Davidof and Australian Securities and Investments Commission

[2017] AATA 37

Davidof and Australian Securities and Investments Commission  [2017] AATA 37 (20 January 2017)

Division:TAXATION & COMMERCIAL DIVISION

File Number:           2016/0164

Re:Tony Davidof

APPLICANT

AndAustralian Securities and Investments Commission

RESPONDENT

DECISION

Tribunal:Mrs J C Kelly, Senior Member

Date:20 January 2017

Place:Sydney

The reviewable decision of 10 December 2015 is set aside and substituted for that decision is the decision that:

·The MINI warrants issued by CSISAL and traded by the applicant did not satisfy s 761D(1)(b) of the Act or reg 7.1.04 of the Corporations Regulations 2001 and were not a derivative under the Act. 

·The applicant was not taking part in or carrying out a transaction or transactions that fell within either s 1041A or s 1041B of the Act, because the transactions in which he was engaged were not trading in financial products.

·ASIC has not established that that applicant has not complied with a financial services law and therefore has not established a basis for making a banning order under s 920A(1)(e) of the Act.

............................[sgd]...............................

Mrs J C Kelly, Senior Member

CATCHWORDS

CORPORATIONS - financial services - banning order – applicant prohibited from providing any financial services – MINI warrants – whether a MINI warrant is a financial product – whether MINI warrants are derivatives – decision under review set aside

LEGISLATION

Corporations Act 2001 (Cth), ss 760A, 761A, 761D(1), 764A(1)(c,) 910(a)(iii), 920A(1), 920B, 1041A, 1041B

Administrative Appeals Tribunal Act 1975 (Cth), ss 25, 43

Corporations Regulations 2001 (Cth), reg 7.1.04

REASONS FOR DECISION

Mrs J C Kelly, Senior Member

20 January 2017

THE REVIEWABLE DECISION

1. The applicant, Mr Davidof, seeks the review of the decision made on 10 December 2015 by the delegate of the respondent, Australian Securities and Investments Commission (ASIC), to prohibit the applicant from providing any financial services for a period of three years (the banning order). The banning order was made pursuant to ss 920A(1) and 920B of the Corporations Act 2001 (Cth) (the Act).

2. The delegate found that the applicant had participated in six transactions involving MINI warrants that were likely to have the effect of creating an artificial price for the MINI warrants.

3. The review in this Tribunal is brought pursuant to s 1317B of the Act and ss 25 and 43 of the Administrative Appeals Tribunal Act 1975 (Cth).

   THE LAW

4. 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 and may prohibit the person against whom it is made from providing a financial services permanently or for a specified period, unless ASIC has reason to believe that the person is not of good fame or character (s.920B of the Act).

5. Section 920B(3) provides:

   (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.

6. Section 920A sets out ASIC’s power to make a banning order.  Relevantly, that power may be exercised where the person has not complied with a financial services law (s 920A(1)(e)), where ASIC has reason to believe that the person is likely to contravene a financial services law (s 920A(1)(f)), or where ASIC has reason to believe that the person is not of good fame or character (s 920A(1)(d)).

7. Chapter 7 of the Act sets out provisions which govern and regulate the conduct of participants in financial services and the markets.

8. Section 760A of the Act sets out the object of the Chapter:

   The main object of this Chapter is to promote:

   (a)confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and

   (b)fairness, honesty and professionalism by those who provide financial services; and

   (c)fair, orderly and transparent markets for financial products; and

   (d)the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.

9. Part 7.10 of the Act is entitled “Market misconduct and other prohibited conduct relating to financial products and financial services”.

10. Section 1041A of the Act 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 operated 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.

11. Section 1041B of the Act relevantly provides: 

    (1)  A person must not do, or omit to do, an act (whether in this jurisdiction or elsewhere) if that act or omission has or is likely to have the effect of creating, or causing the creation of, a false or misleading appearance:

    (a)of active trading in financial products on a financial market operated in this jurisdiction; or

    (b)with respect to the market for, or the price for trading in, financial products on a financial market operated in this jurisdiction.

    …

    (2)  For the purposes of subsection (1), a person is taken to have created a false or misleading appearance of active trading in particular financial products on a financial market if the person:

    (a)enters into, or carries out, either directly or indirectly, any transaction of acquisition or disposal of any of those financial products that does not involve any change in the beneficial ownership of the products; or

    (b)makes an offer (the regulated offer) to acquire or to dispose of any of those financial products in the following circumstances:

    (i)     the offer is to acquire or to dispose of at a specified price; and

    (ii)    the person has made or proposes to make, or knows that an associate of the person has made or proposes to make:

    (A)  if the regulated offer is an offer to acquire—an offer to          dispose of; or

    (B)  if the regulated offer is an offer to dispose of—an offer to      acquire;

    the same number, or substantially the same number, of those financial products at a price that is substantially the same as the price referred to in subparagraph (i).

    Note:  The circumstances in which a person creates a false or misleading appearance of active trading in particular financial products on a financial market are not limited to the circumstances set out in this subsection.

    (3)  For the purposes of paragraph (2)(a), an acquisition or disposal of financial       products does not involve a change in the beneficial ownership if:

    (a)a person who had an interest in the financial products before the acquisition or disposal; or

    (b)an associate of such a person;

    has an interest in the financial products after the acquisition or disposal.

    (4)  The reference in paragraph (2)(a) to a transaction of acquisition or disposal of financial products includes:

    (a)a reference to the making of an offer to acquire or dispose of financial products; and

    (b)a reference to the making of an invitation, however expressed, that expressly or impliedly invites a person to offer to acquire or dispose of financial products.

    THE ISSUES

12. The issues for the Tribunal to determine are:

    (a)Are the MINI warrants, which were traded by the applicant, financial products to which s 1041A of the Act applies?

    (b)Was the delegate wrong at law in applying the High Court’s construction of s 1041A in DPP (Cth) v JM (2013) 250 CLR 135?

    (c)Did the applicant take part in, or carry out, six separate transactions that were likely to have the effect of creating an artificial price for trading in MINI warrants?

    MINI WARRANTS

13. Attachment A to the reviewable decision states the following:

    ·A warrant is a financial instrument issued by a bank or other institution and traded on the Australian Stock Exchange (ASX). It is a form of derivative, that is, it derives its value from another thing which is commonly referred to as the ‘underlying instrument’ or ‘reference asset’. The underlying instrument may be a share, a share price index (SPI), a pair of currencies, or a commodity. A MINI warrant is a particular type of warrant that offers leveraged exposure to an underlying instrument. Leverage refers to the fact that a holder only pays a fraction of the cost of the underlying instrument, yet he or she can gain exposure to the full price movement of that underlying instrument.

    ·Unlike other types of warrants, MINIs are open ended contracts with no set expiry date. (Emphasis added). They will generally track the price of the underlying instrument on a one-for-one basis (also referred to as having a ‘conversion ratio’ or ‘delta’ of one).

    THE TRANSACTIONS

14. The six transactions in issue are:

    ·three trades in AGOKCC MINIs on 21 February 2013;

    ·one trade in XJOKCQ MINIs on 21 February 2013; and

    ·two trades in XJOKCF MINIs on 3 June 2013.

15. AGO MINIs derived their value from Atlas Iron Limited shares. The XJO MINIs derived their value from the S&P/ASX200 Share Price index.

    BACKGROUND FACTS

16. The applicant did not dispute the underlying facts relied upon by the delegate and set out in Attachment A to the reviewable decision.  He did not contest the documentary material listed in Attachment B to that decision.

17. On 15 January 2007, the applicant commenced employment as a private client adviser with Macquarie Bank Limited (MBL), in the banking and financial services group, wealth management division. He continued in that role until he resigned on 11 September 2013.

18. While employed at MBL, by operation of s 910A(a)(iii) of the Act, the applicant was a representative of Macquarie Equities Limited (MEL) pursuant to its Australian Financial Services Licence, which authorised it to:

    (a)provide financial services and carry on a financial services business under its registered business name (Macquarie Private Wealth); and

    (b)carry on a financial services business to deal in a financial product by applying for, acquiring, varying or disposing of a financial product on behalf of another person in respect of various classes of financial products, including securities and derivatives, to retail and wholesale clients.

19. From 13 March 2012, the Applicant was also accredited as a Level 2 Accredited Derivatives Adviser (ADA) under the Market Integrity Rules (ASX Market) 2010 (the Rules).  That accreditation authorised the applicant to provide personal advice to clients in relation to various financial products, including derivatives, options and trade warrants.

    CREDIT SUISSE INVESTMENT SERVICES (AUSTRALIA) LIMITED

20. During 2012 and 2013, Credit Suisse Investment Services (Australia) Limited (CSISAL) held an Australian Financial Services Licence which authorised it to issue, and a make a market for, relevantly, MINIs traded on the ASX.

21. At the relevant times, the CSISAL “warrants desk” was headed by Mr David Anderson (now deceased), with support from Mr Philip McLean. The warrants desk was responsible for issuing warrants (including MINIs) and making a market in those warrants on behalf of CSISAL.

    ARE THE MINI WARRANTS WHICH WERE TRADED BY THE APPLICANT FINANCIAL PRODUCTS TO WHICH S 1041A OF THE ACT APPLIES?

22. ASIC contends that each of the MINIs that is the subject of the trades is a derivative within the meaning of s 761D(1) of the Act and by virtue of s 764A(1)(c), is a financial product within the meaning of s 761A.

23. Section 761D provides:

    (1)  For the purposes of this Chapter, subject to subsections (2), (3) and (4), a derivative is an arrangement in relation to which the following conditions are satisfied:

    (a)under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and

    (b)that future time is not less than the number of days, prescribed by regulations made for the purposes of this paragraph, after the day on which the arrangement is entered into; and

    (c)the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following:

    (i)     an asset;

    (ii)    a rate (including an interest rate or exchange rate);

    (iii)    an index;

    (iv)   a commodity.

    (2)  Without limiting subsection (1), anything declared by the regulations to be a derivative for the purposes of this section is a derivative for the purposes of this Chapter. A thing so declared is a derivative despite anything in subsections (3) and (4).

    (3)  Subject to subsection (2), the following are not derivatives for the purposes of this Chapter even if they are covered by the definition in subsection (1):

    (a)an arrangement in relation to which subparagraphs (i), (ii) and (iii) are satisfied:

    (i)     a party has, or may have, an obligation to buy, and another party has, or may have, an obligation to sell, tangible property (other than Australian or foreign currency) at a price and on a date in the future; and

    (ii)    the arrangement does not permit the seller’s obligations to be wholly settled by cash, or by set‑off between the parties, rather than by delivery of the property; and

    (iii)    neither usual market practice, nor the rules of a licensed market or a licensed CS facility, permits the seller’s obligations to be closed out by the matching up of the arrangement with another arrangement of the same kind under which the seller has offsetting obligations to buy;

    but only to the extent that the arrangement deals with that purchase and sale;

    (b)a contract for the future provision of services;

    (c)anything that is covered by a paragraph of subsection 764A(1), other than paragraph (c) of that subsection;

    (d)anything declared by the regulations not to be a derivative for the purposes of this Chapter.

    (4)  Subject to subsection (2), an arrangement under which one party has an obligation to buy, and the other has an obligation to sell, property is not a derivative for the purposes of this Chapter merely because the arrangement provides for the consideration to be varied by reference to a general inflation index such as the Consumer Price Index.

24. Section 764A(1)(c) of the Act specifies that a derivative is a financial product.

25. ASIC referred the Tribunal to no applicable regulation in relation to s 761D(1)(b) or s 761D(2) of the Act. The applicant referred to the Corporations Regulations2001, reg 7.1.04 which provides, relevantly:

    (1)  For paragraph 761D(1)(b) of the Act, the prescribed period is:

    (a)for a foreign exchange contract-- 3 business days; and

    (b)in any other case--1 business day.

    (2)  For subsection 761D(2) of the Act, and subject to this regulation, an arrangement is declared to be a derivative if the following conditions are satisfied in relation to the arrangement:

    (a)the arrangement is not a foreign exchange contract;

    (b)under the arrangement, a party to the arrangement must, or may be required to, provide at some future time (which may be less than 1 day after the arrangement is entered into) consideration of a particular kind or kinds to someone;

    (c)the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following:

    (i)     an asset;

    (ii)    a rate (including an interest rate or exchange rate);

    (iii)    an index;

    (iv)   a commodity.

    (4)  An arrangement under which:

    (a)a party has, or may have, an obligation to buy tangible property (other than Australian or foreign currency) at a price and on a date in the future; and

    (b)another party has, or may have, an obligation to sell that property; and

    (c)the arrangement does not permit the seller's obligations to be wholly settled by cash, or by set-off between the parties, rather than by delivery of the property; and

    (d)neither usual market practice, nor the rules of a licensed market or a licensed CS facility, permits the seller's obligations to be closed out by the matching up of the arrangement with another arrangement of the same kind under which the seller has offsetting obligations to buy;

    is not an arrangement to which subregulation (2) applies to the extent only that the arrangement deals with that purchase and sale.

    (5)  An arrangement under which:

    (a)a party has an obligation to buy property; and

    (b)another party has an obligation to sell the property;

    is not an arrangement to which subregulation (2) applies merely because the arrangement provides for the consideration to be varied by reference to a general inflation index (for example, the Consumer Price Index).

    (6)  A contract for the future provision of services is not an arrangement to which subregulation (2) applies.

    (7)  A thing that is described in subsection 764A(1) of the Act, other than paragraph 764A(1)(c), is not an arrangement to which subregulation (2) applies.

    (8)  For paragraph 761D(3)(d) of the Act, each of the following is declared not to be a derivative for Chapter 7 of the Act:

    (a)tradeable water rights;

    (b)an arrangement:

    (i)     under which a person (the seller ) has, or may have, an obligation to sell tradeable water rights at a future date; and

    (ii)    under which another person (the buyer ) has, or may have, an obligation to buy the tradeable water rights, or replacement water rights, at a future date; and

    (iii)    that does not permit the seller's obligations to be wholly settled by cash, or by set-off between the seller and the buyer, rather than by transfer of ownership of the tradeable water rights or replacement water rights; and

    (iv)   in relation to which neither usual market practice, nor the rules, allow the seller's obligations to be closed out by matching up the arrangement with another arrangement of the same kind under which the seller has offsetting obligations to buy the tradeable water rights or replacement water rights;

    (c)a carbon abatement contract.

    Note: For carbon abatement contract, see subregulation 1.0.02(1).

    (9)  Subregulations (4) to (8) apply whether or not a matter mentioned in those subregulations is described in subsection 761D(1) of the Act.

    (10)  In subregulation (8):

    " replacement water rights " means tradeable water rights that are granted, issued or authorised as a replacement for the seller's tradeable water rights, including as a result of transformation arrangements mentioned in subsection 97(1) of the Water Act 2007 .

    " rules " means the rules of:

    (d)a licensed market; or

    (e)a licensed CS facility.

    " tradeable water rights " has the same meaning as in the Water Act 2007 .

26. CSISAL issued a Product Disclosure Statement (PDS) for MINIs on 21 January 2013.  At 2.1, the PDS lists key features that apply to all MINIs.  One such feature is ‘the open-ended nature of a MINI’. At 2.8, the PDS sets out when a MINI terminates. The Tribunal also takes into account the description in Annexure A to the reviewable decision set out above that MINI’s have no set expiry date. The Tribunal finds that the MINIs issued by CSISAL and traded by the applicant did not satisfy s 761D(1)(b) of the Act or reg 7.1.04 of the Corporations Regulations2001. MINIs are not a derivative under the Act.  ASIC put to the Tribunal no other basis on which the transactions undertaken by the applicant fell with the definition of financial product.

1. The Tribunal finds that the applicant was not taking part in or carrying out a transaction or transactions that fall within either s 1041A or s 1041B of the Act, because the transactions in which he was engaged were not trading in financial products.  Given that conclusion, it is unnecessary for the Tribunal to consider the other issues in the case.

   DECISION

2. For the above reasons, the reviewable decision of 10 December 2015 is set aside and substituted for that decision is the decision that:

   ·The MINI warrants issued by CSISAL and traded by the applicant did not satisfy s 761D(1)(b) of the Act or reg 7.1.04 of the Corporations Regulations2001 and were not a derivative under the Act. 

   ·The applicant was not taking part in or carrying out a transaction or transactions that fell within either s 1041A or s 1041B of the Act, because the transactions in which he was engaged were not trading in financial products.

   ·ASIC has not established that that applicant has not complied with a financial services law and therefore has not established a basis for making a banning order under s 920A(1)(e) of the Act.

I certify that the preceding 28 (twenty -eight) paragraphs are a true copy of the reasons for the decision herein of Mrs J C Kelly, Senior Member

.............................[sgd]..............................

Associate

Dated: 20 January 2017

Dates of hearing:	11 and 12 July 2016
Applicant:	In person
Counsel for the Respondent:	A Mitchelmore
Solicitors for the Respondent:	A Paciocco, Australian Securities and Investments Commission