"Artificial price" in market manipulation ‒ different tests for different products?

Section 1041A of the Corporations Act 2001 (Cth) prohibits conduct which has, or is likely to have, the effect of creating or maintaining an artificial price for trading in various financial products, including shares and futures.  Some considered the relevant test was settled for all financial products following the High Court decision in DPP (Cth) v JM (2013) 298 ALR 615, a case involving ASX-listed shares.

However, a recent Federal Court case demonstrates that the position is more nuanced and evolving, and that the section might apply differently to different financial products (Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) [2018] FCA 751).

To understand the chameleon-like nature of section 1041A requires an appreciation of its evolution.

Section 1041A: an historical analysis

Historically, market manipulation of shares and futures was regulated separately, and the relevant prohibition framed differently for each.  

The early futures legislation was similar to the current section 1041A.  It prohibited conduct which had, or was intended or likely to have, the effect of creating or maintaining an "artificial price" for dealing in futures contracts on a futures market. The explanatory memorandum and commentary at the time supported the notion that the prohibition was concerned with attempts to manipulate futures prices by manipulating supply and demand for the physical commodities deliverable under futures contracts.  This required economic analysis in two separate markets.

In contrast, the early prohibition in respect of shares involved less complex concepts: it forbade persons from increasing, decreasing, maintaining or stabilising the price of shares for the purpose, or with the intention, of inducing others to buy, sell or subscribe for shares.

Section 1041A brought together the regulation of shares and futures, adopting the language of the former futures legislation.

The High Court test for section 1041A

In JM, the prosecution alleged that the defendant purchased shares in a listed company to maintain the share price in order to avert a margin call.  The case raised for determination whether the term "artificial price" in section 1041A was an economic concept, as was considered to be the case in respect of futures.

In a cautious judgment the High Court stressed the need to assess each case on a fact-specific basis, given the wide range of financial products governed by section 1041A.  Subject to that qualification, and in respect of listed shares, the High Court rejected the notion that section 1041A concerned only economic misconduct, noting that to read section 1041A as being concerned solely with transactions effected from a position of monopoly or dominant power would give the provision little work to do in respect of shares listed on the ASX, particularly in light of the takeover provisions in the Corporations Act which proceed from the premise that monopoly of, or dominance over, the market on the ASX for shares in a particular listed company can be achieved only by making a successful takeover for that company (or under an applicable exception).

The High Court held that in respect of listed shares, the price resulting from a transaction undertaken for the sole or dominant purpose of setting or maintaining price at a particular level is an "artificial price" for the purposes of the section.

The High Court emphasised that it was not necessary nor appropriate for it to comment on whether the test might apply differently in respect of other financial products such as futures, noting that unlike shares, futures have a secondary market: the market for the underlying physical commodity.

Which market?

In the recent Federal Court case, ASIC alleged the defendant contravened section 1041A by undertaking certain transactions in the bank bill market, which affected other financial products, namely bank bill futures, interest rate swaps and cross-currency swaps.  However, there was no evidence of any conduct or effect in the other markets, so ASIC failed in its contention.

This highlights the need to carefully consider the particular financial product in question, as alluded to by the High Court in the JM case, and shows that section 1041A cannot be applied on a global basis.

The need for caution

No doubt the law will become clearer with the passage of time as cases involving different facts and different financial products fall to be decided. 

One area requiring clarification is market stabilisation activity following an initial public offering - so-called "greenshoe" support.  Such conduct would likely be caught by section 1041A and would need to be undertaken with great caution, having regard to the particular financial products and markets impacted by the activity.  Any ASIC "no-action" letter in respect of such conduct would need to be carefully sought on terms which afford maximum protection, noting of course the limitations of such letters. 

The need for caution cannot be over-emphasised given that contravention of section 1041A is punishable by civil penalties and imprisonment.

*Thanks to Christine Demiris for her help in preparing this article.