The civil proceedings by the Financial Markets Authority
(FMA) against Mark Warminger for market manipulation while
a portfolio manager for Milford Asset Management Limited will
provide an interesting test case.
The law is well-established. The interest lies in trying
to establish improper behaviour in the thin and therefore highly
responsive New Zealand share market.
Because the alleged manipulation occurred between December 2013
and August 2014 and so preceded the application of the Financial
Markets Conduct Act (FMCA), the case is being taken under
s11B of the Securities Markets Act 1988 (SMA). Most of the
SMA provisions, however, have been carried forward, largely
unchanged in the FMCA.
placing small trades directly on market in one direction,
followed by large off-market trades in the opposite direction
trading that manipulates the closing price, and
trading conducted in order to set the price rather than for a
genuine commercial purpose.
Civil or criminal
The FMA made the choice to take a civil rather than a criminal
Maximum criminal sanctions are imprisonment for five years
and/or a fine of $300,000 for an individual, $1 million for a body
corporate. Civil proceedings, which can be launched by either the
FMA or by investors, can yield compensation orders and a penalty of
(i) three times any gains made, (ii) the consideration for the
transaction or (iii) $1 million, whichever is the greater.
The principal advantage to the FMA of civil proceedings in this
instance is that they require a lower standard of proof – on
balance of probabilities rather than beyond reasonable doubt. There
is also no requirement to prove that Mr Warminger actually knew his
trading would have the effect of creating a false or misleading
appearance. It is sufficient to prove that he ought reasonably to
have known this.
And a civil claim is open to settlement – whether a
banning order or a fine – whereas a criminal prosecution will
deliver a win or a loss.
If the FMA proves its case, it may open the way potentially for
third parties to sue Milford and/or Mr Warminger. But the fact that
the FMA has settled with Milford means that the claimants will be
on their own in taking action for compensation against Milford. The
FMA cannot join them.
Chapman Tripp comments
Trade based market manipulation generally refers to practices or
conduct that involves the creation of a false or misleading
appearance of active trading in securities, or the supply, demand,
value or price for trading in those securities. The market can also
be manipulated by mis-use of information, such as 'pump and
dump' type campaigns.
This is only the second market manipulation case which has been
pursued in New Zealand.
The first, last year, was against Brian Henry for manipulating
the price of Diligent shares, a company he co-founded. Mr Henry
admitted six breaches and was ordered to pay a penalty of $130,000.
This was at the low end but the Court found that, although Mr
Henry's actions were deliberate, "he did not deliberately
set out to breach the Act".
Although there is little New Zealand precedent to draw on, there
is a significant body of case law available as our market
manipulation regime is similar to that in other jurisdictions, in
The novelty – and the challenge for the FMA – lies
in the peculiarities of the New Zealand market, the relative
thinness of which means that entirely legitimate trades can look
like market manipulation.
Fund managers with a large position in a small company who
legitimately decide to off-load their holding can move that
company's share price. Similarly, on some stocks, a broker
might be the only trader in the stock on a particular day.
These ambiguities did not apply in the Henry case as he admitted
to engaging in matched transactions, where he was essentially
trading with himself, and transactions where he placed multiple
orders for buying and selling Diligent shares without completing
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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