Financial Markets Authority v Zhong
[2023] NZHC 2196
•13 July 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-647
[2023] NZHC 2196
BETWEEN FINANCIAL MARKETS AUTHORITY
Plaintiff
AND
WEI (WALKER) ZHONG
First Defendant
LEI (REGINA) DING
Second DefendantZHONGYANG (SEAN) MENG
Third DefendantJIASHUN (SAM) QIAN
Fourth Defendant
Hearing: 13 July 2023 Appearances:
N R Williams, S Chapman and J Liu for the plaintiff W W Zhong as self-represented first defendant
L R Ding as self-represented second defendant
Judgment:
13 July 2023
Reasons:
15 August 2023
JUDGMENT OF ROBINSON J
[Reasons for Penalty]
This judgment was delivered by me on 15 August 2023 at 4:00pm pursuant to Rule 11.5 of the High Court Rules
…………………………………………………………………… Registrar/Deputy Registrar
Solicitors/counsel:
Meredith Connell S Chapman - FMA
N R Williams, Britomart Chambers, Auckland
Copy to: Mr Zhong and Ms Ding
FINANCIAL MARKETS AUTHORITY v WEI (WALKER) ZHONG [2023] NZHC 2196 [13 July 2023]
Introduction
[1] In my judgment of 6 April 2023 (liability judgment),1 I held that Mr Wei Zhong and Ms Lei Ding had both dealt with shares in NXT listed Oceania Natural Limited (ONL) in contravention of the Financial Markets Conduct Act 2013 (FMCA). In particular, I found they had each contravened or been involved in contravening s 265 of the FMCA (concerning trade-based market manipulation) and s 297 of the FMCA (concerning disclosure obligations).
[2] In each case I made declarations that Mr Zhong and/or Ms Ding had contravened the FMCA as alleged in each of the pleaded causes of action. I granted the parties leave to file memoranda as to the precise terms of those declarations. I also indicated that further submissions and a hearing would be required to deal with penalties and costs.
[3] The penalty hearing took place on 13 July 2023. I subsequently issued a results judgment making declarations in terms of the draft orders filed by counsel for the Financial Markets Authority (FMA).2 I also ordered that:
(a)Mr Zhong pay a pecuniary penalty of $1,330,000;
(b)Ms Ding pay a pecuniary penalty of $760,000;
(c)in regard to each defendant, and pursuant to s 493 of the FMCA, the penalty is to be applied first to pay the FMA’s actual costs in bringing the proceeding; and
(d)any issues as to costs be reserved.3
[4]My reasons follow.
1 Financial Markets Authority v Zhong [2023] NZHC 766 [Liability judgment]. Mr Zhong and Ms Ding have filed an appeal.
2 Mr Zhong and Ms Ding did not file a memorandum in respect of the terms of the declarations and confirmed during the hearing they did not wish to make oral submissions.
3 Financial Markets Authority v Zhong [2023] NZHC 1841.
The contraventions
Market manipulation
[5] In the liability judgment, I found that Mr Zhong and Ms Ding had each contravened the market manipulation provisions of the FMCA on six separate occasions:
(a)Mr Zhong:
(i)17 May 2016 (fourth cause of action);
(ii)7 June 2016 (sixth cause of action);
(iii)5 July 2016 (eighth cause of action);
(iv)19 October 2016 (tenth cause of action);
(v)20 October 2016 (twelfth cause of action); and
(vi)15 February 2017/3 April 2017 (fifteenth cause of action).
(b)Ms Ding:
(i)18 April 2016 (second cause of action);
(ii)17 May 2016 (fourth cause of action);
(iii)7 June 2016 (sixth cause of action);
(iv)5 July 2016 (eighth cause of action);
(v)19 October 2016 (tenth cause of action); and
(vi)20 October 2016 (twelfth cause of action).
[6]Mr Zhong and Ms Ding were found to have contravened s 297 as follows:
(a)Mr Zhong:
(i)13 October 2016 (eleventh cause of action);
(ii)19 October 2016 (sixteenth cause of action); and
(iii)15 February 2017 (seventeenth cause of action).
(b)Ms Ding:
(i)18 April 2016 (third cause of action);
(ii)17 May 2016 (fifth cause of action);
(iii)5 July 2016 (ninth cause of action);
(iv)19 and 20 October 2016 (thirteenth cause of action); and
(v)on 12 occasions between 6 April 2016 and 13 September 2016 (seventeenth cause of action).
[7]I found that Mr Zhong and Ms Ding’s actions:
(a)were the result of collusion and coordination between the two;4
(b)were for the purpose of increasing the price of ONL shares;5
(c)were likely to and/or did prevent the price of ONL shares decreasing;6
4 Liability judgment, above n 1, at [106], [131], [136], [147], [152], [166] and [180].
5 At [106], [150], [166], [182] and [184].
6 At [118], [132] and [146].
(d)were for the purpose of increasing the appearance of active trading in ONL shares;7
(e)included buy orders that were aggressive and not reflective of attempts to buy ONL shares at the best possible price;8
(f)comprised order volumes that were immaterial in the context of existing holdings;9
(g)resulted in trading activity that would not otherwise have occurred;10 and
(h)did not reflect the forces of genuine supply and demand in the market.11
Legislative background
[8] The FMA was established in the aftermath of the global financial crisis and the subsequent collapse of several large finance companies. The FMCA was enacted shortly thereafter. This was part of an effort to consolidate and reform the law relating to financial markets regulation in order to facilitate the development of fair, efficient and transparent financial markets; and to promote the confident and informed participation of businesses, investors and consumers in those financial markets.
The market manipulation regime
[9] Market manipulation is a form of serious and harmful market misconduct. It attracts both civil and criminal liability. The provisions which prohibit market manipulation largely replicate those previously contained in the Securities Markets Act 1988 (SMA).
7 At [118], [145], [152], [167] and [185].
8 At [117] and [165].
9 At [134].
10 At [152].
11 At [134], [146] and [152].
[10] Prior to the enactment of the FMCA, the Minister of Economic Development observed:12
5. Insider trading and market manipulation issues are closely linked. Both market manipulation and insider trading are considered by some commentators to be forms of market abuse that can damage the efficiency and transparency of markets and affect market integrity and public confidence in securities trading …
6. It has been argued that market manipulation harms the integrity of securities and derivatives markets by distorting prices and creating an artificial appearance of market activity. By doing this it undermines public confidence in these markets.
[11] In Financial Markets Authority v Warminger,13 this Court cited with approval the following comments of the Alberta Securities Commission in Re De Gouveia:14
The capital market is the forum in which market participants can implement investment decisions founded on their respective understandings and assessments of the information available. Indications that another, or multiple other, market participants are interested in buying or selling a particular security at a particular time, at a particular price and in a particular volume will form a part — a potentially crucial part — of the information backdrop to trading and investment decisions, and thus to the operation of the market as a whole.
[12] Of course market manipulation laws alone will not maintain or improve market integrity. Market participants need to know that those laws will be enforced. This point was recently emphasised by Venning J in Financial Markets Authority v Zhong (Meng and Qian).15
The disclosure regime
[13] Directors and senior managers of listed issuers are required to disclose their relevant interests and dealings in the issuer’s quoted financial products.16 This is to ensure that information about their trading activities is available to other market participants; and to enable the dates of trades to be checked against the dates on which
12 Minister of Economic Development “Reform of Securities Trading Law: Volume Two: Market Manipulation Law: Discussion Document” (May 2002) at 5.
13 Financial Markets Authority v Warminger [2017] NZHC 1471.
14 Re De Gouveia [2013] ABASC 106 at [129].
15 Financial Markets Authority v Zhong [2022] NZHC 480 [Meng and Qian] at [66]. Messrs Meng and Qian were the third and fourth defendants in this proceeding. They accepted liability but made submissions in relation to pecuniary penalty in a separate hearing before Venning J.
16 Financial Markets Conduct Act 2013, pt 5 subpart 6.
material information became available to the market.17 In this way, the disclosure regime reinforces market integrity.
[14] Mr Zhong and Ms Ding’s non-disclosures contravened the FMCA, and were also in breach of the NZX Market Rules and ONL’s own Financial Products Trading Policy and Guidelines. In breach of these rules and policies, the defendants each failed to notify ONL’s chief financial officer (CFO) of their intention to trade, and they did not seek consent to do so. They failed to confirm to the CFO there was no reason to prohibit their trading; and failed to advise the CFO promptly following completion of the trade.
Pecuniary penalties
[15] The FMA has applied for pecuniary penalty orders against Mr Zhong and Ms Ding. The liability judgment determined that they had each contravened, or been involved in the contravention of, a civil liability provision and declared accordingly.
[16] If the Court determines and declares that a person has contravened a civil liability provision, it may order the person to pay the Crown a pecuniary penalty that it considers appropriate.18 Mr Zhong and Ms Ding’s contraventions were intentional and deliberate. I consider it is appropriate to order them to pay pecuniary penalties.
[17] Section 492 of the FMCA sets out the relevant matters a court must consider in determining the appropriate pecuniary penalty:
492 Considerations for court in determining pecuniary penalty
In determining an appropriate pecuniary penalty, the court must have regard to all relevant matters, including—
(a)the purposes stated in sections 3 and 4 and any other purpose stated in this Act that applies to the civil liability provision; and
(b)the nature and extent of the contravention or involvement in the contravention; and
(c)the nature and extent of any loss or damage suffered by any person, or gains made or losses avoided by the person in contravention or who
17 Financial Markets Conduct Act, s 296.
18 Financial Markets Conduct Act, s 489(2)(c).
was involved in the contravention, because of the contravention or involvement in the contravention; and
(d)whether or not a person has paid an amount of compensation, reparation, or restitution, or taken other steps to avoid or mitigate any actual or potential adverse effects of the contravention; and
(e)the circumstances in which the contravention, or involvement in the contravention, took place; and
(f)whether or not the person in contravention, or who was involved in the contravention, has previously been found by the court in proceedings under this Act, or any other enactment, to have engaged in any similar conduct; and
(g)in the case of section 534 (directors treated as having contravened), the circumstances connected with the director’s appointment (for example, whether the director is a non-executive or an independent director); and
(h)the relationship of the parties to the transaction constituting the contravention.
[18] Although s 492 does not expressly refer to deterrence, this Court has in several earlier decisions held that deterrence — both individual and general — is a relevant consideration when determining a pecuniary penalty under the FMCA.19 In Financial Markets Authority v ANZ Bank Ltd, Muir J suggested that deterrence may in fact be the “overriding objective” when fixing a pecuniary penalty.20
[19] The explanatory note to the Financial Markets Conduct Bill describes three underlying aims behind any pecuniary penalty: the deterrence of non-compliance; the encouragement of voluntary compliance; and the punishment of non-compliance.21 It follows that in order to achieve those aims, pecuniary penalties must be set at sufficiently high levels to ensure they are not perceived as a mere cost of doing business.22
19 Financial Markets Authority v Warminger, above n 13, at [35] and [36]; Financial Markets Authority v Cigna Life Insurance New Zealand Ltd [2022] NZHC 3610 at [58]; and Financial Markets Authority v ANZ Bank Ltd [2021] NZHC 399 at [45].
20 Financial Markets Authority v ANZ Bank Ltd, above n 19, at [45], referring to Department of Internal Affairs v Ping An Finance (Group) New Zealand Co Ltd [2017] NZHC 2363, [2018] 2 NZLR 552.
21 Financial Markets Conduct Bill 2011 (342-1) (explanatory note) at 40.
22 Financial Markets Authority v ANZ Bank Ltd, above n 19, at [55].
[20] That is consistent with the approach taken by the courts under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, where the need to set a penalty at a level which is not considered to be a financially acceptable risk when compared to the potential gains to be had from the misconduct, has been clearly recognised.23
The approach to fixing pecuniary penalties
[21] In setting the penalties for Mr Zhong and Ms Ding, I will adopt the same three stage approach that the Court has previously adopted in pecuniary penalty cases for market manipulation under the SMA,24 and the FMCA.25 This involves:
(a)determining the maximum penalty;
(b)establishing a starting point for the penalty, taking into account factors bearing on culpability and by reference to the applicable maximum penalty; and
(c)adjusting the starting point by applying an uplift or a reduction on the basis of any relevant circumstances personal to the defendant.
Stage one: the maximum penalty
[22] The maximum pecuniary penalty for a contravention, or involvement in a contravention, of a civil liability provision such as s 265, must be calculated in accordance with the formula prescribed by ss 385(2) and 490(1) of the FMCA. Those provisions provide that the maximum penalty to be imposed on an individual is the greatest of:
(a)the consideration for the transaction that constituted the contravention (if any); or
23 Department of Internal Affairs v Ping An Finance (Group) New Zealand Co Ltd, above n 20, at [92].
24 Financial Markets Authority v Henry [2014] NZHC 1853 at [33]–[34] and Financial Markets Authority v Warminger, above n 13, at [13].
25 Meng and Qian, above n 15, at [57]–[58].
(b)if it can be readily ascertained, three times the amount of the gain made, or the loss avoided, by the person who contravened the civil liability provision; or
(c)$1 million.
[23] The maximum pecuniary penalty for a single breach of s 297 by an individual is $200,000.26
[24] In the present case, the consideration for each of the relevant transactions was considerably less than $1 million. As such, the maximum penalty for each breach of s 265 is the greater of $1 million or three times the amount of the gain made or loss avoided by Mr Zhong or Ms Ding (as the case may be), if that amount can be readily ascertained.
Readily ascertained gains made or losses avoided
[25] Previous cases have not considered the meaning of the phrase “readily ascertained”, as used in ss 385(2) and 490(1)(b) of the FMCA. However, in applying a similarly worded provision in the Commerce Act 1986, Hansen J considered that:27
… a defendant’s commercial gain cannot be “readily ascertained” … unless it can be quantified in a timely, efficient and relatively straightforward manner and with reasonable precision and specificity.
I consider that to be a helpful interpretation, applicable also in the context of the FMCA.
[26] This case also raises the issue of whether readily ascertainable but unrealised gains made or losses avoided are to be considered when assessing the maximum penalty in accordance with the formula in ss 385(2) and 490(1).
[27] When ONL listed on the NXT market it had approximately 25.8 million shares on issue. Mr Zhong and Ms Ding held 16 million of those shares as trustees (and
26 Financial Markets Conduct Act, ss 385(4) and 490(3).
27 Commerce Commission v Telecom Corporation of New Zealand [2011] NZCCLR 19 (HC) at [45].
discretionary beneficiaries) of the Zhong Family Trust (Trust). However, when Mr Zhong and Ms Ding contravened s 265, they did so by dealing in shares held by Ms Ding’s parents, not the Trust. Furthermore, neither Mr Zhong nor Ms Ding, as trustees of the Trust, disposed of or acquired ONL shares following any of their contravening transactions. Nevertheless, Mr Zhong and Ms Ding still benefited from the transactions because on each occasion that they manipulated ONL’s share price, the Trust’s shareholding either avoided a loss or gained in market value. As Mr Philip Solarz observed in evidence, every time the ONL share price increased by 10 per cent, the mark-to-market value of the Trust’s shareholding increased by $1.6 million.
[28] Mr Zhong and Ms Ding submit that because those gains made or losses avoided were never actually realised by sale of the Trust’s shares, there is no gain made or loss avoided for the purposes of ss 385(2) and 490(1)(b). On the other hand, counsel for the FMA, Mr Williams, submits that the Trust’s unrealised gains or losses avoided are readily ascertainable; and that calculating the maximum penalty with reference to the Trust’s unrealised gains or losses avoided is in accordance with the purpose and policy of the FMCA.
[29] Section 491 provides guidance for the Court on how to determine gains made or losses avoided for the purposes of calculating the maximum penalty. Section 491(1) provides that:
491Guidance for court on how to determine gains made or losses avoided for purposes of maximum amount
(1)For the purposes of section 490(1)(b), a person must be treated as—
(a)making a gain if the person acquires a financial product for less than its value:
(b)avoiding a loss if the person disposes of a financial product for more than its value.
[30] Neither Mr Zhong nor Ms Ding acquired or disposed of financial products held in their own name. To the extent either of them were directly involved in the contravening trades, they dealt with shares belonging to Ms Ding’s parents with Mr Zhong pretending to be Ms Ding’s father and Ms Ding pretending to be her mother.
On other occasions they were involved in arranging the manipulative trades but were not directly party to them.
[31]However, s 491(3) provides that:
(3)This section does not—
(a)limit the circumstances in which the court may find that a person has made a gain or avoided a loss; or
(b)prevent the court from finding that the amount of the gain made, or the loss avoided, by a person exceeds an amount calculated under this section.
[32] As such, it is ultimately a matter for the Court to determine the amount of the gain made or loss avoided by a person acting in contravention of the FMCA, provided the amount of the gain made or loss avoided can be readily ascertained.
[33] In support of the submission that it is appropriate to take unrealised gains made or losses avoided into account in the assessment of a maximum penalty, Mr Williams refers to authorities from the United States concerning the disgorgement of profits obtained in contravention of securities legislation.
[34] In Securities and Exchange Commission v Shapiro, the Second Circuit Court of Appeals stated that unrealised profits should be taken into account in computing the amount of profits to be disgorged for insider trading: 28
The district court required appellant to disgorge not the actual profits realized when he sold shares in [Harvey’s Stores Inc] after February 18, but the “paper” profits which had accrued as of February 18. Since the price of Harvey’s stock dropped after February 18 appellant had to surrender more than he actually made.
The district court’s approach was reasonable. A violator of the securities laws should disgorge profits earned by trading on non-public information. Once public disclosure is made and all investors are trading on an equal footing, the violator should take the risks of the market himself.
Moreover, a contrary holding would create a serious anomaly that might encourage insider trading. To require disgorgement only of actual profits in cases where the price of the stock subsequently fell would create a heads-I- win-tails-you-lose opportunity for the violator: he could keep subsequent
28 Securities and Exchange Commission v Shapiro 494 F 2d 1301 (2d Cir 1974) at 1309.
profits but not suffer subsequent losses. Such a rule would emasculate the deterrent effect of Rule 10b-5.
[35] Similarly, in Securities and Exchange Commission v Commonwealth Chemical Securities Inc, a market manipulation case, the Second Circuit Court of Appeals stated:29
Defendants complain that the court’s computation of profits and losses ended on March 2, 1973, the last trading day before the SEC suspended trading in BL securities; that they still held substantial amounts of such securities at that time; and that losses after trading was resumed wiped out any profits. We see no reason why, in determining how much should be disgorged in a case where defendants have manipulated securities so as to mulct the public, the court must give them credit for the fact that they had not succeeded in unloading all their purchases at the time when the scheme collapsed.
[36] In another market manipulation case, the Securities and Exchange Commission stated:30
We consider that the amount of disgorgement was properly computed on the basis of [the defendant’s] profits, realized and unrealized, at the time it completed its participation in the … manipulation. Disgorgement is an equitable remedy. A manipulator is not relieved of its disgorgement obligation simply because it chooses, for whatever reason, to retain manipulated securities until their subsequent drop in price dissipates some or all of the manipulator’s ill-gotten gains.
[37] I agree with these statements of principle concerning the disgorgement of unrealised profits. I also agree that these principles support Mr Williams’ submission that unrealised gains should be included in the assessment of maximum penalty under ss 385(2) and 490(1)(b). I consider that is appropriate for the following reasons.
[38] First, there are sound policy reasons to apply the penalty formula in ss 385(2) and 490(1)(b) with reference to unrealised but readily ascertained gains made and losses avoided. The penalty formula is intended to ensure that the maximum penalty exceeds any gains unlawfully obtained, or the prospect of any such gains. The Law Commission described the penalty formula as “an effective deterrent against those who would make a rational decision to breach with the intention of making a profit or
29 Securities Exchange Commission v Commonwealth Chemical Securities Inc 574 F 2d 90 (2d Cir 1978) at 102.
30 Re LC Wegard & Co Inc SEC Release No 34-40046, 29 May 1998 at 6 (footnotes omitted).
avoiding a loss”.31 It would undermine the purpose of the pecuniary penalty regime if readily ascertainable unrealised gains made or losses avoided were excluded from the maximum penalty calculation.
[39] Secondly, not all instances of market manipulation are motivated by the realisation of short-term trading profits. There are other reasons why a market participant might seek to corrupt a share price, some of which are evident in the present case. For example, a shareholder might wish to increase the valuation of the company in advance of a future capital raise; or to strengthen the shareholders’ and/or the company’s hand in negotiations with third party lenders. In each of these scenarios the share price is manipulated for some benefit other than short-term profit taking. The gain is unrealised but immediately advantageous. And even if that gain is never ultimately realised, the manipulative trading has still harmed the market in the meantime. The penalty formula in ss 385(2) and 490(1)(b) should therefore take into account the gains made or losses avoided at the time of the contravening conduct, regardless of whether those gains made or losses avoided are ultimately realised.
[40] Thirdly, I note that if the unrealised gains were excluded from the formula, then ss 385(2) and 490(1)(b) would be practically redundant where the contravening conduct involved so-called “wash trading”. Wash trading is a colloquial term for trading activity which involves a person being directly or indirectly both the buyer and seller of a particular financial product.32 When a person executes a wash trade there is no change in beneficial ownership of the traded product, they are not realising any gain or avoiding any loss. But there is still a direct benefit to their misconduct: the market value of the contravenor’s shareholding will have increased. Section 267 provides that participation in a “wash trade” must be treated as a contravention of s 265. It would defeat the purpose of the penalty formula, including the need for deterrence, if the unrealised gains arising out of these “wash trades” were to be excluded from the calculation of the maximum penalty.
31 Law Commission Pecuniary Penalties: Guidance for Legislative Design (NZLC R133) at [16.36].
32 J P Hambrook Australian Corporation Law Principles & Practice (online ed, LexisNexis) at [7.13.0050].
[41] Finally, when a court turns to stage two of the penalty setting process and sets an appropriate starting point, it will invariably take into account both the defendant’s realised and unrealised profits in assessing the nature and extent of the misconduct. The penalty setting process would lack some coherence if the court could set a maximum penalty with reference only to realised gains or losses avoided but then adopt a starting point with reference to both realised and unrealised gains or losses avoided.
[42] I am therefore satisfied that Mr Zhong and Ms Ding’s unrealised but readily ascertainable gains made or losses avoided resulting from their contraventions should be included in the assessment of maximum penalty.
[43] I am also satisfied that Mr Zhong and Ms Ding’s unrealised gains and losses avoided are “readily ascertainable” when calculated on a mark-to-market basis. As noted, a 10 per cent increase in the ONL share price increased the market value of the Trust’s shareholding by $1.6 million. I accept Mr Williams’ submission that this is an appropriately straightforward and reasonably precise way to calculate the gains made or losses avoided by the Trust as a result of Mr Zhong and Ms Ding’s contraventions.
[44] As I have noted Mr Zhong and Ms Ding held their shares as trustees of the Trust. The third trustee was Zhong Family Trust Limited, the sole director and shareholder of which was Mr Zhong. He and Ms Ding were the settlors of the Trust and held the power to appoint new trustees. The Trust is a standard discretionary trust. Mr Zhong and Ms Ding are discretionary beneficiaries along with their daughter, parents, siblings, nieces, nephews, and any trust of which any of those people are also beneficiaries. As trustees, Mr Zhong and Ms Ding can allocate income or capital to any of the beneficiaries. As discretionary beneficiaries they do not have a proprietary right to trust assets, only a right to be considered for a distribution. Nevertheless, I am satisfied that for the purposes of ascertaining the pecuniary penalty in accordance with the penalty formula, gains made or losses avoided include those which Mr Zhong and Ms Ding have made or avoided in their capacity as trustees of the Trust.
Calculation of maximum penalties
[45]Below I set out the maximum penalty in regard to each contravention.
[46]The maximum penalties for Mr Zhong are as follows:
Market manipulation
(a)17 May 2016: $9.6 million, being three times the $3.2 million mark-to- market increase made by the Zhong Family Trust.33
(b)7 June 2016: $1 million.
(c)5 July 2016: $12 million, being three times the loss avoided of
$4 million by the Zhong Family Trust.34
(d)19 October 2016 and 20 October 2016: $22.56 million, being three times the $7.52 million mark-to-market increase made by the Zhong Family Trust over these two days.35
(e)15 February 2017/3 April 2017: $2.88 million, being three times the
$960,000 mark-to-market gain made by the Zhong Family Trust on 15 February 2017.36
Breach of disclosure
(f) 13 October 2016: $200,000.
33 The contravening transactions increased ONL’s share price by 20 cents: Liability judgment, above n 1, at [111]–[115] and [117].
34 The loss avoided is calculated by reference to the 25 cents difference between the last sale price at market opening on 5 July 2016, $2.35 per share, and the market maker’s morning offer to sell shares at $2.10. Although the manipulation which followed the market maker’s offer ultimately moved the share price to $2.40, Mr Solarz explained in his expert evidence that the contravening transactions had the effect of preventing an almost certain price fall to $2.10: Liability judgment, above n 1, at [137]–[140].
35 The contravening transactions increased ONL’s share price by 47 cents: Liability judgment, above n 1, at [149]–[161] and [166].
36 The contravening transactions increased ONL’s share price by six cents: Liability judgment, above n 1, at [175]–[176].
(g) 19 October 2016: $200,000.
(h) 15 February 2017: $200,000.
Total
(i) Total: $48,640,000.
[47]The maximum penalties for Ms Ding are:
Market manipulation
(a)18 April 2016: $1,920,000. This is three times the $640,000 gain made by the Zhong Family Trust.37
(b) 17 May 2016: $9.6 million.38
(c)7 June 2016: $1 million.
(d)5 July 2016: $12 million.39
(e)19 October 2016 and 20 October 2016: $22.56 million.40
Breach of disclosure
(f) 18 April 2016: $200,000.
(g) 17 May 2016: $200,000.
(h) 5 July 2016: $200,000.
(i) 19 and 20 October 2016: $200,000.
37 The contravening transaction increased the share price by four cents: Liability judgment, above n 1, at [101].
38 See above at [46(a)].
39 See above at [46(c)].
40 See above at [46(d)]
(j) On 12 occasions between 6 April 2016 and 13 September 2016:
$200,000.
Total
(k) Total: $48,080,000.
[48]The total maximum penalties for Mr Zhong and Ms Ding are, respectively,
$48,640,000 and $48,080,000. These maximum penalties are obviously very high. But that is simply a function of the particular facts of this case. Mr Zhong and Ms Ding owned 16 million (approximately 62 per cent) of the ONL shares quoted on the NXT Market. With relatively small trades they were able to manipulate the mark- to-market value of their shareholding significantly. Had I calculated the maximum penalty without reference to Mr Zhong and Ms Ding’s unrealised gains or losses avoided, Mr Zhong and Ms Ding would still face the significant maximum penalties of $6,600,000 and $7,000,000 respectively. That is, $1 million for each contravention of their six contraventions of s 265; and $200,000 for each contravention of s 297.
Stage two: the starting point
[49] This is only the third market manipulation case in New Zealand. Although there is an accepted methodology for setting pecuniary penalties, there is no tariff case.
[50] In setting a pecuniary penalty the Court must have regard to the maximum penalty. In Australian Securities and Investments Commission v La Trobe Financial Asset Management Limited,41 the Federal Court of Australia noted that this was because, first, the legislature had provided for a maximum penalty; secondly, the maximum penalty invites comparison between the worst possible case and the case before the Court; and thirdly, when balanced with all other relevant factors, a maximum penalty can provide something of a yard stick.42 However, the Federal Court went on to state:43
41 Australian Securities and Investments Commission v La Trobe Financial Asset Management Ltd
[2021] FCA 1417, (2021) 158 ACSR 363.
42 At [80].
43 At [80] (citations omitted).
… care must be taken to ensure that the maximum penalty is not applied mechanically, instead of it being treated as one of a number of relevant factors, albeit an important one. It will rarely be appropriate for a court to start with the maximum penalty and proceed by making a proportional deduction from the maximum, and the Court should not adopt a mathematical approach of applying additions or deductions from a predetermined range, or attributing specific values to the relevant factors.
[51]Relevantly, the Federal Court also noted:
[81] In determining the appropriate penalty for a multiplicity of civil penalty contraventions, the Court may have regard to two common law principles that originate in criminal sentencing: the “course of conduct” principle and the “totality” principle.
The s 492 factors
[52] I consider the following factors set out in s 492 are relevant to the determination of a starting point.
Section 492(a) — the purposes stated in ss 3 and 4 and any other purpose stated in the FMCA that applies to the civil liability provision
[53] As I have noted, the main purposes of the FMCA are to promote the confident and informed participation of businesses, investors, and consumers in financial markets; and to promote and facilitate the development fair, efficient and transparent financial markets.44 Part 5 of the FMCA, which concerns dealing in financial products on markets (and includes ss 265 and 297), has the additional purposes of promoting fair, orderly and transparent financial product markets; and encouraging a diversity of financial product markets to take account of the differing needs and objectives of issuers and investors.45
[54] Market manipulation undermines market integrity and transparency. That is unfair to investors and undermines the statutory purpose of the relevant provisions. The Court must bear these harmful effects in mind when setting appropriate penalties.
44 Financial Markets Conduct Act, s 3.
45 Financial Markets Conduct Act, s 229(1).
Section 492(b) — the nature and extent of the contravention or involvement in the contravention
[55] As noted above, Mr Zhong and Ms Ding were each involved in six separate market manipulation contraventions. For Mr Zhong, these occurred between 17 May 2016 and 3 April 2017. Ms Ding’s contraventions took place between 18 April 2016 and 20 October 2016. In each case the contraventions began shortly after ONL was listed on the NXT market on 31 March 2016.
[56] Mr Zhong and Ms Ding carried out each contravening transaction with actual knowledge and a deliberate intention to manipulate the market. That much is clear from Mr Zhong and Ms Ding’s WeChat messages to each other and with others such as Messrs Meng and Qian in Auckland, and Mr Zhu in China. By way of example:
(a)On 7 June 2016, Mr Zhong left a message for Mr Meng: “Had a look at that share today, um, it’s now … down 25 cents … can you get someone, Sam [Mr Qian] or whoever to give a bit [of] support … I am in the middle of negotiating … with the investment bank”. Mr Meng via his associate Ms Lee, then transferred money to Mr Qian who placed orders to purchase ONL shares and later advised Mr Meng “the orders have all been placed”.
(b)Similarly, on 5 July 2016, Mr Zhong messaged Ms Ding: “We indeed have the money, but need to find someone to buy at 2.4”. Mr Zhong tried to call Mr Qian. Mr Qian called back and they spoke for 21 seconds. Mr Zhong then advised Ms Ding: “Sam has been notified. You move first, once your end is done, the transaction completed, notify Sam immediately”. Mr Qian later purchased the ONL shares at $2.40.
(c)Later that day, Mr Zhong messaged Ms Ding: “Mal, when coming back to the office today, told me excitedly that the shares had gone up, I didn’t say a word [giggle]”. Ms Ding replied: “haha”. This is a reference to ONL’s CFO, Malcolm Lindeque, who was unaware Mr Zhong and Ms Ding had been manipulating ONL’s share price.
(d)On 19 October 2016, Mr Zhong left a voice message for Ms Ding for her to “get [zhu/piglet] to … buy at $2.45, 3500 shares, buy it all”. Shortly thereafter, Mr Zhu placed an order to buy 3,500 shares at $2.45.
[57] Mr Zhong and Ms Ding’s plain objective in facilitating and carrying out these manipulative trades was to increase or prop up the ONL share price and to increase the appearance of active trading in ONL shares. On 7 June 2016, Mr Zhong’s message to Mr Meng indicated concern that a recent decline in ONL’s share price would reflect badly on ONL at a time when he was in negotiations with an investment bank. That aligns with Mr Lindeque’s evidence that Mr Zhong wanted to attract additional investors, and that a higher share price could assist with that.
[58] In terms of the nature of their contraventions, I accept Mr Williams’ submission that it is relevant that Mr Zhong and Ms Ding went to significant lengths to hide their involvement in the manipulative trading. They used Ms Ding’s parents’ ASB Securities accounts to carry out trades, with Mr Zhong pretending to be Mr Ding’s father and Ms Ding pretending to be her mother when they each called ASB Securities. They recruited Messrs Meng, Qian and Zhu to place orders on their instruction. On 19 and 20 October 2016, Mr Zhong telephoned ASB Securities to place orders using a telephone registered in the name of his school-aged daughter.
[59] Although the volume of the manipulative trades was relatively small, the extent of the manipulation was significant. On a number of occasions the defendants moved the share price by 10 per cent or more, and the trading on 19 and 20 October 2016 moved the price 20 per cent higher over both those days. Mr Williams correctly points out that the share price would potentially have gone even higher if ASB Securities had not become suspicious and cancelled Mr Zhong and Ms Ding’s outstanding orders.
[60] Finally, Mr Williams says that although ASB Securities had cancelled Mr Zhong and Ms Ding’s trade against each other on 20 October 2016 and suspended Ms Ding’s parents’ securities accounts, Mr Zhong continued the manipulative conduct through Messrs Qian and Zhu. Mr Williams submits that this demonstrates a determination and clear intention to manipulate the market that is relevant to the Court’s assessment of an appropriate penalty. I agree.
Section 492(c) — the nature and extent of any loss or damage suffered by any person, or gains made or losses avoided by the person in contravention or involved in the contravention
[61] Mr Zhong and Ms Ding’s manipulative trading increased the ONL share price which in turn increased the market value of the Trust’s shareholding. In submissions, Mr Zhong and Ms Ding emphasised that ONL has since gone into liquidation, and they did not realise any gains. On the other hand, Mr Zhong and Ms Ding’s contravening conduct increased and sustained the value of the Trust’s significant shareholding over a relatively long period of time, including at a time when Mr Zhong described himself as being in negotiations with an investment bank. As I alluded to earlier, the quantum of realised profit vis-à-vis unrealised profit is relevant to the Court’s assessment of an appropriate starting point.
Section 492(d) — whether or not a person has paid an amount of compensation, reparation, or restitution, or taken any steps to avoid or mitigate any actual or potential adverse effects of the contravention
[62] Mr Zhong and Ms Ding have taken no steps to avoid or mitigate the consequences of their misconduct. As noted above, Mr Zhong continued to facilitate contravening trades after ASB Securities suspended Ms Ding’s parents’ securities accounts.
Section 492(e) — the circumstances in which the contravention, or involvement in the contravention, took place
[63] Mr Zhong was the chief executive officer (CEO) of ONL and chairman of its board. Ms Ding was a senior marketing manager. As trustees of the Zhong Family Trust they held approximately 62 per cent of ONL’s shares.
[64] Mr Zhong and Ms Ding’s roles within ONL required them to disclose dealings in ONL shares. However, in order to disguise their contraventions of s 265, they elected not to make the disclosures required of them under not only the FMCA, but under the NXT Market Rules and ONL’s Financial Products Trading Policy and Guidelines as well. I accept Mr Williams’ submission that this is an aggravating factor of their conduct in this case and is relevant for the purposes of setting an appropriate penalty. As indicated, I also accept it is relevant that the contraventions began very
shortly after ONL was listed and continued for almost a year until they were discovered and regulators intervened.
Section 492(f) — the relationship of the parties to the transaction constituting the contravention
[65] All the defendants were known to each other. They acted in concert, on either side of the same transactions and/or trading with the market maker. All the contraventions were deliberately orchestrated by Mr Zhong and Ms Ding.
Deterrence
[66] Deterrence is central to determining an appropriate pecuniary penalty. The penalty ultimately imposed must not be seen as a cost of doing business or a financially acceptable risk when compared to the gains potentially available from market misconduct. That is particularly so in circumstances where Mr Zhong was CEO and chairman of ONL’s board and Ms Ding held a senior management role at the time of their contraventions. And, as noted, in circumstances where it appears from Mr Zhong’s message to Mr Meng on 7 June 2016, that he was manipulating ONL’s share price in order to improve his position in negotiations with an investment bank.
[67] In oral submissions, Mr Zhong suggested there was nothing significant in this message because it is an important part of any CEO’s job to closely monitor his or her company’s share price.46 Whilst it may well be an essential part of a CEO’s function to monitor the company’s share price, it will never be acceptable to falsely and misleadingly manipulate it.
Previous cases
[68] In considering earlier decisions of this Court imposing pecuniary penalties under the SMA and FMCA for market manipulation, I acknowledge that each involve
46 Mr Zhong and Ms Ding maintain their primary position that the FMA has not sufficiently proven the contents of the WeChat messages because they only had access to Ms Ding’s phone, not Mr Zhong’s. I did not accept that argument (see Liability Judgment, above n 1, at [77]–[83]) but Mr Zhong and Ms Ding pursue it on appeal as they are entitled to do. Mr Zhong and Ms Ding’s submissions during the penalty hearing were made in the alternative to what will be their primary position on appeal.
different circumstances and that comparisons can therefore be of only limited assistance.
[69] In Financial Markets Authority v Henry,47 Mr Henry admitted six breaches of market manipulation by trading shares with himself: wash trading. Mr Henry faced a maximum penalty of $6 million, being $1 million for each contravention and the applicable penalty pursuant to s 42W(1)(c) of the SMA.48 The parties agreed a starting point of $200,000 for the overall misconduct, which the Court accepted. The Court allowed a total reduction of 35 per cent for Mr Henry’s previous good conduct and his acknowledgement of wrongdoing, giving rise to a final penalty of $130,000.49 In Meng and Qian, Venning J considered Financial Markets Authority v Henry had limited precedential value.50 I agree.
[70] Financial Market Authority v Warminger concerned sophisticated and deliberate market manipulation by an experienced fund manager. The defendant had been found liable for two contraventions of the SMA’s market manipulation provisions. The Court assessed the combined maximum penalty to be $3,845,900. That consisted of $2,845,900, being the consideration of the transactions behind one of the contraventions and the applicable penalty pursuant to s 42W(1)(a) of the SMA, and $1 million, being the applicable penalty for the second contravention pursuant to s 42W(1)(c).51 Venning J adopted a starting point of $500,000 for the two contraventions. Against that, his Honour applied a 20 per cent reduction in recognition that this was a first-time contravention and for personal mitigating factors including poor health, giving rise to a final penalty of $400,000.52
[71] Messrs Meng and Qian were the third and fourth defendants in this proceeding. They were both shareholders. Mr Meng was a non-executive director of ONL. Mr Qian was a chartered accountant employed by Mr Meng’s accounting firm, Meng & Associates, which provided accounting services to ONL.
47 Financial Markets Authority v Henry, above n 24.
48 At [38].
49 At [56].
50 Meng and Qian, above n 15, at [77].
51 Financial Markets Authority v Warminger, above n 13, at [15]–[20].
52 At [58]–[63].
[72] Mr Meng was involved in two contraventions of s 265 and one contravention of s 297. Mr Qian was involved in three contraventions of s 265. The parties maintained that they had no intention to manipulate the market but accepted they ought to have reasonably known that their conduct would, or would have likely, had that effect.53
[73] The Court set maximum penalties of $2.2 million and $3 million for Messrs Meng and Qian respectively.54 $1 million was the applicable maximum penalty under ss 385(2) and 490(1) in respect of each contravention of s 265. Mr Meng’s penalty was calculated by adopting a $240,000 starting point and adopting reductions of 10 per cent for having no prior breaches of the FMCA, 10 per cent for admissions, and five per cent for damage to his employment prospects.55 That resulted in a final penalty of $180,000. The Court indicated that a starting point closer to
$500,000 would have been appropriate had Mr Meng been found to have acted deliberately to manipulate the market.56 For Mr Qian, the starting point was $200,000, with reductions of 10 per cent for having no prior breaches of the FMCA, 20 per cent for admissions and early acceptance of responsibility, and five per cent for the personal impact on Mr Qian and his family.57 That resulted in a final penalty of $130,000.
[74] I accept Mr Williams’ submission that Mr Zhong’s misconduct is more serious than that of Mr Henry, Mr Warminger, and each of his co-defendants. Mr Zhong was the CEO and managing director of ONL and, together with Ms Ding, its majority shareholder. His misconduct began shortly after ONL shares were listed on the NXT, and continued for almost a year. Market manipulation quickly became standard practice in the face of share price decline. Mr Zhong instigated and coordinated the misconduct of others. He acted with actual knowledge and deliberate intent to manipulate the ONL share price. His efforts to keep his misconduct hidden included pretending to be his father-in-law whilst trading on his ASB Securities account, and doing so using a telephone registered in his daughter’s name. It is appropriate that the penalty reflects his flagrant and egregious misconduct.
53 Meng and Qian, above n 15, at [3].
54 At [71] and [91].
55 At [86]–[89].
56 At [83].
57 At [102]–[104].
[75] I also accept Mr Williams’ submission that Ms Ding’s overall misconduct was more serious than that of Mr Henry, Mr Warminger and Messrs Meng and Qian. She was a senior manager within ONL who acted with actual knowledge and an intention to manipulate the ONL share price and to create a false appearance of active trading. She actively colluded with Mr Zhong, and recruited Mr Zhu.
[76] For all of these reasons, and taking into account the totality principle, I adopt a starting point of $1,400,000 for Mr Zhong and $800,000 for Ms Ding.
[77] Of course, the starting points sit right at the bottom of the range when considered as a percentage of the maximum penalty calculated under s 490(1)(b), being $48,640,000 for Mr Zhong and $48,080,000 for Ms Ding (2.9 per cent for Mr Zhong and 1.7 per cent for Ms Ding). I have already noted the particular circumstances that gave rise to such high maximum penalties in this case. In setting the starting point, I have also taken into account that the gains were not realised and that, given the size of the Trust’s shareholding and the relative illiquidity of the NXT market, were never likely to be.
[78] For completeness, I note that even taking the alternative lower maximum penalty of $6,600,000 for Mr Zhong, a starting point of $1,400,000 equates to 21 per cent of the lower maximum of $6,600,000. The $800,000 starting point for Ms Ding equates to 11.4 per cent of her lower alternative maximum penalty of $7,000,000. In my view this confirms that the starting points I have adopted are well within range.
Stage 3: personal aggravating and mitigating factors
[79] There are no personal aggravating factors. In terms of mitigating factors, I take into account that neither Mr Zhong nor Ms Ding have previously appeared before the Court in relation to any proceedings under the FMCA or otherwise. In Meng and Qian, Venning J applied a 10 per cent reduction to reflect that neither Mr Meng nor Mr Qian had previously breached the FMCA.
[80] In the circumstances I consider it appropriate to give Mr Zhong and Ms Ding only a five per cent reduction. Mr Zhong and Ms Ding were insiders who acted intentionally in breach of the FMCA over a longer period of time.
[81] Mr Zhong submitted that he and Ms Ding are impecunious, unemployable, and that their family faces a significant financial hardship. He explained they have been forced to give up their careers and leave New Zealand to look for other opportunities.
[82] I accept that in appropriate circumstances a reduction to reflect a defendant’s lack of means to pay a penalty may be appropriate. However, I am not prepared to allow a further reduction here. A defendant relying on impecuniosity as a mitigating factor would ordinarily be expected to provide evidence in support of that submission which, in this case, might have included affidavits setting out Mr Zhong and Ms Ding’s assets and liabilities in New Zealand and in China; tax returns; and, if available, audited financial statements. In any event, given the nature of the breaches and the relevant principles set out in s 492 of the FMCA, I am not satisfied that a reduction for impecuniosity would necessarily be appropriate even if such evidence were available.
[83] Nor am I persuaded that complaints of damaged reputations entitles either Mr Zhong or Ms Ding to a reduction. They have indicated they will no longer be living in New Zealand. In any event, damaged career prospects are merely a consequence of the detection of their on-going and sustained misconduct.
[84] Applying a five per cent reduction to Mr Zhong’s starting point of $1,400,000 results in a total pecuniary penalty of $1,330,000. Applying a five per cent reduction to Ms Ding’s starting point of $800,000 results in a pecuniary penalty of $760,000.
Robinson J
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