Batros and Australian Securities and Investments Commission
[2017] AATA 399
•28 March 2017
Batros and Australian Securities and Investments Commission [2017] AATA 399 (28 March 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2016/1384
Re:Ryan Batros
APPLICANT
AndAustralian Securities and Investments Commission
RESPONDENT
DECISION
Tribunal:Professor R Deutsch, Deputy President
Date:28 March 2017
Place:Sydney
The decision under review is affirmed.
...................................[sgd].....................................
Professor R Deutsch, Deputy President
CATCHWORDS
CORPORATIONS – banning order – inside information – placing sell orders – crossed wall – execution only broker – whether mere cypher – severity banning order – decision affirmed
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth) s 41(2)
Australian Securities and Investments Act 2001 (Cth) s 1(2)(b)
Corporations Act 2001 (Cth) ss 920A, 1042A, 1042C, 1043A, 1043K
CASES
Hartman v Director of Public Prosecutions [2011] NSWCCA 261; (2011) 87 ACSR 52
Re Batros and Australian Securities and Investments Commission [2016] AATA 519
Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
Re Felden and Australian Securities and Investments Commission [2003] AATA 301; (2003) 45 ACSR 111
Re Gray and Australian Securities and Investments Commission (2004) 86 ALD 230; [2004] AATA 1235
Re Hayes and Australian Securities and Investments Commission [2006] AATA 1506; (2006) 93 ALD 494
Re Howarth and Australian Securities and Investments Commission [2008] AATA 278; (2008) 101 ALD 602
Re Sullivan and Australian Securities and Investments Commission [2013] AATA 592R v Farris (2015) 301 FLR 230
SECONDARY MATERIALS
Regulatory Guide 98 – Licensing: Administrative action against financial services providers
REASONS FOR DECISION
Professor R Deutsch, Deputy President
28 March 2017
THE PROCEDURAL BACKGROUND
On 6 November 2015, ASIC (the Respondent) served a notice dated 2 November 2015 on Mr Ryan Batros (the Applicant) pursuant to s 920A of the Corporations Act2001 (Cth) (the Corporations Act) stating that ASIC was concerned that he may not have complied with a financial services law (the s 920A notice).
On 16 December 2015, the Applicant attended a hearing before the Respondent’s delegate with his solicitor. At the conclusion of the hearing, the delegate reserved her decision and stated that the Applicant should provide any further information on which he wanted to rely by early February 2016.
On 8 March 2016, a delegate of the Respondent made a banning order under s 920A(1) of the Corporations Act prohibiting the Applicant from providing any financial services for a period of five years (the delegate’s decision).
The Respondent emailed the delegate’s decision and the banning order to the Applicant’s lawyer on 11 March 2016, and personally served these documents on the Applicant on 16 March 2016.
On 17 March 2016, the Applicant filed an application for review of the delegate’s decision (the review application) with the Administrative Appeals Tribunal (the Tribunal).
On the same day, the Applicant filed an application pursuant to s 41(2) of the Administrative Appeals Tribunal Act 1975 (Cth) seeking an order that the delegate’s decision be stayed pending the final hearing and determination of the review application (the stay application).
The hearing of the stay application took place before Deputy President Cowdroy OAM QC on 26 May 2016.
On 22 July 2016, the stay application was refused and reasons for decision were published: see Re Batros and Australian Securities and Investments Commission [2016] AATA 519.
THE LEGISLATION AND THE POLICY
In performing its functions and exercising its powers, the Respondent must strive to “promote the confident and informed participation of investors and consumers in the financial system”: see s 1(2)(b) of the Australian Securities and Investments Act 2001 (Cth) (the ASIC Act). This objective is also fundamental to the Tribunal’s exercise of its review powers, in which it “stands in the shoes” of the primary decision-maker.
The exercise of the Respondent’s powers under the ASIC Act has at all relevant times been the subject of policy guidelines. Given the matters the subject of the review application “Regulatory Guide 98 – Licensing: Administrative action against financial services providers” (RG 98) is of particular relevance.
The Respondent, and the Tribunal standing in its shoes, are entitled to and should have regard to RG 98: see, eg, Re Gray and Australian Securities and Investments Commission (2004) 86 ALD 230; [2004] AATA 1235, Fisher M at [32]-[36].
Unless there are cogent reasons for not doing so in the particular circumstances of a given case, the Respondent and the Tribunal should implement policy, such as RG 98: Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634.
The relevant legislation begins at section 920A(1)(e) of the Corporations Act which provides that ASIC may make a banning order against a person if that person has not complied with a financial services law.
Division 3 of Part 7.10 of the Corporations Act sets out the insider trading prohibitions.
Section 1042A of the Corporations Act provides the following relevant definitions:
generally available, in relation to information, has the meaning given by section 1042C.
information includes:
(a)matters of supposition and other matters that are insufficiently definite to warrant being made known to the public; and
(b)matters relating to the intentions, or likely intentions, of a person.
inside information means information in relation to which the following paragraphs are satisfied:
(a)the information is not generally available;
(b)if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of particular Division 3 financial products.
Section 1042C of the Corporations Act details when information is “generally available” and provides:
(1)For the purposes of this Division, information is generally available if:
(a)it consists of readily observable matter; or
(b)both of the following subparagraphs apply:
(i) it has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in Division 3 financial products of a kind whose price might be affected by the information; and
(ii) since it was made known, a reasonable period for it to be disseminated among such persons has elapsed; or
(c)it consists of deductions, conclusions or inferences made or drawn from either or both of the following:
(i) information referred to in paragraph (a);
(ii) information made known as mentioned in subparagraph (b)(i).
(2)None of the paragraphs of subsection (1) limits the generality of any of the other paragraphs of that subsection.
Section 1043A of the Corporations Act provides what is prohibited conduct by a person in possession of inside information:
(1)Subject to this Subdivision, if:
(a)a person (the insider) possesses inside information; and
(b)the insider knows, or ought reasonably to know, that the matters specified in paragraphs (a) and (b) of the definition of inside information in section 1042A are satisfied in relation to the information;
the insider must not (whether as principal or agent):
(c)apply for, acquire, or dispose of, relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products; or
(d)procure another person to apply for, acquire, or dispose of, relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products.
Note 1: Failure to comply with this subsection is an offence (see subsection 1311(1)). For defences to a prosecution based on this subsection, see section 1043M.
Note 2: This subsection is also a civil penalty provision (see section 1317E). For relief from liability to a civil penalty relating to this subsection, see sections 1043N and 1317S.
Section 1043K of the Corporations Act provides that a person acting as an agent does not contravene the insider information prohibitions when as a holder of a financial services licence or a representative of a financial services licensee enters into a transaction on behalf of another person under specific instructions if the inside information was not communicated at the time of the transaction. The section states:
A person (the agent) does not contravene subsection 1043A(1) by applying for, acquiring, or disposing of, or entering into an agreement to apply for, acquire, or dispose of, financial products that are able to be traded on a licensed market if:
(a)the agent is a financial services licensee or a representative of a financial services licensee; and
(b)the agent entered into the transaction or agreement concerned on behalf of another person (the principal) under a specific instruction by the principal to enter into that transaction or agreement; and
(c)the licensee had in operation, at the time when that transaction or agreement was entered into, arrangements that could reasonably be expected to ensure that any information in the possession of the licensee, or of any representative of the licensee, as a result of which the person in possession of the information would be prohibited by subsection 1043A(1) from entering into that transaction or agreement was not communicated to the agent and that no advice with respect to the transaction or agreement was given to the principal or to the agent by a person in possession of the information; and
(d)the information was not so communicated and no such advice was so given; and
(e)the principal is not an associate of the licensee or of any representative of the licensee;
but nothing in this section affects the application of subsection 1043A(1) in relation to the principal.
THE REGULATORY GUIDE
As mentioned previously, RG 98 is of particular relevance in this case.
RG 98.44 states that ASIC is likely to make a banning order against a person where there are “serious concerns” about the person and, in particular, where there is a need to protect the public.
RG 98.45 provides that, in determining whether or not to pursue administrative action, such as a banning order, against a person, consideration must be given to the particular facts of the individual case. At the end of RG 98, there are two tables.
Table 1 sets out a non-exhaustive list of factors which might be taken into account in determining whether or not to take administrative action. Those factors include:
(a)the nature and seriousness of a person’s conduct, including, for instance, the duration of the conduct and any dishonesty;
(b)the person’s conduct subsequent to any misconduct, including, for instance, any demonstrated contrition;
(c)the previous regulatory record of the person; and
(d)any mitigating factors advanced by the person.
Table 2 provides examples of conduct and indicates the potential consequences that might follow from engaging in that conduct. Table 2 provides that insider trading is an example of conduct that may justify a banning order of anywhere between 3 and 10 years, and refers to the following factors relevant to the making of a banning order for that period of time:
(a)conduct inconsistent with orderly operation of a financial market;
(b)adverse impact on confidence in or the integrity of a financial market; and
(c)disregard for the law and compliance with regulations.
RELEVANT FACTUAL BACKGROUND
Between 17 January 2012 and 29 August 2014, the Applicant was an authorised representative of Morgans Financial Limited (Morgans). In the period from 1 June 2013 to 29 August 2014, the Applicant worked as a private client advisor at the Morgans’ branch which was and is generally referred to as “Farrer House – Melbourne”.
It is accepted that the Applicant's clients were almost all sophisticated investors and that the Applicant acted on an “execution only” basis.
Amongst the Applicant's clients were:
·Justin Klintberg;
·Shayne Batros ;
·Alice Andrews; and
·Patricia Batros.
Shayne Batros is the Applicant’s father, Patricia Batros is the Applicant’s mother, and Ms Andrews is the Applicant’s mother-in-law.
The trading of relevance took place between 25 and 28 August 2014 in relation to listed securities in a company known as Metals of Africa Limited (Metals of Africa).
Metals of Africa is an Australian public company based in Perth whose ordinary shares and company options (referred to as MTA and MTAO respectively) are listed and able to be traded on the Australian Securities Exchange (the ASX).
By 2013, the Applicant had developed a relationship with two individuals connected with Metals of Africa namely Mr Brett Smith, a non-executive director of Metals of Africa and Ms Cherie Leeden, the managing director of Metals of Africa. The Applicant had regular meetings with Mr Smith and Ms Leeden from 2013.
On or about 27 July 2014, the Applicant contacted Mr John Polinelli, a director of Morgans' corporate advisory division in Perth, in relation to setting up a face-to-face meeting between representatives of the Morgans’ corporate advisory division, Mr Smith, and Ms Leeden.
On 28 July 2014, Mr Polinelli, Mr James Wilson (also of Morgans), and a corporate analyst employed by Morgans met with Mr Smith and Ms Leeden at Morgans’ office in West Perth.
On 31 July 2014, Mr Polinelli sent Ms Leeden an email relevantly stating that Morgans believed it could assist Metals of Africa to raise between $3-5 million dollars in the very near future (the 31 July Polinelli email): T Documents, T6.
According to a witness statement of Mr Polinelli dated 26 May 2015 (paragraphs 24 and 25) Ms Leeden did not initially receive the 31 July Polinelli email.
On 21 August 2014, Metals of Africa requested a trading halt pending the release of an announcement to the market. This trading halt was announced before the market opened on 21 August, and there was no trading in MTA and MTAO on 21 and 22 August 2014: ASX Release T9.
On 21 August 2014, Mr Polinelli had telephone conversations with the Applicant in relation to the trading halt and the 31 July Polinelli email: T44.
At 10:16am on 21 August 2014, Mr Polinelli sent the 31 July Polinelli email to the Applicant (the 21 August Polinelli email): T8.
At 9:12am on 22 August 2014, the Applicant forwarded the 21 August Polinelli email to Ms Leeden: T11.
At 9:46am on 22 August 2014, Ms Leeden replied to the Applicant's email by sending a response to Mr Polinelli which was copied to the Applicant (the 22 August Leeden email): T12.
In the 22 August Leeden email, Ms Leeden stated that she had not received the 31 July Polinelli email and noted that:
“We have a number of brokers currently offering to fully underwrite our next capital raising however we are very keen for RBS to badge our imminent capital raising of circa $5mil (approx. 50/50 placement followed by rights issue). Ben and Ryan from your Melbourne office have been great supporters of our story since I joined the board therefore we’re keen for RBS to lead it due to their ongoing support and RBS’s credible reputation in the sector.
Timing wise, we'd like to move on this as soon as possible, ideally mid-late next week. Would that be achievable from your side? I've attached our announcement that will be lodged at market open, likely on Monday morning.”
At 10:06:45am on Monday 25 August 2014, the Applicant entered a new sell order for MTA on the account of Mr Klintberg: T30.
At 10:13:38am on 25 August 2014, the Applicant entered a new sell order for MTAO on the account of Ms Batros: T33
At 10:15:39 am on 25 August 2014, the Applicant entered two further new sell orders for MTA on account of Ms Andrews (Account name: Masbal Holdings Pty Ltd): T32.
At about 10:18:18am on 25 August 2014, Michael Johnston (at times referred to as “Johnson”) of Morgans' corporate division telephoned Mr Polinelli and stated that the Applicant had current orders to trade in MTA and said words to the effect: “he is on the screen. What is he doing there”?: T34 paragraph 31.
At 10:19:42am on 25 August 2014, Mr Polinelli spoke with the Applicant and stated: "Mate, what the hell are you doing? You're on the screen. You're over the wall”. The Applicant responded that he had placed these orders “a long time ago”: T34 paragraphs 32-4.
At the hearing there was some discussion as to the exact meaning of the term “you’re over the wall”.
Somewhat surprisingly, after questioning from the Tribunal, it became apparent that there is no documented definition of that term. Nonetheless, it was broadly agreed that the effect of the term is that it is directed to a person about a particular class of securities. The term is understood within the industry to mean that the person who is said to be “over the wall” has reached a point (for whatever reason) that his or her ability to transact in relation to the securities in respect of which he or she is said to be over the wall is severely limited, if not completely prohibited.
At 11:18:34am on 25 August 2014, the Applicant entered two further new sell orders for MTA on the account of Justin Klintberg: T30.
At 1:26:11pm on 25 August 2014, the Applicant entered two new sell orders for MTA on the account of Alice Andrews: T32.
At 3:36:25pm on 25 August 2014, the Applicant entered two new sell orders for MTA on the account of Shayne Batros: T31.
At 10:14:19am on 26 August 2014, the Applicant entered two new sell orders for MTA on the account of Justin Klintberg: T30.
On 26 August 2014 at 10:27am (8:27am Perth time), Mr Polinelli sent an email to the Applicant stating:
"you are formally over the wall from 9:46am on the 22nd August – which is the time the email from Cherie Leeden (MD of MTA) was received discussing the transaction, and which you were copied in on by her”.
That email can be found at T14.
Attached to the email was a document titled "Annexure C Wall Crossing Form" (the Wall Crossing Form) which included following details:
Project/Client Name MTA Name of person who is to be taken over the Wall Ryan Batros Rationale Corporate Transaction Date & time of wall crossing 22nd August at 9:46am Employee's Restrictions 55. PA dealing – Not Allowed
56. Client advice – Not Allowed
57. Research publication on company –Allowed/Not Allowed
Other – Allowed/Not Allowed.
The Wall Crossing Form can be found at T15.
At 10:43:28am on 26 August 2014, the Applicant entered a new sell order for MTAO on the account of Patricia Batros: ST4. According to Mr Polinelli by signing the Wall Crossing Form, the wall-crossed staff member is deemed to have acknowledged his or her obligations and restrictions as an “Insider”: T34 paragraph 13.
At 10:48am on 26 August 2014, the Applicant signed the Wall Crossing Form and sent the form to Mr Polinelli by email and provided the original to an office manager at Morgans: T16 and 17.
At 2:12:59pm on 26 August 2014, the Applicant entered two new sell orders for MTAO on the account of Patricia Batros: ST4.
Whilst not referred to in the delegate’s decision, it has since been identified that the Applicant also took steps to cancel existing buy orders in relation to Metals of Africa that were on the market as at 25 August 2014.
At 10:01:49am on 25 August 2014, the Applicant proceeded to delete an existing buy order that was placed on the market for 100,000 shares in MTA at 17.0 cents on account of Justin Klintberg: T 30.
At 10:01:46am on 25 August 2014, the Applicant proceeded to delete an existing buy order that was placed on the market for 100 000 shares in MTA at 17.5 cents on account of Shayne Batros (Account name: Shayne Batros Pty Ltd): T31.
Further action in relation to deleting a buy order originally placed on 25 August 2014 was taken by the Applicant on 28 August 2014.
At the time the Applicant entered and deleted the above orders, there was no specific information available in the market about a proposed capital raising for Metals of Africa.
At 9:37:15am on 1 September 2014, Metals of Africa requested a trading halt in MTA and MTAO: T18.
At 9:53:21am on 3 September 2014, Metals of Africa released an announcement to the ASX titled "Placement and rights issue to raise over $5M" (the ASX Announcement).
The ASX Announcement (found at T19) stated that a placement and rights issue was to raise $5.063 million, and was to be made via the issue of approximately 12.2 million fully paid ordinary shares at $0.15 per share to professional and sophisticated investors, to raise $1.83 million. A non-renounceable, fully underwritten rights issue of up to approximately 21.55 million shares at an issue price of $0.15 each, on the basis of one share for every five shares held on the record date, to raise approximately $3.23 million, was to complete the capital raising. Morgans Corporate Limited was named Lead Manager for the placement and as underwriter of the entitlement offer in the ASX Announcement.
Metals of Africa's market capitalisation (at the relevant time) was $14,489,815. Accordingly, it is generally agreed that the funds to be raised in accordance with the ASX Announcement represented 34.94 per cent of its market capitalisation.
Between 22 and 29 August 2014, MTA traded at prices between $0.15 and $0.205.
On 29 August 2014, the last trading day prior to the release of the ASX Announcement, the closing price of MTA was $0.17: T23.
Between 22 and 29 August 2014, MTAO traded between $0.05 and $0.075. On 29 August 2014, the closing price of MTAO was $0.058: T24.
Between 22 and 29 August 2014, the average volume of MTA traded in was 1,358,193.
On 25 August 2014, the volume of MTA traded was 2,721,983: T 23.
In the same period, the average daily volume of MTAO traded was 583,658. The largest daily volume traded was on 26 August 2014, when 1,821,870 MTAO were traded: T24.
By way of comparison, the average daily volume traded in MTA in the three months of June, July and August 2014 was 1,299,792. Before mid-June 2014, MTA was very thinly traded and did not trade at all on some days. In that period, MTA reached a high price of $0.29 on 18 July 2014 and a low price of $0.057 on 18 June 2014, which indicates that MTA's price tended to vary considerably: T23.
The average daily volume of MTAO traded in the same period was 923,379. MTAO did not trade before 23 June 2014. The price of MTAO in the period also varied enormously, including a high of $0.10 on 18 July 2014 and a low of $0.015 on 23 June 2014: T24.
After the ASX Announcement on 3 September 2014, MTA opened at $0.175 which was $0.005 higher than the previous trading day's closing price. Within 15 minutes after the start of trading, MTA reached an intra-day low of $0.155. At the close of the market MTA was priced at $0.16: T23.
The market weighted average price for MTA's shares on 3 September 2014 was $0.163, which was 4.24% lower than that of the last traded price of $0.17.
After the release of the ASX Announcement, MTAO opened at $0.055 which was down $0.003 from the previous closing price on 29 August 2014. Shortly after trading started, MTAO's price had fallen to an intra-day low of $0.053. At the close of the market MTAO's price rallied to close at its previous trading day's closing price: T24.
The market weighted average price for MTAO on 3 September 2014 was $0.0569, which was 1.9% lower than the last traded price of $0.058.
ISSUES
The following matters do not appear to be in dispute:
(a)information about Metal of Africa’s intention to raise over $5 million in capital was “inside information” within the meaning of s 1042A of the Corporations Act, as prior to the ASX Announcement:
(i)it was information that was not generally available; and
(ii)if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of the particular Division 3 financial products; and
(b)MTA and MTAO are Division 3 financial products to which insider trading provisions in Part 7.10 of the Corporations Act applied.
The matters which are in dispute and the Tribunal must decide are:
(a)Whether or not the Tribunal has reason to believe that the Applicant was in possession of inside information about Metals of Africa that was not generally available at the time when MTA and MTAO securities were traded on 25, 26 and 28 August 2014.
(b)If the Tribunal finds the Applicant was in possession of inside information as outlined in sub-paragraph (a), whether the Applicant contravened s 1043A of the Corporations Act by placing orders on the Morgans’ system.
(c)Whether the Tribunal considers that the power to make a banning order prohibiting the Applicant from providing financial services is enlivened by reason of his contraventions of s 1043A of the Corporations Act, or otherwise.
(d)Should the Tribunal decide to make a banning order against the Applicant, the terms of the banning order and, in particular, its duration.
THE APPLICANT’S CONTENTIONS
The Applicant makes the following contentions.
The Applicant did not read, did not know, and did not act on, or provide advice in relation to the Polinelli email of 26 August 2014 or the 22 August Leeden email and did not otherwise act on or provide advice to any person in relation to any information which was not in the public domain in relation to MTA.
No advice, recommendation or communication of inside information was made by the Applicant to any client prior to the placing of any the relevant execution only orders by any such clients which is evidenced by at least the following:
(a)All relevant orders are described in the Morgans’ records and the Batros records as “execution only orders”.
(b)The course of trade which was the subject of such orders was consistent with the market conditions prevalent at the time, namely the need of MTA to raise capital and the “unknown” ability of MTA to raise the capital in any timely manner, leading necessarily to market uncertainty.
(c)The type of trades undertaken do not of themselves, reveal or indicate that the person who caused such trades to be undertaken was aware of any non public information.
(d)To the extent that the Applicant has been able to obtain evidence from the relevant clients, those clients deny that any information which was not in the public domain was communicated to them and further state that such trades were undertaken in the ordinary course of business.
The Applicant persistently and diligently sought advice from Morgans as to how he should deal with execution only orders which he had received from clients in circumstances where he became aware of information which was not available to the public generally.
As Morgans asserts that the Applicant was aware of information which was not available to the public in relation to MTA, and Morgans state they were aware that the Applicant was processing execution only orders into the Morgans computer system, and Morgans did nothing to stop their click operator from executing such orders, the only conclusion which can be drawn from Morgans’ actions is that:
(a)Morgans did not believe at any material time that the Applicant had communicated any non public information to any client;
(b)Morgans did not believe that the Applicant had used or otherwise relied upon any non public information when inputting the execution only orders into the Morgans computer system; and
(c)the completion of execution only orders was not an activity which was prohibited by the Corporations Act.
There is no reasonable basis for the ASIC delegate to have concluded that the Applicant had acted on or used any information was which was not available to the public.
The Applicant was a mere conduit (a cipher) for execution only orders placed by a client with Morgans. The Applicant did not and could not execute any order which he entered into the Morgans computer system.
All such orders were executed by a click operator employed and controlled by Morgans who could have been instructed by Morgans to reject such orders and otherwise had the capacity and ability to reject any order.
In the circumstances, the Applicant did not dispose of any financial product or enter into any agreement to dispose of any financial product in breach of s 1043A of the Corporations Act because as a matter of fact, the only relevant person who could dispose of such products was Morgans.
At all material times Morgans were aware of all relevant facts and circumstances and Morgans themselves had the principal duty and responsibility to the relevant client not to affect any trade in any circumstances where they considered that such trade would breach s 1043A of the Corporations Act.
In the circumstances the actions of Morgans in “executing” the relevant orders constitutes a novus actus interveniens, in that all the actions of Morgans were free and informed.
No reasonable person in the circumstances could have formed the conclusion that the execution only orders which were given by the clients of Morgans at the relevant time were affected because of any act or use of information by the Applicant for at least the following reasons:
(a)The orders were “execution only orders” and did not involve any input on the part of the Applicant other than as a conduit to Morgans;
(b)Such clients deny that they were in possession of any such information;
(c)The Applicant says he did not advise any client of any such information;
(d)The course of trades are consistent with the fact that it was obvious to any reasonable trader in MTA at the relevant time that without a further capital raising, MTA would run out of money;
(e)The course of trades were entirely consistent with the course of trades undertaken by the market generally and in particular during the period from 25 August to 28 August 2014; and
(f)During that period, approximately 4,000,000 MTA shares were traded. The Applicant processed into the Morgans computer system, client execution only orders for the sale of approximately 425,000 shares, in circumstances where there was relatively significant trading volumes undertaken in MTA into a descending market and in particular according to the records produced by the ASIC expert Mr Dent:
(i)On Monday 25 August 2014, 2,721,983 MTA shares were traded at an opening price of $0.195, with a high of $0.205, a low of $0.165 and a close of $0.170.
(ii)On 26 August 2014, 853,425 MTA shares were traded at an opening price of $0.175, a high of $0.175, a low of $0.150 and a close of $0.155.
(iii)On 27 August 2014, 403,382 MTA shares were traded at an opening price of $0.155, a high of $0.165, a low of $0.150 and a close of $0.150.
Accordingly the empirical evidence demonstrates that at the relevant time the market was a falling market and the sell orders made by the relevant clients were entirely consistent with such market.
The ASIC delegate made the following material errors in making her determination of 8 March 2016:
(a)In numerous places the ASIC delegate states that the Applicant “executed orders” and thereby “disposed” of them for the purpose of section 1043A(1)(c) of the Corporations Act.
(b)For all of the reasons detailed above, the Applicant did not, and could not “execute” or “dispose” of any orders. Such execution was undertaken by Morgans.
(c)The ASIC delegate stated in paragraph 78 “[t]here is no information before me, and Mr Batros has not suggested, that there was any information available in the market about a proposed capital raising for Metals of Africa until the Announcement”. Such statement contradicts the statement of the ASIC expert, Mr Dent, a copy of which is set out behind tab T37 of the ASIC materials. In particular, paragraph 43 of Mr Dent’s report (page 483 of the ASIC materials) states: “[i]t was therefore apparent upon the preceding analysis of MTA’s financial position that MTA would run ou`t of funds by 31 December 2014 and therefore a person could have concluded that MTA would require further capital at some point prior to December 2014”.
(d)At paragraph 81 the ASIC delegate states “Mr Batros did not dispute that he had executed the orders to sell MTA and MTAO”. Such conclusion cannot be made because the Applicant has at all material times asserted that such trades had been undertaken and executed by click operators employed by Morgans.
(e)At paragraph 85 and 86 of the delegate’s determination, the delegate concludes that if the Applicant knew of the existence of a capital raising he would probably know that the share price would fall, and that such knowledge arises because of knowledge of inside information. However such opinion as to the likely fall in the share price is consistent with the opinion of Mr Dent referred to above, which Mr Dent concludes was based on reasonably available public information.
(f)In paragraph 100 the delegate concludes “I am satisfied that it is not a coincidence that Mr Batros executed the sell orders for MTA and MTAO on behalf of at least two persons who were personally connected to him...when he knew the clients would be likely to benefit...”. By contrast however the delegate concluded in paragraph 108 that "there is no evidence that Mr Batros gave advice to the relevant clients or that he communicated the inside information to them before he executed the orders to sell MTA and MTAO on 25 and 26 August 2014”. Such statements are undoubtedly conflicting.
(g)Nevertheless, based on the logic of the statement in paragraph 100, the delegate wrongly concluded at paragraph 108 “the prohibition in subsection 1043A(1) is strict: it is not necessary for ASIC to establish that Mr Batros communicated the inside information to the clients and/or advised them about it”.
(h)Such conclusion cannot be correct at law. Section 1043A(1) requires that there be some nexus between the knowledge of any relevant information and any relevant act or use of that information which has the effect of applying, acquiring or disposing of any relevant financial product for at least the following reasons:
(i)If the mere fact of an entity knowing of information prohibited an entity from performing any act without the use of that knowledge, no large trading organising such as Morgans could ever perform any market trade once anyone within the organisation became aware of any relevant information as the whole entity would be deemed to be infected by such information;
(ii)The concept of an "execution only order” requires the recipient of the information to receive that order as a mere "conduit” for the principal and to process that order on behalf of the principal without any input by that conduit;
(iii)At all material times Morgans knew of all relevant facts and had the opportunity , and in fact did exercise its own discretion as to whether or not to dispose of such financial products by themselves causing and or permitting Morgans click operators to execute the relevant orders into the market; and
(iv)In the circumstances the actions of Morgans break any nexus between the Applicant’s action in inputting the execution only orders into the Morgans computer system and any “disposal” of any financial product. The Applicant could not be said to have procured Morgans to so act, see relevantly,State of Western Australia v Burke (No 3) [2010] WASC 110 (paragraph 19).
THE RESPONDENT’S CONTENTIONS
In the Applicant’s Statement of Issues, Facts and Contentions dated 29 September 2016, it is asserted that the Applicant did not read, did not know, and did not act on or provide advice in relation to the relevant inside information. The Respondent contends these assertions should not be accepted by the Tribunal.
Given:
·the role that the Applicant played in introducing the corporate division of Morgans to Metals of Africa,
·the Applicant’s awareness that Metals of Africa had gone into a trading halt on 21 August 2015,
·the Applicants conversations with Mr Polinelli on 21 August 2015,
·the Applicant’s role in forwarding the 31 July Polinelli email to Ms Leeden, and
·receipt by the Applicant of the 22 August Leeden email,
the Tribunal should be satisfied that the Applicant knew, or ought reasonably to have known, about the inside information at all relevant times.
This conclusion is consistent with the contemporaneous documentary material, in particular the Wall Crossing Form which the Applicant signed and returned to Morgans by which the Applicant expressly acknowledged that he was “over the wall” from 9:46 am on 22 August 2015.
As outlined under the heading “Relevant Factual Background” above, a number of trades in relation to MTA and MTAO all took place at the instigation of the Applicant after that time.
In any event, the Applicant accepts that he had a discussion with Mr Polinelli at approximately 10:19am on 25 August 2015 during the course of which Mr Polinelli told him he was over the wall in relation to Metals of Africa.
There can be no debate that he was in receipt of the relevant inside information in relation to Metals of Africa after this point in time.
The Respondent therefore contends that at the very least the Applicant entered into the various transactions from 11:18am on 25 August 2014 to 2:12pm on 26 August 2014 after he was aware of the inside information.
The Respondent further contends that it is no answer for the Applicant to assert that because he was only involved in “execution only orders” he did not apply for, acquire, or dispose of a relevant financial product whilst he possessed the inside information. The Applicant was directly responsible for taking the actions in relation to MTA and MTAO on the Morgans’ IOS workspace as described in the section under the heading “Relevant Factual Background”.
In addition, the Applicant’s contention that he was a “mere conduit” and that it was Morgans and its “click operators” who were responsible for the relevant trades does not withstand scrutiny. It was the Applicant who physically placed, amended, and deleted the relevant orders. It is not the role or responsibility of Designated Trading Representatives to stop orders placed by Morgans’ staff members who are in possession of inside information.
The Applicant’s conduct in continuing to place, amend and delete orders after he had discussed the inside information with Mr Polinelli (and then signed and returned the Wall Crossing Form) demonstrates that the Applicant either wholly misunderstood the requirements of the Corporations Act, or chose to ignore the law in order to derive benefits from the use of the inside information.
The terms of s 1043A of the Corporations Act are clear. A person must not apply for, acquire, or dispose of financial products (or procure another person to do so) when the person is in possession of inside information. The Applicant knew, or ought reasonably have known, that he was in possession of information that was not generally available about Metals of Africa. As a result, he was prohibited from placing trades, execution only or otherwise. Despite the prohibition, he did so.
In all these circumstances, the discretion to make a banning order was (and is) enlivened.
The purpose of a banning order is to protect members of the public: Re Howarth and Australian Securities and Investments Commission [2008] AATA 278; (2008) 101 ALD 602, Forgie DP at [152]-[180].
A banning order is not made to punish a person even though punishment or the imposition of a penalty may be the practical outcome of such an order: Re Hayes and Australian Securities and Investments Commission [2006] AATA 1506; (2006) 93 ALD 494.
If imposed, a banning order protects the public from a person providing financial services. A banning order may also have the effect of maintaining consumer confidence: Re Felden and Australian Securities and Investments Commission [2003] AATA 301; (2003) 45 ACSR 111.
Deterrence is relevant to the protection of the public: Re Howarth and Australian Securities and Investments Commission [2008] AATA 278; (2008) 101 ALD 602. A banning order does not only provide deterrence to the person the subject of the order, but also to others who are involved or might potentially become involved in the industry. A banning order may also have an educative effect on the person concerned and the industry at large. It informs other participants in the industry, including advisers and consumers, that certain conduct is neither acceptable nor tolerated.
Any breach of the insider trading provisions is an extremely serious matter. As explained by the NSW Court of Criminal Appeal in Hartman v Director of Public Prosecutions [2011] NSWCCA 261; (2011) 87 ACSR 52 at paragraph 94 :
It needs to be remembered that insider trading not only has the capacity to undermine the integrity of the market, it also has the potential to undermine aspects of confidence in the commercial world generally. The principles of confidentiality and trust are fundamental to the operation of many commercial transactions. As the applicant’s employer recognised, advance knowledge by its employees of proposed trades of a significant kind required, as a matter of trust, that they remain in the realm of confidentiality. Insider trading is a form of cheating. Put bluntly, it is a form of fraud, even though its consequences may be more opaque than general fraud.
Having regard to the nature and extent of the applicant’s conduct and his attitude to that conduct, protection of the public and maintenance of consumer confidence require that a banning order be made against him: Re Sullivan and Australian Securities and Investments Commission [2013] AATA 592 at paragraphs 20-21.
The delegate was correct in taking guidance from Table 2 of RG 98 when considering the appropriate duration of the banning order. The Applicant’s conduct in placing orders when he was in possession of inside information displays a complete disregard for the law that governs his chosen field of employment and evinces a general lack of regard for compliance with the relevant regulatory requirements. His failure to demonstrate (even today) any real awareness of the nature, extent, and significance of that conduct demonstrates that a five year banning order is necessary and appropriate.
The Respondent contends that the Tribunal should affirm the decision under review to make a banning order prohibiting the applicant from providing financial services for the period of five years.
THE TRIBUNAL’S CONSIDERATION
In reviewing the facts, it seems to this Tribunal that it is a key point that at 10:19am on 25 August 2014, the Applicant had a discussion with Mr Polinelli in which Mr Polinelli told the Applicant in no uncertain terms that he was over the wall in relation to Metals of Africa. To repeat the essence of that conversation Mr Polinelli said to the Applicant: “Mate what the hell are you doing. You are on the screen. You’re over the wall.”
Now this language was hardly ambiguous or vague and could only be interpreted one way which was that the Applicant in the circumstances that applied at that very moment should not be on the screen. In other words, he should not have any orders placed under his name (even on an execution only basis) on the screen in relation to any securities relating to Metals of Africa.
How this somewhat unsophisticated, blunt, direct and concise message conveyed by Mr Polinelli in very clear language could be construed in any way other than to say – stop transacting in securities relating to Metals of Africa – is difficult to fathom. To suggest that the Applicant was still in the dark as to what he should be doing as an execution only broker is absurd and in my view defies logic.
Yet even in the context of that clear message, on the same day (namely on 25 August 2014) the Applicant entered the following sell orders:
·One hour later at 11:18am, two sell orders for MTA for Justin Klintberg;
·Two and a half hours later at 1:26pm, two sell orders for MTA for Alice Andrews; and
·Five and a half hours later at 3:36pm, two sell orders for MTA for Shayne Batros.
The next day, 26 August 2014 at 10:14am and at 10:43am he entered into further sell orders in respect of MTA for Justin Klintberg and Patricia Batros.
Then at 10:48am on the same day, the Applicant signed the Wall Crossing Form acknowledging he was “over the wall” from 9:46am on 22 August 2014 and returned it to Mr Polinelli.
Yet still he not desist from further activity in Metals of Africa securities.
Some three and a half hours later on that day he sold MTAO for Patricia Batros.
Finally, of relevance is also the fact that he has deleted a number of buy orders at various stages after Mr Polinelli’s comments were conveyed to him.
In the view of this Tribunal, the Applicant’s conduct in continuing to, in particular, place but also to delete orders after he had received such a direct message from Mr Polinelli and then, a fortiori, after he had returned the Wall Crossing Form demonstrates either that the Applicant misunderstands the very clear requirements of the Corporations Act or that he has chosen to ignore the law for whatever reason.
The Applicant relies on the evidence of a witness, Carol Corbey, the Applicant’s branch manager at Morgans, who gave evidence at the hearing. Her evidence indicated that she had requested advice from a compliance officer at Morgans as to how the Applicant should deal with execution only orders. No response was received until late in August 2014 after all trading had ceased. Ms Corbey presented as a straight-talking down to earth manager and I do not doubt the veracity of her evidence. However, that evidence must be taken into account in the context of the communications to the Applicant by Mr Polinelli who was clearly not in any doubt about the Applicant’s position even as an execution only broker. While there may have been some doubt in the mind of Ms Corbey, there was no doubt in the mind of Mr Polinelli and the Applicant clearly chose for whatever reason to ignore the latter.
One other consideration that is said to have caused some doubt in the Applicant’s mind is the fact that the Wall Crossing Form had not been fully completed such that next to the sub-heading “Other” the words “Allowed/Not Allowed” appeared with neither “Allowed” nor “Not Allowed” having been deleted as one might expect.
The Tribunal accepts that this was an unfortunate deficiency but it is unreasonable and irresponsible for the Applicant to take this deficiency to mean trading is “Allowed” especially in the face of Mr Polinelli’s very clear and unequivocal words.
In his defence, the Applicant raises a number of other issues concerning, in particular:
(a)The fact that he was an execution only broker;
(b)The suggestion that he was a mere cypher in the overall Morgans’ network;
(c)The fact that he did not read the 22 August Leeden email at any material time; and
(d)The fact that he only returned the Wall Crossing Form after bullying from Mr Polinelli.
The Applicant was an Execution only broker
The suggestion as put by the Applicant’s counsel is that if a person places orders purely on an execution only basis and does not communicate or advise the client of any inside information that person is somehow outside or exempt from the terms of s 1043A of the Corporations Act.
I can see no basis whatsoever for such an assertion. It is manifestly clear from the terms of that section that there is a blanket prohibition on an intermediary such as the Applicant undertaking any dealings in securities after he or she is in possession of inside information that relates to those securities.
Furthermore, in this context the person need not be consciously aware of, or bring to mind, the nature of the information he or she possessed at the moment in time the order is placed. All that is needed to trigger the section is that the order is placed after the person had the necessary knowledge: R v Farris (2015) 301 FLR 230, Hall J at paragraphs 174-177.
Thus, when the Applicant placed the orders starting at 11:18am on 25 August 2014 and continuing through to the following day, it does not matter that the information he was clearly aware of regarding the capital raising in MTA may not have been to the forefront of his mind. All that matters is that he was in possession of the information.
The only relevant exception to the s 1043A prohibition is to be found in s 1043K of the Corporations Act. That section provides that a person acting as an agent does not contravene the insider information prohibitions if as a holder of a financial services licence or a representative of a financial service licensee, he enters into a transaction on behalf of another person under specific instructions if the inside information was not communicated at the time of the transaction.
Clearly, that exception has no application here.
The Applicant was a mere cypher
The Applicant suggests that he was a mere cypher or conduit who had no real duties beyond processing the orders placed by clients of Morgans.
All the orders, he suggests, were executed by a click operator employed and controlled by Morgans who could have been instructed by Morgans to reject orders and otherwise had the capacity and ability to reject any offer.
Based on the facts I find this suggestion to be largely inaccurate.
The Applicant, even acting on an execution only basis, is called upon to activate transactions through his actions. He is not a mere dummy who is required to blindly follow orders without any capacity for independent thought.
The cypher, if there is one here, is more likely to be the click operator who, as the name suggests, clicks a button upon instruction from the execution only broker.
The Applicant as an execution only broker is not a cypher – he is a person who is in a position where he provides no advice but must exercise independent thought and consider whether in the circumstances as presented from time to time he can execute a transaction having regard to the information he is in possession of at that moment in time.
The Applicant did not read the 22 August Leeden email at any material time
The claim by the Applicant that he did not read the 22 August Leeden email at any material time is, firstly, inconsistent with other statements that he made to certain Morgans representatives on 29 August 2014 in which he indicated very clearly that he had seen that email on Monday 25 August 2014: ST 7 and Exhibit R8.
Secondly, at no stage during the s 19 examination did the Applicant make any claim to the effect that he had never seen or read the 22 August Leeden email. One would have thought that such a critical matter as his awareness of the content of this email would have been to the forefront of his mind at the time of the examination and that he would have raised his awareness or lack thereof of the contents of the email at the time of the examination.
Thirdly, the mobile phone records at Exhibit R4 show that upon landing at Gold Coast Airport on 22 August 2014 the Applicant used 5573KB of mobile data which would be consistent with the downloading of the email.
Fourthly, the Applicant asserts that on returning to his office on Monday 25 August 2014 after a weekend away he deleted all the emails he received the previous Thursday, Friday, Saturday and Sunday without reading them and as a result he was not aware of the 22 August email and its contents.
Quite frankly, it seems highly implausible to me that a man who works in the stockbroking industry where information is so critical, would activate a wholesale deletion of emails covering four consecutive days without even looking at them.
Fifthly, again at no stage during the s 19 examination did the Applicant make a claim to the effect that he had deleted all the relevant emails he had received over the relevant four day period. Again, one would have thought that such a critical matter would have been to the forefront of the Applicant’s mind at that time and he would have raised it at the examination.
The Applicant only returned the Wall Crossing Form after bullying from Mr Polinelli
The suggestion that the Applicant was bullied into signing the Wall Crossing Form is broadly inconsistent with a number of facts.
First, Mr Polinelli denies the allegation completely.
Secondly, the timelines do not in and of themselves suggest that bullying has occurred. In particular, the Wall Crossing Form was signed and returned by the Applicant 21 minutes after it was sent to him on 26 August 2014 and there is no evidence that there were any telephone calls, emails or other discussions between Mr Polinelli and the Applicant in that 21 minute period.
Thirdly, the Applicant sent a covering email with the Wall Crossing Form. In that email the Applicant made no complaint about being required to sign the form or about the contents of the form.
THE TRIBUNAL’S KEY FINDINGS
The Tribunal finds as follows:
(a)as an execution only broker he was not a mere cypher or conduit and the Applicant was not permitted to execute any transactions relating to MTA after he became aware of the inside information;
(b)he became aware of the inside information no later than at 10:19am on 25 August 2014 but quite likely he was in possession of the inside information before then;
(c)the Applicant contravened s 1043A of the Corporations Act and that contravention enlivens the power to make the banning order;
(d)the Applicant was aware of and had read the 22 August 2014 Leeden email by 10:19am on 25 August 2014, at the latest; and
(e)The Applicant signed and returned the Wall Crossing Form without any bullying from Mr Polinelli.
SEVERITY OF THE ORDER
The Applicant has suggested that the banning order should be limited to the time which has already expired because:
(a)There is no dispute that the Applicant requested on numerous occasions, advice from Morgans as to how he should proceed with the execution only orders;
(b)The experts within Morgans did not advise or counsel the Applicant that he should not proceed with execution only orders nor did they stop their click operators from executing such orders;
(c)Morgans at all material times had the power, duty and responsibility for execution of execution only orders on behalf of their clients;
(d)Morgans, as a principal, fell plainly within the objects of s 1043A of the Corporations Act as the recipient of the alleged insider information and had the principal obligation to deal with the situation;
(e)If Morgans had believed that the Applicant had engaged in wrongful or illegal conduct then Morgans was duty bound under the Corporations Act not to process and execute the execution only orders which had been placed into the Morgans computer system by the Applicant; and
(f)In all circumstances the Applicant had acted reasonably, and with diligence.
The Tribunal finds that the Applicant was given clear and unambiguous advice which was more in the form of directions from Mr Polinelli who was a director of Morgans’ corporate advisory division that he was “over the wall” and therefore he should not be on screen transacting in securities relating to Metals of Africa. The suggestion that he sought advice from Morgans, but did not know what Morgans’ position was, is in my view plainly absurd.
The suggestion that Morgans may also have been at fault in some way provides no basis for diminishing the Applicant’s personal responsibility for the transactions that took place while he was in possession of inside information.
If there are others at Morgans who should be pursued in relation to these matters that is a matter for the Respondent to action but in my view should have no bearing on the severity of the banning order imposed on the Applicant.
The Tribunal does not agree that the Applicant acted reasonably and with due diligence. He chose quite consciously:
(a)to execute transactions while in possession of inside information; and
(b)to ignore the advices/directions given by Mr Polinelli by phone on 25 August 2014 and by email on 26 August 2014.
In reaching its conclusion the Tribunal has also had regard to RG 98 and in particular Tables 1 and 2 appearing at the end. The Tribunal is of the view that there is sufficient here to make out a case of insider trading and a banning order of “anywhere between 3 and 10 years” is justified.
However importantly:
(a)the offences appear to have taken place over a few days only; and
(b)there appear to be no other offences.
A banning order at the lower end of that range is therefore reasonable and having regard to the fact that the Applicant has expressed no contrition for his behaviour and still maintains he has done nothing wrong, five years is appropriate and fair.
Accordingly, the Tribunal finds that the case for a banning order is made out and there is no basis for the assertion that the ban is too severe.
DECISION
The decision under review is affirmed.
I certify that the preceding 165 (one hundred and sixty-five) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President
...................................[sgd].....................................
Associate
Dated: 28 March 2017
Date(s) of hearing: 12 & 13 December 2016 Date final submissions received: 6 February 2017 Counsel for the Applicant: T Hartnell Solicitors for the Applicant: M Horton, RBHM Commercial Lawyers Counsel for the Respondent: S Rosewarne Solicitors for the Respondent: E Lee, Australian Securities & Investments Commission
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