The accused (the respondent in the High Court) was the CEO of an ASX listed company, referred to in the judgment as X Ltd, and was charged with contraventions of s 1041A of the Corporations Act for allegedly taking part in transactions designed to artificially buoy the price of X Ltd shares.
In 2005 a Danish company associated with the accused exercised a large number of call options to purchase shares in X Ltd to the value of approximately $10 million. To fund the purchase the company entered into a financing agreement with Opes Prime Securities Pty Ltd (Opes), for which it used its shares and remaining options in X Ltd as collateral.
Over the following year the price of X Ltd shares declined by 30%, and Opes made a number of margin calls requiring the accused to provide over $2 million as additional collateral. In July 2006 Opes sent an email to the accused warning that should the price of X Ltd shares drop below 33 cents it would make another margin call for a further $700,000 as collateral.
During this time the accused’s daughter and her husband sent correspondence to the accused suggesting, effectively, that he provide them with funds to purchase X Ltd shares, to prevent the share price dropping further. While the accused denied any plan to that effect, he subsequently sent large amounts of money (totalling $1.6 million over several months) to his daughter and her husband.
Late on 4 July 2006 an unrelated party bought 50,000 X Ltd shares at 34 cents each – 1 cent above Opes’ margin call threshold. Nine minutes later the accused’s daughter, acting on behalf of a company owned by her husband, purchased 75,000 shares at 35 cents, the effect of which was to lift the closing price of X Ltd shares from 34 to 35 cents. The CDPP alleges the accused contravened s 1041A of the Corporations Act by participating in this and other similar transactions.
In the Victorian Court of Appeal (Warren CJ, Hansen and Nettle JJA)4
The majority, Hansen and Nettle JJA, rejected two earlier decisions of the Federal Court5 which considered the meaning of “artificial price” in s 1041A. They construed s 1041A narrowly, finding that “artificial price” is a technical term that reflects the concepts of “cornering” and “squeezing” as developed in US jurisprudence on market manipulation. These concepts relate to using market dominance to exert pressure on the supply and demand characteristics of commodity markets in order to ‘artificially’ affect the futures market for those commodities.6 “Cornering” involves monopolising or nearly monopolising a cash commodity together with ownership of long futures contracts in excess of the amount of that commodity, so that those with short futures contracts who cannot obtain the cash commodity are forced to offset against long contracts at high prices demanded by the holder of those long contracts. “Squeezing” is the same concept, but where supplies of the cash commodity are low rather than monopolised.
In construing s 1041A and the phrase “artificial price” the majority focussed heavily on its legislative history, as well as the history of ss 1041B and 1041C (which relate to other forms of false trading and market rigging, and complement s 1041A). They traced the roots of s 1041A’s language to s 130 of Futures Industry Act 1986 (Cth), which prohibited taking part in or carrying out a transaction or transaction which had, was likely to have or was intended to have the effect of creating or maintaining an artificial price on a futures market. The Explanatory Memorandum for s 130 provided that s 130 was primarily directed to forms of market manipulation typified as “squeezing” or “cornering” as those concepts are understood in US jurisprudence.7 While noting the scope of s 1041A had been extended to include securities as well as futures, the majority considered that by virtue of its history s 1041A was directed only to activities described as “squeezing” or “cornering”.8 The majority considered that their limited construction of s 1041A was further supported by the fact that s1041B and s1041C of the Corporations Act had their roots in legislation designed to complement the laws said now to lie in s 1041A.9
In contrast, Warren CJ (dissenting) held that an artificial price is a broader concept, being a price that does not come about through transactions reflecting basic forces of supply and demand working in an open, efficient and well informed market.10 Such a definition captures, but is not limited to, transactions and practices related to cornering and squeezing. However, Warren CJ added that the impugned transaction must actually affect the behaviour of subsequent buyers; that is, the conduct must not merely result in the appearance of an “artificial price”, but must result in an actual price (ie, result in shares actually being traded at the higher price).11
In her analysis Warren CJ also considered the legislative history of s 1041A, as well as US jurisprudence on the phrase “artificial price”, which features heavily in US regulation of the securities and futures markets. She observed that s 1041A was effectively the amalgamation of s 130 of the Futures Industry Act 1986 (and its successor legislation) relating to futures, and 123 of the Securities Industry Act 1980 (and it successor legislation) relating to securities.12 Warren CJ considered that while the language of the Futures Industry Act 1986 referring to ‘artificial price’ formed the basis of s 1041A, there was nothing to suggest parliament intended to narrow the scope of the law previously applying to securities when enacting s 1041A, or that laws previously applying to futures only applied to “squeezing” and “cornering” as the majority suggested.13 Warren CJ then discussed the considerable US jurisprudence on “artificial price”, which defines the term as a price which is deliberately created or maintained, and which does not reflect genuine forces of supply and demand. Such a price does not require (though may result from) market dominance.
The CDPP appealed to the High Court from the Victorian Court of Appeal’s decision, on the basis that the majority erred both in its approach to the construction of s 1041A, and in the substance of its conclusion.
In the High Court14
The High Court unanimously rejected the Court of Appeal’s majority judgment which limited the scope of s 1041A to “squeezing” or “cornering”, instead preferring a broader construction reflecting aspects of the minority judgment of Warren CJ. In particular, the High Court held that an “artificial price” is one that does not reflect the forces of genuine supply and demand in an open, informed and efficient market.15 Accordingly, an “artificial price” includes, but is not limited to, a price resulting from a transaction in which the buyer or seller of listed shares undertook it for the sole or dominant purpose of setting or maintaining a price at a particular level.16
The High Court rejected the implications the majority of the Court of Appeal drew from its historical analysis of s1041A. In particular, the Court rejected the majority’s conclusion that the scope of 1041A was limited because it was based on language previously contained in s 130 of the Futures Industries Act 1986 (which the majority said related only to “cornering” and “squeezing”), or because it was complemented by ss 1041B and 1041C. On the first of those points the High Court rejected the argument that s 130 was limited to “cornering” and “squeezing”, finding it had been directed more generally to intentional conduct resulting in a price that did not reflect the forces of supply and demand.17 It also concluded that it would be illogical to limit s 1041A to “cornering” and “squeezing” because such activities are possible only in futures markets, leaving the section with little or nothing to do in relation to shares listed on the ASX.18 On the second point the High Court did not accept that the contents of ss 1041B and 1041C should be read as limiting the scope of s 1041A, for the chief reason that s 1041J provides that, subject to any express provision to the contrary, each section has effect independently of the others, and that nothing in any section limits the scope or application of any other section.19
The High Court found that market manipulation laws in Australia have been, and continue to be, directed towards intentional conduct that results in a price which does not reflect the forces of genuine supply and demand.20 Such a price can be referred to as an “artificial price” within the meaning of s 1041A. The forces of “genuine supply and demand” are those which are “created in a market by buyers whose purpose is to acquire at the lowest available price and sellers whose purpose is to sell at the highest realisable price”.21 A price is contrary to those forces, and thus “artificial”, when, for example, a buyer’s sole or dominant purpose is not to obtain the lowest possible price, but to fix or maintain the price at a higher value.22
In addition, the High Court noted that because s 1041A prohibits transactions that are likely to fix or maintain an artificial price, it is not necessary to prove by counterfactual or otherwise that an accused’s conduct did actually fix or maintain an artificial price; it is sufficient to show the accused set the price with the relevant sole or dominant purpose.23 As a corollary, the Court specifically rejected Warren CJ’s suggestion that a breach of s 1041A requires proof that shares were actually traded at the artificial price.24
Finally, the High Court said that proof of a dominant (as distinct from sole) purpose is sufficient to prove a contravention of 1041A. They emphasised, however, that transacting with the sole or dominant purpose of setting or maintaining a particular price is not an element of the offence in s 1041A; rather, transacting with such a purpose is one way of demonstrating that a price is “artificial”.