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Warminger's market manipulation an expensive conduct lesson, expert says

Friday 3rd March 2017

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Mark Warminger's trial for stock market manipulation will be closely scrutinised by securities law practitioners and has been a good test of the law, says one expert, describing it as "a very expensive way to teach ethics and good conduct".

The High Court today found Warminger manipulated the New Zealand stock market in two trades in 2014. However, the judge rejected another eight alleged instances claimed by the Financial Markets Authority. The trial was brought by the FMA, which claimed Warminger breached the Securities Markets Act by placing small trades on-market in one direction, followed by large off-market trades in the opposite direction in order to set the price, rather than for a genuine purpose.

Warminger was working as a portfolio manager for Milford Asset Management at the time of the breaches and has been on leave while the court action has proceeded.

Roger Wallis, a Chapman Tripp partner focusing on corporate and securities law who has followed and written extensively about the case, said the judgment had been keenly awaited and both parties would be considering whether to appeal.

"The FMA really only needed to win one" instance of a breach, Wallis said. "They just took a representative set of instances. The case is really about testing the law to better inform the market, unfortunately at the expense of Mr Warminger. 

"Our initial view is that the case does helpfully do that - it sets a clearer picture for the market as a whole on what constitutes manipulation versus a good trading strategy. It was pretty hard for Warminger to explain being on both the buy side and the sell side at the same time."

Wallis said the case was never about the FMA wanting to put Warminger in jail nor to hand out a significant fine, but would be carefully studied here and in the UK and Australia, which have similar market regulation regimes.

"These cases don’t come up very often. The FMA has been a little bit hamstrung in this area because of this case," Wallis said. "The NZX currently has a paper out on conduct in the market so it’s quite timely. It is a very expensive way to teach ethics and good conduct but it gives clarity where the boundaries are."

The local market is particularly susceptible to concentration of ownership, with relatively few broking firms and relatively few stocks that institutions actively trade, opening it up to allegations of manipulation, Wallis said.

"There are unique features in the New Zealand market. Once you get past the top 10 to 20 stocks, some of the stocks on the NZX don’t get traded that frequently. It is quite common for reasonable volumes to be traded off-market and reported to the market. Other markets are much deeper."

The only people likely to seek compensation would be people in the market for A2 Milk Co and Fisher & Paykel Healthcare shares on the day, Wallis said. The FMA will reflect on whether it wishes to appeal the eight remaining breaches and Warminger will consider whether to appeal the two. If one appeals, the other would likely cross-appeal, Wallis said.

Warminger and his lawyers have said he is disappointed, but it would be inappropriate to comment further, while the FMA's chief executive Rob Everett said the watchdog is pleased with the outcome but needs more time to consider what it means more broadly for conduct within local markets.

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