Rosenberg and Australian Securities and Investments Commission
[2010] AATA 654
•31 August 2010
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2010] AATA 654
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2009/3619
GENERAL ADMINISTRATIVE DIVISION )
ReLance Rosenberg
Applicant
AndAustralian Securities and Investments Commission
Respondent
DECISION
TribunalMr RP Handley, Deputy President
Mr SE Frost, Senior Member
Date31 August 2010
PlaceSydney
Decision The Tribunal sets aside the decision under review.
.....................[sgd]....................
Mr R P Handley
Deputy President
CATCHWORDS
PRACTICE AND PROCEDURE – Banning order under s 920A of the Corporations Act – false trading and market rigging - having the effect of creating or causing the creation of a false or misleading appearance of active trading in or the price for trading in financial products – misleading or deceptive conduct - special crossings – off-market transactions reported to market – protection of the public – deterrence- correct or preferable decision
RELEVANT ACTS
Corporations Act 2001 (Cth): ss 766C, 767A, 916A, 920A, 920B, 1041B, 1041H
Securities Industry Act 1970 (NSW) (repealed)
CITATIONS
Re XQZT and Australian Securities and Investments Commission [2009] AATA 669
Australian Securities and Investments Commission (ASIC) v Administrative Appeals Tribunal (2009) 181 FCR 130; (2009) 113 ALD 449; (2009) 263 ALR 411; (2009) 76 ACSR 333; (2009) 51 AAR 244; [2009] FCAFC 185
Shi v Migration Agents Registration Authority (2008) 235 CLR 286; (2008) 103 ALD 467; (2008) 248 ALR 390; (2008) 82 ALJR 1147; (2008) 48 AAR 345; [2008] HCA 31
Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60; (1979) 24 ALR 577; (1979) 46 FLR 409
Braysich v R (2009) 260 ALR 719; (2009) 238 FLR 1; (2009) 74 ACSR 387; [2009] WASCA 178
Australian Securities Commission v Nomura International PLC (1998) 89 FCR 301; (1998) 160 ALR 246; (1998) 29 ACSR 473; (1999) 17 ACLC 55; (1999) ATPR (Digest) 46-188
North v Marra Developments Ltd (1981) 148 CLR 42; (1981) 37 ALR 341; (1981) 56 ALJR 106; (1981) 6 ACLR 386; [1981] HCA 68
Australian Securities and Investments Commission (ASIC) v Soust (2010) 183 FCR 21; (2010) 77 ACSR 98; [2010] FCA 68
Australian Securities and Investments Commission (ASIC) v Narain (2008) 169 FCR 211; (2008) 247 ALR 659; (2008) 66 ACSR 688; [2008] FCAFC 120
Johnson Tiles Pty Ltd v Esso Australia Ltd (2000) 104 FCR 564; (2001) ATPR 41-794; [2000] FCA 1572
Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82; (1984) 55 ALR 25; (1984) ASC 55-334; (1984) ATPR 40-463
Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602; (2008) 48 AAR 10; [2008] AATA 278
Rich v Australian Securities and Investments Commission (2004) 220 CLR 129; (2004) 209 ALR 271; (2004) 78 ALJR 1354; (2004) 50 ACSR 242; (2004) 22 ACLC 1198; [2004] HCA 42
Australian Securities and Investments Commission v Forge [2007] NSWSC 1489
Australian Securities Commission v Kippe and Another (1996) 67 FCR 499; (1996) 137 ALR 423; (1996) 20 ACSR 679; (1996) 14 ACLC 1226
Kamha v Australian Prudential Regulation Authority (2005) 147 FCR 516; (2005) 88 ALD 620; (2006) 14 ANZ Ins Cas 61-668; [2005] FCAFC 248
Re Tweed v Australian Securities and Investments Commission (2008) 47 AAR 518; [2008] AATA 514
OTHER AUTHORITIES
ASIC Regulatory Guide 98, ‘Licensing: Administrative action against financial services providers’ (April 2006)
REASONS FOR DECISION
| 31 August 2010 | Mr R P Handley, Deputy President Mr SE Frost, Senior Member |
Mr Rosenberg has applied to the Tribunal for the review of a decision of the Australian Securities and Investments Commission (ASIC) made under the Corporations Act 2001 (Cth) (the Act) to make a banning order prohibiting him from providing any financial services for a period of four years.
background
In early 2008, Mr Rosenberg was the managing director of the Tricom Group of companies, comprising Tricom Holdings Ltd and a number of subsidiary companies including Tricom Equities Ltd (Tricom), an investments and financial services company. Tricom was the holder of an Australian financial services licence and was a trading participant on the Australian Securities Exchange (ASX). Mr Rosenberg was Tricom’s ‘responsible officer’ (the officer who performs duties in connection with the holding of its Australian financial services licence) and an authorised representative (a person who in accordance with s 916A of the Act is authorised by the licensee to provide financial services on its behalf).
Tricom’s operations included securities broking, equity capital markets, and corporate advisory and wealth management. As part of its broking operations, Tricom conducted a securities lending business, with clients ‘lending’ securities to Tricom as collateral for cash loans. The amount of the loan provided by Tricom was determined according to the loan-to-valuation ratio (LVR) of the securities lent to Tricom. The LVR of individual securities varies so that, for example, the securities of a company with a higher market capitalisation attract a higher LVR (eg 70 per cent) than the securities of ‘small-cap’ companies considered a riskier investment (eg 50 per cent). Tricom obtained finance for the cash loans from a number of corporate lenders by on-lending to those corporate lenders securities lent to Tricom by its clients. The corporate lenders from which Tricom obtained the majority of its finance included the ANZ Bank (ANZ), Merrill Lynch, Credit Suisse and Opes Prime, which was also an ASX broker and market participant.
Mr Rosenberg states that on 29 and 30 January 2008, Tricom was unable to settle a series of trades entered into on behalf of a client because the ANZ failed to deliver the relevant securities in response to a recall notice from Tricom. The ANZ’s failure was in turn due to the failure by another party (to whom the securities had been on-lent) to meet its obligation to deliver the securities in response to a recall notice. Tricom’s failure to meet its settlement obligation led to the ASX imposing additional conditions on the operation of Tricom’s securities lending business and to the ANZ requesting that Tricom reduce and eventually cease its securities lending business. Tricom therefore appointed Korda Mentha, a corporate recovery and restructuring business, to advise and assist in winding down its securities lending business.
About two months later, late on 27 March 2008, it became known that one of Tricom’s corporate lenders, Opes Prime, was in financial difficulties, and that administrators might have been appointed. Mr Rosenberg was concerned about the effect this might have on Tricom’s business, and about whether it would be able to reclaim its clients’ securities that it had on-lent to Opes Prime as collateral for finance and which would, in turn, have been on-lent by Opes Prime to corporate lenders to obtain financing.
In February 2008, Tricom had entered into a refinancing arrangement with Opes Prime whereby Opes Prime lent Tricom approximately $43m in return for a portfolio of securities ‘borrowed’ from Tricom. This involved the title to the securities being transferred to Opes Prime under the terms of the standard Australian Master Securities Lending Agreement (AMSLA), which also governed the lending arrangements between Tricom and its clients. As at 27 March 2008, the market value of these on-lent securities was approximately $67m. Mr Rosenberg believed that Opes Prime would, in turn, have on-lent many of these securities to its financiers, which he knew to be principally the ANZ and Merrill Lynch, as security for finance provided to Opes Prime.
During March 2008, Tricom was also involved in a recapitalisation plan involving a group of lenders, including Babcock and Brown Ltd, with a view to Tricom using the capital generated to repay loans obtained from Tricom’s financiers, including Opes Prime, as part of the wind down of its securities lending business. This would result in the recovery of securities on-lent by Tricom to its financiers and, in the case of Opes Prime, it was envisaged that Tricom’s debt to Opes Prime would be reduced from $43m to approximately $8.7m. Mr Rosenberg states that this recapitalisation was scheduled to take place in mid-March 2008 “but was delayed at the insistence of ANZ”. It was then rescheduled for 28 March 2008, but did not proceed due to the events concerning Opes Prime.
On 27 March 2008, the directors of Opes Prime had appointed administrators of its business. On the same day, Opes Prime’s secured creditor, the ANZ, appointed receivers and managers for the assets of Opes Prime. At 9.59 am on 28 March 2008, the ASX issued a media release and a circular confirming that receivers and managers had been appointed for Opes Prime and that its status as a trading, clearing and settlement participant has been suspended immediately. Mr Rosenberg states that he did not learn of these events until later that morning.
Mr Rosenberg learned that Opes Prime was in financial difficulties from the chief financial officer of Babcock and Brown at about 4.30 pm on 27 March 2008. Mr Rosenberg said that between 5.00 pm and 6.30 pm, he made a series of telephone calls to Tricom’s advisers and financiers to try and find out more about Opes Prime’s position. At about 6.00 pm, he was advised by Tricom’s relationship manager at the ANZ that administrators might have been appointed. As a result, Mr Rosenberg was concerned about the implications of this for Tricom, both in terms of its recapitalisation plan and in relation to the securities on-lent by Tricom to Opes Prime. He therefore sought advice from both senior Tricom staff and representatives of Korda Mentha and Babcock and Brown on what action Tricom should take, including how to secure the return of the securities on-lent by Tricom to Opes Prime. It was suggested to Mr Rosenberg that Tricom could consider selling the on-lent securities held by Opes Prime and reporting the sales as special crossing trades.
A ‘trading participant’ (stockbroker) can execute an order on the ASX in two ways: first, by placing an order on the ASX’s integrated trading system, an electronic trading system accessible on the internet; and, second, where the order is valued at more than $1m, by finding a counter-party for the order directly ‘off-market’ in which case the stockbroker will facilitate the transaction on behalf of both parties. The latter is called a ‘special crossing’. Section 18.1.1 of the ASX Market Rules provides that special crossings can be effected at any time by a stockbroker, (a) if the stockbroker is acting on behalf of two clients, at a price negotiated on behalf of the clients, or (b) if the stockbroker sells or buys, relevantly, securities as principal, at a price agreed between the client and the stockbroker.
The price agreed for a special crossing need bear no relation to the market price for the security. Thus, it is possible for the price agreed between the parties for the transfer of securities to be the result of what has been agreed as part of some other transaction from which the parties derive some benefit. The ASX’s website gives an example of a special crossing, noting: “Special Crossings take place with no reference to the current market and may be at any agreed price, regardless of the market price.”
There are a number of types of special crossing. The type relevant in this matter is a ‘block special crossing’ which is one where the consideration for the transaction is not less than $1m. Special crossings effected by a stockbroker must be reported to the market via the ASX’s integrated trading system (ITS). The ASX provides trading and other data electronically to IRESS Market Technology Ltd for inclusion on its share market information system called ‘IRESS’, which is an electronic information system available on subscription and used by brokers, equities traders and investors. The information about a special crossing effected by a stockbroker involving the trade of a security on a particular day is accessible via IRESS, which shows the time of the trade, the price and volume, and bears the code ‘SPXT’ for special crossing. No explanation on IRESS is given for the price at which the special crossing is transacted.
The benefit to the parties of a special crossing being effected by a broker and reported to the ASX’s ITS is that the transaction is ‘settled’ via the ASX Clearing House Electronic Subregister System (CHESS). Section 5.7.3 of the ASX Market Rules imposes an obligation on the parties to settle the transaction at a settlement date that is three business days after the transaction was entered into, referred to as T + 3. On this date, the buyer must be in a position to deliver the agreed price for the securities and the seller must be in a position to deliver the beneficial ownership of the securities.
In this case, Mr Rosenberg, having discussed Tricom's options with his advisers, decided to proceed with effecting 12 block special crossings, Tricom being the seller of securities in the transactions and Tricom Holdings Ltd the purchaser. The effect of this was Tricom was under a market obligation to deliver the securities to the purchaser at the settlement date, that is at T+3. The creation of a market obligation on Tricom to be in a position to transfer the beneficial ownership of the securities to the purchaser would serve as a recall notice/instruction to its corporate lender, Opes Prime, to which it had on-lent the securities, to redeliver the on-lent securities to Tricom.
The market obligation to redeliver the securities arose under clause 7.2 of the AMSLA, which states that the ‘lender’ of securities (in this case Tricom) may call for the redelivery of all or any equivalent securities by the ‘borrower’ of securities (in this case Opes Prime) at any time by giving notice on any business day requiring redelivery at the standard settlement time (here T + 3). At the same time, Tricom had a similar obligation requiring simultaneous repayment of the loan. Whilst benefitting Tricom, the transaction would also benefit Opes Prime as a result of Tricom repaying the loan that had been secured by the on-lent securities.
Mr Rosenberg said he telephoned the ASX compliance division to explain that Tricom proposed to execute a series of special crossings to facilitate the return by its corporate lender Opes Prime of the on-lent securities. He said neither of the two ASX staff with whom he spoke expressed concern about the proposed course of action or suggested that Tricom should not proceed with this course. Of the ASX staff with whom Mr Rosenberg spoke, ASX Market Supervision Compliance Manager Fiona Hooymans’ version of events is to the effect that the ASX could not comment on or endorse the proposed special crossings and that Mr Rosenberg needed to discuss the matter with the receiver of Opes Prime (affidavit dated 4 November 2009, attached file note dated 28 March 2008 (FEH3)).
On the morning of Friday 28 March 2008, between 9.00 am and 9.30 am, Mr Rosenberg gave instructions to Paul Petkovich, a licensed securities adviser employed by Tricom, to execute the 12 special crossings (the portfolio of securities on-lent to Opes Prime comprised 11 securities, but there were to be two separate special crossings for holdings of securities in EBI Securities) before the market opened at 10.00 am. The price at which the special crossings were to be executed was to reflect the recall value (the LVR) of approximately $43m in respect of the securities on-lent by Tricom to Opes Prime. Ten of the special crossings were effected and reported to the market between 9.53 am and 9.59 am, before it opened at 10.00am; and two (both in respect of EBI Securities) were reported shortly after the market opened – at 10.14 and 10.17 am.
Three days later (on 31 March 2008), Mr Rosenberg advised the ASX that the 12 special crossings would be cancelled the next day. Tricom had in the meanwhile obtained finance from a corporate lender (the ANZ) to purchase the on-lent securities or their equivalent. It used this funding to purchase some of the securities from the ANZ (for $21.4m) and some from Merrill Lynch (for $28.2m), with the remaining stock to be purchased on the market when recalled by Tricom’s clients. (The price for the purchase of the securities from the ANZ and Merrill Lynch was between their LVR and market price.)
ASIC was concerned that by placing the buy and sell instructions for the 12 special crossings, Mr Rosenberg might not have complied with s 1041B(1) of the Act in so far as his actions had the effect of causing or creating a false or misleading appearance of active trading on the financial market operated by the ASX in each of the securities which were the subject of the special crossings. ASIC therefore gave Mr Rosenberg notice of a hearing to investigate the matter and gave him an opportunity to appear at that hearing and make submissions. The hearing was conducted on 14 June 2009. On 31 July 2009, a delegate of ASIC decided to impose a banning order on Mr Rosenberg, banning him from providing any financial services for a period of four years.
In the statement of reasons for his decision, the delegate found Mr Rosenberg’s placing of the buy and sell instructions for the 12 special crossings: “was an act that had or was likely to have the effect of causing the creation of a false or misleading appearance on the ASX of active trading in the securities the subject of the 12 SC and with respect to the market for and the price for trading in those securities”.
The delegate said he was satisfied that Mr Rosenberg had failed to comply with s 1041B(1) of the Act and had therefore failed to comply with a financial services law for the purposes of s 920A(1)(e) of the Act. These findings enlivened ASIC’s power to make a banning order against Mr Rosenberg, the purpose of which was not to punish Mr Rosenberg but to protect the public. The delegate also found that Mr Rosenberg “may not have complied with s 1041H(1) of the Act” by engaging in conduct in relation to the securities that was misleading and deceptive or was likely to mislead or deceive. However, in view of his finding that Mr Rosenberg did not comply with s 1041B(1), the delegate said it was unnecessary to consider Mr Rosenberg’s conduct under s 1041H(1).
Having made these findings, the delegate then considered whether he should exercise ASIC’s discretion to make a banning order. While generally accepting Mr Rosenberg’s submissions that the circumstances of the conduct were exceptional and that his actions were motivated by a desire to protect Tricom’s clients’ interests and that he did not intend to manipulate the market or seek to benefit from the 12 special crossings, the delegate found difficulty not with what Mr Rosenberg was trying to achieve but with the method he chose to achieve it. The delegate found that the 12 special crossings: “were a contrivance entered into for the primary purpose of stimulating a response that might have resulted in the recall of Tricom stock in circumstances where [Mr Rosenberg] could not have any certainty that Tricom would be in a position to settle at T+3, or at all”.
The delegate found Mr Rosenberg’s willingness to proceed with the special crossings in these circumstances demonstrated recklessness as to whether Tricom would be in a position to settle on them at T+3, or at all. The delegate found that Mr Rosenberg was motivated not only by the interests of Tricom’s clients but also by Tricom’s interests and therefore his own interests. At that time, Mr Rosenberg held 87.5 per cent of Tricom’s shares.
The delegate found, in all the circumstances, that Mr Rosenberg’s failure to comply with s 1041B of the Act was a serious one. While noting the positive character references tendered on Mr Rosenberg’s behalf and the damage to his reputation which might follow if a banning order were to be made, the delegate concluded that:
the seriousness of Mr Rosenberg’s conduct, the strong public interest in maintaining financial markets that are free from manipulation and the importance of deterrence, both specific but more particularly general deterrence, makes it appropriate that an unconditional banning order should be made.
In considering an appropriate period for the banning order, the delegate referred to ASIC Regulatory Guide 98, ‘Licensing: Administrative action against financial services providers’ (April 2006), and to the factors and examples of conduct set out in Table 2 of the Guide relating to specific periods of banning. The delegate had regard to the “unusual and somewhat unique circumstances” that prompted the 12 special crossings, and the fact that this was a single and limited course of conduct and the market manipulation was not of a kind usually encountered. He concluded that a banning order at the lower end of the range was appropriate and, having regard to the above, decided that Mr Rosenberg should be banned from providing any financial services for a period of four years.
On 4 August 2009, Mr Rosenberg applied to the Tribunal for a review of the delegate’s decision. He also applied for an order staying the operation and implementation of the delegate’s decision and for confidentiality orders. The Tribunal conducted an interlocutory hearing to hear the parties’ submissions on these matters on 20 and 21 August 2010 and, in an interlocutory decision dated 4 September 2009, the Tribunal made orders staying the operation and implementation of the decision and confidentiality orders: ReXQZT and Australian Securities and Investments Commission [2009] AATA 669. An appeal by ASIC heard by the Full Federal Court was dismissed: Australian Securities and Investments Commission v Administrative Appeals Tribunal [2009] FCAFC 185.
relevant legislation
The relevant provisions of the Act state:
ASIC's power to make a banning order
920A(1) ASIC may make a banning order against a person, by giving written notice to the person, if:
…
(e)the person has not complied with a financial services law; or
(f)ASIC has reason to believe that the person will not comply with a financial services law.
(‘Financial services law’ is broadly defined in s 761A to include the conduct referred to in ss 1041B and 1041H referred to below.)
What is a banning order?
920B(1) A banning order is a written order that prohibits a person from providing any financial services or specified financial services in specified circumstances or capacities.
(2)The order may prohibit the person against whom it is made from providing a financial service:
(a)permanently; or
(b)for a specified period, unless ASIC has reason to believe that the person is not of good fame or character.
(3)A banning order may include a provision allowing the person against whom it was made, subject to any specified conditions:
(a)to do specified acts; or
(b)to do specified acts in specified circumstances;
that the order would otherwise prohibit them from doing.
False trading and market rigging - creating a false or misleading appearance of active trading etc.
1041B(1) A person must not do, or omit to do, an act (whether in this jurisdiction or elsewhere) if that act or omission has or is likely to have the effect of creating, or causing the creation of, a false or misleading appearance:
(a)of active trading in financial products on a financial market operated in this jurisdiction; or
(b)with respect to the market for, or the price for trading in, financial products on a financial market operated in this jurisdiction.
…
(2)For the purposes of subsection (1), a person is taken to have created a false or misleading appearance of active trading in particular financial products on a financial market if the person:
(a)enters into, or carries out, either directly or indirectly, any transaction of acquisition or disposal of any of those financial products that does not involve any change in the beneficial ownership of the products; or
(b)makes an offer (the regulated offer) to acquire or to dispose of any of those financial products in the following circumstances:
(i) the offer is to acquire or to dispose of at a specified price; and
(ii) the person has made or proposes to make, or knows that an associate of the person has made or proposes to make:
(A)if the regulated offer is an offer to acquire--an offer to dispose of; or
(B)if the regulated offer is an offer to dispose of--an offer to acquire;
the same number, or substantially the same number, of those financial products at a price that is substantially the same as the price referred to in subparagraph (i).
…
(3)…
(4)…
(‘Financial product’ is defined in s 764A(1) as including a security, and ‘securities’ are defined in s 92 as including shares. ‘Financial market’ is defined in s 767A as a facility through which offers or invitations to acquire or dispose of financial products are regularly made or accepted. This includes a facility of the kind provided by the ASX.)
Misleading or deceptive conduct (civil liability only)
1041H(1) A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.
Note 1: Failure to comply with this subsection is not an offence.
Note 2: Failure to comply with this subsection may lead to civil liability under section 1041I. For limits on, and relief from, liability under that section, see Division 4.
(2)The reference in subsection (1) to engaging in conduct in relation to a financial product includes (but is not limited to) any of the following:
(a)dealing in a financial product;
(b)…
(3)…
the issue
The issue for the Tribunal to determine is whether the decision under review is the correct or preferable decision having regard to all the material before it: Shi v Migration Agents Registration Authority (2008) 235 CLR 286, at [35] (per Kirby J), and [98-99] (per Hayne and Heydon JJ); see also Bowen CJ and Deane J in Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60, at 68.
For the Tribunal to determine the correct or preferable decision, it is necessary for us to address the following questions:
(1)Did Mr Rosenberg fail to comply with a financial services law, thereby enlivening ASIC’s power to make a banning order under s 920A(1)(e)? Answering this question requires that we consider the allegations made by ASIC.
(a)By placing the buy and sell instructions for the 12 special crossings, did Mr Rosenberg do an act which had or was likely to have the effect of creating, or causing the creation of, a false or misleading appearance of active trading in financial products on a financial market operated in this jurisdiction, thereby contravening s 1041B(1)(a) of the Act?
(b)Did Mr Rosenberg do an act that had or was likely to have the effect of creating, or causing the creation of, a false or misleading appearance with respect to the market for, or the price for trading in, financial products on a financial market operated in this jurisdiction, thereby contravening s 1041B(1)(b) of the Act?
(c)By placing the buy and sell instructions for the 12 special crossings, did Mr Rosenberg engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive, thereby contravening s 1041H(1) of the Act?
(2)If (a),(b), or (c) are satisfied, should the Tribunal, standing in the shoes of the decision-maker, exercise the discretion to make a banning order and, if so, having regard to s 920B, what form should that banning order take? In particular, is the banning order made by ASIC prohibiting Mr Rosenberg from providing any financial services for a period of four years the correct or preferable decision?
The Tribunal considers these questions in turn below.
(A)By placing the buy and sell instructions for the 12 special crossings, did Mr Rosenberg do an act which had or was likely to have the effect of creating, or causing the creation of, a false or misleading appearance of active trading in financial products on a financial market operated in this jurisdiction, thereby contravening s 1041B(1)(a) of the Act?
In Braysich v R (2009) 260 ALR 719; [2009] WASCA 178 (Braysich), the Full Court of the Supreme Court of Western Australia discussed the meaning of ‘false or misleading appearance of active trading’ in the predecessor to s 1041B (s 998 of the Corporations Law). Buss JA, with whom Pullin and Miller JJA agreed, stated, at [98]ff:
Section 998 of the Corporations Law: what is the meaning of a false or misleading appearance of 'active trading'?
98.The first limb of s 998(1) prohibits the creation of a false or misleading appearance of 'active trading' in any securities on a stock market. The legislation does not, however, define 'active trading'.
99.In my opinion, the meaning to be ascribed to the expression 'active trading' is to be discerned from the statutory context and the Parliamentary intention in enacting s 998(1).
100.The impugned transactions must 'create' a false or misleading appearance of 'active trading'. The word 'active' requires something more than ordinary volume or price changes in the securities in question. This distinguishes 'active' trading from trading that is not 'active'. …
101.In my opinion, it is apparent, from the statutory context and the Parliamentary intention in enacting s 998(1), that a person will create a false or misleading appearance of 'active trading' in securities for the purposes of the first limb of s 998(1) if, relevantly:
(a)the person enters into, or carries out, either directly or indirectly, any transaction or transactions of sale or purchase which do not reflect the forces of genuine supply and demand; that is, the transaction or transactions are undertaken for the purpose of establishing an artificial market or price; and
(b)the transaction or transactions in question constitute or induce a pattern of new trading in volumes or at prices that would not otherwise have occurred.
102.The false or misleading appearance is created because, in the absence of any disclosure of the illegitimate purpose, there will appear to be trading which reflects genuine supply and demand, and not a scheme to promote or maintain an artificial market or price. See North, 58 - 59; Nomura International [Australian Securities Commission v Nomura International PLC (1998) 89 FCR 301], 391 - 392, 399 - 400, 403, 404 - 405.
ASIC contends that by placing the buy and sell instructions for the 12 special crossings, Mr Rosenberg did an act which did not reflect the forces of genuine supply and demand, and “induced a pattern of new trading in volumes that would not have otherwise occurred” (submissions at [139]). This had the effect or was likely to have the effect of creating a false or misleading appearance of active trading in financial products on a financial market. Mr Speakman, for ASIC, said it is immaterial that the trades are ‘off-market’ transactions. The issue is whether the special crossings had or were likely to have the required effect on a financial market. Thus, ASIC contends, Mr Rosenberg contravened s 1041B(1)(a) of the Act.
Mr Finch, for Mr Rosenberg, noted that the special crossings were transacted ‘off-market’. He submitted that ‘active trading on a financial market’ means the continuous auction process of bidding that occurs on the market. He referred to the definition of ‘on-market’ in s 9 of the Act meaning a transaction effected on a prescribed financial market and being either an on-market transaction as defined in the rules governing the operation of the market or, if not so defined, effected in the ordinary course of business on the market. He submitted that the intention to be attributed to Parliament is that the concepts of ‘on-market’ in s 9 and ‘on a financial market’ in s 1041B, being similar expressions, have consistent and related meanings. He also noted the definition of ‘financial market’ in s 767A emphasising the ordinary function of providing a mechanism through which offers or invitations to acquire or dispose of financial products are regularly made or accepted.
Mr Finch said that, in any event, the appearance created must still be false or misleading. In this instance, he contended, no part of the act was false or misleading. The information reported to the ITS and recorded on IRESS was neither false nor misleading and there was no provision for providing further information explaining the context in which the special crossings were effected.
In our view, it is important to consider what information was provided to the market by the stockbroker (Tricom) in its electronic report to the ITS which was then passed on to IRESS and accessible online by subscribers to the IRESS service.
Addressing the issues raised above, the Tribunal notes, first, that the ‘acts’ in question - the special crossings - involved trading in ‘financial products’ (as defined in Division 3 of Chapter 7 of the Act) and, by virtue of the nature of these special crossings, although reported to the market, the transactions were conducted ‘off-market’. Second, did the special crossings nevertheless create an appearance of active trading on a financial market? In our opinion, to answer this question requires consideration of what is reported to the market by the stockbroker.
To an affidavit dated 4 November 2009, David Fong, a senior market analyst employed by ASIC, attached print copies of IRESS screen displays (referred to on the market as ‘Depth Replays’) for each of the 11 securities that were the subject of the special crossings in this case. The Depth Replay for each security at a particular point in time shows both the number of securities available for sale (known as the ‘Ask Schedule’) and the number wanted for purchase (the ‘Bid Schedule’) together with the price at which and the number of securities (‘volume’) which potential sellers and buyers are prepared to trade. The Depth Replay also shows the number of trades concluded on that day and the price, volume, time of the trade and condition code. Where the trade is a special crossing, the trade bears the condition code ‘SPXT’.
Because special crossings are transacted ‘off-market’, it follows that a person reading the IRESS Depth Replay screen should be immediately aware that a SPXT trade does not, of itself, involve active trading on the market. But does it create or is it likely to have the effect of creating or causing the creation of such an appearance? In our view, this question must be answered in the negative. The wording of s 1041B(1)(a) requires that the appearance must be of active trading in financial products on a financial market. There was no such appearance in this case because it was clear that the special crossings were transacted ‘off-market’.
(B)Did Mr Rosenberg do an act that had or was likely to have the effect of creating, or causing the creation of, a false or misleading appearance with respect to the market for, or the price for trading in, financial products on a financial market operated in this jurisdiction, thereby contravening s 1041B(1)(b) of the Act?
Use of the words ‘with respect to’ in paragraph (b) of s 1041B(1) give this provision a potentially wider application than paragraph (a). Once again, assuming the special crossings to be ‘acts’, the question has two components: first, did the special crossings have, or were likely to have, the effect of creating, or causing the creation of, a false or misleading appearance; and, second, was the appearance with respect to the market for, or the price for trading in, financial products on a financial market operating in this jurisdiction?
The words “is likely to have” in s 1041B(1) mean ‘more probable than not’: Australian Securities Commission v Nomura International PLC (1998) 89 FCR 301, at 396 (per Sackville J). The requirement for there to be an ‘effect of creating or causing the creation of’ indicates that there is no mental element to the provision. As Mr Speakman submitted, “It is the effect, or likely effect that matters” (transcript 4 August 2010, p 133).
With regard to what constitutes a false or misleading appearance, ASIC referred us to the discussion in North v Marra Developments Ltd(1981) 148 CLR 42, a case concerning the application of s 70 of the Securities Industry Act 1970 (NSW), a predecessor to s 1041B(1). In this decision, at 58-59, Mason J (with whom the other four members of the High Court agreed) referred to the object of such a prohibition:
In terms the statutory prohibition is directed against activity which is designed to give the market for securities or the price of securities a false or misleading appearance. In this setting, "calculated" means "designed" or "intended" rather than "adapted" or "suited". 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 forces 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. It is in the interests of the community that the market for securities should be real and genuine, free from manipulation. The section is a legislative measure designed to ensure such a market and it should be interpreted accordingly.
I agree with Hope and Samuels JJ.A. in rejecting the suggestion that the section strikes only at fictitious or colourable transactions. Transactions which are real and genuine but only in the sense that they are intended to operate according to their terms, like fictitious or colourable transactions, are capable of creating quite a false or misleading impression as to the market or the price. 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.
In Australian Securities Commission v Soust (2010) 183 FCR 21, at [90], Goldberg J said that this reasoning is equally applicable to, relevantly, s 1041B(1):
I consider that the reasoning of Mason J in North v Marra Developments Ltd (supra) (par [83] above) in relation to the creation of a false or misleading appearance of active trading and the creation of a false or misleading appearance with respect to the market for, or the price of, securities is equally applicable to the creation of an artificial price for trading in securities. That is to say, the reasoning applies to ss 1041A and 1041B(1)(b).
(See also Braysich, at [33] – [35], per Buss JA, with whom Pullin and Miller JJA agreed.)
The Relevant Evidence
ASIC contends that because of the volume of shares that was the subject of each of the special crossings relative to the issued share capital of the companies, the special crossings, while off-market transactions, were likely to precipitate a price reaction when reported to the market. ASIC relies on the report of Professor Alex Frino, Professor of Finance at the University of Sydney, dated 12 November 2009. Professor Frino said he has conducted research on market transactions for almost 20 years and it is his area of expertise. In his report, at [2], he said:
Because of their size (greater than $1 million), off market transactions are likely to precipitate a price reaction when they are reported to the marketplace. … This is because large traders are perceived by the market to be better informed of the value of stock, and the market reassesses the price of the stock to reflect this information.
Professor Frino says that because of their size, off-market transactions are also likely to precipitate a temporary price effect because they consume a large amount of liquidity and an inducement must be paid by sellers or buyers to entice buyers or sellers into the market. The Tribunal notes that this appears to assume that the liquidity of particular securities may be affected which is not necessarily the case with securities ‘lent’ to a financier as collateral for a loan.
For the 12 special crossings, the percentage of issued share capital and the discount of the price at which each security traded at 10.30 am on 28 March 2008 (except EBI which was sampled at 11.00 am) over the price at the close of trading on 27 March 2008 were as follows:
Security Special Crossing as %
Share CapitalSpecial Crossing
Discount over
27/3/08 closeAOE (Arrow Energy Ltd) 0.44% -29.9% BBW (Babcock & Brown Wind Ptners Gp) 1.09% -29.7% PLV (Pluton Resources Ltd) 5.31% -50.6% HLG (Hedley Leisure & Gaming Ppty Fund 7.88% -46.6% JST (Just Gp Ltd) 0.99% -30.0% WSA (Western Areas NL 0.72% -30.0% BBC (Babcock & Brown Communities Gp) 0.32% -12.7% BBP (Babcock & Brown Power) 0.16% -30.0% BCM (Babcock & Brown Capital Ltd) 0.21% -30.0% EBI (Everest, Babcock & B Alt Inv Trust) 0.36% -40.0% EBI 1.52% -40.0% INES (India Equities Fund Ltd) 4.60% -51.8%
Professor Frino concluded, at [22], that the special crossings created the impression that the securities were overpriced and that there was an imbalance of buyers and sellers. He also considered the effect of the cancellation of the special crossings on 1 April 2008 and, at [25], concluded that this “caused the market to revalue the stocks upwards essentially reversing the price adjustment which took place on 28 March 2008”. Professor Frino told the Tribunal that where special crossings are reported at a deep discount, the market’s reaction is to be cautious because of a perception that the trader may have information which is influencing the transaction, and this market caution could be reflected in a reduction in the market price of the securities.
In cross-examination, Professor Frino acknowledged that he is not familiar with the AMSLA that governed the lending arrangements between Tricom and Opes Prime. He was not aware of Tricom’s contractual right of recall for the 11 securities ‘lent’ by Tricom to Opes Prime as collateral for the loan, and he only became aware of the LVR used in determining the amount of loans in such financing arrangements on the morning he gave evidence.
The expert witness relied on by Mr Rosenberg, John Steinthal, an experienced market trader, investment manager and panel member of the Australian Securities Exchange National Adjudicatory Tribunal, in a report dated 20 October 2009, produced a similar table although using the Volume Weighted Average Prices (VWAPs) for trades on 28 March 2008 as the point of comparison. He said that in his opinion, the changes in the market price over the course of 28 March 2008 were insignificant. The market is aware that special crossings are off-market transactions that can be executed at any price. Mr Steinthal’s table showed the following:
Security Premium/Discount of VWAP on 28/3/08 over prior close on 27/3/08 AOE (Arrow Energy Ltd) -2.8% BBW (Babcock & Brown Wind Ptners Gp) -2.5% PLV (Pluton Resources Ltd) -0.5% HLG (Hedley Leisure & Gaming Ppty Fund -7.7% JST (Just Gp Ltd) +0.5% WSA (Western Areas NL -0.2% BBC (Babcock & Brown Communities Gp) -2.1% BBP (Babcock & Brown Power) -4.60% BCM (Babcock & Brown Capital Ltd) +0.3% EBI (Everest, Babcock & B Alt Inv Trust) -1.3% EBI -1.3% INES (India Equities Fund Ltd) -2.6%
Mr Steinthal said it is evident that following the reporting of the 12 special crossings:
79.… the on market trading in each of these securities on 28 March 2008 culminated in market prices – in the form of VWAP - ranging from a discount of 7.7% to a premium of 0.5% to the previous day’s market closing price of each security. Therefore, the VWAP on 28 March 2008 was substantially different to the traded prices of the 12SC. This demonstrates that following market participants becoming aware of the 12SC, the market behaved in a manner consistent with it not treating the prices reported for the 12SC as reflective of the market price for trading in the securities the subject of the 12SC.
80.In my experience, the further the price at which the Special Crossing is reported away from the current market price of those securities, the more likely it is that the market participants will discount the possibility that the price for the Special Crossing is reflective of the market price for trading in those securities. In essence, market participants will view Special Crossings as increasingly unrelated to current market prices the further they are reported from current market prices.
Mr Steinthal told the Tribunal that he has seen over 1,000 special crossings in the last 10 years and his observations are based on his having watched the market over a long period of time. He said the market perceives special crossings as off-market. However, if the price of a special crossing is close to market price, the market may perceive this as related to the market. The more significant the difference in price, the less likely it is that the special crossings will be perceived to be related to anything occurring on the market. He acknowledged that in the businesses in which he has worked, he could not recall seeing any special crossings between related companies in the same group.
Mr Speakman pointed to the fact that while the appearance created by the special crossings was that they were the result of an arms length transaction concluded between a genuine buyer and a genuine seller, this was not in fact the case. The parties were Tricom and its holding company, Tricom Holdings. Mr Speakman contended that Mr Rosenberg had been duplicitous in not revealing to Ms Hooymans the identity of the buyer of the securities.
Mr Rosenberg provided an affidavit dated 20 October 2009 and gave detailed evidence at the hearing about the course of events in the period 27 March to 1 April 2008. After learning that Opes Prime was in financial difficulties at about 4.30pm on 27 March 2008, he was concerned about the consequences for Tricom and, in particular, about the position in relation to the securities that Tricom had ‘lent’ to Opes Prime to secure Opes Prime’s loan to Tricom of approximately $43m. He was concerned that the difficulty in recovering the securities might delay Tricom’s planned reduction of its securities lending business.
Mr Rosenberg made a series of telephone calls to Tricom’s advisers and financiers to discuss this: David Winterbottom, a partner at Korda Mentha, which had been appointed by Tricom to advise on reducing its securities lending portfolio, two other Korda Mentha employees who were at Tricom’s offices at the time, and Rob Topfer and Deborah Kelly, executives at Babcock and Brown, all met with Mr Rosenberg and his senior executives at Tricom’s offices to have further discussions and explore options for the recovery of the securities on-lent by Tricom to Opes Prime. (Mr Rosenberg noted that Mr Winterbottom was head of Korda Mentha’s Sydney office and “a highly respected insolvency practitioner” (transcript 2 August 2010, p 66).)
Mr Rosenberg was asked why he did not speak with any lawyers about Tricom’s position on Thursday evening. He said that Mr Topfer was a lawyer – a former commercial and corporate partner at Allens and then at Atanaskovic Hartnell. One of the other Korda Mentha employees, Fraser Ronald, was a lawyer, and there were also chartered accountants present. Mr Rosenberg said the concept of using special crossings was discussed at length on the evening of Thursday 27 March in the presence of Tricom’s advisers, including Mr Topfer. If Mr Topfer had not been present, “we would have sought legal advice” (transcript 2 August 2010, p 66).
One of the options for the recovery of the securities was for Tricom to recall the securities from Opes Prime on a ‘delivery versus payment’ (DvP) basis whereby the securities would be transferred to Tricom simultaneously with Tricom repaying the loan to Opes Prime. Mr Rosenberg said that during the course of Thursday evening, he made several telephone calls both to Opes Prime’s offices and to specific employees and was unable to contact anyone. He therefore attempted to contact Opes Prime by email, sending an email message to its Chief Executive Officer and to its securities lending manager at 9.56 pm informing them that Tricom wished to recall its securities, detailing the securities concerned, enquiring about a pay-out figure for the loan, and requesting that Opes Prime prepare for a DvP transaction to facilitate the recall of the securities and the repayment of the loan. When Mr Rosenberg received no response, at 10.22 pm he sent an identical email to Opes Prime’s Head of Operations. Again, he received no response.
The suggestion that Tricom should use special crossings as a means of recovering the securities appears to have come from the Head of Leveraged Products at Tricom, Tim Star, who was involved in unwinding Tricom’s securities lending business. Mr Star provided an affidavit dated 2 October 2009 and also gave evidence at the hearing. Mr Star said that after learning that Opes Prime was in financial trouble, he phoned Mr Rosenberg and they discussed how Tricom might recover the securities on-lent to Opes Prime. Mr Star confirmed that in his conversation with Mr Rosenberg, he suggested that Tricom could sell the securities that had been on-lent to Opes Prime, thereby generating a sale contract note which could be sent to Opes Prime as a means of imposing an obligation on Opes Prime to provide the securities to Tricom at not later than T + 3. Mr Star suggested that the securities should be sold at their LVR price by way of special crossings because special crossings were permitted at any price agreed between the parties.
The LVR price had been used by Opes Prime in determining the amount of the loan made to Tricom. Mr Star said that Mr Rosenberg then asked him to prepare details of the Tricom securities on-lent to Opes Prime together with the LVR in respect of each security, and Mr Star emailed this information to Mr Rosenberg at about 11.46 pm. Mr Star was not aware that Tricom Holdings would be the buyer of the crossed securities.
Mr Rosenberg also explored another option for the recovery of the securities late on the Thursday evening. He telephoned the head of securities lending at the ANZ, John Murray, and proposed that the ANZ re-transfer to Tricom any of the Tricom securities held by it as a result of its funding arrangements with Opes Prime. Mr Murray said he could not respond to the proposal without further consultation within the ANZ. Mr Rosenberg said he sent an email with a similar proposal to Merrill Lynch but received no response.
Mr Rosenberg said that between 7.00 am and 8.00 am on Friday 28 March 2008, he had further discussions with Tricom’s advisers and made repeated attempts to contact Opes Prime by telephone and email without success. At about 9.30 am, he telephoned the ASX and spoke with Ms Hooymans (ASX Compliance Manager Market Supervision) and Bill Woods (Principal Compliance Adviser Market Supervision) to whom he explained that Tricom was proposing to execute a series of special crossings priced at the LVR of the securities to facilitate the return of the securities on-lent by Tricom to Opes Prime. In her affidavit dated 4 November 2009, repeated in her evidence at the hearing, Ms Hooymans said she told Mr Rosenberg that she could neither comment on nor endorse any such transactions. In his evidence, Mr Rosenberg noted that neither Ms Hooymans nor Mr Woods expressed any concern that such transactions could constitute market manipulation or might mislead the market, and said he got some comfort from this.
Mr Rosenberg said if any of the advisers present at the Tricom convened meetings or the ASX had been unhappy with the proposed special crossings, he would not have gone ahead with them. There were other means Tricom could have used to recover the securities – for example, by borrowing or purchasing the relevant securities on the market. Borrowing the securities would have required that Tricom provide collateral to the same value as the borrowed securities. However, Tricom’s preference was to recover the securities from Opes Prime rather than to rely on the market (transcript 2 August 2010, pp 78-79).
Mr Rosenberg said because there was insufficient time to seek approval from Tricom’s clients (who had lent the relevant securities to Tricom as collateral for finance) to enable them to enter into the special crossings as principals, Tricom Holdings entered into the special crossings on its own behalf. It had been the purchaser of securities in its own right on previous occasions. Mr Rosenberg said he asked Paul Petkovich, a designated trading representative at Tricom, to execute the special crossings.
Mr Petkovich provided an affidavit dated 30 September 2009 and gave evidence at the hearing. He said that on Friday 28 March, after meeting with Mr Rosenberg and discussing the special crossings, he returned to his desk at about 9.30 am. He then telephoned the ASX Market Control Division where he spoke with William Blake, informing him that Tricom would be putting through a number of special crossings at a steep discount to the market price. Mr Petkovich asked whether there were likely to be any problems with this. Mr Blake responded that because special crossings are off-market trades, they can be executed at any price agreed by both buyer and seller. Mr Petkovich said he reported this conversation to Mr Rosenberg and then, at about 9.50 am, returned to his desk to execute the special crossings.
Mr Rosenberg said that later that morning, he received a telephone call from Stephen Donnelly, the Chief Financial Officer and a director of Hedley Leisure & Gaming Property Partners Ltd (HLG), some of whose shares were the subject of one of the special crossings.
Mr Donnelly provided an affidavit dated 8 December 2009 and gave evidence at the hearing. He said he received telephone calls from three stockbrokers and three shareholders asking about the special crossings and the price at which they were transacted (47.5 cents), which was approximately half the closing price on the previous day (89 cents). Mr Donnelly said because HLG is an illiquid stock, he was concerned that if the stock was dumped, it would have an effect on the market price of the shares because the special crossing constituted 7.5 per cent of the issued share capital of HLG. He therefore telephoned the ASX, which placed HLG shares in a trading halt. HLG then released an announcement of the trading halt to the market.
Mr Rosenberg said he told Mr Donnelly that the special crossing was intended to effect a recall of the HLG securities from Opes Prime and that the special crossing had been executed at LVR value to reflect the amount of Tricom’s loan to Tom Hedley. Mr Donnelly said that after speaking with Mr Rosenberg, he was reassured about the possible effect of the special crossing which, he said, ultimately had no long term effect on HLG’s share price. At 11.53 am on Friday 28 March, Mr Donnelly sent an email to Stephen Skegg at Tricom and to Mr Rosenberg seeking written confirmation of what Mr Rosenberg had told him. After repeated requests from Mr Donnelly, Mr Rosenberg confirmed this in an email to Mr Donnelly on Sunday 30 March. Mr Donnelly’s email message at 11.53 am on 28 March also confirmed that he had asked Mr Rosenberg to have the HLG shares available for retransfer to Mr Hedley on Thursday 3 April when the loan from Tricom would be repaid.
Mr Donnelly told the Tribunal that when he became aware of Opes Prime’s financial difficulties and of the HLG securities having been on-lent to Opes Prime by Tricom, Mr Hedley, on whose behalf Mr Donnelly administered the Tricom loan, instructed him to get the loan repaid as quickly as possible and get the HLG shares back. To the question, “So you were very happy to hear that Mr Rosenberg had done something that would assist that happening?”, Mr Donnelly answered, “Yes, I was, yes” (transcript 4 August 2010, p 205).
Mr Donnelly was shown a chart showing changes in HLG’s share price over the period from November 2007 (attached to Mr Steinthall’s second affidavit dated 11 February 2010). He told the Tribunal that HLG’s share price had been falling since November 2007 and continued to fall in 2008. While the share price was falling, the price was also very volatile – up one day and down the next. There had been two previous trading halts – on 6 March 2008 and 17 March 2008. Mr Donnelly said that after speaking with Mr Rosenberg on Friday 28 March, he had phoned the ASX to try and get the trading halt lifted immediately, but they required written confirmation of Mr Rosenberg’s advice to Mr Donnelly. The trading halt was eventually lifted on Tuesday 1 April.
Mr Rosenberg described the further discussions with the ANZ and Merrill Lynch over Saturday 29 and Sunday 30 March. On Sunday, Merrill Lynch revealed which Tricom on-lent securities it held from Opes Prime, and from this Mr Rosenberg was able to deduce which Tricom on-lent securities it was likely that the ANZ held. Mr Rosenberg sent a proposal to both the ANZ and Merrill Lynch offering to purchase from each the Tricom on-lent securities at a nominated price. The ANZ agreed to this proposal and also agreed to provide finance for Tricom to acquire the securities held by Merrill Lynch. Mr Rosenberg also kept Ms Hooymans informed of progress in these discussions and, on Sunday afternoon, had a meeting with Ms Hooymans and other ASX staff at Tricom’s offices.
On Monday 31 March, the ANZ provided written confirmation of the above agreement, a copy of which Mr Rosenberg forwarded to Ms Hooymans. Shortly before doing this, Mr Rosenberg had received an email from Ms Hooymans expressing concerns that the 12 special crossings “may not be legitimate” and requesting further information by 7.00 am the following morning. Mr Rosenberg replied informing Ms Hooymans that the special crossings would all be cancelled on the morning of Tuesday 1 April and asking for an extension of time until 12 noon to provide the information requested. This request was refused. Shortly after, Ms Hooymans sent Mr Rosenberg a further email requiring that the special crossings be cancelled as early as possible on Tuesday morning.
Mr Rosenberg responded to Ms Hooymans with the information requested later on Monday 31 March with further confirmation and more detail later on Tuesday 1 April. At 9.45 am on Tuesday, Mr Petkovich notified the ASX that the special crossings had been cancelled.
Apart from HLG, one other of the securities subject to the special crossings – Pluton Resources Ltd (PLV) - requested a trading halt. Anthony Schoer, the Managing Director and Chief Executive Officer of PLV provided an affidavit dated 11 November 2009 and gave evidence at the hearing. He said he was shocked to discover just prior to the market opening on 28 March 2008 that 3.5 per cent of the issued share capital of PLV had been the subject of a special crossing at a price approximately 50 per cent of last traded price. He said PLV is a very illiquid stock and he was concerned about how the special crossing would affect the price of PLV shares trading on the market. That morning, he received several telephone calls from brokers, one from a fund manager and 10-15 calls from retail shareholders who expressed concern and wanted an explanation. Mr Schoer telephoned PLV’s lead broker who, late that afternoon, informed Mr Schoer that Tricom had arranged the special crossing and that the PLV shares in question had been on-lent by Tricom to Opes Prime. Mr Schoer was already aware that Opes Prime were in receivership.
At 9.45 pm on Friday 28 March, Mr Schoer emailed the contact person at the ANZ in relation to the Opes Prime receivership and, on the following morning, sent this person a further email on learning that the ANZ might be in possession of the PLV shares. Mr Schoer asked to be put in contact with someone he could talk to about having the shares placed because PLV is an illiquid stock and the sale of these shares on the market could do considerable damage to the share price. Communications between Mr Schoer, the ANZ and the Opes Prime receiver continued over the weekend leading up to Mr Schoer contacting the ASX and requesting a trading halt on PLV shares which was effected before the market opened on Monday 31 March.
There followed further communications involving Mr Schoer who, on the morning of Tuesday 1 April, learned that the special crossing had been cancelled and immediately contacted the ASX to ask for the PLV share trading halt to be lifted.
Mr Schoer acknowledged that he had not been aware that special crossings could take place off-market and could be at any price without reference to the market price. However, he said that even if he had known what a special crossing was, he would still have been concerned that the ANZ might dispose of the shares. He also acknowledged that the announcement of the special crossings had no effect on the share price of PLV shares.
The Application of the Law
We do not agree with Mr Finch’s contention that the act or omission – in this instance the act to effect the 12 special crossings - must itself be on a financial market. The requirement is that the act or omission “has or is likely to have the effect of creating, or causing the creation of, a false or misleading appearance … with respect to the market for, or the price for trading in, financial products on a financial market”. Thus, the act or omission does not itself have to be one on the financial market. However, such a false or misleading appearance must relate to financial products on a financial market.
Thus, the question is whether the special crossings created such an appearance. Applying the reasoning of Mason J in North v Marra Developments, set out above, what was the character of the special crossings? Would they have appeared to reflect genuine supply and demand and therefore have an impact on the market with respect to the market for or price for trading in the relevant securities?
Special crossings are not the product of normal trading on the market. They are by their nature, and the description in the ASX Market Rules, ‘special’. Relevantly, section 18.1.1 of the Rules permits special crossings at any time between a trading participant as ‘Principal’ and a client at an agreed price. Where a trading participant is involved, a special crossing must be reported to the ASX in accordance with section 16.12. Although not specifically stated in the Rules, it is clear that this price need bear no relation to the market price of the securities. In his affidavit dated 20 October 2009, Mr Steinthal states, at [13]:
Special crossings are regarded by market participants as ‘off market’ trades and unrelated to ‘on market’ trading. They are undertaken at privately negotiated prices between buyer and seller. The details of special crossings are not automatically reported to the market. When special crossings are reported to the market they are accompanied by a specific reference disclosing to market participants that they are special crossings.
As noted above, a person reading the IRESS Depth Replay screen for a security will be able to identify a special crossing transacted by a trading participant by reason of the ‘SPXT’ code appearing against that trade.
The ASX’s website provides information about how the sharemarket works. The website states that “Crossings are a type of order where the buying and selling broker are the same”. There are two main categories of crossings – special crossings and on-market crossings. In relation to special crossings, the website states: “Special crossings may take place off-market at any time, including during Normal Trading.” An example provided to illustrate the nature of a special crossing states relevantly: “Special Crossings take place with no reference to the current market and may be at any agreed price, regardless of the market price.”
The Tribunal notes Mr Donnelly’s evidence about the HLG shares that were the subject of a special crossing, and that when Mr Hedley learned that the shares had been on-lent to Opes Prime, Mr Hedley instructed Mr Donnelly to arrange for the loan from Tricom to be repaid as quickly as possible in order to recover the HLG shares. Mr Donnelly asked Mr Rosenberg to arrange for the shares to be available for retransfer to Mr Hedley on Thursday 3 April 2008 when Mr Hedley’s loan from Tricom would be repaid.
In this situation, it would have been open to Tricom to effect a special crossing to Mr Hedley at the LVR in respect of the HLG shares in order to try and compel Opes Prime to act in accordance with its market obligation and retransfer the shares to Tricom at T+ 3 so that Tricom could in turn effect a transfer to Mr Hedley (the Hedley scenario). In this instance, the information reported to the ASX by Tricom would have been exactly the same as the information reported to the ASX by Tricom on 28 March 2008.
The Tribunal asked Mr Speakman to consider the Hedley scenario (transcript 6 August 2010, p 364 ff). He said the scenario was exceptional and not the normal way such transfers happen. Our response was to ask Mr Speakman how such a transaction can be distinguished from the situation facing Mr Rosenberg, which appears to us, from the evidence, to have also been an exceptional situation. Mr Speakman acknowledged that a special crossing can be effected at any price but indicated that what is important is that the appearance the special crossing gives is that it is being effected between two parties “each of whom is trying to get the best possible price for himself or herself”. He acknowledged that according to ASIC’s interpretation of the law, the Hedley scenario would result in the parties to that special crossing giving a false and misleading appearance to the market, and thereby contravening s 1041B(1) of the Act.
The Tribunal asked Mr Speakman whether this meant that the unwinding of a securities lending arrangement should not be effected by way of a special crossing. Mr Speakman confirmed that this was right and agreed that ASIC’s interpretation was that the law prohibits one from doing that (transcript 6 August 2010, p 366). However, he said in the case of the Tricom special crossings, this was not some technical contravention that Parliament did not intend. Rather, it was an aggravated contravention in circumstances where Mr Rosenberg ought to have known how the special crossing would appear to the market. Moreover, ASIC contends Mr Rosenberg has been deceitful in not revealing to other parties with whom he was negotiating, that this was a “contrived transaction done in-house” (transcript 6 August 2010, p369).
Mr Finch submitted that ASIC’s contention that the special crossings are misleading and deceptive if the parties do not achieve the best price is simply wrong. If the transactions are correctly reported, as was the case here, they cannot have been misleading and deceptive. The special crossings were reported to the market because the rules required this: “it didn’t enter anybody’s mind to even ask the question about whether it might affect the open market option [sic – auction]” (transcript 6 August 2010, p 373-4).
In the Tribunal’s view, it is the appearance on the market that must be considered. The ASX Market Rules permit a special crossing to be effected at any price. A special crossing is not the same as an ordinary trade on the market and this is reflected in the SPXT code that appears against the trade on the IRESS Depth Display screen.
Although the Tribunal was impressed by Professor Frino’s analysis, we note that while he said he has a general knowledge of securities lending transactions, prior to the concurrent evidence session in which he and Mr Steinthal took part on 5 August 2010, he was not familiar with the AMSLA, which he had not read, and nor was he aware of the term ‘LVR’, because he had not been provided with information about the specific transactions as part of his brief (transcript 5 August 2010, p 265). He was also not aware that the securities that were the subject of the special crossings were the subject of securities loan transactions (transcript 5 August 2010, p 268).
Mr Finch put to Professor Frino the example of the exercise of a call option by way of special crossing where the price at which the call to transfer shares could be exercised was significantly less than the market price. Professor Frino acknowledged that the market to which the special crossing was reported would have no knowledge of the motive for the transfer of the shares at a significantly reduced price (p 272) and would make proactive inquiries about why (p 277). In doing so, the market would pay attention to the nature of the special crossing.
We note that Professor Frino’s analysis uses movements in the futures index rather than the ASX index as the benchmark against which movements in the prices of the subject securities should be measured. He sought to reassure us that this should make no difference to his analysis. He also said the announcement at 9.59 am on Friday 28 March that Opes Prime was in receivership would have been accommodated in his analysis. However, given the ‘snapshot’ in his analysis was taken at 10.30 am that morning, we have some concern about whether at that time it is possible to disentangle the effect of the special crossings on the market for the 11 securities from the effect of the Opes Prime announcement. We were unable to form a clear view of the relative effects.
We are satisfied from Mr Steinthal’s evidence that the changes in the market price of the 11 securities over the course of 28 March were relatively insignificant, ranging, on his analysis of the relevant VWAPs for that day, from a discount of 7.7 per cent to a premium of 0.5 per cent over the previous day’s closing price (7 being discounted in the range 0.2 per cent – 2.8 per cent). We are unable to say whether other factors affecting the share market, such as the Opes Prime announcement made by the ASX, may also have contributed to this. We also note Mr Steinthal’s opinion that the further the price of the special crossing is from the market price for the particular security, the less likelihood there is that the special crossing will be perceived to be related to anything occurring on the market.
An issue raised by the application of the relevant legislative provisions in this case is the standard to be applied in determining the effect or likely effect of the special crossings and whether that effect or likely effect was false or misleading. Clearly, the standard is an objective one – that of the reasonable person who has awareness of the special crossings. But what level of knowledge can it be assumed that such a reasonable person has? First, awareness of the special crossings will only come about by reason of a person having access to IRESS. Those who have such access will be subscribers, and it is reasonable to assume that they will either be professional brokers or those interested in up-to-date trading information about particular securities, either because they trade on their own account on the market, or because they hold shares in or are involved in the management of a particular company, or are monitoring trading in that company’s shares.
The information available to subscribers on IRESS is available in the form of a screen display for each quoted company traded on the ASX. A person seeking information about trading in a company’s securities will check on the ‘Depth Display’ screen for that company. The Depth Display screen will only display limited information – as described in para 37 above. This will include the number of trades concluded on the particular day, and the price, volume and time of the trade, besides which appears a ‘condition code’. In the case of special crossings, the condition code is SPXT. Thus, the person reading the screen will be aware if they know the condition codes, which we think it is reasonable to assume that they do, that a particular trade is a special crossing.
Mr Steinthal’s evidence is that the market (correctly) perceives special crossings to be transacted off-market. This is made clear in the information provided about special crossings on the ASX’s website, which states that “Special Crossings may take place off-market at anytime”, that these involve large trades with a minimum consideration of not less than $1m, and that special crossings must be reported to the market via the ITS. The example provided on the ASX website also states that “special crossings take place with no reference to the market price and may be at any agreed price, regardless of the current market price”.
As noted above, Mr Steinthal’s evidence is that the more significant the difference in price between the market price and the special crossing price, the less likely it is that special crossings will be perceived to be related to anything occurring on the market. In answer to a question from the Tribunal, he agreed that there was enough sophistication on the part of both trading participants and observers to differentiate special crossings from normal on-market trades (transcript 4 August 2010 p 236).
The evidence of Mr Donnelly and Mr Schoer indicates that where there is a significant difference between the market price and the special crossing price, questions may be asked and an explanation sought by brokers and those interested in the particular securities. The fact that questions may be asked and explanations sought indicates that those who become aware of the difference in price may exercise caution.
On the basis of this evidence, the Tribunal considers that, in the case of persons having access to information available on IRESS, the objective standard of the reasonable person is one for which we can assume a reasonable level of sophistication and knowledge that includes an understanding that special crossings are not on-market trades and that the price at which special crossings are effected may not reflect the current market price for a particular security.
In the Tribunal’s view, the evidence does not establish that the 12 special crossings had the effect or were likely to have the effect, of creating, or causing the creation of a false or misleading appearance with respect to the market for or the price for trading in the relevant securities. The special crossings were effected at a price significantly different from the market price at the close of the previous day’s trading. Questions were asked and explanations sought by those who became aware of the special crossings, but the change in the market price on 28 March 2008 was relatively insignificant and even then other factors such as the ASX’s announcement about Opes Prime may have affected this.
We also question Mr Speakman’s interpretation of the law in its application to the Hedley scenario, discussed above. In our view, the information reported to the ASX and shown on the IRESS Depth Display screen for the particular securities was not false or misleading. The fact that Tricom Holdings was the buyer of the securities pursuant to the special crossings and that Tricom was using the special crossings as a device to secure the return of the securities ‘lent’ to Opes Prime was unknown to the market.
In our view, the use of special crossings for this purpose was not of itself a contravention of the ASX Rules. Special crossings are by definition transacted off-market and can potentially have a variety of uses, as a result of which a special crossing price may bear no relation to the market price for a security. This is the nature of a special crossing. If a Hedley scenario were to arise, we are not persuaded that it was the intention of Parliament in enacting s 1041B to have it apply in a situation which was essentially a commercial transaction, in accord with a party’s contractual rights (under the AMSLA). Justice Mason’s judgment in North v Marra Developments indicates that the prohibited activity he had in mind was market manipulation, and that he considered the legislative measure (the predecessor to s 1041B) as one designed to protect the market from such manipulation in order to ensure that market transactions reflected genuine supply and demand.
In our view, the circumstances under review in this matter are significantly different from those his Honour had in mind. Special crossings are not usual market trades. They are, by virtue of the ASX Market Rules, trades of a different kind which may be conducted off-market at a price that bears no relation to the market price. We are not therefore satisfied on the evidence before us that the special crossings contravened s 1041B(1)(b).
We recognise that an observer, knowing the facts of this matter, may draw attention to the fact that Tricom Holdings was the holding company of Tricom. Of course, in law, the two companies are separate legal persons. Nevertheless, they are clearly closely associated and it can reasonably be argued that, in principle at least, Tricom, being the trading participant, was in breach of section 18.1.1 of ASX Market Rules by virtue of the fact that Tricom Holdings was not an independent client. However, this was not known by the market and, in our view, what was known by the market did not create a false or misleading appearance.
We note Mr Rosenberg’s reasons for acting in the way he did. Bearing in mind the context was one of close ASX supervision following the events of late January 2008, we are satisfied from Mr Rosenberg’s evidence and his account of what happened over the course of about four and a half days that he was trying to minimise damage to Tricom from the fallout arising from the failure of Opes Prime. That his motives may not have been purely selfless – in so far as he was the majority shareholder in Tricom - is not necessarily a matter for criticism. His actions in seeking the recovery of the securities lent to Opes Prime were potentially of consequence for a range of stakeholders including, in particular, those who lent the securities to Tricom as collateral for loans. It was undoubtedly in the interests of borrowers such as Mr Hedley for Tricom to recover the on-lent securities.
Mr Rosenberg was faced with the need to take whatever action he could to recover the securities as quickly as possible. The evidence establishes that he sought advice from a range of experienced and professional internal and external advisers. Various options for the recovery of the securities were considered. Initially, he tried to recall the securities on a DvP basis. This failed because, on the evening of Thursday 27 March 2008, when he first learned that Opes Prime was in financial difficulties, he was unable to contact anyone at Opes Prime despite trying to do so by telephone and email.
The other main options appeared to be, first, the recovery of the securities using special crossings as a device to pressure a response by Opes Prime in order to be seen to be meeting its market obligations and, secondly, leapfrogging Opes Prime by a direct approach to its financiers Merrill Lynch and the ANZ, who were also Tricom’s principal financiers, to recover the securities. Ultimately, Mr Rosenberg was able to conclude a deal with the ANZ, who agreed to finance the recovery, and he immediately cancelled the special crossings.
We note that there was an additional cost to Tricom in pursuing this route, in terms of the outlay of some millions of dollars, but the benefit was that recovery of the securities was assured and that Tricom would be in a position to meet any market obligations to which it might become subject, such as Mr Hedley seeking a recall of HLG shares under the terms of the AMSLA.
Was Mr Rosenberg devious? In our view, the evidence does not establish this. He was in regular contact with the ASX throughout this period and co-operated in providing such information as was required. While Ms Hooymans did not endorse the proposed special crossings when informed of these by Mr Rosenberg, neither did she raise any objection, and we can understand that Mr Rosenberg might take some comfort from this given that he and Tricom had been working closely with the regulator since the events of late January 2008.
We note that Mr Petkovich checked with Mr Blake in the Market Control Division of the ASX whether there were any problems with effecting special crossings at a steep discount to the market price of the securities and that Mr Blake assured him that there were none. Mr Petkovich reported this to Mr Rosenberg before proceeding to execute the special crossings. Mr Rosenberg acted in the light of advice from both internal and external advisers in a situation where he had to act quickly and in which, we accept, it would probably have been impractical to try and involve all the borrowers such as Mr Hedley whose securities Tricom had on-lent to Opes Prime. Was Mr Rosenberg in breach of section 18.1.1 of the ASX Market Rules by reason of the fact that Tricom Holdings was not an independent purchaser of the securities which were the subject of the special crossings? Possibly ‘yes’. Were his actions in breach of s 1041B(1)? In our view, the answer is ‘no’, as explained above.
(C)By placing the buy and sell instructions for the 12 Special Crossings, did Mr Rosenberg engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive, thereby contravening s 1041H(1) of the Act?
‘Engage in conduct’ is defined in s 9 as doing an act or omitting to perform an act. Section 1041H(2) provides that engaging in conduct in relation to a financial product includes dealing in a financial product. And s 766C(1) defines ‘dealing’ in a financial product as including applying for or acquiring and disposing of a financial product. Thus, ASIC submits that by instructing Mr Petkovich to execute the special crossings and report them to the market, Mr Rosenberg engaged in conduct within the meaning of s 1041H. We note that in Australian Securities Commission v Narain (2008) 169 FCR 211, the Full Federal Court found that the actions of the Company Secretary could be attributed to Mr Narain, the Managing Director, who instructed the Company Secretary to engage in the conduct under review in that matter (see Finkelstein J at [19], and Jacobson and Gordon JJ at [98]).
In the Full Federal Court decision in Johnson Tiles Pty Ltd v Esso Australia Ltd (2000) 104 FCR 564, at [63], French J (with whom Beaumont and Finkelstein JJ agreed) said the principles governing characterisation of such conduct are well-established: “Conduct is misleading or deceptive if it induces or is capable of inducing error”. The test is an objective one and there is no requirement for there to be an intention to engage in such conduct. Conduct is likely to mislead or deceive if that is a “real or not remote chance or possibility” of it doing so: Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82 at 87.
In our view, ASIC’s contention that Mr Rosenberg contravened s 1041H must fail for similar reasons to those in respect of s 1041B(1). We are not satisfied from the evidence that Mr Rosenberg engaged in conduct that was misleading or deceptive in terms of its inducing or being capable of inducing error in relation to dealings in the relevant financial products – the securities that were the subject of the special crossings. The information reported to the ASX about the special crossings and available to IRESS subscribers was neither false nor misleading.
Conclusion
In conclusion, we are not satisfied that Mr Rosenberg contravened either ss 1041B(1) or 1041H of the Act. Thus, the decision must be set aside.
The Tribunal notes that even if we had found Mr Rosenberg to have contravened either or both of ss 1041B(1) and 1041H, we consider the banning order imposed by the delegate was disproportionate to the alleged contraventions of the Act. The power to impose a banning order in s 920A(1) is a discretionary rather than a mandatory one. In our view, it is unnecessary to revisit the discussion of this issue undertaken by the Tribunal in ReHowarth and Australian Securities and Investments Commission (2008) 101 ALD 602 (Howarth), at [139] to [148], which concluded that the power is a discretionary one. We agree with that discussion.
With regard to the purpose of a banning order, we also agree with what the Tribunal said in Howarth, at [180], after discussing the relevant authorities (including Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 – especially McHugh J at [41]; Australian Securities and Investments Commission v Forge [2007] NSWSC 1489 (see especially at [102] - [103] – per White J); Australian Securities Commission v Kippe and Another (1996) 67 FCR 499; 137 ALR 423, per Von Doussa, Cooper and Tamberlin JJ; Kamha v Australian Prudential Regulation Authority (2005) 147 FCR 516; [2005] FCAFC 248, at [73] – per Emmett, Allsop and Graham JJ):
The weight of authority in the Federal and Supreme Courts to whose judgments we have referred seems to be to the effect that a disqualification order, and so a banning order, is made on the basis of what will protect the public. It is not made on the basis of what will punish the person concerned even though punishment or the imposition of a penalty may be the practical outcome of the making of an order. Deterrence is also a relevant concern. Deterrence may relate both to the person concerned and to others engaged or potentially engaged in the finance. If imposed, it is relevant in the case of the individual in that it protects the public from that person’s being involved in the industry. Whether imposed or not, the possibility that an order might be made is itself a deterrent both to an individual and to all of those engaged in that industry.
With regard to protecting the public, we also note the decision of the Tribunal in Re Tweed and Australian Securities and Investments Commission [2008] AATA 514, where the Tribunal considered that a question relevant to any consideration of whether to impose a banning order to protect the public is what might be achieved by the order.
We note that in considering an appropriate period for the banning order, the delegate referred to ASIC Regulatory Guide 98, ‘Licensing: Administrative action against financial services providers’ (April 2006), and to the factors and examples of conduct set out in Table 2 of the Guide relating to specific periods of banning. In our view, the factors in respect of a banning order of between 3 and 10 years would not be found to be established in this case and, quite probably, the same would largely be true of a banning order of under three years. While there is a strong public interest in ensuring financial markets are free from manipulation, we note the delegate said at [139] of his decision, recognising that:
the 12 SC were in effect a single transaction and the unusual circumstances under which they occurred, I am not satisfied that there is reason to believe that Mr Rosenberg will not comply with a financial services law for the purposes of section 920A(1)(f) of the Act.
We agree with the delegate’s assessment. This was an exceptional situation, unlikely to be repeated and, without doubt, Mr Rosenberg will be circumspect in taking any future action of the kind taken in this case. We note there is also no other evidence of Mr Rosenberg having breached provisions of the Act. The delegate appears to have implicitly recognised that the protection of the public was not a relevant consideration in this matter. Thus, given the course of the proceedings instituted by ASIC, and the scrutiny to which Mr Rosenberg has been subject by both ASIC and the ASX, we doubt whether there is any further specific deterrent effect to be gained from making a banning order in respect of Mr Rosenberg. Moreover, given the exceptional circumstances of this case, we also doubt whether any more general deterrent effect would flow from a banning order.
Finally, in relation to the orders made by the Tribunal on 4 September 2009, as later amended, these orders will now be lifted. In particular, in view of our findings, we see no reason for maintaining the confidentiality orders made under s 35 of the Administrative Appeals Tribunal Act 1975 (Cth).
decision
As stated above, the Tribunal sets aside the decision under review.
I certify that the 117 preceding paragraphs are a true copy of the reasons for the decision herein of Mr RP Handley, Deputy President, and Mr SE Frost, Senior Member.
Signed: .........[sgd]........................................................................
Associate
Dates of Hearing: 2 to 6 August 2010
Date of Decision: 31 August 2010
Solicitor for the Applicant: Mr L Hastings, Freehills
Counsel for the Applicant: Mr S Finch SC and Ms A Rao
Solicitor for the Respondent: Ms C Iles, ASIC
Counsel for the Respondent: Messrs M Speakman SC and D Gilbertson
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