As New Zealand’s second stock market manipulation case – the civil action by the Financial Markets Authority (FMA) against Mark Warminger – heads to court in September, we provide a detailed analysis of the applicable legislative and regulatory regime and of relevant case law here and internationally.
The Warminger litigation
The FMA alleges that Mr Warminger misused his privileged position as a portfolio manager for Milford Asset Management Limited to manipulate the market by:
- placing small trades directly on market in one direction, followed by large off-market trades in the opposite direction
- trading that manipulated the closing price, and
- trading conducted in order to set the price.
After an application by Mr Warminger, the High Court ruled in June that the FMA should make minor changes to its statement of claim to identify how the ten trades in question had the effect of creating or causing a false or misleading impression.
Given that Milford was Mr Warminger’s employer, the FMA also considered that Milford was liable for the alleged breaches. Milford denied any such liability but did accept that it had failed to ensure that there was a sufficient degree of oversight and monitoring of the trading activity, which resulted in a failure to intervene.
In June 2015, Milford entered into an agreement with the FMA in full and final settlement of all claims relating to the company (but not Mr Warminger). Milford paid the FMA around $1.5 million, comprising $1 million in lieu of a pecuniary penalty pursuant to section 46A (1) (b) of the Financial Markets Authority Act 2011 and $400,000 toward the costs of the investigation.
The FMA chose to take a civil rather than a criminal action against Mr Warminger.
The principal advantage to the FMA of civil proceedings is that they require a lower standard of proof – on balance of probabilities rather than beyond reasonable doubt. There is also no requirement to prove that Mr Warminger knew that his actions might mislead the market, only that he ought reasonably to have known this. And a civil claim is open to settlement – whether an agreed banning order or a compensation / penalty payment – whereas a criminal prosecution would deliver a conviction or acquittal. In a criminal proceeding, on conviction of an individual the Court could impose a jail term or criminal fine.
If the FMA proves its case, it may open the way potentially for third parties to sue Milford and/or Mr Warminger. But the fact that the FMA has settled with Milford means that the claimants will be on their own in taking action for compensation against Milford. The FMA cannot join them.
The analysis of the market manipulation regime is available here.