Regulation Of Financial Market Manipulation

An Examination for Breach of Duties and Responsibilities

Discuss About The Regulation Of Financial Market Manipulation?

The North v Marra Developments Ltd [1981] case sets precedence in the area of marketing manipulation. As the facts go, stockbrokers had brought proceedings against a client company claiming remuneration for services rendered. In their defence, the client company argued that the contract under which remuneration was being claimed was an illegal contract and as such, they should not be required to pay. With regard to the contract in question, the brokers had raised the market price of the client company shares to aid the client in a takeover bid for another company as well as to mitigate the defendant’s vulnerability to a takeover. The court held that contract and the subsequent actions of the parties amounted to an illegality and as such fees could not be recovered by the plaintiff (White Collar Crimes and Serious Fraud Conference, 2010). The following report has been commissioned to analyse the arguments and findings in the aforementioned case. It will highlight any breach of duties outlined in the case and discuss the rationale behind the Court’s findings. Further, the study will investigate the contributions the decision has made toward the development of Australian Corporations Law thus far.

The following segment aims to examine obligations that may have been breached as presented in the arguments outlined in the case study.  The prime statute relied on in the determination of this case was the Securities Industry Act 1970(NSW). The conduct of the parties in the case was found in contravention of the provisions of Section 70 of the Act 1970 which prohibited the creation of false or misleading appearances of active trading of securities in the bourse (Armson, 2009). This prohibition extended to the manipulation of the market price of the securities. Any person found in contravention of this provision would be held liable for a breach of duty not to create false trading. From the case study, it can be adduced that the scheme to reconstruct Marra’s share capital and subsequent transactions on the Sydney bourse were aimed at establishing a market for the defendant company at a price that would facilitate the takeover offer by Marra to another company. The deliberate agreement to manipulate the share capital so as to paint a particular picture amounted to a breach of duty as per section 70 of the Securities Industry Act 1970 (NSW).

A Critical Analysis of the Court’s Decision

Further, the Securities Industry Act 1970 (NSW) also prohibited market rigging by engaging, either directly or indirectly, in the transactions that affected the price of a class of shares so as to influence a trade in this class of shares. In the case study provided, Marra Developments Ltd was interested in engaging Scottish Australia Holdings Ltd for a takeover action. The market price of Marra’s shares as discussed in the case study was crucial to the completion of negotiations and the success of the offer. This is because the Scottish share price at the time of negotiations was high and it was likely that without the proposed share price a shareholder at Scottish would have fared much better trading on the market than accepting the takeover offer. As such, manipulating the share price was crucial to influencing the purchase and as it was deliberate this amounts to an outright breach of the duty against market rigging.

With regard to current legislation, the parties in the case study provided would have been held liable for breach of s 1041A of the Corporations Act 2001 (Cth) which prohibits market manipulation by providing that individuals must not, either directly or otherwise, engage in transactions that would likely affect the pricing of financial products in the stock market by creating an artificial price (Wilson & Burns, 2017). This breach of duty constitutes a criminal offence punishable by imprisonment of up to five years. In Director of Public Prosecutions v JM [2013] HCA 30, relying on the findings by Mason J in North v Marra [1987] and the provisions of s 1041A, the High Court of Australia found the actions of the defendant to be in breach of the provisions of statute and as such he was held guilty of market manipulation. The defendant had been brought before court on charges that he has conspired with his daughter and son in law to manipulate the trading price of X Ltd on the ASX.

In addition to the contraventions illustrated above, the law also bestows certain obligations on company directors for which the actions of the parties in the case study herein amount to breach. Directors and other officers with controlling powers in an organisation must exercise their powers and execute their duties in a manner that adopts a reasonable degree of care and diligence (Langford, 2014). This is a fiduciary duty adopted into Australian Company law via the provisions of s 180 of the Corporations Act 2001 (Cth). In exercising this obligation, a director must demonstrate that any actions or inactions taken with regard to company affairs were rational and lack the element of material personal interest (ASIC, 2016). In the case study provided it is evident that albeit their intentions were for the overall benefit of the organisations, the transactions undertaken were illegal. A reasonable director or company official exercising due diligence and care would desist from any transaction that would result in an illegality on the part of the company. As such, the directors and officers involved were in breach of their duty of care and diligence.

Ultimately, the position of the Court, in this case, was that the appellants could not claim remuneration as the contract for which they had rendered their services was illegal. Stephen and Aickin JJ, having analysed the reasons for illegality provided by the respondent were convinced that the agreement and subsequent transactions of both parties constituted an illegality and such conduct was in contravention of section 70 of the Securities Industry Act 1970 (NSW). The judges stated that the conduct of the parties illuminated a conspiracy under common law which led to an offence as per s 70 described above. They, therefore, held that the appeal be dismissed as the amounts claimed could not be recovered on an illegality.

In his determination, Mason J acknowledged the finding by Mahoney J.A at a prior hearing that the plaintiffs and defendants had conspired in a scheme to reconstruct Marra’s share capital and to establish a market for the company’s stock by engaging in transactions on the stock exchange. This conclusion is supported by the discussion between Mr North from the appellant company and Mr Killen a director from the respondent company as well as the answers to the interrogatories. In the discussion, the parties expressly acknowledged that the purpose of the arrangement was to establish a market so as to subsequently boost the success of the takeover bid.

Further, in his determination, Mason J upheld the finding of the previous court that the references in the documents prepared by the stockbroker company to the Stock Exchange with regard to the share price were misleading. In the documents in question, the intended price of $16.50 was quoted as the ‘market value’, ‘market price’ and ‘sale price’ on accession. However, these references lacked backing by way of disclosure ascertaining the company’s operations in the market. In essence, Mason J agreed that this lack of disclosure was purposeful to mislead a reader as to the significance of the price in future transactions like the takeover bid.

In his analysis and determination, Mason J assumed the objective of the provision of s 70 of the Securities Act to be the protection of the securities market against any activity that would constitute artificial or calculated manipulation. In his view, manipulation would pervert the market price as it ceases to be a result of the interchange between genuine market forces (McIntyre, 2014). As such, this provision was a statutory measure to ensure a real and genuine securities market. He further held that mere calculation to create a false or misleading appearance accounting to breach; activities did not necessarily have to create the breach outlined. As such, culpable manipulation is determined by the intent to engage in an activity that would constitute a false appearance (Horefield, 2007).

Guided by this analysis the court was, therefore, able to come to the conclusion that the appellants could not claim a recovery of costs for services rendered as their actions amounted to an illegality by virtue that they were a contravention of section 70 of the Securities Industry Act 1970 (NSW).

As aforementioned, the North v Marra Developments Ltd [1981] case set precedence in corporate law and regarded as a leading case in issues of price manipulation and false trading. The holding in the case has been adopted in subsequent cases and its principles reiterated in subsequent legislation. The Corporations Act 1989, under s 997, provided a prohibition against stock market manipulation. This provision, in essence, adopted themes from the conclusions drawn in North v Marra Developments Ltd [1981] and similar prior cases such as Cargill Inc v Hardin {1971] USCA8 443. The current legislation, the Corporations Act 2001 (Cth) maintains the principles upheld in the case via a prohibition on market manipulation and false trading provided for under ss 1041A and 1041B of the Act.

The provisions of the aforementioned statute have been further developed through judicial interpretation evinced in case law. Cases such as ASIC v Soust [2010] FCA 68 relied on the rationale adopted in the case in question to analyse and determine the concept of artificial price with regard to price manipulation. In this case, a company director had purchased shares in his mother’s name prior to close of the market for the year in anticipation of increasing the share price in order to earn a larger bonus under his employment contract (Inhouse Legal, 2017). The court found the director in contravention of ss1041A and 1041B of the Corporations Act guided by the reasoning in North v Marra Developments Ltd [1987] with regard to interpreting the concept of artificial price.

Similarly, in Director of Public Prosecutions v JM [2013] HCA 30, the court relied on the rationale in North v Marra Developments Ltd [1987] to interpret the concept of ‘genuine supply and demand’. (Carter Newell Lawyers, 2013) As held by Mason J, this notion excludes parties whose transactions are aimed at setting or maintaining the share price. As such, the actions of the defendant in the case could not qualify as genuine as they were aimed at creating an artificial price. He was therefore found to be in contravention of s1041A of the Act 2001 (Cth).

Conclusion

From the discourse above it is evident that the main issue outlined in the North v Marra Developments Ltd [1981] case was the creation of false or misleading appearances in order to manipulate the price of securities. In this case, the stockbroking company laid claim to costs for services rendered to Marra Developments for a transaction culminating in a takeover contract. The Court in its deliberations upheld that the conduct of the parties amounted to a contravention of s 70 of the Securities Industry Act 1970 (NSW) as they have purposefully engaged in transactions that affected the market price of the company’s shares in order to influence the success of a takeover bid with another company. This contravention further amounts to a breach of duty as illustrated above. Additionally, the discussion illustrated how the principles highlighted by Mason J in the case have affected the development of Corporations Law in Kenya. The case is considered a leading precedent in false trading and price manipulation cases. Further, the principles have been maintained and incorporated in subsequent statutes such as ss 1041A and 1041B of the Corporations Act 2001 (Cth). Therefore these illustrations, as discussed above, illustrate the significance of the holding in this case to Australian Corporations to date.

References

Armson, E., 2009. False Trading and Market Rigging. s.l., business Law Teachers Association Conference.

ASIC v Soust (2010) FCA 68.

ASIC, 2016. Directors-What are My Duties as A Director?. [Online]
Available at: https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/
[Accessed 3 February 2017].

Cargill Inc v Hardin (1971) USCA8 443.

Carter Newell Lawyers, 2013. What Amounts to artificial market manipulation of share prices. [Online]
Available at: https://www.carternewell.com/page/Publications/Archive/What_amounts_to_artificial_market_manipulation_of_share_prices/
[Accessed 19 September 2017].

Corporations Act 1989

Corporations Act 2001 (Cth)

Director of Public Prosecutions (Cth) (DPP) v JM (2013) HCA 30.

Horefield, D., 2007. Review of Sanctions for Breaches of Corporate Law. Sydney: Securities & Derivatives Industry Association.

Inhouse Legal, 2017. Compliance: Theory and Practice in the Financial Services Industry. [Online]
Available at: https://www.inhouselegal.com.au/Compliance_Course/lecture_4.htm
[Accessed 19 September 2017].

Langford, R. T., 2014. Director’s Duties: Principles and Application. s.l.:Federation Press.

McIntyre, G., 2014. Reforming the Regulation of Financial accounting Market Manipulation, s.l.: University of Sydney.

North v Marra Developments Pty Ltd (1981) HCA 68.

Securities Industry Act 1970 (NSW)

White Collar Crimes and Serious Fraud Conference, 2010. Insider Trading and Market Manipulation. s.l., New Zealand Governance Centre.

Wilson, J. & Burns, A. G., 2017. Stock Market Manipulation Trials: Avoiding the Traps, s.l.: Denv