Diligent's Brian Henry admits market manipulation
Ex-pat investor Brian Henry has become the first scalp in a market manipulation case for the Financial Markets Authority after admitting illegal share trading.
Henry, co-founder of NZX-listed software company Diligent, was sued by the FMA last year over his trading in Diligent's shares in 2010.
Henry conceded defeat today, admitting to six breaches of securities law. According to the FMA he twice executed 'wash trades', namely trading in Diligent shares with himself, which moved the Diligent share price without any change in the ownership of the shares.
He also admitted to placing multiple orders for buying and selling Diligent shares without completing the trade, in a practice known as layering.
The process gave a false impression of trading interest in Diligent shares, forcing other buyers to bid at higher prices and affecting the market closing price.
FMA enforcement director Belinda Moffat said: "misconduct like Mr Henry's undermines the integrity and trust in the fair and orderly operation of the equities market. The public want and deserve to invest in the markets with confidence that any trading activity reflects genuine supply and demand for shares in the market."
A penalty of $130,000 was imposed by the High Court.
In a statement, Henry said he was pleased to have settled the case.
"I am satisfied that the settlement amount reflects the Agreed Summary of Facts which includes references to trading errors which have never been denied or disputed by me," he said.
Henry said the Securities Commission, at the time the market regulator, had decided in 2010 not to take action on his trades.
"However a year ago - three years after the trades - the FMA decided that they had a valid point to make about the integrity of the market, and I respect that.
"It is disappointing that it has taken four years and extensive legal fees for both parties to get to this point."
In a statement to Fairfax last September, Henry expressed a different view of the FMA's action.
"When the case comes to court, at great expense to the taxpayer, it will be clear that their summary of events is inaccurate, overblown and without merit," he said.
In its statement of claim, the FMA alleged that some time around April 27, 2010, Henry had a conversation with Rupert Lister, a manager at ASB, in which Lister "warned the defendant about market manipulation".
Henry reportedly confirmed he was a net seller of the stock and knew he was not allowed to buy and sell to himself.
Two days later, "ASB unilaterally closed the trust's share trading account due to concerns it held about the defendant's share trading".
In his statement of defence Henry denied he was warned about market manipulation and that ASB closed his account because of its concerns.
NZX rules require brokers to monitor and report suspect share trading. The NZX referred concerns about Henry's trading to the Securities Commission in June 2010.
In a statement, the NZX yesterday said it welcomed the court ruling.
"NZX is committed to running fair, orderly and transparent markets. The successful outcome in this case reflects the importance NZX places on upholding the integrity of the markets it operates."
Passing judgment on Henry's breaches of the Securities Markets Act 1988, Justice Venning said his conduct "undermines the development of a fair, efficient, and transparent financial market.
"Such market manipulation is likely to undermine the integrity of the NZX and jeopardise the confidence of both overseas and domestic investors in the NZ security markets."
The Henry case is the first market manipulation case to come before the courts in New Zealand.
Although the Henry's offences carried a potential penalty of up to $1 million each, Moffat said she was comfortable with the fine imposed by the court because Henry had made no discernable profit and had admitted all claims.
"The Court also felt that had did not deliberately set out to breach the Securities Markets Act 1988 - but noted that he ought to have known that his trading breached the law," she said.