By Professor Ann O’Connell
In 1814 a uniformed man posing as ‘Colonel du Bourg’ arrived at Dover bearing news that Napoleon had been killed and his armies defeated. The effect on the London Stock Exchange was dramatic — more than £1.1 million of government bonds were sold in one day before it became clear that the news was a hoax. Captain de Berenger, who posed as the Colonel, was charged with having conspired by spreading false rumours to increase the price of the bonds so that he (and others) could profit from the sale (R v de Berenger (1814) 3 M&S 67). More recently, in January of this year an anti-coal activist released a fake press release purporting to be from the lenders to a mining project to be carried out by listed company, Whitehaven Coal Ltd. The press release announced that the lender was withdrawing from the project for ‘ethical reasons’. The effect was to cause panic selling and the price of Whitehaven’s shares fell dramatically before a trading halt was implemented.
In DPP (Cth) v JM [2013] HCA 30, the High Court considered the legality of a less dramatic way of affecting the securities market: strategically buying shares. The Commonwealth Director of Public Prosecutions alleges that JM asked a family member to buy shares in a company for the purpose of lifting its share price sufficiently high to prevent a bank from requiring extra collateral for a loan he took out to buy call options in the same company. JM has been charged with the crime of creating or maintaining an ‘artificial price’ in a financial market. In advance of his trial, the High Court agreed to resolve a dispute about the meaning of ‘artificial price’.
Australia’s jumbled laws on market manipulation
The purpose of interfering with (‘manipulating’) the securities markets may be for the purpose of making a profit (as in de Berenger), but it may also be to ensure that the closing price of securities is at a particular level. This may be because the shares are consideration for a takeover bid (North v Marra Developments Ltd [1981] HCA 68) or where the share price determines the bonus to be paid to an employee (Australian Securities and Investment Commission v Soust [2010] FCA 68) or for some other reason. Former Chief Justice Gleeson, then Chief Justice of the New South Wales Court of Appeal, noted that it is important to prohibit market manipulation ‘to preserve the integrity of the share market’ (see Fame Decorator Agencies Pty Ltd v Jefferies Industries Ltd [1998] NSWSC 157).
The de Berenger and Whitehaven examples above resulted in manipulation of the securities market yet neither would fall within the section in the Corporations Act 2001 (Cth) headed ‘Market Manipulation’ that was the subject of a recent High Court decision — s 1041A. Section 1041A is in pt 7.10 of the Corporations Act which deals with ‘market misconduct’ and other prohibited conduct in relation to financial products. Perhaps the most polite thing to say about these provisions is that they do not appear to have been included in the Act as a result of careful consideration of policy objectives. Moreover, there are significant overlaps and inconsistencies of style between the provisions reflecting the fact that the sections have quite different origins and have been added together in this part with little attention given to ensuring their practical combined operation.
Sections 1041A to 1041D are concerned with ‘transactions’ on a financial market and ss 1041E to 1041H are concerned with statements or other conduct not necessarily on the market. Nearly all the provisions give rise to criminal liability. The transaction provisions are also civil penalty provisions, that is, the standard of balance of probabilities applies to determine liability and the court may impose pecuniary penalties as provided. The civil penalty provisions were introduced partly because of the difficulty of convicting those engaged in ‘white collar’ crime.
What is an ‘artificial price’?
The recent High Court case of DPP v JM concerned a criminal prosecution under s 1041A. Section 1041A relevantly provides:
A person must not take part in, or carry out ….
(a) a transaction that has or is likely to have; or
(b) 2 or more transactions that have or are likely to have;
the effect of:
(c) creating an artificial price for… ; or
(d) maintaining at a level that is artificial… a price for trading in …..
financial products on a financial market.
The High Court case arose because of a difference of judicial opinion on the meaning of the term ‘artificial price’. In 2010, Justice Goldberg in the Federal Court in Soust, held that this meant a price created ‘for a purpose unrelated to achieving the outcome of the interplay of genuine market forces of supply and demand’. That was consistent with the view expressed by Justice Mason in 1981 on behalf of the High Court in Marra Developments Ltd albeit dealing with the equivalent to s 1041B, which prohibits ‘the creation of a false or misleading appearance with respect to … the price of securities’.
However, the majority in the Victorian Court of Appeal in DPP (Cth) v JM [2012] VSCA 21 (Justices Nettle and Hansen, Chief Justice Warren dissenting) adopted a narrower meaning. Their Honours held that the section was intended to apply to ‘market manipulation by conduct of the kind typified by American jurisprudential conceptions of ‘cornering’ and ‘squeezing’. That conduct relied on monopolistic behaviour that could create shortages (that is, manipulate supply) and so effect the price of the underlying commodity. The majority relied on the legislative history of s 1041A and its similarity to s 130 of the Futures Industry Act 1986 (Cth). The Explanatory Memoranda to that Act referred to a US case (Cargill Inc v Hardin [1971] USCA8 443) as the basis for the section.
The High Court rejects the US approach
The question for determination by the High Court was whether ‘a price of a share on the Australian Securities Exchange (ASX) created or maintained by a transaction carried out for the sole or dominant purpose of creating or maintaining a particular price was an “artificial price”’. The High Court held unanimously that it was. The High Court judgment is refreshing both because it is a joint judgment and because it is quite short. The first half of the judgment is concerned with issues of criminal procedure so the market manipulation issue is dealt with in just 13 pages.
The High Court spent some time considering the legislative history of s 1041A and the other provisions making up pt 7.10. It noted that some of the provisions came from state Securities Industry Acts and some from Futures Industry Acts. Separate rules applied until the Financial Services Reform Act 2001 (Cth) resulted in the provisions dealing with securities and futures (and other types of financial products) combined in a new ch 7 that commenced operation in 2002.
Despite agreeing with the Court of Appeal on the legislative history, the High Court thought that the meaning adopted by the majority in the Court of Appeal was too narrow. One reason for coming to this conclusion was that it would mean that s 1041A would not apply to transactions in relation to listed entities where it is not possible to acquire a monopolistic position or restrict supply. The High Court agreed with the reasoning in Marra Developments Ltd where Mason J said that the section (the equivalent of s 1041B):
seeks to ensure that the market reflects the forces of genuine supply and demand. By ‘genuine supply and demand’ I exclude buyers and sellers whose transactions are undertaken for the sole or primary purpose of setting or maintaining the market price.
The High Court agreed that similar considerations applied to s 1041A and held that a price created or maintained by a transaction carried out for the sole or dominant purpose of creating or maintaining the price would be an artificial price. The High Court did not express a view on the potential overlaps of the two sections or comment on why there are two sections dealing with manipulative transactions.
Is manipulating the price of securities ever legitimate?
The High Court decision has removed the uncertainty concerning s 1041A by affirming the views of Justice Goldberg in Soust. The High Court also noted that s 1041A did not require that the person had a purpose (sole or dominant) of creating or maintaining a price. This was just one way of demonstrating that the conduct was at least ‘likely to have the effect of creating or maintaining’ the price. This also suggests that it is not necessary to demonstrate that the transaction had that effect or that anyone was worse off as a result.
One matter that has not been resolved is whether it is ever legitimate to engage in transactions that create or maintain the price of securities. In 2005, the Australian Securities and Investment Commission (ASIC) released a Consultation Paper on ‘Market Stabilisation’ suggesting that it might be prepared to issue a no action letter in cases, such as following an initial public offering, where the parties purchased and/or sold securities for the purpose of establishing or maintaining the price provided certain conditions were met. ASIC has provided such letters but has never formalised its view on market stabilisation and in any event the no action letter only protects the person from action by ASIC. It would still be possible for the other party to the transaction to avoid liability based on illegality as occurred in Marra Developments Ltd.
Perhaps it is time for a review of the market manipulation provisions to ensure that they are consistent, that overlaps are reduced and that they are appropriate to deal with conduct that can impact on the integrity of the securities market.
AGLC3 Citation: Ann O’Connell, ‘Protecting the Integrity of Securities Markets — What is an “Artificial Price”?: DPP (Cth) v JM’ on Opinions on High (1 August 2013) <https://blogs.unimelb.edu.au/opinionsonhigh/2013/07/25/o-connell-jm/>.
Ann O’Connell is a Professor of Law at Melbourne Law School specialising in tax law and is Special Counsel at Allens Linklaters.