Securities Law: Of pumping and dumping and painting the tape

POSTED BY Andrew Wallace
07 August 2013

posted in market manipulation | misleading | financial markets regulation



Last week the Financial Markets Authority (FMA) announced that it had filed the first market manipulation case to be taken in New Zealand. The announcement serves as a timely reminder of a fundamental part of the rules that govern our financial markets and the seriousness with which potential breaches are treated.

The Securities Markets Act prohibits anyone from, among other things:

  • Making any statement if a material part of the statement is false or the statement is materially misleading, and it’s likely to induce a person to trade the securities of a public issuer, affect the price of those securities, or affect a person’s decision on a shareholder vote; or
  • Creating a false or misleading appearance of securities trading.

Why? Put simply, markets need to reflect genuine supply and demand. Market manipulation undermines the public’s confidence and discourages investment in our capital markets. Individuals who breach the provisions can be liable for up to five years’ imprisonment and fines of up to $300,000. Companies can be liable for fines of up to $1,000,000. Compensation orders and various other remedies are also available.

The case filed by the FMA concerns a founding member of the NZX-listed Diligent Board Member Services, Brian Henry (not to be confused with the Brian Henry of Goldman Henry Capital Management). Few details have been released just yet, but it appears that the FMA has made various claims alleging that certain orders and trades by Mr Henry in 2010 breached the market manipulation provisions of the Securities Markets Act. Mr Henry has said that the case has no merit and that it has already been considered by the FMA’s predecessor, the Securities Commission.

Most major foreign jurisdictions have rules against market manipulation. It’s a problem the world over, made all the more possible by advances in communications and technology generally.

In the United States, a number of cases have involved the accused disseminating unsubstantiated or plainly incorrect information, then using the demand generated by that information to sell their shares for a profit. And just this week, JPMorgan Chase agreed with a US regulator to pay US$410 million to settle charges that it manipulated markets in its bidding for and selling energy in the Midwest and California. Barclays is facing similar charges but has so far chosen to fight them.

Australia has also seen its fair share of market manipulation cases. The most recent, Director of Public Prosecutions v JM, involved the CEO of an ASX-listed company being charged with contraventions of the Australian rules for allegedly taking part in transactions designed to artificially buoy the price of the company’s shares. In that case, it was alleged that JM bought shares in the company through family members in circumstances which prevented the share price falling below a certain level, thereby avoiding certain negative consequences which could have arisen if the price had dropped. The court adopted an expansive approach to Australia’s market manipulation provisions, which could make it easier to prosecute market manipulation cases over there.

Back over this way, the FMA has indicated that compliance in this area is currently under the spotlight, and its recently released Investigations and Enforcement Report contains several strongly-worded statements about market manipulation. The Henry case could well be the first of more to come.

This article was first published in the Your Law column in the Sunday Star Times on 4 August 2013.

Image courtesy of rattigon at

POSTED BY Andrew Wallace
07 August 2013

posted in market manipulationmisleadingfinancial markets regulation



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