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Goldman Sachs NZ trading under scrutiny in market manipulation trial

Thursday 29th September 2016

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Trading by Goldman Sachs has come under the scrutiny of lawyers representing Milford Asset Management portfolio fund manager Mark Warminger in a High Court trial on market manipulation.

Duncan Rutherford, who headed Goldman’s securities team in New Zealand until it was restructured earlier this year, was giving evidence today as part of the first week of the Auckland trial brought by the market regulator, the Financial Markets Authority.

Warminger is accused of making trades on 10 occasions that breached securities law prohibiting trading that is not for a genuine commercial purpose and creates an artificial appearance in the market.

The first cause of action brought by the FMA relates to trading in Fisher & Paykel Healthcare shares on May 27, 2014, where Warminger is said to have bought shares to push up the price of the stock from its opening price of $4.32 to $4.35 through five small buy trades and then later selling 500,000 shares at an allegedly manipulated higher price off-market.

Warminger’s counsel Marc Corlett QC questioned why Goldman Sachs also sold shares in F&P Healthcare in the market’s opening auction that day – 15,000 shares at $4.32 and then 10,000 at $4.33 even though it was “short” in its own facilitation account of 463,000 shares.  The firm made a loss on the trades. The stock price had been volatile closing at $4.35 the previous day and in the “4.20s” the day before that.

Rutherford said it wasn't unusual for the firm to do that given the “bigger picture” of its trading strategy for that day and the commissions it received on trading activity. It also did so in the belief Warminger would be a potential seller that day, he said.

The idea of the facilitation account is not simply to make profits on the shares it trades, he said, but it was part of a suite of services it offered clients and acted like a “bucket” that facilitated trades between clients and increased liquidity on the often volatile New Zealand market.

Goldman Sachs made no further sales after learning from Warminger how many shares he was prepared to sell and at what price.

Rutherford said the Goldman team decided to buy the shares from Warminger at $4.35 once the price had moved up in the morning trading and they were worried it might rise higher. However, they initially only bought $300,000 worth to see if the price would go down again during the day, he said, and then later bought a further $200,000 shares off Warminger at $4.35.

Broker Forsyth Barr also bought shares through a crossing that day at $4.35 from Warminger.

Rutherford agreed it was likely that a volume seller could attract a higher price for shares off-market than the on-screen price smaller parcels of shares were selling for.

Warminger sent an email to Goldman Sachs on the day complaining that the firm hadn’t reported the first crossing with him as required under NZX rules, which would have highlighted to the wider market that a higher price had been paid for the shares.

Rutherford said he didn’t know why there had been a delay as Goldman’s traders knew the requirement.

Corlett also questioned him on whether he had spoken to Warminger prior to the market opening on his trading intentions that day when that was contrary to what he had said in his first interview with the FMA. 

But Rutherford said “to the best of his recollection” he had spoken with Warminger who he typically emailed and rang several times a day. Warminger was a client who “provided a lot of liquidity to the market” as one of the larger institutional traders, he said.

In his opening address on Monday, the FMA’s lawyer Justin Smith said the F&P Healthcare buy orders by Warminger appeared to be aimed at pushing quotes for the shares higher rather than him genuinely trading to buy stock at the lowest level.

He said he understood Warminger would offer a defence in relation to those trades by suggesting that at the same time Goldman was trying to sell stock at an undervalue to try to lower the price.

However, he said the FMA argues Warminger’s trading still breached securities law regardless of other effects in the market.

Chief High Court Judge Geoffrey Venning yesterday rejected a defence application for discovery of NZX participation enforcement memos and made a suppression order banning media reporting on the various brokers involved with the documents.

The case is continuing.

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