Menzies and Australian Securities and Investments Commission
[2019] AATA 1296
•13 June 2019
Menzies and Australian Securities and Investments Commission [2019] AATA 1296 (13 June 2019)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2016/3817
Re:Mark Menzies
APPLICANT
AndAustralian Securities and Investments Commission
RESPONDENT
DECISION
Tribunal:Deputy President B W Rayment OAM QC
Date:13 June 2019
Place:Sydney
The reviewable decision is varied such that the period of the banning order is fixed to conclude on 31 December 2020.
..................................[sgd]......................................
Deputy President B W Rayment OAM QC
CATCHWORDS
CORPORATIONS – banning order – financial services – applicant prohibited from providing any financial services for four years – financial products – MINI warrants – financial market – market manipulation – setting of artificial price for purpose of transferring profit/loss – admissibility of telephone recordings – failure to keep required records – length of banning order – effects of a stay on appropriate length of banning order – public interest – deterrence – decision varied – banning period extended
LEGISLATION
Corporations Act 2001 (Cth) ss 767A, 912A, 920A, 1041A
Corporations Regulations 2001 (Cth) reg 7.8.19
Telecommunications Interception and Access Act 1906 (Cth) s 7
CASES
Australian Securities and Investments Commission v Davidof [2017] FCA 658
Davidof and Australian Securities and Investments Commission [2017] AATA 37
Davidof and Australian Securities and Investments Commission [2017] AATA 2594
Director of Public Prosecutions v JM (2013) 250 CLR 135McLean and Australian Securities and Investments Commission [2017] AATA 2566
REASONS FOR DECISION
Deputy President B W Rayment OAM QC
13 June 2019
The applicant’s company Menzies Securities Pty Ltd (Menzies Securities) held an Australian Financial Services Licence from 2010 until the company surrendered it after a four year banning order had been made against Mr Menzies by the respondent in July 2016. The banning order was made by ASIC following an investigation into certain trading in which Menzies Securities engaged on behalf of clients on the exchange. Mr Menzies was the designated Key Person for Menzies Securities, and he was its sole director and shareholder.
The trading was alleged to be in breach of s.1041A of the Corporations Act 2001 (Cth). The trading followed the pattern discussed in two previous Tribunal decisions in which I participated. They are Davidof and Australian Securities and Investments Commission [2017] AATA 2594 and McLean and Australian Securities and Investments Commission [2017] AATA 2566. The trading concerned MINI warrants, which were involved in the two earlier proceedings. The allegations of breach of s.1041A made against Mr Menzies are similar to the allegations made in the two earlier proceedings.
Mr Menzies was also alleged to have been involved in a failure to keep required records in breach of regulation 7.8.19 of the Corporations Regulations 2001 (Cth) and the terms of the Australian Financial Services licence of the Corporations Act, and therefore in breach of s.912A(1)(b) of the Corporations Act, not only in relation to the transactions relevant to the alleged breach of s.1041A but more generally. The relevant facts are largely admitted in relation to the failure to keep records.
The gravamen of the complaint against Mr Menzies under s.1041A is that he took part in several transactions which had or was likely to have the effect of creating an artificial price for trading in financial products or on a financial market. Section 1041A provides as follows:
1041A Market manipulation
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.
Note 1: Failure to comply with this section is an offence (see subsection 1311(1)).
Note 2: This section is also a civil penalty provision (see section 1317E). For relief from liability to a civil penalty relating to this section, see section 1317S.
Mr Menzies denied that breach. In the first place he says that the trading in which he took part was not trading in a financial product. For the purposes of this submission, Mr Menzies submitted that I should not follow the decision of the Federal Court in Australian Securities and Investments Commission v Davidof [2017] FCA 658. That decision was made by Lee J on appeal from the decision of this Tribunal in earlier proceedings in Davidof and Australian Securities and Investments Commission [2017] AATA 37. Lee J set that Tribunal decision aside and remitted the matter to the Tribunal to be determined again. The decision in Davidof and Australian Securities and Investments Commission [2017] AATA 2594 was the redetermination, which was heard by me and Senior Member Kelly.
As I explained to Mr Menzies during the hearing, I am bound by the decision of Lee J to find that trading in MINI warrants is trading in derivatives and therefore in financial products and I so find. That aspect of s.1041A is therefore to be determined adversely to Mr Menzies.
The question whether the trading was also “on a financial market” largely comes back to the question whether the MINI warrants were financial products because of the definition contained in s.767A of the Act. It is not necessary for me to deal with that question in determining whether s.1041A was breached because I am bound by the decision of Lee J to hold that the trading was in financial products.
Mr Menzies mainly dealt with Mr Anderson from Credit Suisse and the trading in question was suggested and implemented by Mr Anderson and by Mr McLean acting under the direction of Mr Anderson. Trading in MINI warrants by Mr Menzies resulted either in a profit or a loss. Instead of the profit or loss being discharged in cash, it was discharged by what might be described as a netting-off transaction, also in MINI warrants, which resulted in the profit or loss being transferred, and thereafter the netting off transaction was settled in cash. It is the netting off transactions, which enabled the profit or loss to be transferred, which are alleged to be in breach of s.1041A.
On the basis that the netting-off transactions involved contrived transactions during ordinary trading hours, I found in the Davidof and McLean cases that s.1041A was contravened. In Mclean I said at [20]-[39]:
20Chapter 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.
21Part 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.
22The 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.
23Relevantly 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.
24Mr 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.
25As 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.
26It 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.
27As 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.
28As 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.
29Although 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.
30Section 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.
31The 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.
32At [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”.
33Speaking 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...
34The 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.
35The 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 JM and the facts in these proceedings
36In 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.
37The 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.
38There 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.
39The 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.
Mr Menzies sought to distinguish that reasoning by submitting that there was a link between the trading which preceded the netting off transaction and the netting off transaction themselves.
The particular netting-off transactions and the underlying trading needs to be discussed in greater detail to respond to that submission of Mr Menzies.
On 4 and 5 December 2012 Mr Menzies had a number of telephone conversations with Mr Anderson and Mr McLean of Credit Suisse. Credit Suisse then bought and sold a number of securities as a result of those discussions. The securities were in part futures contracts (APZ2) (SPI futures contracts) and in part BHP shares. Menzies Securities’ trading on behalf of its clients resulted in a profit of $10,824. As a result of several trades executed on 5 December, Mr Menzies’ clients made a profit of $10,500 in trading in MINI warrants. Menzies Securities bought a total of 50,000 XJOKCH at $2.60 and sold them at $2.81, resulting in a profit of 21c times 50,000 totalling $10,500. The timing of the buying orders placed by Menzies Securities (each for 25,000 XJOKCH) was 10:50:02 and 10:50:40 and the timing of the selling orders (which together totalled 25,000 XJOKCH) was 10:51:22 and 10:52:07 on the same day.
ASIC tendered evidence that the respective prices of $2.60 and $2.81 were discussed between Mr Anderson and Mr Menzies at 10:42:19 (that is, a few minutes prior to the buying and selling orders being placed). The evidence suggested that Mr Anderson proposed that the security be XJOKCH and that the purchase price be $2.60 and Mr Menzies suggested that the selling price be $2.81. Mr Menzies objected to the evidence being tendered, but I have decided to admit it, for reasons discussed below. He was cross-examined by Dr Renwick SC to suggest that the conversation with Mr Anderson amounted to an agreement. Mr Menzies maintained that he was merely following the instruction that Mr Anderson gave him, but his assent to what Mr Anderson proposed, amounted to an agreement with his proposal, quite apart from the fact that he participated in the negotiation, making suggestions of his own as to how the transaction should be accomplished. Mr Menzies accepted that the division of the sales into two transactions was at his suggestion, for reasons to do with the fact that he was trading on behalf of two individual clients.
Mr Menzies asserted that it was important what particular security was involved in the netting off transaction, which represented merely the accomplishment of the outcome of the hedging transactions which I have described as the underlying transactions. Some of the profits made in the underlying transactions were made by trading in the APZ2 (SPI) futures contracts and the subject matter of the MINI warrant XJOKCH was the SPI index.
I reject that submission for a number of reasons: First, the underlying transactions could have been netted off in cash, and the XJOKCH transaction was undertaken instead of settlement in cash, and in breach of s.1041A of the Corporations Act. Second, the XJOKCH transaction had nothing to do with the BHP share trading, although shares in that company were part of the SPI index. Thirdly Mr Menzies did not assert that the arrangements discussed between him and Mr Anderson which preceded the impugned trading included any discussion about which MINI warrants would be bought and sold at prices other than prices determined by market forces. More importantly, even if there were a link between the MINI warrants and the trading in securities which produced the underlying profit or loss, the creation of an artificial buying and selling price in the MINI warrants would still have amounted to conduct in breach of s.1041A.
Mr Menzies also sought to say that he did not know that the prices were out of accord with market forces, suggesting that he was innocent of wrongdoing. The price discrepancy between the pre-arranged buying and selling prices must have indicated to him that he was trading otherwise than he had traded in the underlying transactions, and also that his purpose and that of Credit Suisse’s representatives was to transfer profit made in the underlying transactions.
In the proceedings which led to the reviewable decision, and in the Statement of Facts Issues and Contentions filed on behalf of Mr Menzies there was no objection taken to the recordings of telephone conversation placed in evidence. Before me Mr Menzies did challenge the admissibility of the recordings and the transcripts. I admitted them on the basis that it was open to be inferred that Mr Menzies knew and consented to the recording in question, so that no illegality was involved in the making of the recordings, and because the product disclosure statement authorised the recording of the conversations, and also because the telephone recordings included beeps which would have suggested to him that recording was occurring. Mr Menzies alleged in his own evidence that he was unaware that recording was occurring. He rather said that he knew that a market participant such as Credit Suisse had an obligation under the regulatory regime to record the conversations, but suggested that the particular Credit Suisse entity with which he dealt may not have been the repository of that obligation.
I am unable to accept that evidence given by Mr Menzies. The beeps alone would have drawn the recording to his attention at the time. He is quite an intelligent man and probably missed very little when the trading was happening. He is likely to have read the product disclosure statement prior to the trading in question. He knew of the regulatory obligations of market participants. I am satisfied that he knew of the fact of the recording, and thereby impliedly consented to the recording. On that basis no question of illegality arose either under s.7 of the Telecommunications Interception and Access Act 1906 (Cth) nor under the applicable Victorian or New South Wales legislation. Interception for the purposes of the Commonwealth Act includes recording without the knowledge of the person making the communication, and section 7 of the Act prohibits interception of a communication passing over a telecommunications system. Mr Menzies had knowledge of the recording in my finding. When Mr Menzies used the telephone he was in Melbourne, and the Credit Suisse personnel were in Sydney, and since the prohibitions in the Victorian and New South Wales legislation depended on express or implied consent, there was no illegality under any of the Acts.
All of the reasons which led the Tribunal to conclude in Davidof and McLean that there was a breach of s.1041A are also present in the case of the impugned dealings of Mr Menzies.
I should next refer to the alleged failure to keep records. The obligation of Menzies Securities was to keep records of all instructions it received to deal in financial products, either on behalf of a client or on its own account: Regulation 7.8.19(a) and (b). The records includes the date and time of receipt of instructions, the date and time of transmission of instructions, and the person who did so, and the date and time of execution of the instructions.
Mr Menzies’ evidence to the delegate was that he recorded instructions in a day book, but did not keep that record. He said that he did not have any books relating to client instructions to deal in warrants during the relevant period. He said that used IRESS and Paritech market software to arrange the dealing in market securities and that these software systems include data capture points for each trade, upon which Menzies Securities relied to satisfy the requirements to record instructions. Electronic records failed to record the details required by regulations, including the instructions received, the client’s name, the date and time the instructions were received. If Mr Menzies relied on the software, that reliance was misplaced.
In his response to ASIC’s Statement of Facts Issues and Contentions, Mr Menzies said that he relied upon Paritech, that Paritech have not been investigated, but as the obligation was his, he took the blame. He also said that he was unaware of the obligation to keep records. Those allegations, including the allegation that he was unaware of the obligations in question, do not advance his case. Unawareness of obligations including conditions of his own licence is a matter which makes the breach more serious.
I find the allegations of breach in relation to the keeping of records to be established. The breach extended to a period of three and a half years.
As the controlling mind of Menzies Securities, the applicant was said to be involved in the contravention of the legislation and the regulations, within the meaning of s.79(c) of the Act. This applied to both the contravention of s.1041A and the failure to keep records.
I turn to sanction. Section 920A of the Act enables ASIC to make a banning order against a person if, inter alia, the person has not complied with a financial services law, or been involved in such non-compliance: S.920A(1)(g).
A banning order enduring for four years was made against Mr Menzies.
He obtained from Senior Member Fice of the Tribunal, subject to conditions, a stay of ASIC’s order in on 9 September 2016 and at his own request that order was discharged on 22 March 2018. Mr Menzies told me that although he had the benefit of a stay from September 2016 until March last year, his business quickly came to an end in fact soon after the banning order was made. He says that he found that market participants would not deal with him despite the stay granted by the Tribunal in 2016. He says that he began to be supported by his family and later by his fiancée and has been unable to earn income since soon after the banning order made by the respondent. Those matters are relevant to the duration of any order now made, and the period of the operation of the stay should not be counted against him in full in my opinion. I am inclined largely to accept his evidence that his business failed despite the conditional stay granted by the Tribunal.
Mr Menzies has steadfastly asserted that the conduct in which he engaged did not amount to market manipulation, and says that he knows what amounts to a breach of that section. He says that any repetition of the conduct in which he is alleged to have engaged is now impossible since participants, including Credit Suisse, have themselves ceased to engage in it.
Part of the case made by ASIC is that it has reason to believe that he is likely to contravene a financial services law, and that part of ASIC’s case does not depend on particular past breaches.
Mr Menzies has tendered character evidence from a number of people. His brother Dr David Menzies expressed his support for him and his desire to continue utilising his services as a broker, as he has done for 10 years. Mr Peter Shakespeare has used the brokerage services of Mr Menzies since 2007 and says that he has always acted in the best interests of his clients and that he is of good character and trustworthy. Others, including Mr Paul Zientek, Mr Ashley Moore, Mr Glenn Reindel, Mr Michael Evers, Mr Lindsay Dudfield, Mr Russell Proud, Mr Joseph Faggianelli and Mr Mario Vallese, spoke well of his service as a broker or financial adviser to them, and expressed confidence in him. They look forward to having a continuing relationship with him in a professional capacity.
I am not prepared to make a finding that Mr Menzies is likely in the future to breach a financial services law.
SANCTION
The sanction is imposed not as a punishment but in the public interest, and to act as a deterrent to others involved in the financial markets against who may be prepared to contravene a financial services law. ASIC has published a regulatory guide which indicates a range of banning orders for typical categories of case, and it is appropriate that that policy be borne in mind in the interest of consistency.
A banning period of three to four years is appropriate in my opinion in the particular circumstances of the case. The stay which was granted by the tribunal should usually lead to the banning order being dated after the termination of the stay.
I do consider that a banning order is appropriate. It is true that the architect of the impugned transaction was Mr Anderson, now deceased. Whether or not he explained his proposed method of trading to any of his superiors within Credit Suisse is not apparent from the evidence. But for the holder of an Australian financial services licence to be involved in a breach of s.1041A of the Act, conduct which involved market manipulation, is very serious, and such as to merit a banning order in both the public interest and in order to deter others from embarking upon such activity, and also to encourage confidence in the market and its operators. On the other hand, the fact that Mr Menzies was not the architect of the impugned trading is a matter which goes to the length of any banning order.
As to duration, Mr Menzies refers to a number of matters. He points out that repetition of the conduct is impossible today because market circumstances have changed and that MINI warrant trading like the impugned transactions is now not engaged in by any market participant. That is no doubt correct and is not irrelevant. Even if there are no opportunities to engage in the particular impugned transactions, as the High Court observed in Director of Public Prosecutions v JM (2013) 250 CLR 135 at [68], the ways in which market manipulations may occur are many and various, indeed limited only by the ingenuity of man. Public confidence in the markets is one of the objects which the legislation is designed to promote and market manipulation is out of accord which public expectations, to say the least
Mr Menzies’ vigorous defence of his conduct did not involve any admission of wrongdoing or contrition. He took a great many points, including a suggestion that although he dealt with Credit Suisse as if he were a principal, he suggested that it was important that neither he nor his company signed any trading document with Credit Suisse, as a principal. In accordance with usual market practice he made himself or his company liable as a principal to Credit Suisse, but did so on behalf of various clients. He described the relationship as a bizarre one, but in my opinion it was the norm.
He put forward the proposition that if he had not been prepared to go along with the scheme of which Mr Anderson was the architect, he and his clients would not have had access to continued trading facilities with Credit Suisse. This case is not persuasive in itself, because of the seriousness of the practice of market manipulation, and was in any event not fleshed out with a detailed account of the consequences to him or his clients of an ability to trade with Credit Suisse.
The personal circumstances of Mr Menzies are relevant to the length of any banning order.
It appears from the reasons of Senior Member Fice that the conditions specified by him were suggested by the legal representative of Mr Menzies. The case cannot now be treated as if there were no stay after the orders made by Senior Member Fice, because Mr Menzies did have the benefit of a stay on conditions sought by him. One of the downsides of seeking and obtaining a stay is that the ability of an applicant to ask that “time served” be taken into account if the result is that the banning order will still be imposed, is diminished. His apparent inability to take commercial advantage of the stay which he had is nevertheless one of the circumstances of the case, and ought in my opinion to be taken into account. The time before the stay was imposed, and the time since the stay was revoked at his request bears, of course, more directly on the appropriate banning order at the present time.
Mr Menzies told me that his sources of income have so diminished that he has been without income and has been supported by his parents and more recently by his fiancée. He has a degree and is relatively young and intelligent, and despite the fact that he knows only the financial markets in terms of experience, it is difficult to conclude that he is without employment prospects if the banning order continues to operate. It is necessary to take account of the breach of s.1041A and the failure to keep records.
The reviewable decision is varied such that the period of the banning order is fixed to conclude on 31 December 2020.
I certify that the preceding 41 (forty-one) paragraphs are a true copy of the reasons for the decision herein of Deputy President B W Rayment OAM QC
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Associate
Dated: 13 June 2019
Date(s) of hearing: 18, 19, 20 February 2019 Date final submissions received: 14 February 2019 Applicant: In person Counsel for the Respondent: Dr J Renwick CSC SC and Mr S Rosewarne Solicitors for the Respondent: Ms J Birch, Australian Securities & Investment Commission
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