McLean and Australian Securities and Investments Commission
[2017] AATA 2566
•7 December 2017
McLean and Australian Securities and Investments Commission [2017] AATA 2566 (7 December 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2015/5344
Re:Philip McLean
APPLICANT
Australian Securities and Investments CommissionAnd
RESPONDENT
DECISION
Tribunal:Deputy President B W Rayment
Date:7 December 2017
Place:Sydney
The decision under review is affirmed and the banning order will commence on the date of publication of this decision.
........................[sgd]................................................
Deputy President B W Rayment
Catchwords
CORPORATIONS – financial services – banning order – applicant prohibited from providing any financial services – financial products – MINI warrants – financial market – market manipulation – setting of artificial price for purpose of transferring profit/loss – whether market reflects forces of genuine supply and demand – decision affirmed
Legislation
Australian Securities and Investments Commission Act 2001, s 1(2)
Corporations Act 2001, ss 761A, 767A, 920A(1)(e), (g), 1041A
Cases
Australian Securities and Investments Commission v Davidof [2017] FCA 658
Director of Public Prosecutions (Cth) v JM [2012] VSCA 21; (2012) 37 VR 1
Director of Public Prosecutions (Cth) v JM [2013] HCA 30; (2013) 250 CLR 135; (2013) 87 ALJR 836
Fame Decorator Agencies Pty Ltd v Jeffries Industries Ltd [1998] NSWSC 157; (1998) 28 ACSR 58
North v Marra Developments Ltd [1981] HCA 68; (1981) 148 CLR 42; 37 ALR 341; (1981) 56 ALJR 106Seven Network Limited v News Limited [2009] FCAFC 166; (2009) 182 FCR 160; 262 ALR 160
Secondary Materials
ASIC Regulatory Guide 98 Licensing: Administrative action against financial services providers
REASONS FOR DECISION
Deputy President B W Rayment
7 December 2017
BACKGROUND
These proceedings are an application to review a banning order made by ASIC against Mr Phillip McLean. The banning order was made by the respondent on 8 October 2015 and was for three years. The power exercised by ASIC was conferred by s.920A of the Corporations Act 2001 (Cth) (the Act). Section 920A(1)(e) empowers ASIC to make a banning order against a person if the person has not complied with a financial services law. Similarly, if the person has been involved in the contravention of a financial services law by another person, there is power to make a banning order against him or her under s.920A(1)(g).
Mr McLean was a Vice President in the Equities Department of Credit Suisse Management (Australia) Pty Ltd between September 2009 and February 2014. He had the degree of Bachelor of Business, a Graduate Diploma of Applied Finance, a Graduate Diploma of Financial Planning and an ASX Derivatives Accreditation, Levels 1 and 2. The latter accreditation was given to him without examination because he had worked for the Australian Stock Exchange (ASX) from April 2001 to December 2005. Credit Suisse in Australia has a number of related companies. It will be convenient to refer to them all without distinction as Credit Suisse in these reasons.
Mr McLean worked on the warrants desk from July 2012, initially in a sales and marketing capacity. From December of that year, he also took on the role of trading and market making, reporting to Mr David Anderson. It seems that the person who directed the method of trading to which these proceedings relate was Mr Anderson, who is now deceased. In the transactions which are impugned, Mr McLean played a leading role, under Mr Anderson’s instructions.
The trading method was most unusual. A trader would instruct Credit Suisse to buy and sell various marketable parcels, and the trading would typically result in a profit or loss. However, instead of Credit Suisse opening an account for the trader, with Credit Suisse either taking security for the trading and sending out contract notes which would be settled by the trader, Credit Suisse (in its own accounts) would show the trading as done on the account of Credit Suisse itself. A note would be kept of the true profit or loss on the trading and Mr Anderson, or Mr McLean in this case, would then pay the trader his profit or recover the trader’s loss by entering into contrived transactions through the purchase by the trader and sale by him or her of MINI warrants, at prices designed to transfer the profit or loss.
The part of that trading method giving rise to a problem for the purposes of these proceedings is the use of the MINI warrants by Credit Suisse and the trader (whose name was Mr Menzies) at prices designed to pay debts arising from earlier transactions. That is alleged to be a breach of s.1041A of the Act, and to enliven, in Mr McLean’s case, the power of ASIC to make a banning order under s.920A of the Act. I will describe the MINI warrants and the market in which they are traded below.
There is no dispute between the parties about whether the trading method described in paragraph 4 above was actually utilised in dealings between Credit Suisse and Mr Menzies. The transactions alleged by ASIC and summarised in the reasons of ASIC’s delegate are all common ground. The trading which led to the profit or loss as the case may be does not need to be described. It is sufficient to say that the balance of trading of December 2012 led to a profit being earned of $6,952.93 which the applicant and Mr Menzies agreed to round up to $7,000. The balance of trading of February 2013 led to losses being suffered in the sum of $17,989, which Mr Menzies and Mr McLean agreed to round up to $18,000.
MINI Warrants
Credit Suisse issued MINI warrants. Warrants are financial instruments issued by banks and other institutions and have been traded on the ASX since 1991. Warrants do not have standardised terms and the terms may vary between different series (even between warrants of the same type) and different warrant issuers. Settlement of warrant trades occurs though the Clearing House Electronic Subregister System (CHESS) in the same manner as share transactions are processed. The terms and conditions of a particular warrant may appear in a product disclosure statement (PDS) and did so appear in this case. The ASX Operating Rules and the law are the constraints with which the terms and conditions must comply. Warrants can be either ‘call warrants’, which benefit from an upwards price movement in the underlying instrument or thing (in this case, listed shares or an index), or ‘put warrants’, which benefit from a downward trend in the underlying instrument or thing.
MINI warrants are described as follows in a document issued by the ASX entitled Warrants – Understanding trading and investment warrants:
MINI warrants are a type of trading warrant that offers leveraged exposure to a diverse range of underlying assets including shares, indices […], currencies and commodities... They allow you to track the value of an underlying asset, on a one for one basis, for a relatively small upfront cost. MINI warrants are classified as either ‘longs’ or ‘shorts’. MINI longs enable you to benefit from an upward price movement in the underlying instrument whereas MINI shorts enable you to benefit from a downward trend…
The document continues:
Unlike other types of warrants quoted on ASX, MINIs are open ended contracts with no set expiry date. Since they have no set expiry date they will generally track the underlying instrument on a one for one basis. The exercise price of MINIs will also vary on a daily basis with the inclusion of the warrant issuers funding costs. Another key feature of MINIs are that they have an in-built stop loss feature which is set above the exercise price for MINI longs and below the exercise price for MINI shorts.
I have drawn the information in the following three paragraphs from the same ASX document.
The PDS documents issued for MINI warrants are available on the ASX website when one looks up a warrant price.
Warrants are traded on the ASX’s integrated trading system, just like shares, and are subject to its dealing rules. The ASX Operating Rules are intended to promote a liquid market in which warrant holders can sell their warrants. In most circumstances the issuer elects to promote liquidity by “making a market” in the warrant series on an ongoing basis, by ensuring that a reasonable bid and volume is maintained in the market for a prescribed period (90% of the time between 10.15 am and close of Normal Trading (normally 4 pm) on any trading day, except in certain “Permitted Circumstances”). Warrant issuers will normally display both bid and offer orders for most warrant series during Normal Trading hours. Credit Suisse as issuer made that election in this case.
Twenty minute delayed trading details are available on the ASX website. Real time prices are also available from brokers and other websites.
As I understand the evidence, one becomes the holder of a MINI warrant either by purchasing it from the issuer or by buying it on the exchange. One then may sell it on the exchange or send the issuer a valid exercise notice, assuming the warrant is “in the money”, that is, showing a profit.
The transactions of purchase or sale on the exchange are online transactions which can influence other buyers and sellers. The fact that they are motivated in the present case by an intention to settle a debt shows that they do not reflect the forces of supply and demand. However they are transactions which are visible to other potential buyers and sellers and are capable of influencing them.
Another feature of the market is that the issuer has elected to ensure liquidity by making a market and the tool utilized for this purpose, although not one which is advertised in the PDS, is that there is an automated market maker which is in use and which sets buying and selling prices for short and long MINIs which change offer prices by reference to the underlying instrument. The automated market maker can be switched off, and then Credit Suisse, through its warrants desk, can manually enter bids at prices of its choosing. Bids, usually or, I infer from the expert evidence of Mr Grant tendered by ASIC, solely made by automated means, will satisfy the obligation of Credit Suisse to make a market for 90% of the trading day. Whether the bids are the product of automated or human intervention will not be disclosed as such. The expert evidence of Mr Grant also suggests that it will be in the periods of time that the automated market maker is turned off (that is, up to 10% of the trading day) that manual bids may be made by the warrants desk.
The impugned transactions
The transactions agreed between Mr Menzies and Mr McLean on 31 December 2012 and 14 February 2013 for payment of the differences arising from trading done by Credit Suisse on the instructions of Mr Menzies, conveyed to Mr McLean, involved in each case the purchase and sale of MINI warrants, at selling and purchasing prices calculated to discharge the differences referred to in paragraph 6 above, so that Mr Menzies’ profits of December 2012 were received by him and his losses of February 2013 were paid by him. In December 2012 Mr Menzies bought 100,000 ‘XJOKCG’ at $2.23 and sold them at $2.30, enabling him to receive his profit of $7,000. XJOKCG referred to a MINI warrant in which the underlying instrument was the ‘S&P ASX 200 Futures Contract (Mar-2013)’. Credit Suisse bought 100,000 XJOKCG at $2.30, being the same quantity it had sold at $2.23 by Mr McLean himself causing the offer made by Mr Menzies to sell at $2.30 to be accepted by Credit Suisse.
In February 2013 the MINI warrant utilised was XJOKCH which was also a warrant in which the underlying instrument was the same ‘S&P ASX 200 Futures Contract (Mar-2013)’. For this transaction, Mr Menzies bought 50,000 XJOKCH at $2.95 and sold them to Credit Suisse at $2.59 and Mr McLean instructed Mr Chighine who also worked on the warrants desk to effect those transactions by turning off the automated market maker and conducting the sales and purchases made by Credit Suisse manually. Those transactions enabled Credit Suisse to make a profit of $18,000, thereby enabling Mr Menzies to discharge the “debt” he had incurred to Credit Suisse.
ISSUES
The issues in this review are:
(a)Was the power to ban the applicant enlivened, and in particular, was there a contravention by him of s.1041A of the Act;
(b)If so, what banning order, if any, is appropriate in the particular circumstances of the case. It is relevant to note in this respect that the Tribunal stayed the banning order pending the hearing of this application for review, so that if a banning order is appropriate, it must commence after the pronouncement of these reasons for decision.
LEGISLATIVE FRAMEWORK
Chapter 7 of the Act has, by s.760A, the main object of promoting:
(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.
Part 7.10 of Chapter 7 deals with market misconduct. Division 2 of Chapter 7.10 deals with prohibited conduct other than insider trading, which is dealt with in Division 3. Division 2 is concerned with financial products generally and with financial markets generally, the latter being widely defined in s.767A of the Act, which is also within Chapter 7. It is the purpose of Division 2 of Chapter 7.10 to draw together and to state, in a uniform way, market misconduct other than insider trading. Previous laws had distinguished between misconduct affecting the futures markets and the share market, for example. Now misconduct within one market would be characterised in the same way as misconduct in other markets, and would affect the markets for (broadly defined) financial products equally.
The section of which it is alleged Mr McLean was in breach is s.1041A of the Act, which is within Chapter 7.10 and which, under s.761A of the Act, is a financial services law. Section 1041A provides as follows:
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.
Relevantly to the present proceedings, the section is engaged, inter alia, if:
(a)a person (that is, the applicant) takes part in, or carries out (whether directly or indirectly…);
(b)a transaction that is likely to have an effect;
(c)the effect is of creating an artificial price for trading; and
(d)the trading is in financial products on a financial market operated in this jurisdiction.
Mr McLean puts items (a), (b) and (c) in issue in these proceedings. The trading in question was on the ASX of MINI warrants issued by Credit Suisse. In Australian Securities and Investments Commission v Davidof [2017] FCA 658 it was held by the Federal Court that the MINI warrants are a financial product and there is no doubt that the trading was on a financial market as defined in s.767A of the Act. Accordingly item (d) is satisfied and it was not put in issue before me.
As to item (a), Mr Muddle SC, who appeared for Mr McLean, submitted that on the facts Mr McLean neither took part in nor carried out, and in each case neither directly nor indirectly, the transactions in question. He submitted that the parties to the transactions did not include Mr McLean, whose participation in them was as a Credit Suisse employee, and that he did not carry them out. The expression “takes part in” will be satisfied by being a party to the transaction but playing at least an important role in a transaction as an employee may be sufficient to amount to taking part in the transaction directly or indirectly. That is all the clearer in the present case because the transactions of 31 December 2012 and 14 February 2013 were all specifically agreed between Mr McLean and Mr Menzies prior to their execution. All the relevant market transactions which happened on both days were discussed in advance and are fully explained by their discussions. The mechanics were incidental to the arrangements. That seems to me to amount to Mr McLean taking part in the impugned transactions. In any event he executed the impugned transactions of 31 December 2012 directly, and gave instructions for the 14 February 2013 transactions to be carried out by Mr Chighine, who also worked on the Credit Suisse warrants desk, so I am satisfied that the applicant also carried out all of the transactions, directly or indirectly.
It is therefore not necessary in the present case to examine whether Mr McLean was involved in a contravention by another person (that is, Credit Suisse or Mr Menzies) of a financial services law, which would also have enlivened the power of ASIC to make a banning order in accordance with s.920A(1)(g) of the Act.
As to item (b), the statutory assumption is that one transaction may be capable of producing a breach of the section, so that a series of buy or sell orders is not requisite. The word “likely” means not more likely than not, but refers to a real chance or possibility: See Director of Public Prosecutions (Cth) v JM [2012] VSCA 21 at [349]; (2012) 37 VR 1 per Nettle and Hansen JJA (from which an appeal was allowed on other grounds, as referred to in paragraph 28 below) and compare Seven Network Limited v News Limited [2009] FCAFC 166 at [744]-[750]; (2009) 182 FCR 160; 262 ALR 160. In that sense, a transaction on the share market brought about by the acceptance of a single buy or sell order is capable of affecting (in the sense of having a real chance of affecting) at least one subsequent transaction so that for a time at least it will have the necessary effect. I consider below the question whether the market for MINI warrants is similar. Subject to that question, item (b) is established.
As to item (c), the creation of an artificial price may be only temporary, until ordinary market forces operate again: In Fame Decorator Agencies Pty Ltd v Jeffries Industries Ltd [1998] NSWSC 157; (1998) 28 ACSR 58, a decision of the NSW Court of Appeal, Gleeson CJ said, speaking of provisions in the Corporations Law as it then stood:
It is convenient to deal first with s998, which relevantly provides:
“998(1) A person shall not create, or do anything that is intended or likely to create, ...... a false or misleading appearance with respect to the market for, or the price of, any securities."
This provision is the current Australian counterpart of s124 of the Securities Industry Act 1980 (Cth), s70 of the Securities Industry Act 1970 (NSW) and ss9(a)(i) and 10(b) of the Securities Exchange Act 1934 (US) and Rule 10b-5 made pursuant to s10(b). (For an examination of United States authorities on the corresponding legislation see Ashley Black, "Regulating Market Manipulations: Sections 997-999 of the Corporations Law" (1996) 70 ALJ 987).
In North v Marra Developments Ltd [1981] HCA 68; (1981) 148 CLR 42, a case concerning s70 of the Securities Industry Act 1970 (NSW) Mason J said, at 58-59:
In terms the statutory prohibition is directed against activity which is designed to give the market for securities or the price for securities a false or misleading appearance. ...... It is not altogether easy to translate the generality of this language into a specific prohibition against injurious activity, whilst at the same time leaving people free to engage in legitimate commercial activity which will have an effect on the market and on the price of securities. Purchases or sales are often made for indirect or collateral motives, in circumstances where the transactions will, to the knowledge of the participants, have an effect on the market for, or the price of, shares. Plainly enough, it is not the object of the section to outlaw all such transactions.
It seems to me that the object of the section is to protect the market for securities against activities which will result in artificial or managed manipulation. The section seeks to ensure that the market reflects the forced of genuine supply and demand. By `genuine supply and demand' I exclude buyers and sellers whose transactions are undertaken for the sole or primary purpose of setting or maintaining the market price.
The concluding sentence is directly in point in this case.
Mason J went on to reject the suggestion that s70 struck only at fictitious or colourable transactions.
This approach accords with United States authority on similar legislation, where a price reflecting basic forces of supply and demand working in an open, efficient and well-informed market, is contrasted with an artificial price resulting from manipulative conduct. (See, for example, Cargill Inc v Hardin [1971] USCA8 443; 452 F.2d 1154 (1971), Freeman v Laventhol & Horwath [1990] USCA6 1765; 915 F.2d 193 (1990)).
Section 998 aims to preserve the integrity of the share market. Markets, in reflecting the interaction of forces of supply and demand, may suffer from a variety of imperfections, including mismatches of information, without such imperfections destroying their integrity. However, the conduct of a seller of thinly traded shares, calculated to effect sales at the lowest, rather than the highest, obtainable price, and timed so as to deflect the possibility of some purchasers bidding up the price, had both the purpose and effect of creating, temporarily, an artificial market and price.
Although the provision considered by Gleeson CJ was different from s.1041A in several respects, the proposition that the effect required by item (c) above need only be temporary seems to me to be equally true of s.1041A. Mr Muddle SC submitted that there will be no breach of the section unless the effect created by the transaction is “enduring”. That submission seems to me to be inconsistent with the observation of Gleeson CJ to which I have referred. I reject Mr Muddle’s submission both for that reason and because the statute assumes that one transaction may be enough to produce a breach. That seems to involve that the effect need not be “enduring”. Mr Muddle SC also sought to support this submission by referring to the fact that the automated market maker was turned on after the impugned transactions. I discuss that submission at paragraph 45 below.
Section 1041A itself was considered by the High Court in Director of Public Prosecutions (Cth) v JM [2013] HCA 30; (2013) 250 CLR 135; (2013) 87 ALJR 836 (JM). The case concerned facts alleged by the Crown and before the trial, certain questions were reserved by the trial judge arising from the Crown’s allegations, relating to s.1041A. It was alleged that, using his daughter’s account, the accused bought shares in a certain company so as to avoid the price falling below a level which would or might have triggered a margin call against the accused. Because of that purpose, it was alleged that the purchases either created or maintained an artificial price for the shares. The case was concerned with on-market transactions in listed shares, and the High Court said that its discussion (following paragraph [58]) was confined to transactions of that kind. Nevertheless, as is discussed below, that discussion may also be instructive for present purposes.
The Court discussed with evident approval Cargill Inc v Hardin (1971) 452 F (2D) 1154, a case concerned with the futures market, where the US Court of Appeals noted that “(t)he methods and techniques of [market] manipulation are limited only by the ingenuity of man”. At [70] the Court stated that the “fundamental point that should be taken from the decision in Cargill is that market manipulation is centrally concerned with conduct, intentionally engaged in, which has resulted in a price which does not reflect the forces of supply and demand” and stated that the same proposition underpinned the decision of the High Court in North v Marra Developments Ltd [1981] HCA 68; (1981) 148 CLR 42; 37 ALR 341; (1981) 56 ALJR 106, citing passages from the judgment of Mason J in that case, agreed in by the other members of the Court, treating transactions entered into for the sole or dominant purpose of setting or maintaining the market price as not being transactions reflecting the forces of genuine supply and demand. Two points emerge from this in my opinion.
At [72] the Court said that the price which results from a transaction in which one party has the sole or dominant purpose of setting or maintaining the price at a particular level is not a price which reflects the forces of genuine supply and demand in an open, informed and efficient market. An accepted offer where (at least) one party has such a sole or dominant purpose is a “transaction which can be characterised as at least likely to have the effect of creating or maintaining an artificial price for trading in the shares”.
Speaking of the question whether it is necessary to prove that the impugned transactions “went on to affect the behaviour of genuine buyers and sellers in the market” the Court denied that this was so and said at [74]:
…On-market transactions on the ASX (like the impugned transactions in this case) are made openly. Participants in the market can be (and are) informed of the transactions which occur. Participants in the market are entitled to assume that the transactions which are made are made between genuine buyers and sellers and are not made for the purpose of setting or maintaining a particular price...
The Court observed that proving at least a dominant purpose of setting or maintaining a price is one way of demonstrating that the impugned transaction is at least likely to have the effect of setting or maintaining an artificial price.
The effect of the decision in JM in my opinion, is that one way of engaging s.1041A is for a transaction to be entered into with the sole or dominant purpose of creating or maintaining the price at a particular level. But the reason why such conduct will amount to a breach is that such a transaction does not reflect the forces of supply and demand. The sole or dominant purpose discussed in JM is not the only way to produce a breach of the section, for the methods and techniques of market manipulation are “limited only by the ingenuity of man”.
Drawing an analogy between the reasoning in JMand the facts in these proceedings
In the facts of these proceedings, the purpose of both parties to the impugned transactions was to accomplish the result of enabling payment of a difference to be paid on other transactions. The difference arose from genuine trading, but the entry into the impugned transactions for the sole purpose of settling that difference was not a transaction reflecting the forces of genuine supply and demand, yet they would have appeared to be such to participants in the market. If, in JM, instead of entering into the impugned transaction to create or maintain a price in order to avoid a margin call, one or both parties had entered into a transaction in order to enable one party to pay and the other to receive, debts owed on another account, in my opinion the transaction would have been characterised as one not reflecting the forces of supply and demand. That is because the transaction would appear to be one entered into by a genuine buyer and a genuine seller, yet would not have been such. It was entered into at a price likely to mislead other market participants, and which would be at least likely to affect the following market, at least temporarily, until the market went back to normal. Mr Muddle SC submitted that the sole or dominant purpose of setting or maintaining the price at a particular level was absent in this case, and submitted his client’s purpose was quite different from the purpose considered in JM, namely to enable a debt to be repaid, or, putting it another way, to enable a profit or loss to be transferred. That object, in my opinion, equally involves a breach of s.1041A because the purpose of the parties did not reflect the forces of supply and demand. The Court described but one way of demonstrating that the section was breached. This case illustrates another way to do so. The object of the impugned transactions was to avoid some of the very conduct that s.760A makes clear that Chapter 7 was to promote, namely informed decision making, and transparent markets for financial products.
The analogy to JM would be all the closer if the market in question relevantly resembled an open ASX market for shares. The test stated in JM was whether the market was an open, informed and efficient one.
There was exposure of the market in which these warrants were traded and this financial market was open, informed, and efficient. Therefore the analogy between the JM case and the present one is strong.
The impugned transactions were accordingly likely to have the effect of creating an artificial price for trading in financial products on a financial market, in contravention of s.1041A of the Act.
That brings me to the question whether, in the circumstances of Mr McLean’s breach of s.1041A, a banning order is justified and if so, for what period.
QUANTUM OF BANNING ORDER
As to whether a banning order should be made and its duration, the applicant offers an undertaking in the following terms:
I, Philip McLean … undertake to the Administrative Appeals Tribunal and to the Australian Securities and Investment Commission that I will not in any way be involved in trading and/or market making in the financial services industry for a period of three (3) years.
On the expiry of a three (3) year period, I undertake not to be involved in the trading and/or market making in the financial services industry until completion of the Designates Trader Representatives course and having obtained a Designed Trader Representative Licence. [sic]
He submits that the terms of the undertaking could be embodied in a limited banning order having the same or an analogous effect.
He says that he never wanted to engage in market trading or market making and was obliged by his employer to do so. He says he was not qualified to undertake that activity. He points out that he was directed by his immediate superior to conduct trading in exactly the manner in which it was conducted. Recognising that the purpose of a banning order is the protection of the public, he submits that an industry-wide ban is not necessary to protect the public. He submits that the occasion for his taking a leading role in the impugned transactions was the absence of Mr Anderson on leave and then through illness.
He submits that his training for the job was rudimentary and inadequate and that if the impugned trades involved a contravention of the Act, it is Credit Suisse alone who should be blamed for that fact.
Mr McLean suggested that the transactions were not out of the ordinary and referred to certain evidence given before the delegate by Mr Chighine. The evidence of Mr Chighine was not tested before me. He also reported to Mr Anderson, and although he was senior to Mr McLean, I find it difficult to place much weight on the evidence he gave without hearing from him. Mr McLean also led evidence from an expert, Mr Morgan. Mr Morgan thought that in some respects what occurred in this case was similar to transactions he had experienced in the market, but when asked by Dr Renwick SC whether he knew of any circumstances similar to the transactions which I have characterized as a breach of s.1041A, said that he was not aware of such circumstances in other cases. He also made some observations about his beliefs concerning the effect of the impugned transactions on market participants. Two points should be made about those observations. The first is that, as the High Court emphasized in JM at paragraph [74], and as the section makes clear in terms, it is not necessary to go further than prove the likelihood (meaning real chance) that market participants will be affected by an impugned transaction. Secondly, as the High Court also observed in JM, market participants are entitled to assume that transactions on the market are the result of the forces of supply and demand. The High Court put it that because the section refers to likelihood, it is not necessary to go further and show that market participants did act on the artificial price created. It follows that in a case where the allegation is one of likelihood, one does not need to look at what happens in the market after the impugned transaction. At the moment of the impugned transaction, if there is a real chance that buyers or sellers would be influenced to make offers to buy or sell financial products on the assumption (which they are entitled to make) that the artificial price is the result of the forces of supply and demand, it does not matter that they do not do so, or even that they may find that they are unable to do so. Mr Muddle SC relied on the fact that the automated market maker was turned on after the impugned transactions, and submitted that any buyer who tried to buy or sell at comparable prices to the impugned transactions would be unable to do so. That inability would mean only that the effect of the impugned transactions would be temporary, which is sufficient to make out a case of breach.
The applicant refers to the absence of complaint concerning the applicant’s behavior before and after the events in question, and to the hardship he would suffer if a banning order which was industry-wide in its effect were made.
The respondent submits that ASIC must strive to promote the confident and informed participation of investors in the financial system under s.1(2) of the Australian Securities and Investments Commission Act 2001 (Cth). It submits that the power to make a banning order is for the purpose of protecting the public,[1] deterring like conduct[2] and maintaining investor confidence in financial markets.[3]
[1] Australian Securities Commission v Kippe (1996) 20 ACSR 679.
[2] Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602; Re HIH Insurance Ltd and HIH Casualty and General Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80 at [56]; Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 at [41] and [43]; Re Dollas-Ford and Australian Securities and Investments Commission [2006] AATA 704 at [13] to [15]; and Re Musumeci and Australian Securities and Investments Commission (2009) 109 ALD 677.
[3] Australian Securities Commission v Kippe (1996) 20 ACSR 679; Re Felden v ASIC (2003) 73 ALD 149; s.760A of the Act, s.1(2) of the Australian Securities and Investments Commission Act 2001.
On the appropriate duration of a banning order, the respondent submits that regard should be had to Regulatory Guide 98 Licensing; Administrative action against financial services licensees. The policy considerations evident in that document suggest that any banning order should be of three to ten years’ duration where there is a breach of s.1041A of the Act, and regard may properly be had to that policy particularly in order to promote consistency in decision-making.
For those reasons ASIC submits that the banning order made by the delegate, namely a three year order, is the correct or preferable decision and ASIC submits that the undertaking or limited banning order proposed by the applicant ought not to be accepted.
ASIC both cross-examined the applicant and called evidence about training which the applicant received from a Credit Suisse employee.
Mr McLean testified that shortly after he began work at Macquarie Bank in 2006, that he had been accredited in ASX Derivatives at Level 1 and Level 2 without examination because over nearly five years until December 2005, he had worked for the ASX.
He is presently employed by the Australian Corporate Bond Company which issues a financial product on the ASX, being single corporate bond exchange traded funds. He is in charge of the sales team, developing reports and training.
When he came to Credit Suisse, he had worked in the promotion of warrant products, for the ASX and at Macquarie Bank, but MINI warrants had not yet been introduced.
He agreed that his training at Credit Suisse included training about the prohibition of market manipulation and about derivatives. From about July 2012 at Credit Suisse he began marketing MINI warrants. His salary at Credit Suisse, including bonuses, reached $300,000 per annum by the time the impugned transactions were undertaken.
He said that he did not appreciate that what he was doing in December 2012 and February 2013 was wrong but certainly believes now that it was wrong. He said he did not consider whether the transactions involved ordinary supply and demand at the time of the transactions.
I do not accept the correctness of the answers to which I have just referred. His experience and level of training and knowledge and involvement in the impugned transactions should, and in my judgment, would, have alerted him to the likely breach of the market manipulation prohibitions. I do not find that the answers set out in the previous paragraph were deliberately false, and am prepared to accept that they were the result of reconstruction.
Mr McLean supports his ex-wife and the child of that marriage and he has remarried and has a second child by that wife. He provides support to his parents.
His professional experience is wholly within the financial services industry in which he presently works and a banning order would cause him obvious hardship. He is aged 40 years and would be likely to obtain other employment if a banning order were imposed.
In my opinion, a breach of s.1041A by a financial services licensee is a very serious matter. Market manipulation is prohibited in order to further the objects of promoting confident and informed decision making by consumers of financial products and services, and fair, orderly and transparent markets for financial products. As the High Court observed in JM at [74]: “[p]articipants in the market are entitled to assume that the transactions which are made are made between genuine buyers and sellers and are not made for the purpose of setting or maintaining a particular price”. For a financial services licensee to be involved in such activity is, if anything, all the more serious. A range of banning orders of three to ten years is in my opinion, speaking generally, good guidance for a regulator to provide, and the object of promoting consistency is a good one. Of course, the range is guidance rather than something which is intended to be mandatory or inflexible.
In Mr McLean’s case, the circumstances that loss was not suffered, that he was directed to undertake the impugned transactions in the way they were executed, that the main source of the wrongdoing was the decisions taken by Mr Anderson, and the hardship he will suffer as a result of a banning order, together with the absence of evidence of prior or subsequent misconduct, combine to suggest that the period of the banning ought to be at the lower end of the scale.
DECISION
Nevertheless, on account of the matters submitted by ASIC to which I have referred in paragraph 47 above, namely the public interest in protecting the public, deterring like conduct by others and maintaining investor confidence in financial markets, I am satisfied that as to whether to impose a banning order, its general nature, and its duration, the preferable decision is that made in the reviewable decision.
Therefore the reviewable decision will be affirmed and the banning order will operate for three years from the date of publication of this decision.
I certify that the preceding 62 (sixty-two) paragraphs are a true copy of the reasons for the decision herein of Deputy President B W Rayment
..........................[sgd]..............................................
Associate
Dated: 7 December 2017
Date(s) of hearing: 13 & 14 November 2017 Counsel for the Applicant: Mr W Muddle SC Solicitors for the Applicant: Gillis Delaney Lawyers Counsel for the Respondent: Dr J Renwick SC & Ms F Gordon Solicitors for the Respondent: Australian Securities and Investments Commission
1
10
0