What Is Market Manipulation?: The High Court Of Australia Weighs In

In a recent decision, the High Court of Australia adopted an expansive approach to the market manipulation provision in that country's corporations statute. In particular, the High Court rejected the notion that market manipulation is restricted to the misuse of monopolistic or dominant market power. The High Court instead held that purchasing shares for the sole or dominant purpose of creating or maintaining a specific price amounts to market manipulation, even in the absence of proof that the transaction affected the behaviour of genuine market participants. The High Court's decision will likely make it easier to prosecute market manipulation in Australia and may have ramifications in Canada as well.

Background

The accused (referred to as "JM") was charged with 39 counts of market manipulation, and two counts of conspiring with others to commit market manipulation.

An entity associated with JM had borrowed money to exercise a large number of call options. These call options were for shares in a company (referred to as "X Ltd.") that was listed on the Australian Securities Exchange. The shares in X Ltd. were used as collateral for the loan. In the event that these shares dropped below a certain value, the borrower was subject to margin calls requiring that additional collateral be provided.

The Commonwealth Director of Public Prosecutions (the "CDPP") alleged that, on July 4, 2006, JM's daughter (on behalf of a company controlled by her husband) bought shares in X Ltd. so as to prevent the day's closing price for shares in X Ltd. from dropping below the value at which a margin call on her father's loan would have been made. According to the CDPP, JM's daughter made the purchase for the sole, or at least the dominant, purpose of preventing a margin call, and the transaction had the effect of creating or maintaining an artificial price for the shares, contrary to section 1041A of the Corporations Act 2001. JM pleaded not guilty to all charges.

A dispute arose between the CDPP and JM as to the meaning of "artificial price" in section 1041A. After the plea had been made, but before a jury was empanelled, the trial judge stated a case and reserved certain questions for determination by the Victorian Court of Appeal. The issue, in essence, was whether market manipulation under section 1041A should be narrowly construed, such that it only applies to transactions effected by a person who has monopolistic or dominant market power.

This issue arose...

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