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Australian expert to say Warminger's trades didn't breach law, lawyer tells court

Tuesday 27th September 2016

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An Australian expert in market manipulation will give evidence that none of the trades identified by the Financial Markets Authority in its case against Milford Asset Management portfolio manager Mark Warminger created a false or misleading appearance in the market.

Warminger’s lawyer Marc Corlett QC, in his opening defence at the High Court in Auckland today, said Professor Michael Aitken, a professor of ICT strategy at Sydney’s Macquarie University and one of the world’s leading experts in market manipulation, will give evidence on behalf of Warminger.

After considering all 10 courses of action the FMA has alleged against Warminger, Aitken concluded there was not a single instance where the fund manager’s trading between December 2013 and August 2014 breached securities law by creating a false or misleading appearance.

Aitken has a particular interest in the design and implementation of real-time market surveillance systems to identify prohibited trading behaviours such as insider trading and market manipulation and has designed the SMARTS system in use in more than 50 national stock exchanges worldwide.

The case against Warminger is the first market manipulation case in New Zealand to go to trial.

Warminger, who has been on extended leave from the fund management firm since last year, is accused of misusing his privileged position with an institutional investor by placing trades in stocks in one direction to move the price so he could later transact significant off-market sales, known as cross-trading, at a greater profit.

He’s also accused of placing trades in companies to set artificial prices. The FMA alleged his activities contravened the Securities Markets Act 1988 which prohibits trading that is not for a genuine commercial purpose.

Corlett said Aitken’s evidence would compare with that of the FMA’s own experts – one an analyst and another a trader – “who think they can divine from the trade data, a handful of emails, and the timing of some telephone calls, a malevolent intention behind Warminger’s trading on 10 occasions.”

He argued that Warminger traded stock as part of his role looking after $669 million worth of funds under management rather than just buying the stock and holding until he wanted to divest them.

The FMA’s lawyer Justin Smith QC said yesterday that Warminger was under a “certain amount of pressure” to improve the under-performance of the funds under his management.

But Corlett said motive for the alleged market manipulation remained a “real bewilderment” to Warminger.

If the FMA case was proved, the 10 trades would have increased the value of the fund by around $50,000 which represents an increase of just 0.007 percent on the funds under his management, he said.

The theory that Warminger was under pressure over the performance of the funds was never put to him during the FMA’s interview process and the FMA hadn't called a single witness to talk to the document that it is based on, he said.

“Over a six-month period he was just over 1 percent behind the benchmark,” Corlett said. “This FMA interpretation of personal appraisal documents is in there for no other reason than the need for the FMA to come up with something to explain the otherwise inexplicable – why a highly regarded and successful fund manager would put his career in jeopardy by engaging in criminal conduct for no obvious financial gain?”

Corlett said the case rests on the FMA having to prove that the buying and selling Warminger did had the effect of inflating, depressing, or maintaining the price and led to a price for the shares that is different from the proper and efficient market price.

In other words, a false and misleading price had to be contrasted with the “real” price, being the outcome reached by arms-length transactions between parties which resulted from the normal forces of supply and demand, he said.

Originally four Milford witnesses were to be called and now none are, although executive director Brian Gaynor is being called by the defence to give evidence.

Currently, the court is considering an interlocutory application for discovery of documents from the defendant which is opposed, the content of which has been placed under suppression orders by Chief High Court judge Geoffrey Venning.

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