appearance of trading (matched orders or wash sales), marking the close by trading at close of the market to affect the price, or repeatedly buying at a higher price to induce others to bid more (upticking).
What did FMA need to prove?
- certain trading by Mr Warminger;
- that the trading had or was likely to have the effect of creating a false or misleading appearance about the extent, or demand for, trading in those securities; and
- Mr Warminger knew, or ought reasonably to have known, his trading was likely to have that effect.
The Court said that FMA had to prove actual or constructive knowledge of the likely effect of Mr Warminger's actions, but rather than proving a specific intent, the purpose of the trading was relevant in considering whether the manipulation occurred.
The purpose of a trade will be assessed by looking at a number of different facts relating to a particular trade, including correspondence, market data and variance from normal trading patterns.
It was noted that any trade can affect price, or impact demand – whether it is a manipulative trade depends on its purpose.
The Court also accepted that it overstates the position to say that there is only one legitimate purpose of trading – for seller to sell at the highest possible price and buyer to buy at the lowest. The experts for both parties agreed that trades can legitimately be carried out for collateral motives such as price or volume discovery, or positioning.
In terms of the evidential burden, in relation to a wash sale or a matched order, manipulation is presumed. There is no presumption if the trader can show trading, or the offer to trade, was made for a legitimate purpose. There is also no presumption if the trader was acting for someone else and did not know, or ought not reasonably to have known, that there would be no change in beneficial ownership.
Turning to the trades, the two where the Court found manipulation were in Fisher & Paykel Healthcare (FPH) and A2 Milk (ATM).
The FPH trades
It is useful to summarise trading that Mr Warminger conducted with two brokers – Forsyth Barr (FB) and Goldman Sachs (GS). Trading occurred as follows on 27 May 2014:
On the FB side:
- At 10.38am, FB trader advised that she is a buyer of 450,000 FPH shares.
- Mr Warminger advised that he is a seller at $4.35.
- At 10.41am, an on-market order is placed to buy 30,000 FPH shares (three trades were concluded at $4.32).
- FB trader asks if Mr Warminger would sell 225,000 FPH shares at $4.32 – Mr Warminger does not respond.
- FB sees an off-market crossing of 300,000 FPH shares at $4.35 and, at 10.58am, asked Mr Warminger if he would sell 200,000 FPH shares at $4.35 – which he agreed to at 11.02am.
Meanwhile on the same day, on the GS side:
- Before market open, GS indicates they are a likely buyer of FPH and Warminger indicates he is a likely seller.
- At 10.42am, GS emails Warminger to buy 500,000 FPH shares at $4.32.
- Between 10.43am and 10.45am, Warminger entered on-market buy orders for 125,000 FPH shares at $4.33 to $4.34.
- At 10.48am, Mr Warminger calls GS advising he would sell at $4.35. GS agrees to buy 300,000 FPH shares at $4.35 off-market.
- At 10.54am, Mr Warminger reminds GS to report the crossing (this is the crossing that is seen by FB after which FB asks Mr Warminger to sell FPH to them).
The Court found that the purpose behind the on and off-market buying by Mr Warminger was to increase FPH's price to allow him to sell at $4.35, and that his actions gave a false and misleading appearance of trading, and that he would have known the trades had that effect. It rejected Mr Warminger's argument that he was a willing seller at $4.35 and bought below that price because it represented good value.
The ATM trades
By contrast, trading found to be manipulative with ATM involved buying small parcels on-market to maintain a higher market price after a material purchase, rather than to reflect genuine demand. Indeed it was found that, were he a genuine buyer, Mr Warminger was aware of a significant volume of ATM for sale if he truly wanted to buy the stock – but that would likely have reduced the market price below that at which he had bought earlier in the day.
The other trades
In the eight other remaining claims, the Court found Mr Warminger's evidence as to his reason for trading plausible or that FMA's evidence had not made out the manipulation alleged.
Where to from here?
Having found a breach in two instances, the Court is still to determine a penalty.
Either party has 20 working days within which to appeal the decision.
What can we learn from the case?
The case is important as it brings clarity for the first time as to actual trading that took place, and the matters to which the Court will have regard in determining whether manipulation has occurred. These are fact based, and the conduct of the trader in each case will be relevant.
Paying a higher than market price on a trade will not necessarily breach the law. Regularly doing so on small trades where no genuine desire to buy and hold may well do so. The same applies to selling to affect price, or the appearance of trading.
Trades must be undertaken for a legitimate commercial reason in circumstances where there is genuine supply and demand. While intent to breach may be hard to prove, the Court will make an inference of purpose. To determine a genuine purpose, a court will consider the context in which the trading occurred. To quote one of the cases cited, when all facts are considered, 'they can emerge as ingredients in a manipulative scheme designed to tamper with free market forces'.
The case does not provide black and white answers. What it does do is give traders and trading firms an opportunity to reconsider their processes, and change them if additional checks and balances are required. This may involve interposing another step before trades can be made, where higher risk may exist (including because of demand for, or lack of liquidity in, a security, or one where a trader may have a short or long position they need to correct), training, and demonstrating a culture of compliance.