Australian Securities and Investments Commission v Administrative Appeals Tribunal
[2010] FCA 807
•30 July 2010
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Administrative Appeals Tribunal [2010] FCA 807
Citation: Australian Securities and Investments Commission v Administrative Appeals Tribunal [2010] FCA 807 Appeal from: Re Shaun Bruce Bond and Australian Securities and Investments Commission [2009] AATA 50 Parties: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v ADMINISTRATIVE APPEALS TRIBUNAL and SHAUN BRUCE BOND
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v SHAUN BRUCE BOND
File numbers: QUD 50 of 2009
QUD 55 of 2009Judge: DOWSETT J Date of judgment: 30 July 2010 Catchwords: TRADE PRACTICES – market misconduct – market manipulation – banning order – construction of s 1041A of the Corporations Act 2001 (Cth) – whether sale and purchase transactions had effect of creating artificial price – relevance of intention Legislation: Administrative Decisions (Judicial Review) Act 1977 (Cth) Sch 1
Administrative Appeals Tribunal Act 1975 (Cth) s 44
Corporations Act 2001 (Cth) ss 761A, 920A, 920B, 1041A, 1041B, 1041C, 1317S
Trade Practices Act 1974 (Cth)
Securities Industry Act 1970 (NSW) s 70Cases cited: Australian Postal Corporation v Sellick (2008) 245 ALR 561 followed
North v Marra Developments Ltd (1981) 148 CLR 42 considered
Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602 cited
Australian Securities and Investments Commission v Soust (2010) 183 FCR 21 approvedDate of hearing: 12 October 2009 Dates of last submissions: 19 October 2009, 2 November 2009, 17 June 2010 and
30 June 2010Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 53 QUD 50 of 2009
Counsel for the Applicant: Mr MB Oakes SC with Mr Pike Solicitor for the Applicant: Australian Securities and Investments Commission Solicitor for the First Respondent: Ms J Lye of Australian Government Solicitor Counsel for the Second Respondent: Mr DJ Campbell SC with Mr D Farrell Solicitor for the Second Respondent: Barry Nilsson QUD 55 of 2009
Counsel for the Applicant: Mr MB Oakes SC with Mr Pike Solicitor for the Applicant: Australian Securities and Investments Commission Counsel for the Respondent: Mr DJ Campbell SC with Mr D Farrell Solicitor for the Respondent: Barry Nilsson
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 50 of 2009
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
ApplicantAND: ADMINISTRATIVE APPEALS TRIBUNAL
First RespondentSHAUN BRUCE BOND
Second Respondent
JUDGE:
DOWSETT J
DATE OF ORDER:
30 JULY 2010
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The application be dismissed.
2.The parties have liberty to apply within seven days as to costs.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 55 of 2009
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
AppellantAND: SHAUN BRUCE BOND
Respondent
JUDGE:
DOWSETT J
DATE OF ORDER:
30 JULY 2010
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.The decision of the Administrative Appeals Tribunal dated 23 January 2009 be set aside.
3.The matter be remitted to the Administrative Appeals Tribunal for further consideration and determination according to law.
4.The parties have liberty to apply within seven days as to costs.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 50 of 2009
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
ApplicantAND: ADMINISTRATIVE APPEALS TRIBUNAL
First RespondentSHAUN BRUCE BOND
Second Respondent
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 55 of 2009
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
AppellantAND: SHAUN BRUCE BOND
Respondent
JUDGE:
DOWSETT J
DATE:
30 JULY 2010
PLACE:
BRISBANE
REASONS FOR JUDGMENT
THE DECISION
I am presently considering matters numbered QUD 50 of 2009 and QUD 55 of 2009. In matter no QUD 50 of 2009 the applicant is the Australian Securities and Investments Commission (“ASIC”). The first respondent, the Administrative Appeals Tribunal (the “Tribunal”), has indicated that save as to costs, it will abide the order of the Court. The second respondent is Shaun Bruce Bond (“Mr Bond”). In matter no QUD 55 of 2009 the applicant is ASIC, and the respondent is Mr Bond. Both matters concern a decision made by ASIC pursuant to s 920A of the Corporations Act 2001 (Cth) (the “Corporations Act”), to ban Mr Bond from providing financial services for a period of five years from the date of service of the order. The order was dated 26 August 2008. Mr Bond successfully sought review of that decision in the Tribunal. In matter no QUD 50 of 2009 ASIC seeks review of the Tribunal’s decision, apparently pursuant to the Administrative Decisions (Judicial Review) Act 1977 (Cth) (the “ADJR Act”). In matter no QUD 55 of 2009 ASIC appeals against the Tribunal’s decision pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (the “AAT Act”).
MULTIPLE PROCEEDINGS
Such duplication of proceedings is, in my view, most undesirable. It may be that Parliament intended that there be both a limited right of appeal from a decision of the Tribunal pursuant to s 44 of the AAT Act and a right to judicial review pursuant to the ADJR Act. Such intent would seem unlikely, save for the presence of para (y) in Sch 1. The exclusion of one category of Tribunal decisions, and the exclusion of one sub-set of that category, suggest that it was intended that Tribunal decisions be generally reviewable under the ADJR Act. The availability of two avenues for review raises the likelihood of multiple proceedings with attendant additional cost. Some consideration should be given to legislative clarification of the position so that the duplication of proceedings can be avoided. In any event it is appropriate that, despite my personal reservations, I follow the decision of Bennett J in Australian Postal Corporation v Sellick (2008) 245 ALR 561 at 580-582.
THE LEGISLATION
Pursuant to s 920A(1) of the Corporations Act:
ASIC may make a banning order against a person, by giving written notice to the person, if:
…
(e) the person has not complied with a financial services law; or
(f)ASIC has reason to believe that the person will not comply with a financial services law.
Section 920B provides:
(1)A banning order is a written order that prohibits a person from providing any financial services or specified financial services in specified circumstances or capacities.
(2)The order may prohibit the person against whom it is made from providing a financial service:
(a)permanently; or
(b)for a specified period, unless ASIC has reason to believe that the person is not of good fame or character.
(3)A banning order may include a provision allowing the person against whom it was made, subject to any specified conditions:
(a)to do specified acts; or
(b)to do specified acts in specified circumstances;
that the order would otherwise prohibit them from doing.
Section 1041A provides:
A person must not take part in, or carry out (whether directly or indirectly and whether in this jurisdiction or elsewhere):
(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 trading in financial products on a financial market operation in this jurisdiction; or
(d)maintaining at a level that is artificial (whether or not it was previously artificial) a price for trading in financial products on a financial market operated in this jurisdiction.
The term “financial services law” is defined in s 761A to mean
(a) a provision of this Chapter or of Chapter 5C, 6, 6A, 6B, 6C or 6D; or
(b)a provision of Chapter 9 as it applies in relation to a provision referred to in paragraph (a); or
(c)a provision of Division 2 of Part 2 of the ASIC Act; or
(d)any other Commonwealth, State or Territory legislation that covers conduct relating to the provision of financial services (whether or not it also covers other conduct), but only in so far as it covers conduct relating to the provision of financial services.
THE FACTS
ASIC asserts that its power to make a banning order against Mr Bond on the ground specified in s 920A(1)(e) was engaged by his alleged failure to comply with s 1041A of the Act. It also asserts that, pursuant to s 920A(1)(f), it had reason to believe that he would not comply with a financial services law. The relevant facts appear from the reasons of the Tribunal at paras 7 to 18. In those reasons the word “Strategic” denotes the company “Strategic Wealth Advice Pty Ltd”, of which company Mr Bond was the sole director. The word “Prime” denotes the listed company, Prime Retirement and Aged Care Property Trust Limited. I will adopt the same nomenclature in these reasons. The Tribunal found that:
7.Mr Bond has been involved in financial planning since 1999, initially as an employee of a large financial institution and, since September 2003, with Strategic. Mr Bond holds diplomas in financial planning and financial services and an advanced diploma in financial services. Strategic commenced its operations in Ayr in North Queensland in September 2003. It obtained a financial services licence, issued by the Commission, on 4 January 2006. That licence authorises Strategic to provide financial advice, and deal in, a variety of financial products including, relevantly, what are described as “MDA services”. MDA is an acronym for managed discretionary account. The majority of Strategic’s customers have accounts of this type. Those customers execute a document, described as a statement of advice, which sets out, amongst other things, the customer’s investment strategy including a recommended portfolio of investments. Strategic is authorised by MDA customers to trade in shares within the parameters of the agreed investment strategy without prior agreement from the customers.
8.The MDA statement of advice disclosed that Mr Bond was a salaried employee of Strategic and that Strategic and Mr Bond might “have a relevant interest in the acquisition or disposal of securities/shares of the class recommended.” The expression “relevant interest” was not defined so far as I can see. Additionally, reference was made to the fact that “directors, staff, and associates of Strategic … may have beneficial interests in securities recommended in this report…”
9.When shares are purchased for an MDA customer by Strategic they are purchased in the name of the customer, not Strategic. Where, as happens frequently, Strategic buys shares on behalf of a number of customers, Strategic and the broker through which the purchase is made have an arrangement whereby the broker records the purchase in separate contract notes for each customer. And where, as happened in the present case, a large parcel of shares is acquired by Strategic on behalf of a number of customers at different prices, Strategic calculates the average purchase price and the number of shares to be allotted to individual customers and the broker prepares contract notes in accordance with those calculations.
10.Prime was listed on the Australian Securities Exchange on 3 August 2007. Prior to that listing Prime had been a public unit trust. In late July 2007 Mr Bond, in his capacity as trustee of his family trust, acquired 300,000 $1.00 units in what was then called the Prime Retirement and Aged Care Property Trust. That purchase had been funded, in part, by a margin loan from the National Australia Bank. The terms of that loan required Mr Bond to maintain a loan to valuation ratio of 50%, i.e. he could borrow up to 50% of the current value of securities subject of the loan.
11.The units in the public unit trust were converted to $1.00 shares upon listing, thus on and from 3 August 2007 Mr Bond, as trustee, held 300,000 shares in Prime.
12.Mr Bond had spent some time investigating the worth of Prime and its value as a prospective investment for Strategic’s customers. He had initially read a research paper prepared in September 2005. At around the same time he had inspected some of Prime’s facilities and had participated in a presentation by its directors. At some time afterwards Prime units became “approved” investments for Strategic, that is, they could be purchased for MDA customers without prior notice to, or the agreement of, those customers.
13.Thereafter, in or about April and again in August 2007, Mr Bond received more research material regarding Prime that continued the theme that Prime was a worthwhile investment. Despite this, the share price of Prime fell gradually after listing such that Mr Bond was required to deposit to his margin lending account on 16 October 2007 in order to keep below the loan to valuation ratio of 50%. On 8 November 2007 Mr Bond received an e-mail from his banker advising of a further margin call of $14,162 because of further falls in the price of Prime. Mr Bond said, and I accept, that he had adequate credit available to him at that time such that selling his Prime shares was not the only way in which he could have satisfied the call. As it happened, the call was satisfied on 26 November 2007 when the proceeds of the sale of Mr Bond’s Prime shares were credited to his margin lending account. It is now necessary to consider the circumstances of that sale and the other events of 21 November 2007.
14.A short while prior to 21 November 2007 Mr Bond had a conversation with a person who gave him advance notice of a forthcoming research paper into Prime. He was told that the paper, when published, would indicate that Prime had a worth that gave its shares a value of $1.22. That was broadly consistent with the earlier research undertaken by Mr Bond. Around that time Prime shares were trading in the range of $0.80 to $0.89 having steadily declined from their price of $1 at listing in August 2007. Shares in Prime were what the parties were content to describe as “thinly traded”, that is, few shares, in relative terms, were sold on any trading day. After an initial flurry of activity immediately following listing the average number traded daily dropped such that in the 20 trading days prior to 21 November 2007 daily trading was in the order of 309,000 shares.
15.In any event Mr Bond decided that a number of his MDA customers should acquire Prime shares. He ascertained that he wanted to purchase 2,500,000 shares but that he wanted to acquire them at a price below $1.02. I do not understand the Commission to criticize either the decision to purchase the shares or the decision to purchase them at prices up to $1.02. It is the manner in which that purchase was effected that is the object of the Commission’s criticism of Mr Bond.
16.To undertake the purchase Mr Bond used “E*TRADE” an internet facility that enabled him to see on a computer screen what shares in Prime were on offer in the market and the price at which the holder was prepared to sell, to list his own shares for sale at a nominated price and to accept offers to sell at nominated prices. Up until 2.07 p.m. on 21 November 2007 a total of 40,800 Prime shares had been traded at a highest price of $0.89.
17.At 2.07 p.m. Mr Bond listed the 300,000 Prime shares owned by him for sale at $1.00, a price well above any that been achieved for some considerable time. Minutes later Mr Bond commenced to purchase the 2,500,000 Prime shares required for his MDA customers. He did that by placing an order with E*TRADE to buy 2,500,000 shares at $0.875 per share, that being the price of the last trade some hours earlier that day. Within the next five minutes Mr Bond acquired just over 2,400,000 Prime shares by gradually increasing the price of his offer to buy and buying parcels of shares on offer at prices starting at $0.89 until he acquired a final parcel at $1.01.
18.The steps involved were as follows:
(a)at 14.07.33 Mr Bond entered a bid to sell his 300,000 Prime shares at $1.00;
(b)at 14.09.35 Mr Bond entered a bid to buy 2,500,000 shares at $0.875. There were no sellers at this price;
(c)at 14.09.50 Mr Bond amended his bid price to $0.89 and made two trades (6,200 and 20,000) at this price;
(d)at 14.10.31 Mr Bond amended his bid price to $0.895, and made six trades (6,422, 10,000, 2, 2, 2, 10,000) at this price;
(e)at 14.10.40 Mr Bond amended his bid price to $0.90 and made three trades (15,100, 100,000 and 35,000) at this price;
(f)at 14.10.50 Mr Bond amended his bid price to $0.91 and made two trades (10,000 and 10,989) at this price;
(g)at 14.11.39 Mr Bond amended his bid price to $0.915 and made one trade (10,000) at this price;
(h)at 14.11.48 Mr Bond amended his bid price to $0.92 and made four trades (50,000, 30,000, 10,000 and 10,000) at this price;
(i)at 14.11.57 Mr Bond amended his bid price to $0.925 and made three trades (8,308, 22,000 and 15,000) at this price;
(j)at 14.12.06 Mr Bond amended his bid price to $0.93 and made three trades (10,000, 10,000 and 50,000) at this price;
(k)at 14.12.17 Mr Bond amended his bid price to $0.935 and made one trade (5,500) at this price;
(l)at 14.12.26 Mr Bond amended his bid price to $0.94 and made three trades (14, 5,000 and 18,907) at this price;
(m)at 14.12.34 Mr Bond amended his bid price to $0.945 and made one trade (50,000) at this price;
(n)at 14.12.44 Mr Bond amended his bid price to $0.95 and made eight trades (52,000, 27,701, 5,000, 45, 30,000, 45,000, 11,000 and 20,000) at this price;
(o)at 14.12.55 Mr Bond amended his bid price to $0.955 and made two trades (10,000 and 111,627) at this price;
(p)at 14.13.02 Mr Bond amended his bid price to $0.96 and made six trades (2,500, 45,583, 10,000, 50,000, 27,000,and 50,000) at this price;
(q)at 14.13.14 Mr Bond amended his bid price to $0.97 and made two trades (45,919 and 25,000) at this price;
(r)at 14.13.29 Mr Bond amended his bid price to $0.985 and made four trades (45,300, 50,000, 50,000 and 11,000) at this price;
(s)at 14.13.59 Mr Bond amended his bid price to $0.99 and made one trade (20,000) at this price;
(t)at 14.14.10 Mr Bond amended his bid price to $0.995 and made one trade (10,000) at this price;
(u)at 14.14.24 Mr Bond amended his bid price to $1.00 and made fifteen trades (50,000, 43,733, 75,000, 20,000, 30,000, 10,000, 100,000, 10,000, 130,000, 36,000, 100,000, 27,000, 30,000, 300,000 and 23,400) at this price. The parcel of 300,000 was that listed for sale by him in his capacity as trustee;
(v)at 14.14.41 Mr Bond amended his bid price to $1.01 and made two trades (40,000 and 100,000) at this price;
(w)at 14.14.47 Mr Bond deleted the balance remaining (91,746) of his original bid for 2,500,000 having acquired 2,408,254 Prime shares in the process set out above. Mr Bond says that he deleted the bid at this point because the next bid to sell in the market was at $1.06 and because he was not prepared to go above $1.01;
(x)thereafter on that day there were another six trades, unconnected with Mr Bond, where the price was [sic] ranged from $0.90 to $0.925.
THE TRIBUNAL’S DECISION
As appears at para 21 of the Tribunal’s reasons, the Commissioner’s case was that Mr Bond engaged in this conduct with the effect of artificially raising the price of Prime shares “from the proper and efficient market price that day”, and that he had thereby taken part in a single transaction, or two or more transactions, which had, or were likely to have the effect of creating an artificial price for trading in Prime shares. The Tribunal identified a number of respects in which ASIC’s case was potentially ambiguous and a number of changes in the case which occurred during, or after the hearing. They were:
·In ASIC’s amended statement of facts and contentions it was asserted that Mr Bond had taken part in a transaction or transactions. In its submissions, ASIC asserted that he had carried out such transactions. The Tribunal proceeded upon the basis that the allegation was that Mr Bond had taken part in the transaction or transactions. The italicized words reflect the wording of s 1041A.
·At some stage ASIC sought leave to amend its statement of facts and contentions to allege, in the alternative, that the various identified dealings constituted only one transaction. This amendment was allowed.
·The Tribunal pointed out that ASIC had submitted, in connection with its reliance on s 920A(1)(f), that Mr Bond would not comply with a financial services law. The Tribunal treated the submission as being that “there is reason to believe that that would be so”. Again, the italicized words reflect the words of s 920A(1)(f), although perhaps not accurately.
·With regard to its reasons for any belief as to future compliance, ASIC relied on the following matters:
•that Mr Bond had breached Strategic’s conflicts of interest policy;
•that he had performed transactions which “interfered with the basic forces of supply and demand working in an open and well informed market in contravention of s 1041A of the Act”;
•that he breached his duty to Strategic’s customers to avoid conflict of interests; and
•that the transactions were undertaken without the fully informed consent of Strategic’s customers on whose behalf the Prime shares were purchased.
The Tribunal noted that the first and second matters had always formed part of ASIC’s case but that the third and fourth matters had been identified subsequent to the hearing. The Tribunal did not understand Mr Bond to object to ASIC’s relying on those matters.
Mr Bond attacked both bases for the banning order, arguing that he had not breached any financial services law, and that ASIC had no reason to believe that he would do so in the future. As to the alleged breach of s 1041A he submitted that he had not taken part in the relevant transaction or transactions, the ultimate purchasers being the individual clients of Strategic. This submission was correctly rejected. I do not understand it to have been ventilated before me. He also submitted that the transactions had not had the effect of “creating an artificial price for trading”.
The Tribunal dealt with this aspect of ASIC’s case at paras 32 and 33 of its reasons as follows:
32.The more difficult question is whether the transactions had the effect of “creating an artificial price for trading” in Prime shares. The Commission’s case is put on this basis in its final submissions:
“19.… by placing a huge buy order in a thinly traded stock on the market and then increasing the buy price incrementally 21 times in the space of 5 minutes, pushing [Prime’s] share price from .87c to over $1.00, the Applicant carried out transactions that had the effect of creating an artificial increase in the price of [Prime’s] shares.
20.The fact that the Applicant had his sell order already on the market at the price of $1 renders his manipulative actions to increase the price of the share, actions that were also calculated to achieve a self-interested result.”
33.It is not entirely clear what is intended to be conveyed by paragraph 20, however I observe that in cases such as the present, where an applicant’s livelihood is at stake, the Commission ought distinctly allege (and prove) bad faith if it is to be relied upon. The Commission did not put its case on the footing that the series of transactions was a sham or a device to enable Mr Bond to dispose of his shares at $1.00 and thus avoid incurring the loss that would have been incurred by him had he sold his shares at the market prices prevailing at the time, or that the decision to purchase Prime shares for Strategic’s clients was no more than a means to that end. The Commission did not attack the propriety of Mr Bond’s judgment that Prime shares were a good investment at a price below $1.02, nor his decision to buy 2.5 m shares for Strategic’s clients up to that price. Nor did it suggest that either decision was made other than bona fide. It seems to me that it is thus necessary, in considering this aspect of the case, to put to one side the fact that Mr Bond ended up selling his own shares. Thus the question posed by the Commission’s case is whether Mr Bond’s actions had the effect of creating an artificial price for Prime shares.
In my view ASIC was, in para 20 of its submissions, asserting that Mr Bond had entered into the sale transactions for reasons of self-interest. That would not exclude an honest belief on his part that Prime shares were under-valued by the market, and that their true value, as he saw it, might be recognized in the future. I will return to this matter at a later stage.
Much of the difficulty surrounding the case at first instance seems to have arisen out of uncertainty as to the meaning of s 1041A. At that time, there was no judicial authority concerning the section. There was, however, one decision concerning a broadly similar provision. In North v Marra Developments Ltd (1981) 148 CLR 42, the High Court considered s 70 of the Securities Industry Act 1970 (NSW) (the “NSW Act”) which provided:
A person shall not create or cause to be created or do anything which is calculated to create, a false or misleading appearance of active trading in any securities on any stock market in the State, or a false or misleading appearance with respect to the market for, or the price of, any securities.
At 58-59 Mason J said (Stephen, Murphy, Aickin and Wilson JJ concurring):
The relevant prohibition in the section is against creating, or causing to create, or doing anything which is calculated to create, “a false or misleading appearance with respect to the market for, or the price of, any securities”.
In terms the statutory prohibition is directed against activity which is designed to give the market for securities or the price of securities a false or misleading appearance. In this setting, “calculated” means “designed” or “intended” rather than “adapted” or “suited”. It is not altogether easy to translate the generality of this language into a specific prohibition against injurious activity, whilst at the same time leaving people free to engage in legitimate commercial activity which will have an effect on the market and on the price of securities. Purchases or sales are often made for indirect or collateral motives, in circumstances where the transactions will, to the knowledge of the participants, have an effect on the market for, or the price of, shares. Plainly enough it is not the object of the section to outlaw all such transactions.
It seems to me that the object of the section is to protect the market for securities against activities which will result in artificial or managed manipulation. The section 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. It is in the interests of the community that the market for securities should be real and genuine, free from manipulation. The section is a legislative measure designed to ensure such a market and it should be interpreted accordingly.
At para 35 the Tribunal observed that “much of what Mason J said is equally true of the s 1041A of the present statute”, also observing that:
… the key to s 1041A of the Act is the existence of genuine buyers and genuine sellers. In common with the section under consideration in Marra Developments, s 1041A of the Act seeks to ensure that the market reflects the forces of genuine supply and demand.
At paras 36-40 the Tribunal said:
36.What effect then did Mr Bond’s transactions have on the market? It is the case that the price at which Prime shares were traded in the market went up from $0.89 to $1.01 in a short space of time and then returned to about $0.90. But despite that I do not consider that the effect of the transactions was to create an artificial price because the trades were made at prices, which, at the time, reflected the forces of genuine supply and genuine demand.
37.Mr Bond, on behalf of Strategic’s customers, was a genuine buyer who was prepared to purchase up to 2.5 m shares at prices up to $1.02. The sellers were persons who had offered their shares for sale at prices ranging from $0.89 to $1.01. There is no reason to suppose that the sellers, including Mr Bond, were other than genuine in the sense that they had made a judgment about the prices at which they were willing to sell. There was nothing “artificial” about the prices paid merely because they happened to exceed the prices paid by other purchasers prior to, and after, the purchases by Mr Bond. At the times when Mr Bond made his purchases the value of Prime shares was that reflected by the prices offered and accepted. The value of Prime shares was the price that Mr Bond, a willing purchaser, was prepared to buy at, and the price at which willing sellers (including Mr Bond) were prepared to sell at. Thus the prices reflected fair market value.
38.The Commission relied upon evidence of Mr Russell McCrory, a retired stockbroker with vast experience in share trading but, with respect, it seems to me that much of what the Commission asked him to express an opinion on, misses the point. His evidence was that, ordinarily, to acquire a sizeable parcel of shares in a stock like Prime:
“… one would have to be prepared to be patient and execute the order over quite a few days, keeping a close watch on the trading screen and acquiring any shares that were offered at an acceptable price and also leaving a bid or bids for some shares at lower prices in case a seller offered stock at the best bid price.”
Nonetheless he went on to say:
“If for some reason the stock was required to be purchased much more urgently then one would have to bid the price up to a level where the required volume was seen to be available in the dealing screen.”
39.That, as it seems to me, is precisely what Mr Bond did and accords with the view I have taken on the forces at work in the market as a consequence of Mr Bond’s transactions. Mr Bond’s judgment, which has not been criticized, was that it was necessary to undertake the purchase more urgently, in part because he had advance notice of a favourable report about the value of Prime shares and in part because, as Mr Bond said and as Mr McCrory accepted, market movements are scrutinized by “day traders” who might seek to take advantage of a large purchase order acquired in the “patient” manner suggested by Mr McCrory. Moreover, as Mr McCrory agreed, purchasing shares is not an exact science.
40.Thus I am not satisfied that Mr Bond’s trading had the effect of creating an artificial price in Prime shares and, accordingly, I am unable to conclude that his actions breached s 1041A of the Act. That part of [ASIC’s] case is not made out.
If there is any error in this line of reasoning, it occurs in the proposition in para 36 that “the trades were made at prices, which, at the time, reflected the forces of genuine supply and genuine demand”. The justification for the proposition appears in para 37. There are two relevant assumptions:
• that all sellers, including Mr Bond, were “genuine, in the sense that they had made a judgment about the prices at which they were willing to sell”; and
• that “(t)he value of Prime shares was the price that Mr Bond, a willing purchaser, was prepared to buy at… .”
The fallacy in the first assumption lies in treating Mr Bond and other sellers as being in similar positions. As a seller, he was aware that his client buyers were going to acquire a substantial number of shares. Other sellers did not have that knowledge. Their decisions were made on the basis of reported sales in the market, including sales to Mr Bond’s clients. There is also no evidence that other sellers had access to Mr Bond’s information concerning an anticipated and favourable report.
The fallacy in the second assumption, at least on ASIC’s case, lies in the assertion that Mr Bond and each of his clients was a willing purchaser in the relevant sense. Mr Bond was certainly willing to buy, but his willingness was arguably the outcome of his desire to sell his own shares. Of course, there may be a legitimate reason for a person in his position selling his own shares whilst buying shares in the same company for his clients, and at different prices. One such explanation would be financial embarrassment. It is also understandable that in selling his shares, Mr Bond should seek to maximize his sale price. However it does not follow that any steps taken to achieve that result will be consistent with the statutory objective underlying s 1041A, namely maintaining an informed market for share trading.
In view of its conclusion that Mr Bond had not contravened s 1041A, the Tribunal addressed the question of reasons for belief as to future non-compliance upon that basis. It was “not particularly troubled” by Mr Bond’s alleged breach of Strategic’s conflict of interests policy. It was more concerned about “the substance of his actions towards his clients”. ASIC submitted that Mr Bond breached his duty to his clients by failing to avoid a conflict of interests. The Tribunal considered that his conduct might more accurately be described as preferring his personal interest over his duty to his clients. It considered that “… extraordinarily, he was not conscious at the time that there was anything wrong with what he was doing”. The Tribunal observed that he had not obtained his clients’ “fully informed consent” to his actions. Further, “… he did not disclose to his clients that he was selling his own shares to them at a price considerably in excess of those that had been achieved in the open market for some time.” The Tribunal concluded that these matters, “compounded by Mr Bond’s failure at the time to comprehend the vice of his actions” satisfied it that Mr Bond’s conduct was “discreditable and plainly breached his fiduciary duty”. However it considered that the relevant question was whether such conduct provided reason to believe that he would not comply with financial services laws in the future.
The Tribunal then referred to the following passage from an earlier Tribunal decision, Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602:
“Although perhaps trite to say so, what amounts to reasonable grounds will depend on the context. In this case, the immediate context is that of s 920A(1)(f) but the broader context is that of founding a power on which to make a banning order. As we will conclude later in these reasons, that is a power that is exercised on the basis of the protection of the public and not for the punishment of the person banned or to penalise that person. There is no doubt, though, that a consequence of a banning order is to prevent the person banned from undertaking work that person has chosen to do in the past. That may well be work that has provided the person’s income and means of supporting him or her self and a family. That is a serious consequence for the person just as protecting the public is a weighty endeavour. These sorts of matters will be borne in mind in deciding whether there exist facts sufficient to induce in the mind of a reasonable person a reason to believe that the particular state of affairs exists.
In the case of s 920A(1)(f) that state of affairs is that the person ‘will not comply with a financial services law’. The state of affairs is not the person ‘may not comply with a financial services law’. To our minds, the distinction between what a person will do and what that person may do is very important. A state of mind in which a person has a reason to believe that another person may do something may well be reached before and on less convincing material than is required for a state of mind that the person will do something.”
The Tribunal noted that the Commission had not sought to establish reason to believe that Mr Bond would not comply with any particular provision of the Act other than s 1041A. It proceeded upon the basis that the question was whether “there is reason to believe that he would ignore or disregard the scheme established by the Act that regulates those who provide financial services, whether wilfully or through ignorance or incompetence”. The Tribunal accepted that in some circumstances, a pattern of past breaches might provide an affirmative answer to that question, whereas in other cases, the gravity of a single episode might be sufficient for that purpose. However it concluded that it could not be so satisfied in the present case, saying at para 47:
47.Mr Bond’s conduct in preferring his private interest is discreditable and does not reflect well on him. His failure to comprehend the vice of his actions is also worrying as it points to the possibility that Mr Bond has an inadequate understanding of what is required of him. These matters arguably raise a possibility of a breach of financial services law in the future but I am well short of being satisfied that Mr Bond will do so. Moreover one can be reasonably confident that Mr Bond will have gained a valuable insight about the need for regulatory compliance from these proceedings. Thus the second basis of the Commission’s case is not made out. (Emphasis in original.)
ON APPEAL
On appeal ASIC has taken an ambivalent attitude to the decision of the High Court in Marra Developments. Initially it submitted that the decision was based upon a section which was not analogous to s 1041A, and that the Tribunal’s reliance upon that decision was therefore misconceived. It is submitted, with respect to s 1041A and Marra Developments, that although “the existence of genuine buyers or sellers may be highly relevant to some allegations of false trading and market rigging under s.1041B. It does not follow that the same is the case with s.1041A”.
ASIC also then submitted that:
There is no reason to treat s.1041A as not extending to transactions which, though “genuine”, do have the effect of creating an artificial price. It is the effect of conduct, and not the process by which that effect is achieved, that is the focus of s.1041A.
It then noted that intention is not a requirement in order that s 1041A be engaged. Rather, “(c)entral to the proper interpretation of s 1041A is the meaning to be given to the word ‘artificial’ ”. Finally, ASIC submitted that:
(A)n artificial price is one different to that which would have been arrived at through the ordinary forces of supply and demand. This would at least entail that buyers and sellers are at arms length in seeking, respectively, the lowest and highest available prices. This is consistent with the ordinary meaning of “artificial” as being “constructed, contrived, not natural”.
While this decision has been reserved, Goldberg J handed down his decision in Australian Securities and Investments Commission v Soust (2010) 183 FCR 21. It seems that in arguing that case ASIC was somewhat more enthusiastic about the decision in Marra Developments than they were before me. His Honour treated the decision as informing the proper approach to s 1041A. In further submissions filed after the hearing in the present case, ASIC has adopted the reasoning of Goldberg J, whilst still submitting that:
To rely on North v Marra Developments and to focus only on whether the buyer was motivated to buy, and the seller motivated to sell, as Deputy President Hack SC did in the present case, and not consider whether the resultant price at which the trade or trades took place was the outcome of an arm’s length transaction between parties giving effect to the basic, or ordinary forces of supply and demand, is to err.
In any event the following propositions emerge from the submissions:
·it is not necessary in order to establish a civil contravention of s 1041A to prove that the alleged contravenor intended to affect the price of the securities or bring about an artificial price, or indeed had any particular state of mind concerning the transaction;
·an artificial price is to be contrasted with a “real” price, being the outcome reached by arms-length transactions between parties giving effect to the basic forces of supply and demand.
The second criticism made of the Tribunal’s decision by ASIC is that it misunderstood, and therefore failed to consider an aspect of ASIC’s case, namely that the transactions constituted a device to enable Mr Bond to dispose of his own shares at $1 each. This approach led the Tribunal, in considering the question of whether the transactions had the effect of creating an artificial price, to exclude from its consideration the fact that Mr Bond had sold his own shares. ASIC asserts that it specifically raised the proposition that the primary purpose of the transactions was to enable Mr Bond to sell his own shares for the same price for which he had purchased them. It is further submitted that Mr Bond’s manipulative conduct was calculated to achieve a self-interested result.
Mr Bond submits that the Tribunal concluded that his conduct had not created an artificial price “because the trades were made at prices, which, at the time, reflected the forces of genuine supply and genuine demand”. He also submits that ASIC made no criticism of either his decision to purchase the shares on behalf of his clients or his decision to purchase them at prices up to $1.02. He submits that there was unchallenged evidence before the Tribunal that the shares were undervalued at that time, and that purchasing them was both a rational and commercially sensible decision. In this respect Mr Bond seeks to make much of the section heading “market manipulation”. He submits that “(t)he artificial price is the mechanism by which market manipulation is to occur”, and that:
A genuine seller may have a number of different objects or motives in selling shares. In this case one motive Bond had was to sell the shares held by the superannuation trust. But merely because the transaction was not at arms length (in that Bond gained the advantage of selling his shares to clients) does not mean that it was artificial as that term is used in the section. A transaction not at arms length will not be artificial if it does not cause “market manipulation”. “Artificial” should be read as referring to such acts which create market manipulation. The logical test for this is the one adopted by the learned Deputy President, namely that of a genuine supply and a genuine demand.
Mr Bond then refers to the reasons of Mason J in Marra Developments. His Honour accepted that some purchases or sales, made with “indirect or collateral motives” and in circumstances in which such transactions would “to the knowledge of the participants, have an effect on the market for, or the price of, shares”, would not be caught by s 70. His Honour considered that such transactions were to be distinguished from “activities which will result in artificial or managed manipulation”. Mason J observed that the prohibition was designed to ensure that the market reflected “the forces of genuine supply and demand”, which expression excludes “buyers and sellers whose transactions are undertaken for the sole or primary purpose of setting or maintaining the market price”. Mr Bond then submits that s 1041A dictates an enquiry as to whether “an artificial price has caused market manipulation”, and that where the supply and demand are genuine “that cannot occur”. Mr Bond then submits that he “intended and achieved the purchase of the shares at a commercially fair price”. Finally, he submits that “intention must remain an element of the section, as without it, a court would not be able to determine particular circumstances which may give rise to ‘market manipulation’ or an artificial price”.
It is a little difficult to understand Mr Bond’s assertion that “the artificial price is the mechanism by which market manipulation is to occur”. In my view, the manipulation will generally produce the artificial price. Similarly, the assertion that the enquiry is as to whether “an artificial price has caused market manipulation” is misconceived.
I understand Mr Bond’s reference to intention in his original submissions to be to an intention to manipulate the market. If so, then, in his reply to the applicant’s second further submissions (concerning the decision in Soust), Mr Bond varies that submission to some extent. He submits that:
For there to be an artificial price in the first place, the price must reflect non-genuine forces of supply and demand. This occurs when buyers are unconcerned with buying securities at the lowest possible prices, and sellers are unconcerned with achieving the highest possible prices. For buyers to be unconcerned about obtaining securities at the lowest possible price, there is required to be a foundation of dishonourable intent or purpose present as a primary driver for this behaviour. For sellers to be unconcerned about achieving the highest possible prices, there also needs to be a foundation of dishonourable intent or purpose present as a primary driver for this behaviour.
Thus he submits that:
It is therefore logical to surmise that whilst it is not specifically stated in the legislation, it is implicit that there must be dishonourable intent or purpose which drives self interested behaviour in order to create an artificial price and subsequently contravene s.1041A.
There is clearly a distinction between an intention to manipulate the market and a dishonourable intent or purpose.
I have referred to ASIC’s submission that the Tribunal erroneously proceeded upon the basis that ASIC was not contending that the transactions were a device to enable Mr Bond to dispose of his shares at a relatively favourable price. Mr Bond asserts that the Tribunal correctly identified ASIC’s position. In order to understand this aspect of the matter, it is necessary to consider the various statements of facts and contentions and the parties’ written submissions. ASIC’s first statement of facts and contentions was dated 17 November 2008. At para 11 ASIC asserted that:
(c)(T)he result of this rising price of PTN was that the Applicant’s sell order for 300,000 units for $1.00 was filled at 14.14.24 with his units being sold to clients of Strategic at the price of $1.00 … .
At para 19 ASIC alleged that it had formed the view that Mr Bond had “breached his own company’s conflict of interests policy” and had “deliberately set out to perform transactions that interfered with the basic forces of supply and demand working in an open and well-informed market in contravention of s.1041A of the Act”. Thus the conflict of interest and the alleged market manipulation were linked. At para 21 it asserted, in connection with the assertion that Mr Bond had breached Strategic’s conflict of interests policy, that:
By placing the buy and sell orders in the manner he did, the Applicant placed himself in a position of material conflict in breach of the Policy because he:
(a)placed the order to sell his own PTN shares at $1.00 knowing the last price for them had been .89c;
(b)then placed a large buy order for 2,500,0000 shares when the total traded for that time was 40,800;
(c)then proceeded to amend the buy order upwards as the available units were traded; and
(d)the effect of this was that the buy order matched asks until his sell order was filled.
This seems to me to be very close to an allegation that the purpose of the transaction was to dispose of his 300,000 shares at a favourable price.
In Mr Bond’s statement of facts and contentions dated 1 December 2008 he asserted at para 10(d)
… there was no connection between the completion of the Applicant’s sell order and the deletion of the buy order … .
In ASIC’s response dated 9 December 2008, at para (2)(c), ASIC asserted:
… the Applicant deleted the buy order as soon as his shares had been sold because the primary purpose of the transactions that took place on 21 November 2007 was for the applicant to sell his own shares (or those held by his family trust) for the same price for which he had purchased them … .
In the transcript of Mr Bond’s cross-examination in the Tribunal the following passage appears at TS 47 ll 14-20:
Mr Bond, I would suggest that you placed your 300,000 shares on the market at a dollar first, before you placed the buy orders, and amended the buy order up so that you could sell your shares at a dollar and avoid a margin call that you had been warned about?---That’s incorrect.
And that you were also avoiding having to sell your shares at a loss?---That’s incorrect.
If you had placed your shares on the market as the market stood on 21 November before all the incremental price increases that went with your buy order, you would have been selling your 300,000 shares at approximately 89 cents, or somewhere around that mark. Is that right?---That’s correct.
So you acknowledge, Mr Bond, with the benefit of hindsight, that there was a conflict?---I do.
Can you explain for the Tribunal what that conflict was?---That conflict was that I had mitigated a loss essentially by selling at a dollar and not at the 89 cent level, or whatever the thing started at.
And your clients bought at an artificially inflated price. Would you agree with that?---Yes.
At the close of evidence in the Tribunal, ASIC decided to amend its statement of facts and contentions. It was agreed that such amendment should be effected by the delivery of an amended document. One of the anticipated amendments was to insert into para 19 an allegation that Mr Bond had “deliberately set out to achieve a result that placed his own interests ahead of the interests of his clients”. Paragraph 19 relates primarily to the question of future non-compliance. Nonetheless, it is fairly clear that ASIC proposed to allege that Mr Bond had preferred his own interest to those of his clients. His interest lay in maximizing the sale price of his own shares. In the end para 19 was amended in a number of ways, in particular, by:
·deleting the allegation that any manipulation was deliberate; and
·adding allegations of conflict of interest and absence of the clients’ “fully informed consent”.
In response, Mr Bond amended his statement of facts and contentions by:
·alleging that he had only offered his shares for sale once he recognized that there were insufficient shares available for purchase by his clients at a price below $1.01;
·admitting breach of duty and absence of consent; and
·declining otherwise to plead to allegations concerning future non-compliance “as the financial services laws which it is pleaded [he] will not comply with are not identified”.
The parties then made their written submissions. In his submissions Mr Bond asserted that:
·there was uncontradicted material suggesting that the value of the shares on an asset-value basis was in excess of $1.00 ($1.16 or $1.22);
·that no criticism had been made of the relevant research papers; and
·that there was no criticism of the quantity of shares which Mr Bond had sought to purchase.
At para 23 Mr Bond submitted that:
In these circumstances it cannot be said that the applicant was manipulating the market so as to enable him to be able to sell his own shares at an acceptable price.
In its submissions to the Tribunal at para 20, ASIC submitted that:
The fact that [Mr Bond] had his sell order already on the market at the price of $1 renders his manipulative actions to increase the price of the share, actions that were also calculated to achieve a self-interested result.
At paras 23-29, ASIC invited the inferences:
·that Mr Bond wished to sell his shares for the same price as that at which he had purchased them and thereby avoid a margin call; and
·that he used his clients’ buy orders to ramp up the price of the stock, thereby avoiding having to sell the shares at a loss.
It may be correct to say, as the Tribunal did at [33], that ASIC had not attacked the propriety of Mr Bond’s judgment that Prime shares were a good investment at a price below $1.02, nor his decision to buy 2.5 million shares for Strategic clients at up to that price. It may also be correct that ASIC did not put its case on the footing that the series of transactions was a sham. However ASIC seems always to have asserted that the transactions were a device to enable Mr Bond to dispose of his shares at a price of about $1.00, thus avoiding the loss that would have been incurred by him had he sold his shares at the previously prevailing market price.
CONSTRUCTION OF S 1041A
The decision of Goldberg J in Soust clearly and correctly identifies the proper approach to s 1041A. However I shall attempt to state my understanding of its relevance, and that of the decision in Marra Developments, for present purposes. I do not accept ASIC’s attempt to treat the latter decision as irrelevant to the construction question. At least some of the conduct previously proscribed by s 70 of the NSW Act would fall within the terms of s 1041A and not with the terms of s 1041B or s 1041C. It is not necessary that I demonstrate my reasons for this view. The limitations upon the scope of ss 1041B and 1041C are clear enough.
It is true that s 70, as construed by Mason J, struck at transactions which were “designed” or “intended” to create or cause a false or misleading appearance with respect to price. Section 1041A does not expressly address intention. It rather strikes at involvement in transactions which have, or are likely to have the effect of creating an artificial price for trading in financial products on a financial market in Australia. In my view this approach reflects the mischief identified by Mason J in Marra Developments at 59. His Honour recognized that a price which was motivated by a desire to set and maintain the price was likely to mislead other market participants who would treat it as indicating the price at which a willing, but not overly anxious buyer and seller would strike a bargain. Section 70 prescribed certain market-related purposes, and so Mason J tailored his reasons around those purposes. Section 1041A operates more broadly, striking at effect or likely effect. However the relevant mischief is the potentially misleading effect of market transactions which are not between a buyer and a seller who are both seeking the most favourable price. In the absence of knowledge that a transaction lacks that characteristic, other market participants will generally assume that each transaction has it. A transaction which does not fit that description will be potentially misleading.
In attacking participation in transactions which have a particular effect or likely effect, s 1041A goes well beyond the reach of s 70. However there is nothing unusual about such an approach. Provisions in the Trade Practices Act 1974 (Cth) take a similar approach. In the criminal law, offences are not infrequently defined by reference to the effect or likely effect of conduct. It may seem that s 1041A offers little guidance as to what is lawful and what is not. However that perception is misconceived. Involvement in any transaction in which both the buyer and seller seek the most advantageous price will not engage s 1041A. Involvement in any other transaction may do so. It is, of course, possible that one party will be a bona fide purchaser or seller and the other, not. In so far as concerns proceedings for civil penalties, s 1317S will protect innocent parties. It is probable that in criminal proceedings, absence of knowing involvement will be an answer to any charge.
In the present case the parties seem not to have appreciated the true significance of Mr Bond’s intentions in ascertaining whether the various transactions had, or were likely to have the relevant effect. The issue seems to have been raised, but primarily, although not exclusively, in connection with future contravention. It is true that s 1041A does not directly proscribe any particular intention, but the notion of artificial price invites attention to the effect or likely effect of the transaction in question. If a transaction is not between a buyer and seller, each of whom is seeking the most advantageous price, then the transaction may have the proscribed effect or likely effect. In the Tribunal ASIC may not have articulated its case as clearly as it evidently did before Goldberg J. Nonetheless it is clear from para 11 of its original and amended statements of facts and contentions, that the sale of Mr Bond’s own shares was a relevant consideration. Paragraph 20 of its submissions, cited by the Tribunal at para 32 of its reasons, demonstrates the basis of such relevance. The Tribunal erred in concluding that Mr Bond’s sale of his own shares was irrelevant to its consideration of the effect or likely effect of the transactions in question.
As the matter was determined by the Tribunal on the basis that there had been no breach of s 1041A, it must be remitted for further consideration. I should, however, say something about the Tribunal’s approach to s 920A as it appears from para 47 of its reasons. I have set out that paragraph above. In order that there be a banning order, it is not necessary that either ASIC or the Tribunal be satisfied that Mr Bond will, in the future, breach a financial services law. It is only necessary that the relevant decision-maker have reason to believe that he will do so. One other matter deserves comment. In his submissions in the Tribunal, Mr Bond raised a question as to whether it was necessary that ASIC identify a particular financial services law which, it had reason to believe, Mr Bond would breach. I have received no submissions on that matter and make no comment upon it.
ORDERS
I set aside the decision of the Administrative Appeals Tribunal dated 23 January 2009. I order that the matter be remitted to the Administrative Appeals Tribunal for further consideration and determination according to law.
COSTS
In my view, this matter was properly the subject of appeal pursuant to s 44 of the AAT Act. The appeal was, in effect, on a question of law, namely the proper construction of s 1041A and, incidentally, s 920A. I will hear submissions as to costs.
I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett. Associate:
Dated: 30 July 2010
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