Financial Markets Authority v Warminger

[2016] NZHC 1193

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-001727 [2016] NZHC 1193

UNDER	the Securities Markets Act 1988
BETWEEN	FINANCIAL MARKETS AUTHORITY Plaintiff
AND	MARK WARMINGER Defendant

Hearing:	27 May 2016
Counsel:	JBM Smith QC and NR Williams for Plaintiff M Heron QC and A Ho for Defendant
Judgment:	3 June 2016

JUDGMENT OF ASHER J

This judgment was delivered by me on Friday, 3 June 2016 at 3 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

Meredith Connell, Auckland.

Cook Morris Quinn, Auckland. JBM Smith QC, Wellington.

M Heron QC, Auckland.

FINANCIAL MARKETS AUTHORITY v WARMINGER [2016] NZHC 1193 [3 June 2016]

Introduction

[1]      The defendant Mark Warminger seeks particulars of the statement of claim of the Financial Markets Authority.  This is a civil proceeding for a pecuniary penalty under the Securities Markets Act 1988 (“the Act”).  Despite being a civil case, where pecuniary penalties are sought, the gravity of this feature adds weight to the need for the claim to be properly and fairly pleaded, to allow defendants to fully understand

and answer the case facing them.1

[2]      The section of the Act that is allegedly breached is s 11B:

11B   False or misleading appearance of trading, etc

A person must not do, or omit to do, anything if—

(a)   the act or omission will have, or is likely to have, the effect of creating, or causing the creation of, a false or misleading appearance—

(i)    with respect to the extent of active trading in the securities of a

public issuer; or

(ii)  with respect to the supply of, demand for, price for trading in, or value of those securities; and

(b)   the person knows or ought reasonably to know that the person’s act or

omission will, or is likely to have, that effect.

[3]      It has been held in the Western Australian Court of Appeal in Braysich v R in respect of the equivalent provision:2

In   my  opinion,   it   is   apparent,   from  the   statutory  context   and   the parliamentary intention in enacting s 998(1), that a person will create a false or misleading appearance of “active trading” in securities for the purposes of the first limb of s 998(2) if, relevantly:

(a)   The person enters into, or carries out, either directly or indirectly, any transaction or transactions of sale or purchase which do not reflect the forces of genuine supply and demand; that is, the transaction or transactions are undertaken for the purpose of establishing an artificial market or price; and

(b)   The transaction or transactions in question constitute or induce a pattern of new trading in volumes or at prices that would not otherwise have occurred.

1      Commerce Commission v Southpower Ltd (1997) 8 TCLR 6 (HC) at 11.  This was in the context of  a  Commerce Commission claim,  but  the  same  basic  principle  should  apply  where  the Financial Markets Authority seeks a serious pecuniary penalty.

2      Braysich v  R  [2009] WASCA 178, (2009) 238 FLR 1 at [101]; overturned on appeal by Braysich v R [2011] HCA 14, (2011) 243 CLR 434, but the Court of Appeal’s analysis of the meaning of the provision was not doubted, at [115].

[4]      In the High Court in North v Marra Developments Ltd it was said:3

Transactions which are real and genuine but only in the sense that they are intended to operate according to their terms, like fictitious or colourable transactions, are capable of creating quite a false or misleading impression as to the market or the price.  This is because they would not have been entered into but for the object on the part of the buyer or of the seller of setting and maintaining the price, yet in the absence of revelation of their true character they are seen as transactions reflecting genuine supply and demand and having as such an impact on the market.

[5]      The case for the Financial Markets Authority (“FMA”) is that trading on the New Zealand share market by Mark Warminger, the defendant, amounted to market manipulation in breach of s 11B.   In essence, it is claimed that Mr Warminger misused his privileged position as a trader working for an institutional investor with access to real time market data to carry out trades of shares in a particular company, not for the genuine commercial purpose of supply and demand, but rather to increase the market price of shares so that he could then transact significant off-market sales of those shares at a greater profit.

[6]      There is a pattern followed in the statement of claim over the 10 causes of action.   Each commences with a detailed history of Mr Warminger’s trading in relation to certain shares in a company over a certain period.  It will be argued at the trial that the dealings show, amongst other things, the deliberate purchasing of shares at above-market value to raise the general sharemarket price, and then significant off-market crossings to take advantage of that increased price.  At the conclusion of this detailed pleaded factual sequence, there is a pleading as to the effect of the trading history, and this is the paragraph for which particulars are sought.  To give an example from the first cause of action, at para 123 of the statement of claim after the factual recital it is pleaded:

123. The 27 May FPH trades had, or were likely to have, the  effect  of creating, or causing the creation of, a false or misleading appearance:

(a)   with respect to the extent of active trading in FPH shares; or

3      North v Marra Developments Ltd (1981) 148 CLR 42 at [40].

(b)   with respect to the supply of, demand for, price for trading in, or value of FPH shares.

[7]      There  then  follows  a  pleading  of  knowledge,  to  give  an  example  from para 124:

124    The defendant knew, or ought reasonably to have known, that the

27 May FPH trades had, or were likely to have, that effect.

[8]      Mr Heron QC argues that paras 123 and 124, and those later paragraphs in the  same  form,  are  insufficiently  particularised  and  do  not  plead  the  actual misleading appearance, or the matters of which Mr Warminger has knowledge.  He seeks particulars of such clauses in respect of all 10 causes of action as follows:

2.    Identify whether the plaintiff alleges acts or omissions of the defendant in respect of each of the 10 trades had or were likely to have the effect of creating or causing the creation of an appearance with respect to the: (a)   extent of active trading in shares; or

(b)   supply of shares; or

(c)   demand for shares; or

(d)   price for trading in shares; or
(e)   value of shares.

3.    In respect of each appearance set out in response to paragraph 2 above, for each of the 10 trades, specify:

(a)   what was the appearance that the plaintiff alleges acts or omissions f the defendant in respect of each of the 10 trades created or caused the creation of; and

(b)   what does the plaintiff say was the true state of affairs; and
(c)   how was the alleged appearance false or misleading; and

(d)   to whom is it alleged any false or misleading appearance was given and at what time and how was such appearance given or supplied.

4.    Specify what is the “effect” referred to.

[9]      In reply, Mr Smith QC for the FMA submits that it is plain from the pleading what is being alleged, given that the relevant facts are set out with particularity, and the  consequence  is  obvious.    A market  can  be  manipulated  simply  by  placing artificial orders, and this is in effect fully pleaded.

Assessment

[10]     The object of a statement of claim is to set out in precise language what the claim is about, to show in the causes of action the particular basis of each claim, and

in the prayers for relief, the relief sought.4   Such pleadings must give such particulars “as may suffice to inform the Court and the party or parties against whom relief is sought of the plaintiff’s cause of action”.5     Excessively refined pleadings can be unnecessary and  wasteful  of  costs.6      In  complex  cases,  such  over-pleading  can obscure rather than clarify issues.

[11]     There have been no New Zealand cases which have gone to trial relating to a Securities Markets Act claim of this type, and necessarily there is no precedent for the necessary particulars.7   Mr Smith is right to say that the FMA pleading, in terms of the background facts, is detailed.  It sets out with precision the particular actions of Mr Warminger that are said to constitute the misleading appearance.  Over several pages it is alleged that Mr Warminger engaged in certain actions which, it will be submitted, create the strong inference  that he  was attempting to manipulate the

market. He would purchase some shares at an unduly high price and in doing so would  set  an  artificially  high  price  benchmark,  and  then  proceed  with  his  real purpose of selling a large quantity of shares off-market at a higher price than would otherwise be the case.

[12]     However,  while  it  is  pleaded  that  this  created  a  “false  or  misleading appearance” in terms of the Act, it is not pleaded how that was so. That is left for the reader to infer; it is to be assumed that the preceding facts show that Mr Warminger has created a misleading effect.

[13]     While  it  may  well  be  that  this  could  be  assumed  from  the  previous paragraphs, pleading is not about inferential assertions.  Such assertions fall short of the certainty and clarity offered by an express allegation.   In my view, the way in which the trades had the effect of creating or causing the creation of a false or misleading appearance needed to be spelt out.   It is too important to be left to inference.  The statement of claim should tell the defendant the allegations that must

be answered, so the defendant is not left to guess, and can affirm or deny with

4      Price Waterhouse v Fortex Group Ltd CA179/98, 30 November 1998 at 18.

5      High Court Rules, r 5.26.

6      BNZ Investments Ltd v Commissioner of Inland Revenue (2008) 23 NZTC 21,821 (HC) at [45].

7      The only other case referring to s 11B of the Act is Financial Markets Authority v Henry [2014] NZHC 1853.

confidence.     If  the  defendant  is  left  to  infer  how  the  conduct  constituted manipulation, even though the inference in the end may be reasonably plain, that is not enough.

[14]     Here this is far from an entirely academic exercise.  I had my attention drawn to the press release issued by the FMA where it summarised the allegations in the following way:8

The FMA alleges the trading falls into the following categories:

·     placing small trades directly on market in one direction, followed by large off-market trades in the opposite direction;

·     trading that manipulates the closing price; and

·     trading conducted in order to set the price, rather than for a genuine commercial purpose.

[15]     The  pleading  is  not  in  any  specific  way  easily  related  to  these  three allegations.   The actual manipulation is not described, and it could be any of the three.  In fact the pleading is, as I understand, directed at the last category.

[16]     In essence then, the pleading currently is unduly conclusory, and there is no bridge between the facts given, and the conclusion of a misleading appearance.  It needs to be explained.  The effect of this being specifically pleaded will be that the defendant knows precisely the allegation to be answered, which is what is required of a statement of claim in all cases.9

[17]     I therefore propose allowing the request for particulars, but not on the terms sought by the defendant.   The particulars sought require specific identification of acts or omissions in respect of each of the 10 trades and in respect of five separate categories.   As requested, they are too broad and would create a very complex statement of claim and a longer and more cumbersome pleading.

[18]     The order I will make will be much shorter and will hopefully only require the addition of a sentence or two to the statement of claim.   I will order that the

8      Cited in Financial Markets Authority v Warminger [2015] NZHC 2306 at [10].

9      Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53 at [84].

plaintiff at the paragraphs mentioned,10  identify the false or misleading appearance created by the actions in the preceding paragraphs.  I envisage that the particulars to be provided, having referred back to the pleaded conduct, will assert that the defendant manipulated the market by appearing to purchase shares when the transactions were not driven by supply and demand, but instead were designed to artificially move the market upwards so that the defendant could achieve off-market sales at a higher price than would otherwise by the case.

[19]     I have no doubt that these suggested words could be put with more precision, and indeed I may have not adequately captured the plaintiff’s case.  But there is a need for a pleading along these lines to make it clear.

[20]     Mr Heron QC also sought particulars of what the defendant knew or ought reasonably to have known in relation to the trades.  He argued that the FMA should provide particulars of the facts and circumstances from which it is alleged that Mr Warminger ought to have reasonably known the effect of his conduct.

[21]     While I think some slight amendment is required in relation to the knowledge pleading, the change needs only be relatively minor, providing that particulars are given of the alleged false or misleading appearance.  Once those facts are given, it will be sufficient if it is pleaded that the defendant knew or ought reasonably to have known that the 27 May FPH trades had, or were likely to have, the previously pleaded false or misleading appearance.  No greater specificity would be required.

[22]     I record  I see no  difficulty in  the  statement  of  claim  referring to  active trading, supply of, demand for, price for trading, and value of FPH shares.  These are all words used in s 11B and to that extent their pleading is justified.  They can all be aspects of a trade which misleads the market, or the consequences of such conduct. If the FMA allegations are correct, Mr Warminger’s trades were not genuine acts of trading, they did not reflect real supply and demand, and resulted in the price for trading or value of the shares being inflated.  This all follows from the earlier parts of  the  statement  of  claim,  and  the  paragraph  itself,  if  particularised  as  I  have

directed. That aspect of the wording does not need to be changed.

10     Paras 123, 145, 161, 177, 200, 218, 237, 253, 274 and 295.

Result

[23]     I order that the statement of claim be amended to identify how the FPH trades had the effect of creating or causing the creation of a false or misleading appearance. I  also  order  that  the  pleading  be  further  particularised  to  specify the  facts  and circumstances  from  which  it  is  alleged  the defendant  ought  to  have  reasonably known the effect of his conduct.

[24]     I  will  retain  supervision  of  this  aspect  of  the  file.    If  there  are  further outstanding issues relating to these particulars I would ask the parties to file memoranda and that they be referred to me.

Costs

[25]     While the application has been successful, the form of particulars sought has not been granted, and I have declined to order some of those sought entirely.  This may be a case for costs lying where they fall, but if the parties disagree they may file submissions.

……………………………..

Asher J