The Warminger trial: Determining the parameters of permissible conduct
On Friday, the Auckland High Court released its decision in the first defended market manipulation case decided in New Zealand.1 The Financial Markets Authority (FMA) alleged that former Milford Asset Management portfolio manager Mark Warminger manipulated the market through certain trades between January and September in 2014.
Venning J held that Mr Warminger’s trades on two occasions amounted to market manipulation. The parties have been instructed to file within 20 working days of the judgment a joint memorandum setting out the process to determine whether the Court should make a pecuniary penalty, and if so the quantum of such penalty.
The judgment is significant because it delineates the boundary between legitimate trading strategies and market manipulation. In particular, it confirms that a trader’s subjective purpose (as determined from contextual factors such as emails and phone calls) is relevant to a finding of manipulation. Although the relevant provision was s 11B of the (now repealed) Securities Markets Act 1988 (Act), the judgment remains relevant as this provision is now contained in substantively identical language in
s 265 of the Financial Markets Conduct Act 2013.
Relevance of purpose
The case considers the role of purpose in determining whether manipulation has occurred. Given the lack of New Zealand precedent in this area and the fact that purpose is not an element of s 11B, it was previously unclear what, if any relevance a trader’s purpose had in determining whether manipulation had occurred. The FMA said that purpose was relevant because it was not necessary to prove actual effect under s 11B. The defence alleged that the FMA’s case relied on there being an effect of manipulation, and that no such effect existed.
Venning J considered that little in practice may turn on the different approaches. In His Honour’s view, because Mr Warminger had considerable expertise in trading, if the FMA established that Mr Warminger’s purpose was to achieve a certain effect, then it was likely his trades would have that effect. Therefore, while it was not necessary for the FMA to establish Mr Warminger’s purpose in order to demonstrate manipulation had occurred, the Court nevertheless considered that his purpose was relevant.
Such was the importance of purpose in Venning J’s view that he considered it may be “the key factor which distinguishes culpable manipulation from a trade made for genuine reasons.” Indeed, it appears to have been the extra ingredient present in the two causes of action in respect of which Mr Warminger was found to have breached s 11B. In contrast, in relation to the eight causes of action in respect of which Mr Warminger was not found in breach of s 11B, Venning J considered that there were plausible alternative explanations for Mr Warminger’s conduct.
How is purpose established?
- The market data (for example, aberration in normal trading patterns). This was the sole focus of Mr Warminger’s expert witness, Professor Aitken.
- Evidence showing the context in which the trading occurred, such as emails or telephone communications. The trader’s conduct as a whole will be considered by the court. Venning J considered that “in most cases” such context would be important. The FMA’s experts focussed on the context of Mr Warminger’s trading.
- Circumstantial evidence which suggests an opportunity or motive to manipulate the market. For example, in one instance, Venning J considered it relevant that at the time of the trades, Mr Warminger was underperforming and would likely have felt pressure as a consequence.
Key points from the case
- A trader’s intention or purpose alone will not be sufficient in establishing market manipulation.
- Despite this, if the court is satisfied that an experienced trader had a manipulative purpose, the court is likely to conclude the trading had or was likely to have a manipulative effect. In both causes of action in respect of which the Court found a breach, Venning J considered that both the purpose and the effect of Mr Warminger’s trading activity was the same: his purpose was to manipulate the market, and his trading had that effect.
- Similarly, if the court is satisfied that an experienced trader’s trading activity had a manipulative effect, the court is likely to conclude the knowledge element of market manipulation is satisfied. Venning J considered that an experienced trader will know the likely effect of their trading.
- Trades can (of course) be carried out for legitimate indirect or collateral motives (for example, price or volume discovery) without being manipulative. However, defendants’ explanations for their trading may not be accepted by the court where they are inconsistent with other evidence. For example, in one instance, the Court did not accept Mr Warminger’s explanation that certain trades were for the purpose of discovering volume, because the evidence suggested that at the relevant time he already knew where the volume lay.
- In order for a person to be found to have manipulated the market, the FMA is not required to show that any trader was actually affected by the person’s trading activity.
The relevant legal framework
Mr Warminger was accused of contravening s 11B of the Act, which provides that a person must not do an act (or omit to do an act) that has or is likely to have the effect of creating a false or misleading appearance of trading in shares, in circumstances where the person knows or ought to have known that such an effect would occur or was likely.2
The burden of proof was on the FMA to show that Mr Warminger breached s 11B on the balance of probabilities. While Venning J accepted this was the correct burden, he agreed with a submission by the defence that because of the seriousness of the allegations, the FMA was required to adduce strong evidence to make out its claim.
Venning J held that on the balance of probabilities, Mr Warminger manipulated the market in breach of s 11B of the Act in relation to two of the ten causes of action. In respect of the other eight causes of action, Venning J considered that the trading behaviour raised “a number of issues”, but he was unable to conclude that those trades amounted to manipulation given the evidence before the Court and Mr Warminger’s explanation for the transactions.
This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.