Market manipulation – a suspect form of human ingenuity

A recent High Court of Australia decision has held that conduct with a dominant purpose of maintaining a price level of public securities constitutes unlawful manipulation. It sheds potential light on how the New Zealand courts may interpret market manipulation prohibitions as they apply to on-market trades.

That guidance may be timely as the Financial Markets Authority has just filed its first market manipulation case.

Price rigging on the ASX

The alleged manipulative conduct in Director of Public Prosecutions (Cth) v JM,1 was a family affair. The defendant's daughter was alleged to have purchased, at her father's behest and through her husband's company, shares in an ASX listed company in which the defendant father owned shares.

The alleged purpose of the purchase was to prevent the closing price falling below the point at which the defendant would have to provide additional collateral to the lender that had funded the acquisition of his shares.

The High Court of Australia had decided in 19812 that buying shares in order to set or maintain a market price was unlawful.3 So far, so easy. However the charges in JM were not brought under the successor provision to that considered by the High Court in 1981 but under section 1041A of the Corporations Act 2001 (Cth). This prohibits trading which is or is likely to have the effect of creating or maintaining "an artificial price" for financial products.

The defendant contended, successfully in the Victorian Court of Appeal, that the concept of an artificial price was to be understood by reference to case law developed in respect of commodity futures markets (primarily in the United States), typified by practices involving a "squeeze" or "corner".4 Accordingly, the conduct allegedly engaged in was excluded.

The High Court rejected this argument, and allowed the appeal. The Court noted that the United States jurisprudence did not limit market manipulation and artificial prices to squeezes or corners. Rather, it involved any conduct engaged in with the intention of creating a price that does not reflect the forces of supply and demand.5

As stated in the leading US case of Cargill Inc v Hardin, "[t]he methods and techniques of manipulation are limited only by the ingenuity of man."6

The High Court considered the price must reflect the forces of genuine supply and demand as created by buyers wishing to buy at the lowest available price and sellers wishing to sell at the highest realisable price in an...