Fame Decorator Agencies v Jeffries Industries

[1999] HCATrans 50

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S70 of 1998

B e t w e e n -

FAME DECORATOR AGENCIES PTY LIMITED

Applicant

and

JEFFRIES INDUSTRIES LIMITED

First Respondent

PHILIP JOHN CAVE, DANIEL WONG, DENIS CHADWICK CLEARY, DIANE NOLDER

Second Respondents

AUSTRALIAN SECURITIES COMMISSION

Third Respondent

DEBORAH FENWICK

Fourth Respondent

Application for special leave to appeal

GAUDRON J
McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 12 MARCH 1999, AT 11.40 AM

Copyright in the High Court of Australia

_______________________

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friend, MR C.C. WATERSTREET, for the applicant.  (instructed by Holman Webb)

MR G.A. PALMER, QC:   If your Honours please, I appear with my learned friend, MR M.R. SPEAKMAN, for the respondent.  (instructed by the Australian Securities Commission)

GAUDRON J:   For which respondent?

MR PALMER:   That is the third respondent.

GAUDRON J:   I ask that because I have a certificate from the Registrar who certifies that she has been informed that the first respondent, Jeffries Industries Limited, does not wish to be represented at the hearing of this application and will submit to any order of the Court save as to costs.

She also certifies that she has been informed that the second respondent, Cave and others, do not oppose or intend to appear at the hearing of the application for special leave to appeal and, further, she certifies that she has been informed by Blake Dawson Waldron, solicitors for the fourth respondent, Deborah Fenwick, in the Court of Appeal, that they do not have any instructions to make submissions in this application.  So far as concerns that respondent, the applicant has filed an affidavit of service and the fourth respondent has not entered an appearance.

Yes, thank you, Mr Jackson.

MR JACKSON:   Your Honours, the application is concerned with two provisions of the Corporations Law, namely sections 995 and 998 which is set out at pages 24 and 25 of the application book.  Your Honours will have seen that the conduct which was held to constitute a breach of those provisions was to accept offers made by third parties on the Stock Exchange to buy shares in a company at particular prices.  It was not a case of any collusion and it was a case where acceptance of some of the offers was held to constitute the breach.  When I say acceptance of some of the offers, what I mean to convey is what appears from the primary judge at page 31, paragraph 2, where your Honours will see that, in his second declaration, he referred to some sales which took place at 14 cents and at 13 cents, although there had been a number of sales at the same time, in effect, which took place at the higher prices, the various prices being accepted as the number of shares offered for sale was exhausted.  You will see those figures at page 5.

Your Honours will also see, if I could go to the dissenting judge in the Court of Appeal’s reasons, Justice Priestley, at page 57, at the bottom of the page, where his Honour said, in the last paragraph on the page, that it was very difficult to see how one could come to a conclusion that the sales at the higher prices would not be in breach of the sections but the sales at the lower prices would be.  The purpose of the sales, I should say, as your Honours would have seen, was to take advantage of a publicly known fact and that was that the conversion rate for conversion of ‑ ‑ ‑

GAUDRON J:   But where is the error of principle in your submission?

MR JACKSON:   Your Honour, what I was going to say was this, and I am going to take your Honours to the provisions now.  If I could just go back to page 24 – what I was going to seek to say was that the conduct did not, on the face of it, in our submission, fall within the ordinary words of sections 995 and 998.  The way in which the majority in the Court of Appeal arrived at the view that it did was to apply some observations in the reasons of Justice Mason, which effectively were the reasons of the Court in North v Marra Development ‑ ‑ ‑

GAUDRON J:   You say it is neither “misleading or deceptive or is likely to mislead or deceive”, do you?

MR JACKSON:   Yes, your Honour.

GAUDRON J:   And then it was not “intended or likely to create, a false or misleading appearance”?

MR JACKSON:   “With respect to the market for”, that was the relevant part of it.

GAUDRON J:   It is a question of fact, is it not, at the end of the day?

MR JACKSON:   Undoubtedly there was a basic question of fact.  The question of fact was one in relation to which there were findings of fact which are not in dispute, findings of basic fact which are not in dispute, and in relation to those matters, the actual transactions which took place were of the clearest kind and the point we would simply seek to make about them is that if one looks at the words of, for example, section 998(1) one sees that the sales which took place were sales that were genuine.  They were not false in any way.  Every aspect of them was true and they described what the market was on the relevant day.  Because, your Honours, one was not creating a market; there were offers already in the market that were accepted by our client.

Now, your Honours, the reason why the majority took the view which they did was in reliance upon, as I said, North v Marra Developments 148 CLR 32. It is, I think, in the bundle of authorities that have been supplied to your Honours by the respondents. The relevant passage is the passage which commences at the bottom of page 58, the last three lines, and goes through to page 59, about point 8 on the page.

GAUDRON J:   It only had to have an effect on the appearance.  It only had to give an appearance, did it not?  Give a false or misleading appearance with respect to the market, which seems to be ‑ ‑ ‑

MR JACKSON:   Your Honour, if I could just say this.  One can say a false or misleading appearance, but if one looks at section 998(1) and looks at what happened, the market of course ultimately consisted of those who buy or want to buy and those who sell or want to sell.  But at the time of the transactions there were persons, unknown to the applicant, who had offered to buy shares in the relevant quantities at particular prices.  The applicant offered its shares for sale.  Automatically they are taken up by those persons going down the line in terms of the prices and, your Honours, that is, with respect, the market.  If one says a “false and misleading appearance with respect to the market”, but what is the market?  That was the relevant market.

Your Honours, what we would seek to say is that what has been done by the majority in the court below has been to adopt a passage in Marra, in particular the passage which is the second new paragraph on page 59 and the last part of it where it is said:

This is because they would not have been entered into but for the object on the part of the buyer or of the seller of setting and maintaining the price, yet in the absence of revelation of their true character they are seen as transactions, reflecting genuine supply and demand and having as such an impact on the market.

That is elaborated upon in the next paragraph. May I just seek to say, your Honours, that if one goes to the paragraph commencing, “When purchases have been made of shares in a company”, what one sees is that that is concerned, in a sense, with market manipulation, the references to “setting and maintaining a market price”, and one sees also, a little further down:

In reality the purchases are calculated to create a false market or false price.  The false or misleading appearance is that the market, in the absence of any disclosure that a market support operation is on foot, appears to be real or genuine, there being no overt sign of market support or manipulation.

Your Honours, the point we would seek to make is that whilst no doubt it is true to say that in some cases transactions which are not fake transactions may have an effect upon the market, and North v Marra Development is itself such a case, what one sees is, in this case, the dicta of the Court there have been applied to a situation which is quite remote, in our submission, from that which was applicable in that case.

GAUDRON J:   But you have to go further than that, do you not?  You have to say that what happened could not give a false or misleading appearance.

MR JACKSON:   Your Honour, what we have to say is that – we do not have to go quite so far, with respect, because what the ‑ ‑ ‑

GAUDRON J:   Do you not?  “Was not likely to give a false or misleading appearance”.

MR JACKSON:   Yes, and in that regard, your Honour, without going to the detail of it, what we would submit is that the dissent of Justice Priestley is really eloquent on the issue because it was a circumstance where, to anyone being familiar with the market, the circumstances which would surround possible sales were known because the circumstance that the dividend had not been able to be paid and so the conversion – the system for conversion of shares into the ordinary shares had come into being and it had been announced there would not be the dividend paid and one sees then a circumstance where people being familiar with the market in those shares would know that the shares are ones ‑ ‑ ‑

GAUDRON J:   Where do the words “familiar with the market” come from?  They are not to be found in the subsection, are they?

MR JACKSON:   No, your Honour, I accept that immediately, but what one is speaking about is creating a false or misleading appearance with respect to the market.  In determining what is the market on the one hand and what is false and misleading on the other, one is entitled to take into account the store of knowledge that is available to persons who have been utilising the market.  The store of knowledge included the fact that the time for the 20 days was, in effect, almost up, it was running, and that the amounts – the conversion factor would be something that depended on the sales of shares over 20 days.

Your Honours, what we would seek to say is that if one takes the words in North v Marra as being applicable to the present case, then it is a case, in our submission, where the Court should review that case with a view to considering whether the provisions do truly apply to cases of this kind. 

GAUDRON J:   Is there any point of construction involved?

MR JACKSON:   Well, there is, your Honour.  There is a point of construction that has been brought about by – and I do not mean this the slightest degree offensively, of course – but what has happened has been that by the Court’s decision in North v Marra, a particular construction has been given to section 998 and to the equivalent provision - and to section 995.  The result of that is that on one view of North v Marra it has a very wide operation.  Now, these are provisions that operate throughout Australia.  They are provisions which, in the case of section 998, though not 995, give rise to criminal sanctions - and one of the office bearers of the applicant is being prosecuted criminally in relation to it – and it is a case where, in our submission, no doubt it is a case of construction but this is hardly a provision of non-general application.  It is a question of what it means.

And, your Honours, in support of that, we would submit that what was said by Justice Priestley in his dissent is – I think I used the word before – eloquent in relation to the interpretation of the provision. 

GAUDRON J:   Yes, thank you.

MR PALMER:   Your Honours, in this case there is no special leave point.  The decision of the Court of Appeal and the primary judge was correct.  They were decisions founded on clear findings of fact and the construction and application of the relevant sections is not and cannot really be in doubt.  The construction and application of the two sections, 998 and 995, are made clear by the principles enunciated in North v Marra and your Honours have been taken to that.

McHUGH J:   But it is a very different case, is it not?

MR PALMER:   With respect, no, your Honour.

McHUGH J:   But this is a case where there were genuine buyers in the market.

MR PALMER:   This is a case where there were genuine sellers in the market and a buyer – there were genuine buyers in the market but the seller wanted to manipulate.  In Marra the buyers wanted to manipulate and there were genuine sellers in the market.  The only difference between the cases is that in Marra the manipulator was a buyer who wanted to force the price up ‑ ‑ ‑

McHUGH J:   That gives a very different appearance.  But here you have somebody in the market who is prepared to buy these shares at 13 cents, 14 cents, and for the applicant’s collateral advantage, it decides to sell.  Now, how does that deceive the market?

MR PALMER:   Because the market, as their Honours both in the High Court in Marra and in the Court of Appeal found, held as a matter of principle, the market depends upon a commonly accepted perception that although there may be different motives why people want to buy or sell, nevertheless the prices genuinely reflect supply and demand between those who are willing, but not anxious, to sell at a reasonable price and those who are willing to buy at the current price.

McHUGH J:   That test was satisfied here, was it not?

MR PALMER:   No, it was not, your Honour, because the range of prices established for these shares over the period preceding this by quite some time was within a certain range.  That range was, at the lowest, 25 cents.  It had ranged from 50 at maximum down to 25.  There had never been any sales as low as 13 and 14, which were the subject sales, and the evidence was that those bids had been put on as a matter of pure speculation and optimistic wild hope by certain bidders who simply put on bids as a matter of practice, way below the market price, they stand in the market for a certain length of time under the system of the Exchange, so that if there is a sudden movement in the price up or down or whatever, those bids will be standing there and must be taken up if the price comes down, for example, to that particular bid.

McHUGH J:   I appreciate that, but supposing there was some other seller, desperate for money, because that seller had to get some money to settle some other transaction, and there is the buyer in the market at 13 cents or 14 cents and you sell at that price.

MR PALMER:   There would be no offence or no difficulty there simply because there is not the requisite intention required by both sections in the buyer or the seller accepting that price.

McHUGH J:   But what is the intention on the part of the seller here?

MR PALMER:   The intention of the seller here, as found by the Court of Appeal and the court below, was clearly to manipulate the market and for no other purpose.  Can I take your Honours to the relevant passages in the judgment ‑ ‑ ‑

GAUDRON J:   It was to bring about a result that required manipulation of the market.

MR PALMER:   Yes, and for no other purpose.

McHUGH J:   You are not manipulating the market ‑ ‑ ‑

MR PALMER:   Oh yes, your Honour, for this reason, because the market operates on the basis that the buyers and sellers are operating within the accepted parameters of genuine supply and demand.  Now, somebody may have a genuine demand or need to sell shares because of pressing financial circumstances.  That is one thing.  The price may come down because, for example, a liquidator of a company has to liquidate assets on a fire sale basis for some reason or other and has to dump shares.  That is a market factor.

McHUGH J:   Do we know what the next range of sales were in this particular case?  Does the evidence disclose it, after this?

MR PALMER:   Yes, it does.

McHUGH J:   What was it?

MR PALMER:   If I can take your Honours to page 45 of the application book.  One bears in mind that these shares in this company were very thinly traded.  The sales were infrequent.  That, in itself, of course would render the market susceptible to manipulation, as the court found.  There was a placement of 1.45 million shares in March 1995.  Those prices ranged from 25 to 35 cents each; 40,000 shares sold in April from 35 to 50 cents; and a sale at 45 cents.  Now, these sales went down to 13 cents – the bulk of the shares, your Honours will see set out at pages 46 and 47 of the application book and one bears in mind the critical factor in the finding of manipulation that, as appears from page 49 of the application book, the sales were made deliberately within the last three minutes of the close of trading on 28 April.

McHUGH J:   Yes, but it was not with the intent to manipulate the market; it was for the purpose of obtaining a collateral advantage.  The seller must have known it would have no effect whatever on the market.  The evidence at 45 shows in April they were up selling at 45 cents.

MR PALMER:   Your Honours, what happened was, as found at page 49 of the application book, sales were effected within the last three minutes which brought the price of the shares down by 71 per cent on the last price prior to these sales being effected.  Seventy-one per cent within three minutes the sales had fallen and the purpose of the sale three minutes before close of trade, as their Honours find:

was to foreclose the possibility that, in response to the placing of selling orders, additional buyers would come into the market offering to purchase shares in Jeffries at prices above the figures of 14c or 13c.  That is exactly what happened on the next trading day, which was the Monday…..the market price…..recovered to a figure well in excess of 14c.

But on that Friday the closing price for the shares had, within one day as a result of this last three minutes of trading, fallen by 71 per cent.  Now, that gave – and it was capable of giving - the impression to the market that there were genuine buyers and sellers in the market in Jeffries shares on that day and, as a result of some circumstance reflected in genuine supply and demand, a price fall of 71 per cent had occurred within a day.

McHUGH J:   But that does not fasten on the words of the section.

MR PALMER:   If I can take the two sections separately, your Honours, and say why each is breached.  As to why section 995 was breached, if your Honours go to 53 of the application book your Honours will see the section:

A person shall not…..
…..
engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

And if your Honours go to page 54 your Honours will see how it was that the court found that that section had been breached.  Their Honours say at 25 ‑ ‑ ‑

GAUDRON J:   There is no intention there – there is not necessarily an intention involved in 998(1), is there?

MR PALMER:   No, your Honour.

GAUDRON J:  

A person shall not…..do anything that is…..likely to create, a…..misleading appearance…..with respect to the market for, or the price of, any securities.

MR PALMER:   Yes, that is so.

McHUGH J:   But how can accepting an offer in the market create a misleading or deceptive appearance?  By reason of your subjective motive you have already accepted that if you had sold to meet a debt it would not have that effect.  Now, the two propositions cannot stand together.

MR PALMER:   What is the impression that the market gets which, if not corrected, will be misleading?  And their Honours found, and the High Court in Marra says, the market acts on the basis that people enter into the transactions on the market as a result of genuine supply and demand and not for the purpose of manipulating the price.

McHUGH J:   He was not intending to manipulate the price.  He was taking the opportunity of – he took advantage of a price for his own purposes.

MR PALMER:   That is manipulation of the price, and the Court of Appeal found this on the facts and this is why it is a factual question.

McHUGH J:   This case is about as far removed from the mischief these sections were designed to deal with as could be imagined.  Really.  I mean, this ‑ ‑ ‑

MR PALMER:   It does not seem as though I am going to change your Honour’s mind by further discussion.

McHUGH J:   No, no.  There is no inconsistency between accepting your general argument and what the mischief was.  I mean, this was to deal with churning and people creating artificial prices for markets.  Here you have a buyer in the market and somebody comes along and sells.

GAUDRON J:   A lucky buyer.

MR PALMER:   All I can do by way of Parthian shot to your Honour is to say the situation in this case was no different from the factual situation in Marra.  In Marra the manipulator wanted to get the price up.  So they kept on putting bids into the market, buy bids, at the higher prices, chasing sellers who would be obviously wanting to sell at higher and higher prices.

McHUGH J:   Yes, but when this appellant sold at 13 cents, he had no further interest in what happened to the market.  If it sold the next day for 12 cents of 60 cents, it was of no relevance.  This had a very limited time span here.

MR PALMER:   The same position applied in Marra.  Their purpose was limited for the object of their scheme while a takeover proposal was being formulated.  They had no interest in the market after their object had been achieved.  So it is simply a question of a finding of fact in this case, at first instance and on appeal, that the sole object of Fame disposing of these shares at this price was to get the price down for a particular purpose.  Now, the market does not operate on that basis, that people are selling for or buying in order to achieve particular prices rather than to satisfy genuine supply and demand.

McHUGH J:   But people are always doing things in relation to share prices to keep a price steady.  They may spread their order over several weeks or months, and the reason they do it is they do not want to push the price up, if they are buyers, or they do not want to push them down if they are sellers.

MR PALMER:   Well, to take your Honour’s example – and we can go on for a long time and probably will have to at a later time – a liquidator, for example, of a company with a large parcel of shares and having to sell that, as your Honour says, would say to himself, well, if I put all these shares on the market at the same time, there is a huge parcel, it might be 10 per cent of the share capital, I am obviously going to force the price down.  I do not want to do that so I will put the shares on in certain manageable parcels.  That is avoiding the consequence of a certain action in the market in regard

to how genuine buyers and sellers in those shares would react if a lot of shares are put on the market at the same time.  That is one thing.  But if the liquidator for some reason or other said, it is to my collateral benefit to dump all these shares on the market at the one time so that the market price will obviously go down and, as a result of that, I will immediately be able to do something else, then that could be within the purview of the section.

GAUDRON J:   You say there is a difference between obtaining the best price that the market will pay and obtaining a price which is by far from the best price that the market will pay and which serves to bring about some collateral advantage?

MR PALMER:   Exactly so.  A recent case, a very good example of that, was Nomura Securities in the Federal Court.  I do not know if it is coming up here, but in that case it was a deliberate and well orchestrated plan on the part of the Nomura Securities, because they were arbitrageurs, to dump ‑ ‑ ‑

McHUGH J:   This is Justice Sackville’s judgment?

MR PALMER:   Yes.  And if the purpose of the sections is to preserve the integrity of the markets and the expectations of both buyers and sellers, that people are genuine buyers and sellers and not in the market to achieve as their object the creation of a certain price ‑ ‑ ‑

McHUGH J:   But they were genuine parties.  One wanted to sell, the other one wanted to buy.  They both genuinely wanted to buy and sell.

MR PALMER:   Your Honour, I am repeating myself.  We, in our submission - there is no question that, both in Marra and in this case, there was a genuine third party to the transactions, in Marra genuine sellers, in this case a genuine buyer.  But the purpose of manipulation in one of those parties has the effect of bringing about a breach of the sections.  It is really, in our submission, a question of fact if one accepts the principle in North v Marra as correct.  Those are our submissions.

GAUDRON J:   Thank you, Mr Palmer.  Yes, Mr Jackson.

MR JACKSON:   Your Honours, can I just say three things.  The first is in relation to what was the price immediately on the day immediately following.  Your Honours will see that on page 14 and your Honours will see it is the first new paragraph on the page where – and I am speaking about line 22:

It is interesting to note that of the 20,000 shares which were bought…..at 14 cents, he resold 10,000 of them at 30 cents on the next day of trading, and within a further two days, had sold another 8,000 at 40 cents.

McHUGH J:   He did well out of it.

MR JACKSON:   Indeed, your Honour.  Your Honour will see – bottom fishers, I think they are called - that what he said, at the bottom of page 13, the last three lines:

they would have been very cheap at 14 cents.  He said that the reason for his bid was that he was not selling them but that he was buying them.  The whole purpose of the trading of the company…..was to buy cheaply and sell at a profit.

GAUDRON J:   And he did not think in his wildest dreams that anyone would sell at 14.

MR JACKSON:   No.  But, your Honour, one reads on then, and what he said was:

but if you’re not there, you don’t get them.  Sometimes it happens.  In this case it happened.”

McHUGH J:   Mr Jackson, why is it not a question of fact?  I mean, I might have one view of the facts but the other Judges have a view of the facts.

MR JACKSON:   Your Honour, it does not, in our submission, really involve just a question of fact.  What one sees is, if I could just go to North v Marra for a moment, the bottom of page 58 and the top of page 59, what has happened, and I just refer to the sentence commencing on the third‑last line on page 58 and going then to the end of the second line on page 59, what has happened, in our submission, in a case like this is that the remarks that the Court then makes on page 59 have been treated as ones of general application and the result is that whilst, of course, the case depends on particular facts, at the same time the observations in North v Marra have been treated as being of too general an application and it is that which gives rise to the issue of principle.

GAUDRON J:   But where do you say the section has been infringed?  Where do you say there has been an error of construction?  Ultimately it depends on the words of the section.

MR JACKSON:   Quite, your Honour.

GAUDRON J:   And at least so far as 998 is concerned, it is extremely wide, is it not?

MR JACKSON:   It is wide, but if one looks at the words and looks at the circumstances, one sees that it simply says that:

A person shall not create, or do anything that is intended or likely to create, a false or misleading appearance –

if I can just take the second part, which is perhaps wider –

with respect to the market for, or the price of, any securities.

No question about the price, because the price is absolutely clear – they were offers and acceptance.  One sees, on the other hand, that if one is speaking about “a false or misleading appearance with respect to the market, for” – and this is where I am repeating myself, I think, this is what I said earlier – the market was that there were people offering and there was someone buying.

GAUDRON J:   You define it simply in terms of people offering and selling, rather than as Mr Palmer does, in terms of offers by people willing, but not over-anxious, to sell or buy.

MR JACKSON:   Your Honour, could I just say two things about that.  To use the expression “willing, but not over-anxious”, as my learned friend did, was to translate from their air of valuation on compensation, perhaps, a concept which has little relevance to the Stock Market, because, in relation to the Stock Market, one is speaking about circumstances where people may be anxious, they may want to, all sorts of reasons.

GAUDRON J:   Why does one not say the market is that which is obtained by people who wish to obtain the best possible price for their shares and those who wish to buy at the best possible price?

MR JACKSON:   Well, your Honour, because that is a description of part of the market and it really is not, with respect, a description of what ‑ ‑ ‑

GAUDRON J:   Does not the section seem to proceed on that assumption?  Otherwise there would be no point in it. 

MR JACKSON:   No, your Honour.  May I just respond to it.  What I would seek to say, your Honour, is this, that the market is a concept which describes those persons who are, or potentially are, willing to participate by buying or selling.  It does not mean that they necessarily want to sell at the

best price available.  What they want to do, if one was talking about selling, is sometimes to sell at whatever price is available.  It may be for a variety of reasons.  The other thing, your Honour, we would seek to say, if one is looking at the provision, could I just seek to - your Honours, may I have a few seconds to tell your Honours what I want to say. 

GAUDRON J:   Certainly.

MR JACKSON:   If one goes to what is said by Justice Priestley at page 57 in the second paragraph on that page about line 20, it is very difficult, in our submission, to see that his Honour’s summation of the effect of the provision in relevant respects is incorrect.

GAUDRON J:   Thank you.

This case turns essentially on a question of fact about which opinions might be divided, as in the Court of Appeal.  It is not, therefore, a matter suitable to attract the grant of special leave.  Special leave is refused.

MR PALMER:   If the Court pleases, I seek an order as to costs.

MR JACKSON:   Your Honour, our submissions say nil under that heading.

GAUDRON J:   Yes.  It is refused with costs.

AT 12.16 PM THE MATTER WAS CONCLUDED