Schlaepfer v ASIC - [2019] NSWSC 1644

No judgment structure available for this case.

Supreme Court

New South Wales

Medium Neutral Citation: Schlaepfer v ASIC [2019] NSWSC 1644
Hearing dates: 18-22, 25-29 March, 1-5, 8, 11 April 2019
Date of orders: 26 November 2019
Decision date: 26 November 2019
Jurisdiction: Common Law
Before: Fagan J
Decision:
Judgment for the defendants

Catchwords:
DEFAMATION – where oral communications made by officer of financial regulator to stockbrokers – whether communications conveyed defamatory imputations – where communications expressed regulator’s concern regarding possible manipulation of Australian stock market – whether plaintiffs identified by the communications

DEFAMATION – defences – justification – common law qualified privilege defence established – defence of statutory qualified privilege established
TORT – injurious falsehood – elements – malice not proved
Legislation Cited: Australian Securities and Investments Commission Act 2001 (Cth)
Corporations Act 2001 (Cth)
Defamation Act 2005 (NSW)
Defamation Act 1974 (NSW) (repealed)
Cases Cited: Amalgamated Television Services Pty Ltd v Marsden (1998) 43 NSWLR 158; [1998] NSWSC 4
AMI Australia Holdings Pty Ltd v Fairfax Media Publications Pty Ltd [2010] NSWSC 1395
Austin v Mirror Newspapers Ltd (1985) 3 NSWLR 354
Bashford v Information Australia (Newsletters) Pty Ltd (2004) 218 CLR 366; [2004] HCA 5
Bellino v Australian Broadcasting Corporation (1996) 185 CLR 183; [1996] HCA 47
Cush v Dillon; Boland v Dillon (2011) 243 CLR 298; [2011] HCA 30
Fairfax Media Publications Pty Ltd v Pedavoli [2015] NSWCA 237
Palmer-Bruyn and Parker Pty Ltd v Parsons (2001) 208 CLR 388; [2001] HCA 69
Papaconstuntinos v Holmes a Court [2012] HCA 53
Prince v Malouf [2014] NSWCA 12
Ratcliffe v Evans [1892] 2 QB 524
Triggell v Pheeney (1951) 82 CLR 497; [1951] HCA 23
Waterhouse v Broadcasting Station 2GB Pty Ltd (1985) 1 NSWLR 58
Category: Principal judgment
Parties:
Daniel Schlaepfer (first plaintiff)
Select Vantage Incorporated (second plaintiff)
Australian Securities and Investments Commission (first defendant)
Greg Yanco (second defendant)
Representation:
Counsel:
TK Tobin QC with M Richardson; AC Harding (plaintiffs)

J Hmelnitsky SC with M J Lewis; PJH Holmes
(defendants)
Solicitors:
Mark O’Brien Legal (plaintiffs)
Ashurst (defendants)

File Number(s): 2016/302827
Publication restriction: No

Judgment

HIS HONOUR: The first plaintiff (Mr Schlaepfer) claims damages in defamation for statements alleged to have been published orally by the second defendant (Mr Yanco) on six separate occasions over the dates 21, 24 and 28 November 2018. Mr Yanco was and is an officer of the second defendant, the Australian Securities and Investment Commission (“ASIC”). Mr Schlaepfer and the second plaintiff (“Select Vantage”) claim damages for injurious falsehood arising out of substantially the same published matter. The plaintiffs’ actions, brought against Mr Yanco and ASIC, are pleaded in a second further amended statement of claim filed on 22 February 2019 (“the statement of claim”). The current defence was filed on 11 March 2019.
These reasons are organised under the following headings, which may be found at the paragraph numbers indicated:

The Australian stock market and the MIR [3]

The parties [7]

Issues – defamation of Mr Schlaepfer [10]

Issue 1: Mr Yanco’s oral statements to brokers [10]

Issue 2: Identification of Mr Schlaepfer [12]

Issue 3: Imputations and true innuendoes [15]

Issue 4: Justification [19]

Issue 5: Common law and statutory qualified privilege [24]

Issue 6: Damages for defamation [29]

Issues – injurious falsehood [31]

Elements of the tort [31]

Issue 7: Representations concerning the plaintiffs [33]

Issue 8: Alleged falsehood of the representations [34]

Issue 9: Malice [35]

Issue 10: Actual damage [36]

Background to the issues [38]

Mr Schlaepfer’s early involvement with Swift Trade [38]

Regulatory action against Swift Trade in the UK [44]

Regulatory action against Swift Trade in the USA [58]

Transfer of Swift Trade’s business to Select Vantage [60]

Compliance obligations of Select Vantage’s traders [61]

Transaction constraints on Select Vantage’s traders [66]

Training, methodology and remuneration of Select

Vantage’s traders [68]

Select Vantage’s in-house screening of traders’ activities [75]

Select Vantage’s infringements on the Tokyo exchange

in 2012 [79]

Select Vantage’s trading on the Australian market through

Morgan Stanley [82]

Select Vantage’s infringement on the Tokyo exchange

in February 2014 [85]

Termination of Select Vantage’s relationship with

Morgan Stanley [85]

Select Vantage’s trading on the Australian market

through Macquarie [90]

ASIC’s surveillance of Select Vantage’s trading through

Macquarie [100]

ASIC’s approach to Macquarie re termination of

services to Select Vantage [125]

Notification to Select Vantage of termination by Macquarie [128]

Issue 1 – Mr Yanco’s oral statements to brokers [130]

Statements to brokers on Friday 21 November 2014 [130]

Statement to Citi on Monday 24 November 2014 [141]

Market Surveillance Update No 53 issued 25 November 2014 [142]

Statement to BA Merrill Lynch on Friday 28 November 2014 [143]

Findings as to the terms of the conversations [144]

Issue 2: Identification of Mr Schlaepfer [154]

Issue 3: Imputations and true innuendoes [169]

Principles [169]

Imputations (a) or (b): criminal layering or unlawful manipulation [171]

Imputations (c) & (d): misconduct of business by Mr Schlaepfer [175]

True innuendoes [179]

Issue 4: Justification [185]

Two aspects of the defendants’ case on truth [185]

Mr He’s evidence [191]

Professor Putnins’ evidence [204]

Mr Carr’s evidence [233]

Mr Kruyne’s evidence [247]

Mr Veidners’ evidence [253]

Failure to prove Mr Schlaepfer was knowingly concerned

in layering [255]

Failure to prove that Morgan Stanley terminated for layering [260]

Issue 5: Common law and statutory qualified privilege [261]

Common law qualified privilege [261]

Statutory qualified privilege [286]

Issue 6: Damages for defamation [292]

Issue 7: Representations concerning the plaintiffs [294]

Issue 8: Alleged falsehood of the representations [295]

Issue 9: Malice [300]

Issue 10: Actual damage [301]

Conclusion and orders [311]

The Australian stock market and the MIR

The impugned statements are alleged to have been made by Mr Yanco to senior executives of major stockbrokers in Sydney. The activities of the stockbrokers were governed by Market Integrity Rules (“MIR”). These rules were made by ASIC pursuant to s 798G of the Corporations Act 2001 (Cth) for the purpose of regulating and supervising the stock market. In 2014 there were in force separate MIR for the Australian Stock Exchange (“ASX”) and for a competitor exchange known as Chi-X, respectively. These rules have since been repealed and replaced. In the MIR stockbrokers were referred to as “Market Participants”, electronic order books operated by the ASX and Chi-X were referred to as “Trading Platforms” and orders, cancellations of orders and amendments placed on Trading Platforms were referred to as “Trading Messages”.
The MIR recognised that Market Participants each operated their own systems of transmitting Trading Messages to the Trading Platforms. Each Participant was required under the MIR to have at least one representative, known as a “DTR”, who was authorised to submit Trading Messages. “Authorised Persons” under the MIR included clients of Market Participants who were permitted by the Participant to submit Trading Messages to its system, through which the Messages would go to the Platforms without the intervention of any employee or representative of the Participant. This has been referred to in the evidence as Direct Market Access (“DMA”) and in the Rules it was identified as Automated Order Processing (“AOP”). A definition appears in cl 1.4.3 of the Rules as follows:

“Automated Order Processing” means the process by which orders are registered in a Market Participant’s system and, if accepted for submission into a Trading Platform by the Market Participant, submitted as corresponding Trading Messages without being keyed or rekeyed by a DTR.

Clause 5.6.1 of the rules required that if a Market Participant should use its system of electronic trading for AOP, it had to have appropriate automated filters in place and it had to ensure that use of its system would not interfere with the efficiency and integrity of the market. Clauses 5.6.2 and 5.6.3 imposed additional requirements to ensure that, where a Participant provided DMA/AOP to clients, the activities of clients would not interfere with the efficiency or integrity of the market, that Trading Messages capable of having that effect could be cancelled and that access to the Participant’s system, and hence to the Trading Platforms, could be suspended or limited in relation to any client whose conduct might threaten the good order of the market.
Clause 5.6.12 provided as follows:

5.6.12 Limitations on Automated Order Processing
(1) This Rule applies where ASIC reasonably considers that:
(a) A Market Participant is not complying with the Automated Order Processing Requirements; or
(b) it is otherwise appropriate to direct a Market Participant to take the actions referred to in subrule (2).

(2) A Market Participant must, if directed to do so by ASIC:
(a)   cease conducting Automated Order Processing until ASIC is satisfied that the Market Participant complies with the Automated Order Processing Requirements; or
(b)   immediately suspend, limit or prohibit the conduct of Automated Order Processing in respect of:
(i)   one or more Authorised Persons or clients;
(ii)   Automated Client Order Processing;
(iii)   Automated Order Processing; or
(iv)   one or more Cash Market Products,
as required by the direction.

Maximum penalty: $1,000,000

The parties

Mr Schlaepfer has at all relevant times, including in 2014, been the president and Chief Executive Officer (“CEO”) of Select Vantage, as well as being a director of the company and its secretary. He is the sole beneficiary of a trust that owns all of the issued shares in Select Vantage. Select Vantage was incorporated in Anguilla on 12 September 2011. Since 2017 it has been domiciled in the Cayman Islands. In 2014 the company conducted a business of day trading on stock markets around the world. In Australia it traded on the ASX and on Chi-X.
Mr Schlaepfer was the sole shareholder of another entity, Merlito Securities Company (“Merlito”). Merlito is registered in Hungary. From August 2012 to August 2014 it had an agreement with a licensed stockbroker in Australia, Morgan Stanley, under which the latter provided direct access to the Australian stock markets. Through Merlito’s arrangements with Morgan Stanley, orders could be placed and trades could be made by Select Vantage personnel. From 20 August 2014 Merlito’s DMA arrangement with Morgan Stanley came to an end and it commenced a similar arrangement with Macquarie Securities Australia Pty Ltd (“Macquarie”), another broker to the Australian stock market.
In 2014 Mr Yanco was the Senior Executive Leader, Market Supervision within ASIC. Under that title he was the senior executive of ASIC in charge of and responsible for market supervision. Supervision included oversight of the compliance by Market Participants with the MIR. Mr Yanco was based in Sydney and reported directly to Commissioners of ASIC. A team of ASIC officers under him carried out surveillance of the stock market, including identifying and investigating evidence of manipulation.

Issues – defamation of Mr Schlaepfer

1. The oral statements

It is common ground that on 21 November 2014 Mr Yanco spoke by phone to market compliance executives at each of UBS, Bank of America Merrill Lynch (“BA Merrill Lynch”), Credit Suisse and Deutsche Bank and that on 24 and 28 November 2014, respectively, he spoke in person to executives of Citi and BA Merrill Lynch. All of those entities were licensed stockbrokers in Australia. Like Macquarie they provided direct market access to approved clients. The plaintiffs allege that during the five conversations on 21 and 24 November 2014 Mr Yanco said words the substance of which is set out in Annexure A to the statement of claim (see [13] below) and that in the sixth conversation, face-to-face on 28 November 2014, he said the same words together with an additional point that is set out in Annexure B (see [144] below). The words attributed to Mr Yanco in these two Annexures are the foundation of the plaintiffs’ causes of action, said to have conveyed both the defamatory imputations relied upon by Mr Schlaepfer and the false representations relied upon by Select Vantage.
The first issue in the proceedings is whether the plaintiffs have proved on the balance of probabilities that the words spoken were as alleged in the two Annexures. The plaintiffs sought to prove this by tendering an email sent by Mr Andrew Couper of Credit Suisse to several of his fellow employees on 21 November 2014 at about 4:08pm. The plaintiffs submit that this is a business record of the words actually spoken, admissible as proof of the truth of its contents as to what was said. The defendants dispute the admissibility of the email and in any event deny that it purports to record the substance of the words spoken. The plaintiffs did not call evidence from any of the persons to whom the words in issue are alleged to have been communicated. Mr Yanco gave evidence of what he said on each of the six occasions, in terms materially different from those alleged by the plaintiffs.

2. Identification of Mr Schlaepfer

The plaintiffs allege that the words spoken by Mr Yanco on all six occasions included the following:

1. ASIC has concerns that a particular entity is layering the market.
2. ASIC is aware that the Entity has been closed down at two brokers because of their behaviour.

As explained more fully below, “layering” is understood by brokers and other stock market participants to refer to a particular technique and pattern of trading by which a misleading impression is created in the market, having the likely effect of stock price manipulation.

The plaintiffs allege that those to whom Mr Yanco spoke republished his words to other employees of their organisations, that this was the natural and probable consequence of the original publication and that it was in any event impliedly authorised by Mr Yanco. With respect to each of the six matters complained of it is pleaded that: “The republication is relied upon only as to damages”. Mr Schlaepfer is not referred to by name in the words alleged to have been spoken. The plaintiffs contend that those who heard the words and those to whom the words were republished would have identified Mr Schlaepfer as the person of whom defamatory imputations were conveyed. Identification of Mr Schlaepfer is disputed by the defendants.
On the issue of identification the plaintiffs rely in part upon a circular issued by ASIC on 25 November 2014 to brokers and other participants in the Australian stock market. The circular was entitled Market Supervision Update and is referred to as “MSU No 53”. The plaintiffs argue that parts of this document provided context that would have caused persons to whom the impugned words were published or republished to identify Mr Schlaepfer. This gives rise to a subsidiary issue as to whether the plaintiffs are estopped from relying upon MSU No 53 in this way. The defendants assert that in December 2014 a dispute about the circular was resolved on terms, inter alia, that the plaintiffs released ASIC from any claims arising from its publication. The defendants contend that in reliance upon this release they issued an agreed clarification on 17 December 2014, namely, MSU No 54.

3. Imputations and true innuendoes

The imputations defamatory of Mr Schlaepfer that are alleged to have been conveyed by Mr Yanco’s words are particularised in par 12 of the statement of claim as follows:

(a)   [Mr Schlaepfer] was engaging in criminal conduct by layering the stock market.
(b)   In the alternative to (a), [Mr Schlaepfer] was engaging in unlawful market manipulation.
(c)   [Mr Schlaepfer] had conducted his business in such a way as to warrant the Head of Market Supervision at ASIC contacting the head of compliance at a large brokering house and warning him of the risks of doing business with both his companies Merlito Securities and Select Vantage.
(d)   [Mr Schlaepfer] had so mis-conducted his financial business as to deserve having had two brokers terminate relationships with his company Merlito Securities.

The parties are at issue as to whether any of these imputations were conveyed by the words spoken. After consideration of whether Mr Yanco’s words were in substance as the plaintiffs have alleged and whether they would reasonably have led the listener to believe that Mr Schlaepfer was the person referred to, it will be necessary to determine whether any of the above meanings were conveyed.

In par 18 of the statement of claim Mr Schlaepfer alleges six extrinsic facts, one or more of which is alleged to have been known to one or more of the persons to whom Mr Yanco’s words were published or republished. Mr Schlaepfer relies upon these extrinsic facts, first, to support the imputations set out at [15] above as true innuendoes if they are not found to arise from the natural and ordinary meaning of the spoken words. Secondly, the extrinsic facts are relied upon to support additional imputations as true innuendoes. These may be condensed as follows:

(a)   [Mr Schlaepfer’s] companies, (i) Merlito Securities and (ii) Select Vantage, engaged in stock market manipulation.
(b)   [Mr Schlaepfer’s] companies, (i) Merlito Securities and (ii) Select Vantage, engaged in stock market manipulation to such a serious extent that two brokers terminated their relationships with [each of them].
(c)   [Mr Schlaepfer] is such a dishonest trader that he deserves to be compared to the disgraced Peter Beck.
(d)   [Mr Schlaepfer] had authorised such serious manipulation of markets as to warrant the Head of Market Supervision at ASIC contacting the head of compliance of a large broking house and warning him of the risks of doing business with his companies (i) Merlito Securities and (ii) Select Vantage.

The case concerning true innuendoes gives rise to issues as to:

whether any person with whom Mr Yanco spoke on any of the six relevant occasions knew of the extrinsic facts or any of them and

if so, whether the words spoken conveyed any of the imputations referred to at [15] and/or [17] above when heard by a person who had knowledge of those facts.

4. Justification

The defendants have pleaded the defence of justification pursuant to s 25 of the Defamation Act 2005 (NSW). If it should be found that any of the imputations set out at [15] and [17] above were conveyed with respect to Mr Schlaepfer the defendants contend that those imputations were substantially true. The most substantial issue of truth concerns whether Mr Schlaepfer personally engaged in layering on the Australian stock market or caused Select Vantage to do so.
The business model of Select Vantage involved trading activity of 1,800 individual traders located at various places around the world, each of whom was authorised to use the company’s capital to trade on stock markets to which Select Vantage had direct market access through brokers. The company set the parameters of trading. A significant limitation was that only day trading was permitted; that is, each trader could buy and sell shares but had to close out his or her position on each exchange at the end of each trading day. No stock was permitted to be held overnight.
The traders were engaged in groups called “pods”, each of which had a particular physical location. There was a manager for each pod. A large number of the traders were located in China. Because of the minor difference between that country’s time zone and Australian Eastern Standard Time, Select Vantage’s Chinese traders were active on the ASX and Chi-X. They were authorised by Select Vantage to trade through Merlito’s direct access relationship with Macquarie. The plaintiffs contend that the individual traders were free to place bids and asks and to buy and sell stock according to their individual strategies and decisions.
The facts and circumstances upon which the defendants rely to establish the substantial truth of the imputations, to the extent they may be found to have been conveyed with respect to Mr Schlaepfer, are particularised in Schedule A to the defence. This spells out in great detail the conduct of Select Vantage’s traders with respect to seven named stocks on dates in the period August to November 2014. There are 21 days of trading, in one or more of seven identified stocks. On two of the days, two of the relevant stocks were traded. These may be considered as 23 “stock/days”. In relation to each stock/day the defendants have alleged that one or more offences against s 1041A or s 1041B of the Corporations Act 2001 (Cth) was committed by Merlito and/or by Select Vantage, counselled and procured by Mr Schlaepfer. Select Vantage’s capital was used but Merlito had the DMA services agreement with Macquarie. For most purposes Select Vantage and Merlito may be referred to interchangeably.
Whether the activities of Select Vantage’s traders on the 23 stock/days involved market manipulation by layering is a question that occupied a great proportion of the hearing time and attracted a very large volume of documentary and expert evidence. Some of the evidence concerning the market activities of Select Vantage’s traders will have to be considered not only with respect to the defence of truth but also in connection with the common law and statutory defences of qualified privilege.

5. Common law and statutory qualified privilege

The defendants rely upon ASIC’s duties and powers, under the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”) and under the Corporations Act, to supervise the stock market exchanges and Market Participants. The defendants contend that ASIC has at all material times had an interest, arising from its statutory obligations, to promote a fair, orderly and transparent stock market. They contend that the licensed brokers with whom Mr Yanco spoke in late November 2014 had the same interest, arising from their licence obligations and duties imposed by the MIR.
From these considerations the defendants contend that when Mr Yanco conducted the impugned conversations with brokers in November 2014 he was under a duty to speak to them about his concerns with respect to Select Vantage’s trading and that the conversations were in furtherance of a common interest between the regulator and the licensed brokers, namely, an interest in the promotion of a fair, orderly and transparent stock market. It is further argued that the communications were necessary for the convenience or welfare of society. These considerations are said to attract common law qualified privilege.
It is common ground that a discussion took place between Mr John Price, a Commissioner of ASIC, Mr Tom Veidners, an ASIC market surveillance officer, and Mr Paul Packham, Macquarie’s Regional Head of Compliance, on 20 November 2014. Mr Price expressed ASIC’s concern about signs of market manipulation by traders using Merlito’s DMA account with Macquarie and reminded Mr Packham of Macquarie’s obligations not to permit its clients’ direct access to the market to be used in a manipulative way. The next day Macquarie notified Merlito that its DMA services agreement was terminated. Mr Schlaepfer contends that Mr Yanco’s phone calls and face-to-face conversations with compliance personnel of other major brokers at the time of and shortly after this termination event had the effect of warning off those brokers from entering into relationships with Merlito, Select Vantage or Mr Schlaepfer. Mr Schlaepfer contends that ASIC had at the time no more than a suspicion of market misconduct and that this was insufficient to give rise to a duty to communicate with brokers in the terms alleged.
For the purposes of the statutory defence under s 30 of the Defamation Act, the defendants allege that Mr Yanco believed on reasonable grounds that each of the compliance executives at the various broking houses to whom he spoke on 20, 21 and 28 November 2014 had an interest or apparent interest to receive information on the subject of possible market manipulation. It is contended that Mr Yanco spoke to each of them in the course of conveying information on that subject and that his conduct was reasonable. Those are the prerequisites for the defence stipulated in s 30(2).
Mr Schlaepfer’s response to the statutory defence includes the allegation of malice. A further issue is whether, on the assumption that the various brokers had at least an apparent interest in receiving information about possible market manipulation, Mr Yanco acted reasonably in speaking directly to them and conveying the information he did. Mr Schlaepfer contends that a more reasonable course would have been to issue notices to Select Vantage, Merlito and/or Macquarie for compulsory production of documents and provision of information and to enquire further into the market observations that had raised ASIC’s concerns.

6. Damages for defamation

The parties are in dispute as to whether the evidence led by Mr Schlaepfer to prove hurt to his feelings is sufficient to support general damages in this category. With respect to damage to reputation, although the defendants accept that there is a presumption of at least some such damage they submit that the award would be very small because, as a Canadian-based businessman, Mr Schlaepfer has not proved that he enjoyed any reputation in Australia prior to the matters complained of. The defendants submit that in assessing damages the Court is only concerned with loss of reputation in Australia, not in Canada.
Mr Schlaepfer claims aggravated damages, the award of which would depend upon it being found that Mr Yanco’s statements to the stockbrokers were improper and/or unjustifiable and/or lacking in bona fides: Triggell v Pheeney (1951) 82 CLR 497; [1951] HCA 23; Waterhouse v Broadcasting Station 2GB Pty Ltd (1985) 1 NSWLR 58 at 74-75. The defendants deny that any of these criteria are satisfied, relying upon what they allege was a statutory duty of Mr Yanco to communicate with the stockbrokers (as referred to under issue 5 above concerning common law and statutory qualified privilege).

Issues – injurious falsehood

Elements of the tort

The elements of the tort of injurious falsehood are as stated by Gummow J in Palmer-Bruyn and Parker Pty Ltd v Parsons (2001) 208 CLR 388; [2001] HCA 69 in the following passage:

[52] The elements of the action for injurious falsehood usually are expressed in terms which derive from Bowen LJ's judgment in Ratcliffe v Evans [1892] 2 QB 524 at 527-528, to which further reference will be made.
Thus, generally, it is said that an action for injurious falsehood has four elements [further citation omitted]: (1) a false statement of or concerning the plaintiff's goods or business; (2) publication of that statement by the defendant to a third person; (3) malice on the part of the defendant; and (4) proof by the plaintiff of actual damage (which may include a general loss of business) suffered as a result of the statement.

In proof of elements (1) and (2) Select Vantage relies upon the oral statements alleged to have been made by Mr Yanco to brokers on 21, 24 and 28 November 2014. Therefore the resolution of Issue 1 in Mr Schlaepfer’s defamation claim, concerning what was actually said, bears upon the cause of action for injurious falsehood as well.

7. Representations concerning the plaintiffs

The following representations of and concerning Select Vantage and Mr Schlaepfer are alleged to have been conveyed by the words spoken by Mr Yanco on the six occasions in November 2014, taken together with the extrinsic facts pleaded at par 18 of the statement of claim (and reproduced at [179] below):

(a)   [Select Vantage] was engaging in market manipulation by layering the market.
(b)   [Select Vantage] had been terminated by two brokers for layering the market.
(c)   [Select Vantage] was a related entity of Peter Beck, the disgraced former principal of Swift Trade Inc, who had been barred in the USA for market manipulation, and whose company, Swift Trade Inc, was levied an £8 million fine for market manipulation.
(d)   [Mr Schlaepfer], principal of [Select Vantage and of Merlito], was engaging in market manipulation by layering the market.

The defendants dispute that any of these representations were conveyed.

8. Alleged falsehood of the representations

Select Vantage bears the onus of proving that the alleged representations, or at least some of them, were false for the purposes of element (1) of the tort of injurious falsehood. The defendants deny that the representations referred to above, if made, were false. The evidence upon which the Court is to determine whether representations (a) and (d) were false is the same as that upon which the defendants’ justification defence to Mr Schlaepfer’s defamation claim is to be decided under Issue 4 only the onus is reversed. The plaintiffs allege that it was false to represent that Select Vantage’s trading on the 23 stock/days constituted market manipulation in contravention of s 1041A of the Corporations Act or the creation of a false appearance of active trading contrary to s 1041B. With respect to representation (b) the plaintiffs contend that this referred to the cessation of its DMA agreements with Morgan Stanley (in August 2014) and Macquarie (on 21 November 2014). The plaintiffs say it was false to assert that Morgan Stanley terminated Merlito’s DMA “for layering” the market. The plaintiffs also contend that representation (c) was untrue in that Select Vantage was not in any way related to Peter Beck or his entities.

9. Malice

With respect to element (3) of the tort of injurious falsehood, the plaintiffs must prove that Mr Yanco used each of the six occasions of speaking to executives of broking houses in November 2014 for an indirect purpose, or in pursuit of an indirect motive, to cause injury to Select Vantage’s business: AMI Australia Holdings Pty Ltd v Fairfax Media Publications Pty Ltd [2010] NSWSC 1395 at [31]-[36]. Again this is in contest because the defendants say that Mr Yanco communicated with the stockbrokers in performance of his statutory duties, as considered under Issue 5 above (concerning common law and statutory qualified privilege).

10. Actual damage

In closing written submissions Select Vantage has expressly refrained from contending “that any quantifiable loss arises for calculation by the Court”. However, it submits that the Court “can infer the existence of some loss” as a result of it being unable to secure broking services that were essential to continued trading. Select Vantage says brokers would not deal with it after the alleged injurious falsehoods were published. It relies upon its financial statements for calendar 2014 showing total worldwide trading revenue and direct costs. These figures are said to prove that on a worldwide basis the company’s gross margin was 4.53% on revenue. The direct costs are not dissected between Australia and the 25 to 30 other countries in which Select Vantage traded and from which it derived the gross revenue. Select Vantage gave evidence of its trading revenue from Australia for the year to 21 November 2014, when Macquarie terminated its direct market access. It submits that the 4.53% may be applied to the Australian revenue and that the Court may infer that, at least up to termination, some gross margin was derived from the company’s Australian activities.
Select Vantage further submits that the company would have continued to derive gross margin from trading on the Australian stock market in the years following November 2014 and that this gross margin, admittedly unquantified, has been lost as a result of the injurious falsehoods published by the defendants. All of this is disputed by the defendants, who contend that actual damage has not been proved and hence that an essential element of the tort is not made out.

Background to the issues

Mr Schlaepfer’s early involvement with Swift Trade

Mr Schlaepfer was born and educated in Canada and is now in his early 30s. He graduated with a Bachelor of Commerce degree from the University of Toronto in 2003. He attained the degree of Master of Business Administration from Concord University in 2009 and completed the requirements to become a Chartered Finance Analyst in 2010.
In about 2003 Mr Schlaepfer was engaged as an independent contractor to an entity named Barka Co Ltd (“Barka”), to undertake share trading using the capital of Swift Trade Inc (“Swift Trade”). In that capacity Mr Schlaepfer traded on share markets in North America and Europe under constraints set by Swift Trade, including that only day trading was permitted and that the value of open orders on the market at any given time had to be below a specified ceiling. Remuneration was a percentage of trading profits, calculated monthly.
During 2005-2007 Mr Schlaepfer and two partners conducted their own firm under the name Tri-Star Trading. This entity managed a number of other subcontractors to Barka, all of whom engaged in the same kind of share trading activity using the capital of Swift Trade. Tri-Star Trading received from Barka a percentage of the profits made collectively by all traders under Tri-Star Trading’s management and distributed that percentage amongst the individuals.
From 2007 Mr Schlaepfer ceased his involvement in Tri-Star Trading and worked as a trader in Swift Trade’s head office. At the request of one of the owners of the company he also undertook software development. In about 2009 or 2010 Mr Beck, an owner and principal of Swift Trade, paid “a fine, or settlement” to the Ontario Securities Commission for his failure to disclose, when questioned, that his father was the ultimate beneficial owner of his companies.
In 2010 Mr Schlaepfer, in the capacity of consultant, entered into an agreement with Mr Beck to advise on policies and procedures to address risks in Swift Trade’s business. The risks under consideration were those of losing capital through trading and of infringing stock exchange rules. At Mr Schlaepfer’s suggestion Mr Beck enlisted the assistance of Mr Hugo Kruyne, whom Mr Schlaepfer had known since 2004 and whom he regarded as very astute with respect to software systems for identifying and controlling risks, both with respect to capital loss and regulatory non-compliance. Mr Schlaepfer found that Swift Trade had no system for monitoring activities of its traders that might infringe market rules. He and Mr Kruyne examined hundreds of communications received from regulators around the world querying patterns of trading that appeared to involve manipulation by the technique known as “layering”, as explained at [48] below.
Mr Schlaepfer and Mr Kruyne set up filters in Swift Trade’s computerised order-placing system, designed to generate alerts if any of the patterns that had attracted regulators’ enquiries should be repeated. Neither Mr Schlaepfer nor Mr Kruyne nor any of the traders that they had managed were the subject of any proceedings by regulators in connection with Swift Trade or its US licensed dealer, an entity named Biremis Corp.

Regulatory action against Swift Trade in the UK

From 2007 to 2011 Swift Trade was investigated by the Financial Services Authority (the “FSA”) for alleged manipulation, by layering, on the London Stock Exchange (“LSE”). At that time the FSA was the statutory body with responsibility for regulating the financial services industry in the United Kingdom. The trading conduct investigated had occurred during calendar year 2007. On 6 May 2011 the FSA issued a final notice, accompanied by reasons, pursuant to which Swift Trade was fined £8 million for market abuse. The FSA found that throughout 2007 Swift Trade had systematically and deliberately engaged in manipulative trading by layering.
At par 2.2 of its reasons the FSA provided a definition of the offending activity, which is quoted at [48] below. The definition is to be understood against the background that on the LSE, as on the ASX, an order book for each stock is displayed on a screen available to traders and brokers. On one side are the bids; that is, offers to buy a given quantity of the stock at a nominated price. The identity of the trader placing the bid is not shown. At a particular time there may be, for example,

a bid for 10,000 of the stock at 34¢;

a bid for 5,000 at 33¢;

a later-placed bid for 7,000 at 33¢ - and so on.

On the other side of the book the asks (offers to sell) are similarly displayed. There might be

15,000 of the stock at an ask of 36¢;

2,000 at 37¢;

5,000 at 38¢ - and so on.

Bids and asks of the above nature are referred to generically as “limit orders”, being offers to transact at a price which is specified or “limited”. It is open to a trader at any time to execute a trade by placing a “market order”, crossing the spread between the highest bid price and the lowest ask price to meet the terms of one of the limit orders resting on the order book. In the above example this might be done by a buyer executing a trade at the most favourable (lowest) ask price thereby purchasing all or some of the 15,000 shares on offer at 36¢. In completing this transaction the buyer would exceed the price of the highest bid amongst the resting limit orders on the book, being the bid for 10,000 at 34¢.
Paragraph 2.2 of the FSA’s reasons of 6 May 2011 is as follows:

Layering involves entering relatively large orders on one side of the LSE order book … , which has the effect of moving the share price as the market adjusts to the fact that there has been an apparent shift in the balance of supply and demand. This is then followed by a trade on the opposite side of the order book which takes advantage of, and profits from, the share price movement. This is in turn followed by a rapid deletion of the large orders which had been entered in order to cause the movement in price, and by a repetition of this behaviour in reverse on the other side of the order book. Swift Trade placed the large orders in order to give a false and misleading impression of supply and demand. The large orders were not intended to be traded. They were carefully placed close enough to the touch price (i.e. the best bid and offer prevailing in the market at the time) to give a false and misleading impression of supply and demand, but far enough away to minimise the risk that they would be executed. They were deleted in seconds in order to further minimise the risk that they would be traded. The trading activity caused many individual share prices to be positioned at an artificial level, from which Swift Trade profited directly.

In the example given at [45] and [46], this pattern would involve Swift Trade having placed the ask of 36¢ for 15,000 of the stock and also placing numerous relatively large bid orders at, for example, 33¢ and 32¢. These bid orders would be far enough away from the ask price to be unlikely to be executed but would create the impression to other traders that there was an accumulating demand in excess of supply. That impression would induce another trader to purchase the stock offered by Swift Trade at 36¢. The selling price would thereby have been pushed up artificially to the advantage of Swift Trade. Swift Trade would then remove all the layered orders it had placed on the bid side, which it had never intended to execute.
In further illustration of the FSA’s definition, in this example Swift Trade would have sold at the inflated price of 36¢ and would now reverse the process so as to position itself to buy at, say, 35¢. It would place a bid for a quantity of the stock at 35¢ and proceed to layer up relatively large volume asks on the opposite side of the order book at, say, 36¢ and 37¢. The volume of stock being offered for sale on the ask side would create the impression amongst other traders that supply exceeded demand and would cause a seller to cross the spread and execute a sale to Swift Trade on its bid at 35¢. Having bought at this favourably and artificially low price Swift Trade would then cancel the numerous asks that it had placed. As with the layered bids in the first phase of the manipulation, Swift Trade would never have intended to execute trades on its layered asks in the second phase.
It will be apparent from the above description that in carrying out this strategy the trader necessarily must place a number of resting limit orders on one side of the book, none of which results in a trade. When a single trade has taken place at the artificially induced price all of the layered limit orders on the opposite side of the book are removed. A tally at the end of the day will show that the trader has placed a very large number of orders, most of which have come to nothing, for only a handful of executed trades. This is referred to as the Order to Trade Ratio. It is a metric that in conjunction with other indicia may be regarded by surveillance and compliance professionals as evidence that layering has taken place.
The following further extracts from the FSA’s reasons are relevant to the issues in the present case:

2.4 The FSA regards this as a particularly serious case of market abuse for the following reasons:
(1) the manipulative trading was deliberate, was intended to create a false or misleading impression and an artificial share price and was undertaken to achieve a profit;
(2) the manipulative trading was widespread and systematic. It was repeated on many occasions and in many different shares on the LSE over [calendar 2007];
(3) the manipulative trading was undertaken by many individual traders, sometimes acting in concert with each other, and was widespread across many trading locations worldwide. Swift Trade disseminated this trading strategy to individual traders and trading locations;
(4) Swift Trade profited substantially from the trading to the detriment of other market participants;
(5) although Swift Trade became aware in March 2007 that the LSE had raised concerns regarding the trading activity, not only did Swift Trade continue its manipulative trading, it also actively sought to evade restrictions on the trading. It refined the trading pattern which made it less easy to detect, it purported to impose effective controls on the trading when this was not the case, and it took steps to avoid regulatory scrutiny by changing its Direct Market Access (“DMA”) provider;
(6) while the price movements which Swift Trade caused were short term, they still operated to the detriment of other market participants at the time of trading. Further, the trading activity had significant market impact for a prolonged period in a variety of FTSE 100 and FTSE 250 stocks because it was widespread, systematic and repeated. The volume of the manipulative trading was large enough to misrepresent the overall liquidity on the order book for the shares in question and to deter genuine liquidity providers from trading when they perceived that manipulative trading was being undertaken;
(7) the manipulative trading disrupted and distorted the price formation process; and
(8) conduct of this kind, if unchecked, could undermine market confidence.

The FSA’s reasons continued as follows:

2.7   The trading activity involved placing individually or cumulatively large orders to buy or sell shares on the order book, the majority of which orders were subsequently cancelled without being executed. Relatively small orders were placed on the opposite side of the order book. The large orders gave the impression of substantive demand for, or supply of, the shares and had the effect of moving the share price such that the smaller orders entered on the other side of the order book became more attractive and were executed, at which point Swift Trade’s large orders were rapidly cancelled. Swift Trade profited from the small price movements which followed such orders by buying after triggering a fall and selling after triggering a rise in the share price.
2.8   The large orders were not intended to be traded and were very unlikely to be traded because of the combination of their size, their distance from the touch price and their short duration given their rapid cancellation. They created a false impression of supply of or demand for, or price of, the shares in question as there was no intention to trade at the prices and in the quantity stated. The purpose of the large orders was to trigger share price movements from which Swift Trade could profit.
2.9   Individual price movements were small. However, the trading activity created a distinct movement of the price first one way and then the other. This movement was created by Swift Trade which was then in a position to gain an advantage over other market participants by trading in response to the price movement it had caused. By repeating the pattern many times a day and in a large number of shares across a range of market sectors, the small benefit from each individual price movement was magnified. …
…

4.11 [In 2007] Swift Trade operated a network of over 50 customers based in over 150 trading locations worldwide, which in turn engaged over 3,000 traders as independent contractors. These traders engaged in day trading and were not permitted to hold positions overnight. During the Relevant Period, none of the trading locations which engaged in the manipulative trading were in the United Kingdom.
4.12 The manipulative trading activity was ostensibly conducted independently of Swift Trade by traders retained by its customers, with Swift Trade providing the trading platform and required connectivity to the LSE. However, Swift Trade directed and controlled the manipulative trading activity in the following ways:
(1) Swift Trade actively disseminated the trading strategy to individual traders and trading locations;
…

The reference at 4.11 to “customers” is to entities that engaged individual traders as independent contractors. Under contractual arrangements between the customers and Swift Trade, the individual traders were permitted to use Swift Trade’s capital, its computerised systems for electronic placement of trades and its relationships with brokers who provided direct market access.
At paragraphs 4.17-4.26 the FSA summarised its interaction with Swift Trade during 2007. It had expressed concerns regarding manipulative trading to the company’s DMA provider in March 2007. Swift Trade responded by contending that the activity was legitimate and that “traders were merely reacting quickly and independently to changing market conditions”. The company purported to impose controls on its traders and represented to the DMA provider and to the LSE that it had done so. The FSA found that no effective controls had been imposed despite Swift Trade having the necessary technical capabilities and resources.
In June 2007 Swift Trade’s DMA provider imposed its own controls, including a minimum time during which orders were to be left on the order book, a restriction upon the number of open orders per trader per stock and a limit on the size of individual orders. This resulted in the manipulative trading evolving, with a small number of very large orders being placed instead of a large number of smaller orders. The changed trading pattern was more difficult to detect however the DMA provider’s measures hampered the traders’ manipulative activities significantly. The provider suspended Swift Trade on 31 May 2007 and 20 June 2007 and “switched off” Swift Trade’s access to the LSE in September 2007.
Swift Trade then commenced to use another DMA provider, from October 2007. It continued manipulative trading with the new provider, not informing it of the restrictions and controls that the previous provider had imposed or of the concerns that had been raised by the LSE. Modifications were made to the manner of trading, making the manipulation more difficult to detect. The second DMA provider withdrew Swift Trade’s access to the LSE on 4 January 2008, at the request of the Exchange. The FSA drew the following conclusions:

4.24 Swift Trade was able to suspend or terminate access by individual traders or trading locations to the LSE and other exchanges. Despite the continuing and escalating concerns expressed, Swift Trade failed to take any effective action to stop the manipulative trading, which was not limited to isolated offices or individual traders. Rather, Swift Trade and Peter Beck instructed traders to trade in a way designed to avoid detection by regulators. The manipulative trading was undertaken by many individual traders, sometimes acting in concert with each other, and was widespread across many trading locations worldwide.
…

5.33   The FSA finds that Swift Trade did direct the manipulative trading activity. The FSA rejects the assertion that Swift Trade did not have any involvement in the trading activity except as an electronic order router. Instead the FSA considers that the only credible explanation for the utilisation by a wide range of Swift Trade customers across a wide range of geographical locations and time zones of the same, highly unusual, trading strategy was that Swift Trade was directing and controlling the trading activity. Furthermore the FSA finds that there is clear evidence not only that Swift Trade was aware that ‘layering’ was occurring but also that it had disseminated this trading strategy having identified this as an effective way of manipulating the market.
5.34   … The FSA considers that despite the outward appearance of independence between Swift Trade and its customers … the true position was that Swift Trade was involved in the direction and control of these entities. Swift Trade was able to exert influence, through contracts with customers, which demonstrate that it had not relinquished control of the trading of these customers. The control which Swift Trade had as a result of contracts with its various customers was augmented by the close links between Swift Trade and personnel employed by its customers. The FSA considers that Swift Trade had a significant incentive to maintain control over the trading activity of its customers as it took a substantial portion of the trading profits of these customers. The FSA finds that these connections between Swift Trade and its customers give rise to the compelling inference that the unusual layering activity seen in this case was disseminated and utilised at Swift Trade’s direction.
5.35   Furthermore the FSA considers that the opaque business model adopted by Swift Trade and its attempts to evade regulatory scrutiny or control demonstrate that Swift Trade was knowingly and deliberately engaging in market abuse. ... These efforts to evade any effective restraint being put upon the layering activity were accompanied by a business structure that was designed to shield Swift Trade from robust scrutiny and to thus ensure that the trading could continue.
5.36   The FSA finds that the evidence, set out in the paragraphs above, of Swift Trade’s involvement in facilitating, disseminating and directing the abusive trading strategy is further bolstered by certain internal communications at Swift Trade and an account given by a former employee when interviewed by the [Ontario Securities Commission]. Various internal communications at Swift Trade provide clear evidence that the management of Swift Trade were not only aware that layering was occurring but that they were urging traders to continue making profits whilst endeavouring to evade drawing any regulatory attention to their activities. This evidence is complemented by comments in interview made by a former employee of Swift Trade in which he describes the efforts that the management of the firm made to disseminate the trading strategy.

Regulatory action against Swift Trade in the USA

Mr Schlaepfer continued his consultancy to Swift Trade until 2011. By that time the company had approximately 5,000 traders, organised in about 250 pods, all of them day trading on stock exchanges around the world with Swift Trade’s capital. Following FSA’s action in 2011, Mr Beck, Swift Trade and related entities were the subject of formal allegations by the Ontario Securities Commission in 2012. The Commission alleged widespread failures of record-keeping, failure to supervise traders and numerous other defaults, amounting to a “culture of non-compliance”. The complaints were settled by an agreement of 20 June 2012 under which, inter alia, Swift Trade and Biremis Corp were prohibited for six years from trading in securities in Ontario and Mr Beck was prohibited for two years from being a director of any securities trading entity.
Mr Beck and Biremis Corp also faced regulatory action in the United States, for lack of supervision of their traders that had resulted in layering and market manipulation. They were expelled by the Financial Industry Regulatory Authority of the United States (“FINRA”) on 31 July 2012. In December 2012 Mr Beck, Mr Kim (a co-owner of the businesses) and Biremis Corp agreed to a lifetime ban from registration in the securities industry in the United States.

Transfer of Swift Trade’s business to Select Vantage

In mid-2011 Mr Schlaepfer was of the view that Mr Beck could not continue to conduct the business of Swift Trade following the FSA’s decision. Mr Beck apparently accepted this. The two of them agreed terms on which Mr Schlaepfer would take over the business. The following transactions were entered into:

Subject to a selection process described at [61] below, traders and managers who had been contracted to Swift Trade or to an intermediate entity, were engaged by Elite Vantage Placement Ltd (“Elite Vantage”). This company was under Mr Schlaepfer’s control and direction. Traders within Canada were engaged as independent contractors to Elite Vantage and traders elsewhere in the world entered into employment with that company. On 1 January 2013 Elite Vantage entered into a Trader Services Agreement with Select Vantage, pursuant to which Elite Vantage agreed to engage traders and make them available to trade Select Vantage’s capital on stock markets worldwide.

The traders were required to sign agreements that they would comply with the trading rules and regulations of the exchanges on which they operated (see [62]-[65] below) and “some compliance training” was given by a company in the Select Vantage group.

On 1 January 2013 Select Vantage entered into a Services Agreement with Omira Corporation SA (“Omira”) pursuant to which Omira was required to operate a website called “DayTradetheWorld”. Marketing information was provided on the website to anyone interested in becoming a trader of Select Vantage’s capital. Omira was also required to host training sessions for managers of traders, provide service support for managers and trainers and impose risk controls to protect Select Vantage’s capital. Omira’s issued capital is owned by the same trust – of which Mr Schlaepfer is the sole beneficiary – that owns all of the shares in Select Vantage.

From 2013, computer servers in New Jersey, Hong Kong and London were used by Select Vantage to interface with providers of direct market access for the placement of orders on stock markets. I infer that either the use of these servers was taken over from Swift Trade or that Select Vantage made independent arrangements for the use of the servers commencing in 2013.

Red Flowers Technologies Inc (“Red Flowers”) and Orbixa Technologies Inc (“Orbixa”), companies of which Mr Beck was the principal, owned or had rights to a program for placing stock market orders through the abovementioned servers. The program was called ProsperPro or, in one version, PPro8. On 1 January 2013 Red Flowers entered into a Technology License Agreement with Select Vantage pursuant to which a license to use the above software was granted for an initial term of 20 years. The Agreement defined Net Trading Revenue as gross revenue less brokers’ fees and regulatory charges. A monthly royalty was payable to Red Flowers at the rate of 5% of Net Trading Revenue derived from US markets and 10% of revenue from all other markets. A second Technology License Agreement was entered into on the same date and in the same terms between Orbixa as licensor and two of Mr Schlaepfer’s Canadian companies.

Red Flowers also owned a program for back-office record-keeping to account for stock exchange transactions (called, in 2001, Back Office Portal and later renamed Metro) and a proprietary software tool to manage and avert wash trading amongst the traders (called Rosemary). As Mr Schlaepfer explained:

[A]ll trades [by Swift Trade’s traders] are going to the market with the same beneficial owner. So as two traders inadvertently trade with each other, they’ve effectively traded stock on the stock market where there was no change in beneficial owner.

Mr Schlaepfer said this would amount to wash trading, which is prohibited. It was necessary to have software which would raise alerts if it should occur. Select Vantage entered into a license agreement with Red Flowers in order to use the Rosemary software for this purpose. It had the capability automatically to cancel or reduce the size of an order to prevent it resulting in a wash trade.

Mr Schlaepfer acquired Merlito from one of the co-owners of Swift Trade. This company had a broker’s licence in the United States.
Neither Mr Beck nor any other person who had an ownership interest in Swift Trade obtained an interest in Select Vantage or in Merlito. Apart from the agreements for licensing software from Mr Beck’s companies, the only residual business relationship between Mr Beck and Mr Schlaepfer and the Select Vantage group of companies is that the latter hold leases of some office space in a building owned by a Beck company.

Compliance obligations of Select Vantage’s traders

During the process of Select Vantage taking over the business of Swift Trade, commencing in 2011, Mr Schlaepfer identified traders (including managers of locations or pods) whose actions had been the subject of regulatory inquiries and warnings directed to Swift Trade. Those traders were not taken on by Mr Schlaepfer’s new entity, Elite Vantage. He gave evidence that he also caused “even more conservative checks on manipulative behaviour” to be incorporated into Select Vantage’s monitoring systems. Traders who infringed these “even more conservative checks” were “just fired” and, consequently, were not offered contracts with Elite Vantage. Mr Schlaepfer gave no details of the additional “checks on manipulative behaviour” or of their efficacy in identifying traders who had a propensity to infringe market rules. The selection process resulted in about 1800, or 40%, of Swift Trade’s traders moving across to the Select Vantage group.
Canadian traders who were engaged to trade using Select Vantage’s capital were required to enter into an Independent Contractor Agreement with Elite Vantage. In Section 6 of this Agreement the responsibilities of the trader were stipulated, including:

(d) complying with:
(i) all policies and procedures established by Elite Vantage from time to time, including the Compliance Agreement, as may be amended from time to time; and
(ii) all instructions of the Manager that are not inconsistent with (i); and

(e) complying with all applicable Laws and marketplace rules and the applicable terms of this Agreement and ensuring that any and all persons under the Independent Contractor's supervision at the Trader Location, if applicable, comply at all times with all applicable Laws and marketplace rules and with the terms of this Agreement.

The Compliance Agreement referred to in par (d)(i) of Section 6 of the Independent Contractor Agreement was a separate document. It included the following:

You have trading access to various marketplaces around the world through one or more of Select Vantage [and related entities] (the "Select Group"). As a condition of such access, you must comply with all applicable marketplace trading rules, and all applicable regulations issued by the authorities that regulate such marketplaces.
The Select Group will use their best efforts to make available to you links to the applicable trading rules and regulations. However, it is ultimately your responsibility to know these rules and regulations before you trade.
In particular, you agree that you SHALL NOT:
1. Intentionally engage in wash trading. A "wash trade" is a trade in which there is no change in the beneficial ownership of the securities. Under no circumstances should you try to execute against your own posted orders or against the orders of another trader trading through Select Group.
2. Intentionally engage in team trading. "Team trading" involves two or more traders co-ordinating their trading activities, so that they actually trade as a team while giving the appearance of trading as separate individuals. In many countries, team trading can be considered fraudulent trading. To be safe, you should not discuss your specific trading intentions with other traders.
3. Intentionally manipulate the opening price or closing price. This includes sending either large orders or multiple small orders around the time of market open/market close, which are intended to improperly impact the opening/closing price.

Traders outside Canada were employed by Elite Vantage under an Employment Agreement, which included the following terms:

I.1   The Employee shall, on behalf of Elite Vantage and/or its affiliate(s), place orders to buy and sell securities … and execute trades from out of the Office Location subject to (i) the terms and conditions hereof, (ii) all applicable Laws (including securities regulations and marketplace rules) …
I.2   “Laws” means any and all applicable laws, including … policies, guidelines and … any and all applicable self regulatory organisation or securities regulatory authority requirements …
II.1   The Employee shall only utilise the order execution system permissioned to him from time to time by Elite Vantage and the [location manager], which shall be accessible only at the Office Location. …
II.2   The Employee acknowledges that Elite Vantage and its affiliate(s) are subject to securities regulations and marketplace rules governing trading on the markets which the Employee will access. The Employee acknowledges and agrees that failure to comply with any securities regulatory requirements communicated to him from time to time, or that he reasonably ought to have been aware of, may result in sanctions ranging up to immediate termination.

Mr Schlaepfer said that throughout 2013 and 2014 all managers of locations were bound by a schedule of Manager Duties to Ensure Trader Compliance. That document required that the managers should ensure their traders did not communicate their specific trading intentions to others. Managers were directed to forbid traders from using cell phones or other devices that would enable them to communicate with other traders. The managers were also required to enforce the rule that traders must be in the office location when active and to ensure that no trader’s unique identification number was used by any other person.

Transaction constraints on Select Vantage’s traders

Mr Schlaepfer gave evidence that the limitations imposed by Select Vantage and Elite Vantage on traders in its system were as follows:

day trading only;

compliance with “applicable rules and regulations”, as per the Compliance Agreement (see [63] above);

no trading in prohibited stocks, a list of which was issued and updated by Select Vantage (or a related entity) from time to time;

a limit on the total value of orders that a trader could have open at any time, variable from $10,000 up to $20 million for a highly experienced trader in the US market;

a limit on trading losses for a single day, variable between traders;

each trader was only permitted to place and to have open at any time two resting orders per side of the order book on a particular stock (or “symbol”) on any exchange, “unless [the trader] had more experience and the strategy [warranted] it”, in which case if the trader could explain a strategy and justify exceeding the limit of two open orders per side, exemption would be granted.

Mr Kruyne said with respect to the limitations in (6) that, in Australia during August to November 2014 that permissible number of resting orders became five per side per stock per exchange. Some of the above limitations were enforced by automated functions of Select Vantage’s ProsperPro software. For example with respect to limitation (4), an attempt by the trader to place an order that would take the total of his or her open orders over the trader’s applicable limit would simply be blocked. The order would not go through. Similarly with respect to limitation (5), once a trader had incurred losses for the day up to his or her limit, any attempt to place further orders would be automatically rejected. Likewise with respect to limitation (6), an attempt to place an additional limit order on either side of the order book for a particular stock on an exchange would fail and an error notification would be displayed on the trader’s screen.

Training, methodology and remuneration of Select Vantage’s traders

Mr Schlaepfer said that managers of locations had responsibility for hiring traders, providing basic training on the use of the software through which trades were carried out, giving basic instruction on how the markets worked and providing access to Select Vantage’s market simulator as the final stage of preparation. He said that traders were given:

some small learning lessons on the mechanics of how a market works, what a rebate was, some basics on tactical analysis, some basics on understanding the correlation between a stock and the futures market, but very rudimentary, basic courses … [T]hen they would look at those lessons and … first they would practice on our simulated environment and then they would move on … to the actual markets.

Commencing in 2012 or 2013 Select Vantage prepared instructional videos for managers and traders explaining how day trading could be successfully carried out within the regulated framework of stock markets. These videos concerned individual topics and were referred to as “modules”. They were prepared in English and “a large subset” were also in Mandarin, Spanish and Russian. These modules were distributed to the pods for the use of managers in instructing traders.
Mr Schlaepfer described the techniques “ordinarily used by traders to take advantage of the gap or the spread between bids and asks in the market”, in these terms:

[S]pread capture involves bidding and offering on either side of the book, or bidding or offering on one side of the book until you’re filled and then trying to get out on the other side of the spread to capture that spread.

He used the term “spread capture” interchangeably with “market making” to describe the above process. He said that this was discussed with prospective traders “as a basic high level thing [that] could be done”. I infer that such discussion was part of the basic instruction provided by the managers. Despite the seemingly technical terminology, Mr Schlaepfer agreed that the trading procedure he had described came down to buying stock at a price, waiting until it could be sold at a slightly higher price and then selling.
He said that it was important in day trading to have the ability to “go short”, that is, to sell a particular stock without having previously acquired a quantity of it with which the sell transaction could be completed. This could be done where the broker had an inventory of the stock that the trader could borrow in order to be able to enter into a sell transaction, with a view to purchasing replacement stock at a later point in the day’s trading at a lower price and returning this to the broker’s inventory. Mr Schlaepfer defined the term “locate” or “short-locate” as meaning an indication from the broker that inventory of the particular stock was available and could be borrowed, thus enabling the trader to “go short”.
The arrangement for remuneration was that each manager was paid, monthly, 83% of net revenue generated by the activities of all traders in the location or pod. Distribution of this share of the revenue amongst the traders was in the discretion of the manager.
Mr Schlaepfer himself does not trade on the stock market with Select Vantage’s capital and he did not in 2012-2014. He also does not (and did not) communicate directly with traders about their trading decisions, apart from dealing with managers in relation to alerts raised by the Ginger monitoring system, described below.

Select Vantage in-house screening of traders’ activities

When Select Vantage commenced to operate the business it implemented software under the name “Ginger”, which Mr Schlaepfer described as a surveillance tool. This had the capacity to read the “receipts of transactions” that were carried out by traders and to screen them with filters designed to reflect “rules and regulations around the world”. Mr Schlaepfer explained the “receipts of transactions” as being the whole dataset of trading messages sent electronically to brokers to effect transactions and messages from brokers by way of acknowledgement. The Ginger software would generate alerts if the application of the filters identified transactions that met the program’s criteria for infringement of relevant trading rules. The alerts would then be followed up “by human investigation”. Mr Kruyne’s evidence referred to later in these reasons shows that the Ginger criterial for alerts were too narrow to identify a significant range of non-compliant trading.
In 2014 Select Vantage had about 1,800 traders around the world. They placed approximately 400,000 orders per day, that is, bids, asks and cancellations. The data for all of these was run through the Ginger software continuously. If alerts were generated the software enabled the trader and his or her location to be identified immediately. A surveillance team within Select Vantage was assigned to review the alerts and if examination of the trading data appeared to warrant further enquiry the traders concerned would be contacted for an explanation.
Each trader location was issued with an item of computer hardware called a cube. Select Vantage applied a policy that every trader must be in the office of the location to which he or she was attached when trading. This was achieved by requiring that any computer used by a trader to access Select Vantage’s system for placing stock market orders would have to be connected to the cube in the trader’s location. Mr Schlaepfer gave evidence that this effectively ensured that traders were in their respective location offices when trading because they would not be able to transmit and receive data swiftly enough for day trading purposes if they attempted to connect to the cube wirelessly from outside the office.
Mr Schlaepfer agreed that a number of traders in the one pod, all working close to each other in a single office, could cooperate between themselves to place a substantial number of resting limit orders for a stock listed on a particular exchange, in order to carry out a layering strategy. This would subvert the individual trader limit of two or five orders per side per symbol at any one time. Mr Schlaepfer said that the Ginger in-house surveillance software looked for “exactly that” and was configured to raise an alert if this collaborative trading was identified.

Select Vantage’s infringement on the Tokyo exchange in 2012

Select Vantage was trading on the Tokyo stock exchange in 2012. In that year the Japanese regulatory authority, the “SESC”, identified that Select Vantage traders were trading between the two pods in an attempt to manipulate the market. Twenty traders were involved, all located in China. Select Vantage was fined the equivalent of $500. It terminated the services of all of the traders. Select Vantage’s broker, Morgan Stanley, suspended the company’s access to the Tokyo market for six months while it carried out a full review of its own compliance systems to verify their capacity to identify trading behaviour of the kind that had attracted the regulator’s attention. According to Mr Schlaepfer this review involved applying the broker’s vetting system to every trade that Select Vantage had carried out using the broker’s access to all markets.

Select Vantage’s trading on the Australian market through Morgan Stanley

On 18 February 2014 the Japanese SESC recommended a penalty against Select Vantage for manipulating the price of shares in two listed companies “by placing large orders and cancelling them before they could be executed”. The authority alleged that there was similar manipulative trading in a total of 88 other stocks. All of this was alleged to have occurred in April 2012.
On 4 August 2012 Merlito entered into an agreement with Morgan Stanley for direct market access to the ASX and Chi-X. About half of Select Vantage’s traders were domiciled in China and because of the closeness of the two countries’ time zones many of them traded on the Australian market.
On 10 October 2013 Morgan Stanley received from ASIC a direction under s 912C(1) of the Corporations Act to provide a written statement concerning trading in the shares of Eden Energy Ltd (“EDE”) on 7 October 2013. ASIC required Morgan Stanley to provide the full names and contact details of the account-holders (and underlying beneficiaries) for whom orders had been placed and trades carried out in the stock under direct market access through Morgan Stanley. The dealings had been effected by Select Vantage traders through Merlito. ASIC enquired whether Morgan Stanley had concerns about the dealings:

with specific regard to the multiple orders at the same price levels and consequently multiple price levels on the order book throughout [7 October 2013], especially given volumes on the buy side were large in comparison to the sell side whilst the volumes sold were greater than that acquired.

On 27 October 2013 Mr Kruyne prepared on behalf of Select Vantage a detailed written analysis of the trading in question, in which he argued that the transactions were consistent with legitimate day trading strategy. He referred to Select Vantage’s surveillance system, which he said had a focus on, inter alia, layering. Morgan Stanley attached Mr Kruyne’s analysis to its response to ASIC dated 1 November 2013. Morgan Stanley said it operated its own “real-time risk management tool” for monitoring trade flow by its clients. This had not generated any alerts that, on examination, were of concern. Morgan Stanley advised that the trades in question had been placed by 91 individual traders spread across 19 locations and that it had assurance from Merlito that “no trader can see what the other traders are trading”. The broker said Merlito’s real-time trade surveillance did not generate any alerts with respect to the trading in EDE. It referred to the post-trade surveillance and analysis in Mr Kruyne’s email, from which it said Merlito and Select Vantage had satisfied themselves of the appropriateness of the dealings.
On 6 November 2013 a Final Enquiry File note was prepared by the Market Surveillance Team within ASIC, recording the following conclusions:

Surveillance notes that the orders which [Select Vantage] place appeared genuine at this time, as they do not appear to be layering or spoofing. These orders sit in the market and wait to be picked up by the increase in liquidity and/or volatility of certain securities on certain days. They are only deleted toward the end of the day as [Select Vantage] attempt to entirely close their positions. There is insufficient evidence of the reference stacking one side of the schedule while attempting to trade on the other side. Based on the above, no more action is recommended.

Select Vantage’s infringement on the Tokyo exchange in February 2014

Mr Schlaepfer told this Court that the Japanese SESC also took action in 2014 for conduct that he described as traders purposely influencing an auction conducted on the Tokyo exchange at a lunchtime break in trading. This appears to have been an entirely separate episode from that referred to in the previous paragraph. Mr Schlaepfer said that Mr Kruyne on behalf of Select Vantage had brought the relevant features of the trading in 2014 to the attention of Morgan Stanley before the SESC had queried it. Morgan Stanley saw no irregularity in what was occurring and said “it was okay to continue the behaviour as is”. The Japanese authority saw the matter differently and in 2017 a fine of US$180,000 was imposed. Mr Schlaepfer said that this is under appeal.

It is not correct that Mr Yanco and ASIC had no more than “a bare suspicion” of layering by Mr Schlaepfer’s companies. Mr Schlaepfer’s submissions seek to capitalise on the careful language in which Mr He’s analytical reports are couched. Those reports refer to “suspected layering”; a concern that layering “may be creating a false and misleading appearance of active trading”; “early stage regression results”; the need for further analysis and the results of “initial observations”. The underlining is as it appears in the plaintiffs’ submissions. I have concluded in connection with the defence of justification that the market analysis carried out by Mr He alone constituted a strong circumstantial case of manipulation by layering. A case on this type of activity, concerned as it must be with the intent of the traders, would almost invariably be circumstantial. Mr He and Mr Veidners both said that in their respective substantial careers in this field neither of them had ever seen order placement of this scale and nature. The restrained terms in which Mr He described what he had found reflects his professionalism as a market analyst. For a regulatory officer in Mr Yanco’s position, who was required to make a decision on whether or not to act to protect the market, the accumulated evidence was ample.
In submitting that the evidence ASIC had accumulated was insufficient to warrant the “extraordinary step” of communicating with brokers whom Merlito and Select Vantage might approach, Mr Schlaepfer characterises the conversations as a “warning off” to those brokers. I reject that characterisation. They were advices to exercise caution. I do not consider that the conversations were “extraordinary” in the sense that Mr Schlaepfer apparently intends to submit, namely, that they exceeded what was reasonably incidental to the purposes of the occasion or that they were gratuitous. I reject the submission of malice.
Mr Schlaepfer has made extensive submissions as to alternative courses that ASIC might have taken, mostly in the nature of further information gathering under statutory notices; contacting personnel of Merlito and Select Vantage directly or arranging to have Mr Schlaepfer examined by market regulatory authorities in Canada. The obvious disadvantage of pursuing any of these courses would be that in the meantime Merlito and Select Vantage would engage another broker, who would provide DMA services to them in ignorance of ASIC’s concerns and of the need for vigilance. There might well be a continuation of what appeared, on substantial circumstantial evidence, to be aggressive layering. Damage to the reputation of the market might be done, individual investors might suffer loss and another broker might find its own compliance, and perhaps its licence, compromised. It was not extraordinary or excessive in the whole of the circumstances for Mr Yanco to have eschewed these less satisfactory alternatives and, instead, to have alerted brokers to ASIC’s concerns about the substantial new client that might in the near future approach them.
Mr Schlaepfer submits that Mr Yanco and ASIC had no basis for believing that Morgan Stanley had terminated its services to Merlito/Select Vantage for layering. On that basis he contends that it was malicious for Mr Yanco to state that this client had been “turned off” by two brokers for market activity of that type. However, I am satisfied on the balance of probabilities that Mr Yanco had a proper basis for making this statement in reliance upon information that had come from Merlito’s/Select Vantage’s former broker, Morgan Stanley.
According to Mr Veidners, in about August 2014 he was in regular discussion with Mr Szalajko, the Executive Director of Legal and Compliance at Morgan Stanley. The discussions concerned matters unrelated to the subject of these proceedings but in the course of them Mr Szalajko said:

Morgan Stanley has taken a risk-averse position and has terminated providing trading facilities for Merlito as a result of the regulatory action taken against it in Japan.

No contemporary file note of this conversation was tendered but on 20 November 2014, in an email to Mr He, Mr Veidners referred to:

[the] recent Japanese regulatory outcome which prompted Morgan Stanley to cease providing market access for Merlito in Australia.

Although this email does not refer to Mr Veidners’ conversation with Mr Szalajko it is corroborative of his recollection in that regard. On the whole of Mr Veidners’ evidence and from reading his reports and email correspondence I find him to be a careful and professional officer. The Court has no reason to think that he would have written in the above terms to his junior colleague, who was working on an investigation of Merlito’s/Select Vantage’s market activities, unless he had a reasonable basis for saying that the SESC’s regulatory action had caused Morgan Stanley to terminate its relationship with this client. I would not be prepared to attribute to Mr Veidners that he would simply make this up or that he would express mere speculation in such definitive terms when communicating on an important subject to a fellow officer.
I am satisfied on the balance of probabilities that Mr Szalajko did inform Mr Veidners in words to the effect that Mr Veidners recalls. I am further satisfied that Mr Veidners accepted this information at face value and had no reason to doubt it. The terms of the SESC’s conclusions, published in February 2014 and reiterated in early June and early July 2014 by the International Bankers Association of Japan (see [93] above), were damning of Merlito/Select Vantage. It would have been highly plausible to Mr Veidners that this would have caused the client’s then broker to terminate the relationship in order to avert ongoing regulatory scrutiny and risk to its licence.
Mr Schlaepfer submits that Morgan Stanley did not in fact terminate its relationship with his companies on account of the SESC’s action but for a different and blame-free reason that he described (see [86]-[88] above). However, it was reasonable for Mr Veidners to have accepted at face value the information that I find he received from Mr Szalajko in about August 2014. There is no reason why Mr Veidners should have doubted or enquired further into this information, coming as it did from the senior compliance officer of the broker that had effected the termination of services.
I am further satisfied that this information from Mr Szalajko must have been passed on by Mr Veidners to Mr Yanco. In his statement and in oral evidence Mr Yanco was unable to recall a specific conversation on the subject but he did recall, in general terms, that in about August 2014 he was informed Morgan Stanley had “turned off” Merlito/Select Vantage. In oral evidence he said that he had assumed this occurred because of the client’s trading behaviour. He also said that throughout September and October 2014 he had frequent conversations with Mr He and Mr Veidners about their concerns with respect to layering activity by Select Vantage (see [119] above). I make the inference that these conversations would inevitably have included what Mr Veidners had learned from Mr Szalajko and that Mr Yanco, like Mr Veidners, would have had every reason to accept that explanation of the end of the Morgan Stanley-Merlito/Select Vantage relationship.
Written closing submissions on behalf of Mr Schlaepfer develop at length the proposition that ASIC had acted wrongfully in the teleconference involving Mr Price, Mr Veidners and Mr Packham on 20 November 2014 (see [125] above). It is submitted that ASIC “quite deliberately determined to apply pressure to Macquarie to end the relationship with Select Vantage/Merlito/Mr Schlaepfer” and that the reason Macquarie terminated DMA services “is quite plainly because of the pressure ASIC applied to them”. ASIC’s conduct on this occasion is not directly the subject of any cause of action and it appears these propositions are advanced as a secondary indication of malice on the part of Mr Yanco in his conversations with the brokers.
I find nothing improper, let alone unlawful, in the terms of the teleconference on 20 November 2014. To ASIC’s perception Merlito/Select Vantage was layering the market. Macquarie, as a licensed Market Participant providing DMA services, was obliged at least to make all reasonable endeavours to prevent this occurring. Having regard to the conclusions Mr He had reached by 20 November, ASIC would have been in dereliction of duty had it not informed Macquarie of Mr He’s findings thus far and of its ongoing investigation and its intent to pursue breaches of the Market Integrity Rules and of the Corporations Act if such should be confirmed. It was appropriate for ASIC to remind Macquarie in very direct terms that it had a responsibility under its licence and that it needed to act. Of course, if Macquarie could satisfy itself that no improper trading was taking place then it had a strong commercial incentive to defend its client’s market activity. Alternatively, if Macquarie could not provide an innocent explanation for the impugned trading then it could implement further controls and closer scrutiny in order to reassure ASIC. Merlito was a substantial and valuable client of Macquarie, generating substantial brokerage fees on high volumes of order placements.
Mr Schlaepfer’s attempt to portray Macquarie as a vulnerable middleman, in fear of losing its licence and subject to unfair pressure from the regulator, is unrealistic. Macquarie’s internal communications show that its own compliance personnel were just as concerned about Merlito as ASIC’s analysts. Macquarie’s termination of the relationship was a rational commercial response to prima facie evidence of manipulative trading, fairly and properly brought to the broker’s attention by the regulator, and coincident with its own assessments. Neither the nature of ASIC’s approach nor the fact of Macquarie’s response is indicative of mala fides on the part of ASIC that could in any way contribute to a finding of malice with respect to Mr Yanco’s subsequent conversations with other brokers.
The occasion of Mr Yanco conveying to the brokers that ASIC was concerned about the trading behaviour of a client who may be looking to engage their DMA services was privileged by the community of interest of himself and the listeners. The occasion protected his communications even if they conveyed defamatory meanings with respect to Mr Schlaepfer. The common law defence of qualified privilege is established.

Statutory qualified privilege

For the purpose of considering the defendants’ plea of qualified privilege under s 30 of the Defamation Act2005 (NSW)it is sufficient to quote the following extracts from the section:

30 Defence of qualified privilege for provision of certain information
(1)   There is a defence of qualified privilege for the publication of defamatory matter to a person (the recipient) if the defendant proves that:
(a)   the recipient has an interest or apparent interest in having information on some subject, and
(b)   the matter is published to the recipient in the course of giving to the recipient information on that subject, and
(c)   the conduct of the defendant in publishing that matter is reasonable in the circumstances.

Paragraphs (a) and (b) of s 30(1) are satisfied by the circumstances adverted to at [263]-[271] above. As the defendants have not proved that the alleged defamatory meanings were true of Mr Schlaepfer, in order to establish that their conduct in publishing them was reasonable for the purposes of paragraph (c) they had to prove that they attempted to verify the imputations before Mr Yanco spoke to the brokers: Austin v Mirror Newspapers Ltd (1985) 3 NSWLR 354 at pp 361B, 362G-365C. That was a decision of the Privy Council on s 22 of the Defamation Act 1974 (NSW) (repealed), which was in materially the same terms as s 30 of the current Act.
Section 30(3) permits the Court to take into account, among other things, the following matters when determining the reasonableness or otherwise of the defendants’ conduct:

(g)   the sources of the information in the matter published and the integrity of those sources, and
(h)   whether the matter published contained the substance of the person’s side of the story and, if not, whether a reasonable attempt was made by the defendant to obtain and publish a response from the person, and
(i)   any other steps taken to verify the information in the matter published.

The statements made by Mr Yanco to the brokers were very important to the discharge of his and ASIC’s statutory duties. The Market Integrity Rules placed a burden upon the brokers to control the market activity of their clients through direct access utilising AOP. ASIC was empowered to direct the brokers as necessary to try to ensure that their clients did not undermine the integrity of the market. There was a significant public interest in Mr Yanco expeditiously notifying these brokers that they should be wary of taking on an unnamed client whose direct market access via Macquarie had just been terminated. The enquiries that had been made, both by way of Mr He’s analysis of Select Vantage’s trading and by ascertaining that Mr Schlaepfer was the principal behind Merlito and Select Vantage and had previously been concerned in Swift Trade when it engaged in layering other markets, were in my view as reasonably thorough as could be expected having regard to the urgent need to protect the Australian share market.
If Mr Yanco’s communications with brokers in the circumstances of this case should be regarded as unreasonable for the purposes of s 30(1)(c), thereby denying Mr Yanco and ASIC the protection of qualified privilege under the Defamation Act, then the defendants would be strongly inhibited against intervening proactively to protect market integrity. If subs (1)(c) should be applied in such a way as to require more thorough enquiry than occurred in this case – as to Select Vantage’s misconduct and Mr Schlaepfer’s involvement and responsibility – the fairness and transparency of the market could be heavily compromised and its reputation for fair dealing severely damaged by a manipulative trader going from broker to broker while the regulator collected more circumstantial evidence. The difficulty of proving infringements of ss 1041A and 1041B, particularly as against an individual executive, is obvious. A great deal of damage could be done to the reputation of the stock exchange if Mr Yanco should be required to gather more extensive evidence than he did before warning other brokers.
The defence of qualified privilege under s 30 has been established in respect of Mr Yanco’s conversations, on the assumption that they carried the imputations pleaded and that those imputations were published of Mr Schlaepfer.

Issue 6: Damages for defamation

In summary Mr Schlaepfer’s defamation action fails at the following points:

Issue 1: The impugned oral communications by Mr Yanco with brokers were not as alleged in Annexures A and B to the statement of claim (repeated at [137] and [144] above) but were in the terms found at [153].

Issue 2: Mr Schlaepfer was not identified in the conversations and any imputations or innuendoes conveyed were not of or concerning him.

Issue 3: The imputations and innuendoes alleged in pars 12 and 16 of the statement of claim (repeated at [15] and [17] above) were not conveyed.

Issue 5: If the imputations and/or the innuendoes were conveyed, the defendants are protected from liability by the common law and statutory defences of qualified privilege.

There is therefore no occasion for me to assess damages. It would not be practical to do so on a contingent basis, to facilitate an end to the litigation if an appeal against my decision on liability should be filed and should be successful. In that event, the assessment would depend upon which imputations or innuendoes might be found to have been conveyed. It would also depend upon the basis for denying the defendants the protection of qualified privilege, in particular whether the privilege was lost through malice. In short, if my dismissal of the action is reversed damages will have to be assessed in light of the Court of Appeal’s reasons.

Issue 7: Representations concerning the plaintiffs

The representations alleged as the foundation of the plaintiffs’ injurious falsehood case are set out at [33] above. Representations (a) and (b) (that Select Vantage was engaging in market manipulation and had been terminated by two brokers for layering) were not conveyed by Mr Yanco’s spoken words, taking into account the extrinsic facts, for the reasons given at [172]-[182]. Representation (c) (that Select Vantage was related to Peter Beck or his entities) was not conveyed because there was nothing in Mr Yanco’s words, as I have found them, or in the extrinsic facts to suggest that Select Vantage was such a “related entity” in any relevant sense. Representation (d) (that Mr Schlaepfer engaged in market manipulation) was not conveyed for the reasons given at [172]-[184].

Issue 8: Alleged falsehood of the representations

If representation (a) was conveyed (that Select Vantage was engaged in market manipulation by layering), the plaintiffs have not proved this false. On the contrary, I have found that the defendants have proved it true, as explained under the heading “Issue 4: Justification” commencing at [185].
If representation (b) was made (that two brokers had terminated Select Vantage for layering), the defendants have not proved this true for the reasons given at [260] above. On the other hand, for the purposes of the cause of action for injurious falsehood the onus is borne by the plaintiffs to prove this representation untrue. I am affirmatively satisfied that Macquarie terminated its relationship with Merlito/Select Vantage “for layering”. Therefore, proof that the representation was untrue would depend upon the plaintiff satisfying me on the balance of probabilities that Morgan Stanley terminated its services for some other reason. I am not so satisfied. The account Mr Schlaepfer gave of Morgan Stanley asking him to find another broker for a reason concerned with the use of a product that had attracted unfavourable public comment was to my mind not convincing or satisfactory. Even if he took part in conversations with Morgan Stanley personnel to the effect that he described, this does not persuade me that the broker’s ultimate decision was not based at least substantially upon Select Vantage’s conflict with the Japan SESC over layering. In the absence of evidence from witnesses who could speak on behalf of Morgan Stanley, the question whether termination by that broker occurred “for layering” is neither proved nor disproved.
If representation (c) was made (that Select Vantage was a related entity of Peter Beck) then it was untrue. I accept the evidence of Mr Schlaepfer that neither Select Vantage nor any intermediate or connected entity is in any relevant sense related to Peter Beck or his entities.
If representation (d) was made (that Mr Schlaepfer was engaging in market manipulation by layering), then with respect to proof of falsehood the position is much the same as for representation (b). The defendants have not proved this true, for reasons given at [255]-[259] above. On the other hand, nor has Mr Schlaepfer satisfied me on the balance of probabilities that he was not knowingly concerned in the layering that, as I have found, was clearly undertaken by Select Vantage’s traders.
Mr Schlaepfer expressly and repeatedly denied such knowing concern, including during his long cross-examination. Notwithstanding these denials I am not persuaded to make an affirmative finding in his favour with respect to the alleged falsehood of this representation. I take into account Mr Schlaepfer’s extensive experience of trading on share markets, his intimate knowledge gained through working with Swift Trade of the kind of manipulation that has been proved here, his knowledge of and responsibility for the Select Vantage internal controls and his knowledge of frequent internal alerts raised by traders’ actions and the company’s wholly inadequate responses. I add to this Mr Schlaepfer’s comprehensive knowledge of the structure of his company’s traders and trader locations and of the parameters within which traders were required to operate. From all of this it must have been obvious to Mr Schlaepfer that Select Vantage’s business model provided fertile ground for repetition of the kind of manipulation that a previous entity in which he had been involved as a trader, Swift Trade, had carried out.

Issue 9: Malice

The reasoning I have set out under the heading “Issue 5: Common law and statutory qualified privilege” commencing at [261], contains affirmative findings that the impugned communications by Mr Yanco took place in a setting of legitimate common interest between Mr Yanco and the persons addressed and that the matters communicated were relevant and appropriate to that common interest. Those findings negate the plaintiffs’ allegation of malice, which the plaintiffs bear the onus of proving if their injurious falsehood claim is to succeed. Malice is not proved.

Issue 10: Actual damage

In Palmer-Bruyn and Parker Pty Ltd v Parsons Gummow J said at [73] (citation omitted):

[W]hatever may be its origins, an action in injurious falsehood requires either that the defendant intended to cause the harm or that the harm be the "natural and probable result" of the publication of the false statement.

Gummow J held that limiting criteria of remoteness and reasonable foreseeability are not applicable in determining whether damage has been caused by an injurious falsehood or in determining quantum. At [96] his Honour said that “an injurious falsehood is a legal cause of pecuniary loss if ‘it is a substantial factor in bringing about the loss’”. Gummow J accepted, on the basis of Bowen LJ’s judgment in Ratcliffe v Evans [1892] 2 QB 524 at 527-528, that proof of “general loss of business” without proof of a particular amount is sufficient to establish special damage, which is an element of the cause of action.
I am not satisfied that either Mr Yanco or ASIC intended to cause harm to either of the plaintiffs through the words spoken by Mr Yanco to the various brokers on 21, 24 and 28 November 2014. In accordance with the passage quoted above from the judgment of Gummow J the question is therefore whether the plaintiffs have proved that some damage was occasioned to them, at least in the nature of “general loss of business”, that this was the natural and probable result of Mr Yanco’s spoken words and that those words were a substantial factor in bringing about the loss.
In final written submissions the following was put by the plaintiffs:

On the issue of special damages Select Vantage does not submit that any quantifiable loss arises for calculation by the Court. However, it does submit that the Court can infer the existence of some loss.

Following the above submission the plaintiffs set out references to Select Vantage’s consolidated financial statements showing the company’s total revenue from trading worldwide in 2014. They assert that the statements disclose direct costs of such an order as to give rise to a gross margin of 4.53%. There is no evidence from which I could be satisfied that this margin, or any margin, held true for the component of Select Vantage’s trading that was conducted on Australian markets. No accounting opinion has been tendered to that effect. No evidence was led from any witness with appropriate accounting qualifications who is familiar with Select Vantage’s financial records. The plaintiffs have not tendered evidence upon which I would be prepared to find on the balance of probabilities that Select Vantage derived gross revenue from trading on Australian markets, to which a gross margin percentage could be applied. All that was tendered in that regard was an email dated 2 May 2018 from someone named “Olga” asserting that the “total Gross for AUD trading from Nov 22, 2013 until Nov 21, 2014 is 10,926,173.57 AUD”. I am not prepared to find special damage upon the basis of this brief and bald assertion.
Select Vantage submits that no part of its head office costs is attributable to its trade on Australian markets and that therefore the gross margin that it asserts, being 4.53% of the $10,926,173, is the measure of the profit it was making on its Australian trade in the period November 2013 to November 2014. Again, I am not prepared to accept that there was no component of head office costs attributable to the Australian trade in the absence of qualified accounting opinion based upon an examination of the company’s records.
If the plaintiffs had proved that Select Vantage was trading profitably on the ASX and Chi-X up to 21 November 2014, they would still have had to prove that such profitable trading would have continued but for Mr Yanco’s conversations with brokers on 21, 24 and 28 November 2014, by which the alleged injurious falsehoods were conveyed. The plaintiffs submit:

[A] strong inference can be made that Macquarie would have continued to provide brokering services to [Select Vantage] (subject always to [Select Vantage] complying with trading regulations) had ASIC not directed Macquarie to cease doing so. […] There is no dispute that when Merlito was terminated by Macquarie, [Select Vantage] lost its Australian business and that it never recovered that business. The publication of the matters complained of, to a targeted group of brokers who might realistically have replaced Macquarie, had the effect of confirming and establishing [Select Vantage’s] exclusion from the Australian market.

An obvious problem with this submission is that it attributes the alleged loss primarily to ASIC having caused Macquarie to terminate its relationship with Merlito/Select Vantage, which is not the foundation of the plaintiffs’ cause of action. Macquarie’s termination not only does not found any claim against the defendants, it becomes a circumstance relevant to the drawing of an inference as to what would have occurred absent Mr Yanco’s conversations with the brokers. I would not infer that any of those brokers would have been willing to enter into a DMA agreement with Select Vantage against the background of the Japan SESC’s findings of February 2014 and the cessation of Select Vantage’s relations with, first, Morgan Stanley and then, within three months, Macquarie, regardless of the reason for either of these terminations. In order to persuade the Court that, but for Mr Yanco’s conversations, any of these brokers could have been expected to commence a relationship with Select Vantage after 21 November 2014 there would need to have been some convincing affirmative evidence in that regard. None was tendered.
Further, if Select Vantage had proved that it was unable to continue trading on Australian markets because of the impugned conversations, the Court would also need to be satisfied that this sounded in loss. Loss of access to this market is not to be equated with loss of a client. There is no evidence from which I could find that, when Select Vantage’s traders were precluded from trading on the Australian stock market, they were unable to turn their attention and their application of the company’s capital to the markets of Japan, Hong Kong, Singapore or anywhere else around the world, with equal effect.
In summary the plaintiffs’ injurious falsehood action fails at the following points:

Issue 7: The impugned oral communications by Mr Yanco with brokers were not as alleged in Annexures A and B to the statement of claim (repeated at [135] and [142] above) but were in the terms found at [151]. Taking those conversations together with the extrinsic facts relied upon by the plaintiff’s, the representations they allege were not conveyed.

Issue 8: If, contrary to my judgment, the representations were made, the plaintiffs have proved the falsehood of only representation (c). They have not discharged their onus of proving that representations (b) and (d) were false and I am affirmatively satisfied that representation (a) was true.

Issue 9: If the representations were made, there was no malice on the part of the defendants.

Issue 10: It has not been proved that any actual damage was caused to either of the plaintiffs as a result of the alleged representations, if they were made.

Conclusion and orders

In reaching the conclusions expressed here I have considered the entirety of the evidence and submissions although I have not referred to everything that was put before the Court; it would be impractical to do so. I have noted earlier the extent and detail of the expert opinion evidence. The lay evidence was also voluminous. Mr Schlaepfer’s evidence, alone, occupied more than five days. As for the documents tendered, the main body of them were in seven volumes comprising over 3,000 pages. Many further documentary exhibits were added separately. I have reviewed all of the lay and documentary evidence but in these reasons I have confined my consideration to the events and records that appear most decisive.
In accordance with directions made at the conclusion of the trial on 11 April 2019 and subsequent supplementary directions, the defendants’ closing submissions in writing were received on 10 April 2019 and the plaintiffs’ were received on 14 June 2019. Exchanges of reply submissions were then permitted and these concluded on 27 September 2019. The written submissions run to approximately 230 pages on each side and are extremely thorough. The numerous arguments, counter-arguments, rejoinders and subsidiary points that I have not addressed specifically in these reasons are those that I have not found to carry significant weight towards my conclusions, which are based upon the more central considerations articulated above.
The plaintiffs’ case has been advanced upon submissions that reflect indignation concerning the conduct of ASIC and its senior market surveillance officer. The following passage is quoted from the plaintiffs’ closing written submissions:

Mr Yanco had no reasonable basis to believe that [Select Vantage]/Merlito/Mr Schlaepfer were actually layering the Australian market. He had no reasonable basis to believe in the truth of the other (very serious) imputations. His belief in the truth of the imputations is itself enough to establish unreasonable conduct on the part of the defendants.
The failure to enquire and the inconclusive, inadequate and speculative investigations that had occurred cannot be considered in isolation from the identity of the publisher. The ASIC is a regulator. It is not supposed to make pre-judgments or jump to conclusions. It should fulfil its statutory responsibilities soberly and dispassionately. Mr Yanco’s and the ASIC’s belief in the truth of the imputations as at 21 November 2014 is inconsistent with the proper mindset of a regulator.

The umbrage in these arguments is misplaced. The plaintiffs’ assertions about what ASIC did and what it is not “supposed” to do are inaccurate and self-serving. The high ground they take is cut away by the facts. Select Vantage’s traders, operating in their hundreds from beyond the jurisdiction, were deliberately creating false impressions on the Australian stock market by placing orders that they never intended to execute. Between September and November 2014 they were trying to induce other traders to buy stock in reliance upon false impressions created by layering. This was being done for Select Vantage’s profit and for the traders’ share. Meanwhile other stock market participants were, at least, put at risk of being defrauded. The integrity of the market was subverted. If this had been allowed to continue genuine investors’ confidence in the stock exchange would have been diminished and the efficient flow of capital would have been compromised.
From 30 October 2014 Macquarie was well aware of strong indicia that its client was trading in a manipulative manner. The warnings of Macquarie’s compliance personnel were discounted by its commercial executives. Macquarie was evidently not going to act to stop its client’s misconduct. If Commissioner Price and ASIC’s surveillance officer Mr Veidners had not phoned Mr Packham to remind Macquarie of its legal obligations under the Market Integrity Rules, Select Vantage’s traders would likely have continued their fraudulent assault on the market.
ASIC did not “make pre-judgments” or “jump to conclusions”. It acted properly in accordance with its charter by intervening upon the sound prima facie evidence that Mr William He had collected. The warning to Macquarie to fulfil its license responsibilities was the first intervention. Mr Yanco’s alert to other potential brokers, that they may be approached by a client whose market conduct was concerning to ASIC, was the second intervention. ASIC’s judgment on the prima facie evidence has since been vindicated by Professor Putnins’ more comprehensive post-trade analysis, the luxury of which Mr Yanco did not have when he had to make a decision about action to protect this important financial institution.
Although it has not been proved that Mr Schlaepfer was knowingly concerned in the market misconduct of his company’s traders, he has no legal basis for complaint against the defendants. If he and Select Vantage have suffered loss, fault lies with the traders. They collaborated to place orders in a manner that any trader would know intuitively, would be likely to mislead the market and to create artificial prices.
For the reasons stated herein there will be judgment for the defendants. Subject to any submissions that may be made when this judgment is handed down, the plaintiffs will be ordered to pay the defendants’ costs.

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Decision last updated: 26 November 2019

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Schlaepfer v ASIC [2019] NSWSC 1644

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Medium Neutral Citation:	Schlaepfer v ASIC [2019] NSWSC 1644
Hearing dates:	18-22, 25-29 March, 1-5, 8, 11 April 2019
Date of orders:	26 November 2019
Decision date:	26 November 2019
Jurisdiction:	Common Law
Before:	Fagan J
Decision:	Judgment for the defendants
Catchwords:	DEFAMATION – where oral communications made by officer of financial regulator to stockbrokers – whether communications conveyed defamatory imputations – where communications expressed regulator’s concern regarding possible manipulation of Australian stock market – whether plaintiffs identified by the communications DEFAMATION – defences – justification – common law qualified privilege defence established – defence of statutory qualified privilege established TORT – injurious falsehood – elements – malice not proved
Legislation Cited:	Australian Securities and Investments Commission Act 2001 (Cth) Corporations Act 2001 (Cth) Defamation Act 2005 (NSW) Defamation Act 1974 (NSW) (repealed)
Cases Cited:	Amalgamated Television Services Pty Ltd v Marsden (1998) 43 NSWLR 158; [1998] NSWSC 4 AMI Australia Holdings Pty Ltd v Fairfax Media Publications Pty Ltd [2010] NSWSC 1395 Austin v Mirror Newspapers Ltd (1985) 3 NSWLR 354 Bashford v Information Australia (Newsletters) Pty Ltd (2004) 218 CLR 366; [2004] HCA 5 Bellino v Australian Broadcasting Corporation (1996) 185 CLR 183; [1996] HCA 47 Cush v Dillon; Boland v Dillon (2011) 243 CLR 298; [2011] HCA 30 Fairfax Media Publications Pty Ltd v Pedavoli [2015] NSWCA 237 Palmer-Bruyn and Parker Pty Ltd v Parsons (2001) 208 CLR 388; [2001] HCA 69 Papaconstuntinos v Holmes a Court [2012] HCA 53 Prince v Malouf [2014] NSWCA 12 Ratcliffe v Evans [1892] 2 QB 524 Triggell v Pheeney (1951) 82 CLR 497; [1951] HCA 23 Waterhouse v Broadcasting Station 2GB Pty Ltd (1985) 1 NSWLR 58
Category:	Principal judgment
Parties:	Daniel Schlaepfer (first plaintiff) Select Vantage Incorporated (second plaintiff) Australian Securities and Investments Commission (first defendant) Greg Yanco (second defendant)
Representation:	Counsel: TK Tobin QC with M Richardson; AC Harding (plaintiffs) J Hmelnitsky SC with M J Lewis; PJH Holmes (defendants) Solicitors: Mark O’Brien Legal (plaintiffs) Ashurst (defendants)
File Number(s):	2016/302827
Publication restriction:	No