Financial Markets Authority v Warminger

• Jurisdiction: New Zealand
• Judge: Venning J
• Judgment Date: 03 March 2017
• Neutral Citation: [2017] NZHC 327
• Docket Number: CIV-2015-404-001727
• Court: High Court
• Date: 03 March 2017

Under The Securities Markets Act 1988

Between

Financial Markets Authority

Plaintiff

and

Mark Warminger

Defendant

[2017] NZHC 327

CIV-2015-404-001727

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

Application for a declaration that the defendant manipulated the trading of a number of stocks on the NZX Limited exchange and for a pecuniary penalty — the defendant was employed as a portfolio manager — he managed investment funds and Kiwisaver funds for retail clients and also manages funds on behalf of wholesale clients — the plaintiff alleged the defendant had breached s11B Securities Markets Act 1998 (“SMA”) (false or misleading appearance of trading — act or omission will have, or is likely to have, the effect of creating, or causing the creation of, a false or misleading appearance) by trading in a manner that had, or was likely to have had, the effect of causing the creation of a false or misleading appearance — whether the defendant had a defence under s11B SMA (presumption as to false or misleading appearance of trading).

Appearances:

J B M Smith QC, N R Williams and K S Graham for Plaintiff M Heron QC, M A Corlett QC, D C S Morris and I Rosic for Defendant

JUDGMENT OF Venning J

Venning J

This judgment was delivered by me on 3 March 2017 at 9.30 am, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date……………

Contents
The proceedings	[1]
Parties	[2]
NZX and the equities market in New Zealand	[8]
The investigation	[26]
Standard of proof	[31]
The elements to be proved under s 11B	[34]
“ The act or omission”	[38]
“ Will have, or is likely to have the effect”	[39]
“ Creating or causing the creation of a false or misleading appearance”	[73]
“ With respect to the extent of active trading; …or the supply of, demand for, price for trading in, or value of those securities…”	[74]
“ Knew or ought reasonably to have known”	[75]
Positive defence	[77]
The evidence	[86]
The expert witnesses	[91]
The cross-examination of Professor Aitken	[99]
The transactions in issue	[104]
Fisher & Paykel Healthcare Corporation Limited – 27 May 2014 (COA1)	[106]
The a2 Milk Company Limited – 29 January 2014 (COA2)	[152]
ATM – 9 July 2014 (COA3)	[180]
ATM – 6 August 2014 (COA4)	[212]
Restaurant Brands New Zealand Limited – 30 April and 1 May (COA5)	[227]
Sky Network Television Limited – 19 February 2014 (COA6) [240] Xero Limited – 15 May 2014 (COA7)	[261]
Xero Limited – 30 June 2014 (COA8)	[279]
Wynyard Group Limited – 31 July 2014 (COA9)	[300]
Skellerup Holdings Limited – 30 April 2014 (COA10)	[316]
Result	[326]
Declarations	[328]
Pecuniary penalty and costs	[331]

The proceedings

1 The Financial Markets Authority (FMA) says that between January 2014 and September 2014 Mark Warminger manipulated the trading of a number of stocks on the NZX Limited (NZX) exchange. It seeks declarations to that effect and a pecuniary penalty against Mr Warminger.

Parties

2 The FMA was established under Part 2 of the Financial Markets Authority Act 2011. It has a statutory role under the Securities Markets Act 1988 (the Act) to receive and investigate suspected contraventions of the NZX's Exchange Rules and of the Act. It must notify NZX of its decision on the investigation and may apply to the Court for declarations and a pecuniary penalty order under s 42R of the Act.

3 Mr Warminger holds an Honours Degree in Economics from the University of London. He was employed by Milford Asset Management Limited (Milford) as a portfolio manager in May 2011. By 2014 he had accumulated 16 years' experience in equity markets.

4 Milford manages investment funds and Kiwisaver funds for retail clients and also manages funds on behalf of wholesale clients. In total it manages approximately $3.5 billion in funds for approximately 20,000 clients.

5 Mr Warminger managed the following funds (the funds) for Milford:

• …a New Zealand active equities mandate for the New Zealand Superannuation Fund;

• …the Milford NZ Equities Wholesale Fund;

• …the Mercer Trans-Tasman Shares Trust;

• …the Waikato Community Trust Inc Portfolio; and

• …the Trust Investments – Sustainable NZ Share Fund.

6 Mr Warminger also managed the New Zealand equities portion of the Milford Trans-Tasman Fund.

7 As at 31 August 2014 the total value of assets under Mr Warminger's management was approximately $669 million.

NZX and the equities market in New Zealand

8 NZX is the main equities market in New Zealand. NZX uses an automated screen trading and electronic registration system for trading, clearing, settling and registering securities transactions or transfers in connection with the market. The market is anonymous. Neither the broker nor the client details are visible to the market place on the day of trading. They are not disclosed in market data. The brokers but not their clients are identified in market data after two business days.

9 NZX is self-regulating. To that end it has developed rules which it has promulgated to its trading participants, such as brokers (NZX Rules). The NZX Rules include a prohibition against trading that has the effect or is likely to have the effect of creating a false or misleading appearance. 1 NZX monitors and enforces the NZX Rules through a NZX regulation team with support from a market surveillance team. The rules are enforceable between NZX and each trading participant.

10 The trading day on the NZX main board is broken down into a number of sessions:

Period	Normal Trading
Enquiry	8.00 am – 9.00 am
Pre-open	9.00 am – 10.00 am
Normal Trading	10.00 am – 4.45 pm
Pre-close	4.45 pm – 5.00 pm
Adjust	5.00 pm – 5.30 pm
Enquiry	5.30 pm

11 During the enquiry sessions, no bids or offers can be entered, amended or withdrawn. It is an observation phase only.

12 During the pre-opening session, bids and offers may be entered, amended or removed but trades will not be created even where prices/yields meet or overlap.

13 During the normal trading session bids and offers may be entered and if opposing prices/yields match or overlap, a trade is automatically executed by the NZX systems.

14 At the end of the trading day, the pre-close session operates. Bids and offers may be entered, amended or removed but trades are not created when prices/yields meet or overlap. At the end of the pre-close session, a closing market price is established based on the level of overlapping bids and offers.

15 During the adjust session, NZX dealers may deal in securities and report those trades through the trading system.

16 Orders are placed in a queue in the market and sorted on the basis of price then time. Orders are described as either bid or ask orders. A bid is an offer to buy. An ask is an offer to sell. A quotation or “the quotes” is the current best bid and ask in a particular stock. The “spread” or “bid-ask spread” is the difference between the best bid and ask for a given stock.

17 Trading via NZX occurs in two ways: on-market via the central order book or off-market via crossings or deals negotiated directly between brokers. In a crossing the same trading participant acts as buyer and seller, either in an agency capacity for both parties or as agent for one side and principal on the other. The NZX Rules require the price and volume to be reported through the trading system immediately if executed during the normal trading session. The NZX Rules also require crossings during normal trading hours to be executed at a price within current quotes, with only limited exceptions. 2 One exception is a special crossing. A special crossing includes a crossing where the consideration is the lesser of $1,000,000 or five per cent of the market capitalisation of the issued securities.

18 There are broadly two different types of orders an investor can submit to a trading platform such as NZX. The first is a passive order (sometimes described as a limit order), which rests on the order book waiting for other parties to trade against it. Such orders are liquidity-supplying. They provide other investors with the option to buy or sell shares. They do not execute immediately because they are not priced at the best ask/bid price in the market. The other type of order is a market order. A market order is structured to execute immediately against one or more orders on the opposite side of the order book. Market orders are referred to as liquidity-demanding orders and can, in some cases, be described as anxious or aggressive. The term aggressive is usually reserved for an order that breaks through three or more ask or bid price levels.

19 Market participants and investors are able to access real time market data through software such as IRESS Market Technology (IRESS). At all material times Mr Warminger had access to real time market data for NZX through Milford's IRESS order system.

20 NZX is a relatively small (particularly by volume) market. As a consequence it is less liquid than overseas markets. It also has a larger volume of crossings than overseas markets. The illiquidity of NZX makes it more susceptible to manipulation.

21 NZX has institutional and retail investors. Milford is an institutional client of NZX. Milford's principal business is the investment of money. NZX also has retail clients, including “mum and dad” investors who place their orders through brokers. Normally, trading on the central order book is restricted to brokers.

22 Institutional traders seldom place a single order into the market. More often they ask a broker to work the order to achieve a benchmark price such as the volume weighted average price (VWAP). If the broker beats the VWAP benchmark the broker earns the difference. Conversely if the broker fails to meet...