FMA v Henry  NZHC 1853 [7 August 2014]
In July 2013, the Financial Markets Authority (FMA) filed civil proceedings against Brian Henry alleging market manipulation of shares in the NZX-listed Diligent Board Member Services, Inc (Diligent). The case came before the court on a consent basis, with Mr Henry accepting that his conduct amounted to market manipulation in breach of section 11B of the Securities Markets Act 1988 (SMA).
Section 11B of the SMA provides that a person must not do, or omit to do, anything if:
- the act or omission will have, or is likely to have, the effect of creating, or causing the creation of, a false or misleading appearance:
- with respect to the extent of active trading in the securities of a public issuer; or
- with respect to the supply of, demand for, price for trading in, or value of those securities; and
- the person knows or ought reasonably to know that the person’s act or omission will, or is likely to have, that effect.
The court made a declaration of contravention to that effect and confirmed that the pecuniary penalty of $130,000 proposed by both parties was appropriate on the facts of the case.
The case arose out of a series of trades by Mr Henry from April until June 2010 through a trust of which he and his wife were trustees and beneficiaries. The trust had a substantial security holding in Diligent.
On two occasions Mr Henry used an online trading platform to first sell shares, then to buy the shares back. This is colloquially known as ‘wash sales’ and since there was no change in beneficial ownership under the SMA these transactions amounted to a presumptive breach of section 11B of the SMA. On another four occasions Mr Henry placed simultaneous buy and sell orders that inflated the market price of Diligent’s shares, and gave the impression of trading interest. In these instances Mr Henry ought reasonably to have known that those orders would give a false or misleading appearance of trading, so they also amounted to breaches of section 11B.
The six trades in issue were significant. As a percentage of the trading in Diligent’s shares during the relevant period the trust’s trades accounted for: 38.19% in April; 16.18% in May; and: 22.96% in June.
Court’s decision on pecuniary penalty amount
Athough the parties had agreed a penalty of $130, 000, the court still had to assess whether it was appropriate.
The maximum penalty that the court could impose under the SMA was $6 million ($1million for each breach), but it settled on $200,000 as a starting point after determining that the breaches supported a penalty towards the lower end of the scale. In reaching this amount the court took into account that:
- While Mr Henry’s actions were deliberate, he did not deliberately set out to breach the SMA. Justice Venning acknowledged that his liability arose because he “ought to have been aware” that what he was doing was a breach. In fact, Mr Henry apparently saw himself as an amateur “market maker” providing support and liquidity for Diligent’s stock;
- He was open about his trading;
- Mr Henry did not gain materially out of the trading in issue; and
- There was no direct evidence of any loss or damage suffered by other persons.
In determining the final amount (of $130,000) the court then appears to have taken into account that Mr Henry’s conduct was mitigated by the fact that he had not previously been found to have engaged in similar conduct or conduct in breach of the SMA; that his actions had been conducted with the intention to ameliorate the negative impact on Diligent’s share price caused by his resignation as director; and that he had conceded a possible limitation argument which would have enabled him to strike out the proceedings.
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FMA has indicated that investigating and responding to misconduct in New Zealand’s secondary markets is a priority area of focus for the FMA. In FMA’s press release on this case, Belinda Moffat, FMA Director of Enforcement, said: “There is a strong public interest in deterring share trading that is false and misleading. Where there is a case that meets the standard of evidence required and where court action satisfies the public interest, then FMA will take proceedings to ensure confidence in the development of fair, efficient and transparent markets.”
The market manipulation provisions in the SMA have been carried over in the Financial Markets Conduct Act 2013, which will replace the SMA on 1 December 2014.