Part III: Description of New Zealand Law as it Applies to Market Manipulation
90. This part of the discussion document describes the current position in New Zealand with regard to the laws which may apply to market manipulation.
91. These laws and regulations include provisions of the Crimes Act 1961, section 9 of the Fair Trading Act 1986, parts of the Securities Act 1978 and the Securities Regulations 1983. The common law tort of deceit may also be able to be used against some forms of market manipulation.
92. There are also self regulatory arrangements which regulate aspects of market manipulation. These are found in the New Zealand Stock Exchange's Code of Business Practice and the New Zealand Futures and Options Exchange's Business Conduct Rules.
93. The issue of trading based market manipulation is not addressed directly by New Zealand legislation. There are some provisions regulating the offering of securities and providing for civil and criminal liability for false or misleading statements in prospectuses and advertisements, providing some regulation of disclosure based manipulation. Apart from these, certain provisions of criminal and consumer protection legislation have some application to market manipulation. There are no provisions specifically dealing with manipulative practices in the secondary market for securities trading.
94. The laws and arrangements mentioned above demonstrate a piecemeal approach which may deal with some forms of market manipulation. It can be seen that there is no comprehensive body of law designed exclusively to deal with market manipulation. There is also a lack of consistency with the regulation of insider trading. Some of the laws that appear to apply do so only incidentally, as part of general laws such as those for consumer protection or those intended to apply to fraudulent activity.
95. The application of these laws and regulations to market manipulation is discussed below.
Securities Act 1978
96. Part II of the Securities Act 1978 prohibits offers of securities for subscription to the public without an authorised investment statement or registered prospectus.
97. Section 55 of the Securities Act deems that a statement is untrue if it is misleading in the form and context in which it is included or is misleading by reason of the omission of a particular which is material to the statement in the form and context in which it is included.
98. Section 56 imposes civil liability for misstatements in a prospectus or advertisement. The section provides that certain persons are "liable to pay compensation to all persons who subscribe for any securities on the faith of an advertisement or registered prospectus which contains any untrue statement for the loss or damage they may have sustained by reason of such untrue statement".
99. Regulation 8 of the Securities Regulations 1983 provides further prohibitions for advertisements. The section states that "no advertisement shall contain any information, sound, image, or other matter that is likely to deceive, mislead, or confuse with regard to any particular that is material to the offer of securities contained or referred to in the advertisement".
100. Regulation 5(1) of the Securities Regulations requires the disclosure of additional information in a prospectus, if without such information, a statement would be misleading.
Crimes Act 1961
101. Section 257 of the Crimes Act deals with conspiracy to defraud and provides:
"Every one is liable to imprisonment for a term not exceeding 5 years who conspires with any other person by deceit or falsehood or other fraudulent means to defraud the public, or any person ascertained or unascertained, or to affect the public market price of stocks, funds, shares, merchandise, or any thing else publicly sold, whether the deceit or falsehood or other fraudulent means would or would not amount to a false pretence as hereinbefore defined."
102. In the case R v Adams & Ors T No 240/91 the Crown alleged that Mr Hawkins and Mr Darvell conspired by deceit, falsehood and other fraudulent means to affect the public market price of shares in Equiticorp Holdings Limited in that they agreed to dishonestly support the company's share price. Although the Crown was able to establish that both defendants had misled the press and the New Zealand Stock Exchange, the Crown failed to establish that this conduct resulted from any concerted action between the two accused that amounted to a conspiracy for the purposes of section 257. This section is targeted at preventing conspiracy, but does not cover fraudulent conduct carried out by an individual.
103. This provision as it relates to market manipulation is discussed in paragraph 128 below. Other fraud provisions of the Crimes Act may also apply, for example section 250 under which it is an offence for any promoter, director or officer of a company to make a false statement with intent to induce any person to buy shares in the company. There is, however, a lack of case law on this.
Fair Trading Act 1986
104. Section 9 of the Fair Trading Act 1986 contains a general prohibition against misleading conduct in trade. This section states:
"No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive".
105. This prohibition may apply to market manipulation which involves misleading or deceptive conduct. This issue is discussed in paragraphs 118 to 125 below.
New Zealand Stock Exchange Code of Conduct
106. The relevant section of the New Zealand Stock Exchange's Code of Conduct is:
Avoiding misleading or deceptive acts or representations
Member Firms and their representatives shall refrain from any action which would hinder or disrupt the fair, efficient and orderly functioning of the market.
Member Firms shall not communicate groundless or false information or rumours and may not undertake any activities, including advertising, which are misleading or deceptive or would mislead or deceive others about the true state of the market.
Member Firms and their representatives shall not engage in any manipulative practices such as trades which involve no change in beneficial ownership, or which falsely indicate activity.
The NZSE will not discourage new trading strategies provided they are not prohibited by law (such as insider trading) and they do not diminish the fairness, openness or efficiency of the market.
107. Breaches of the Code are treated by the Board of NZSE as breaches of the requirement to observe good stockbroking practice and the disciplinary provisions of the Rules apply. These provisions give the disciplinary committee, if it finds a member guilty of a breach, the power to:
- Expel the member from membership;
- Suspend the member for a stated period;
- Order the member to pay a penalty not exceeding $100,000 for an individual member or $1,000,000 for a member firm, plus GST or any other applicable tax; or
- Censure the member
New Zealand Futures and Options Exchange Business Conduct Rules
108. The New Zealand Futures and Options Exchange includes in its Business Conduct Rules a prohibition against misleading conduct and describes manipulative activity as an "undesirable situation" which may be investigated by the business conduct committee. The committee may terminate or suspend a dealer's membership for breaches of the rules.
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