Milford fund manager faces 10 causes of action

"Market manipulation strikes at the heart of the pricing system on which all investors rely," Justin Smith QC, counsel for the Financial Markets Authority, told the High Court at Auckland today at the start of the country's first such case to go to trial.

In the case, the FMA has accused Milford Asset Management portfolio manager Mark Warminger of breaching securities law in relation to 10 sharemarket trading actions carried out between December 2013 and August 2014 and is seeking financial penalties against him.

Mr Warminger, who has been on extended leave from his position as a portfolio manager at the 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 is also accused of placing trades to set artificial prices. The activities contravened the Securities Markets Act 1988 which prohibits trading that is not for a genuine commercial purpose and creates an artificial appearance in the market, Mr Smith said.

There have been a number of insider trading cases in New Zealand but the only other market manipulation case was in 2014 when expatriate investor Brian Henry admitted illegal share trading and was fined $130,000 before the case went to court.

Mr Henry, a co-founder of NZX-listed software company Diligent Corp, was sued over his trading in Diligent shares in 2010. He admitted to placing multiple orders for buying and selling Diligent shares without completing the trade, which gave the false impression of trading interest in the shares, forcing other buyers to bid at higher prices and affecting the market closing price.

Mr Warminger is said to be a highly experienced equities trader having worked in New Zealand and overseas for several global firms and he had autonomy at Milford to buy and sell New Zealand traded equities without adequate oversight, Mr Smith said.

At August 31, 2014, Warminger had $669 million of assets in several funds under his management, including funds invested through a then mandate with the New Zealand Superannuation Fund.

He is alleged to have made the trades through brokers, often anonymously, knowing they represented prohibited market manipulation and would have an effect on "a fair and openly transparent market", Mr Smith said. Even if he didn't know, lack of knowledge about the prohibition is no defence, he said.

Under the act, the direct evidence only has to show the trader had knowledge of the effect of his behaviour, not an intent behind that effect, and that he ought to have had that knowledge given his position, Mr Smith told the court.

The NZX, which is responsible for ensuring a fair, orderly and transparent sharemarket, issued a guidance note in February 2008 on market manipulation and reissued it in 2011. The guidance note outlined what market trading it consider unacceptable because it was manipulative, Smith said.

Uneconomic trading is a hallmark of market manipulation, he added.

The first cause of action brought by the FMA relates to trading in Fisher & Paykel Healthcare shares where Mr Warminger is said to have bought shares to push up the price of the stock from its opening price of $4.32 to $4.35 in one day through five small buy trades and then later selling a significant chunk of shares at the allegedly manipulated higher price. The buy trading resulted in a loss when commissions were taken into account which meant there was "no economic rationale" for them, Mr Smith said, while he made healthy profits from the shares sold.

The second and third causes of action relate to trading in A2 Milk shares, which Mr Warminger was heavily overweight in through the funds he managed. The stock had been on a downward spiral from 96c a share in February 2014 to around 70c by June/July, which was affecting the performance of the funds under Mr Warminger's management and potentially his performance bonus.

Mr Warminger had had meetings with Milford's former managing director Anthony Quirk and executive director Brian Gaynor over the funds under his management not delivering expected returns in the first half of the year and the poor performance had "put him under a certain amount of pressure," Mr Smith said.

The portfolio manager is alleged to have made aggressive trades, dominating morning trading of A2 shares on these particular days, in the hopes his purchases would spur other buyers into action before the share price rose even higher. He could then sell a significantly higher number of shares later in the day at the higher, allegedly manipulated price. In the third cause of action, the price of A2 shares kept ping-ponging up and down despite Mr Warminger constituting 93% of the early morning trading that pushed the share price to a spread of 68-70c. He inquired of other stock brokers whether anyone was selling a significant number of shares, which was thwarting his alleged efforts to raise the price.

Mr Warminger could face a penalty of up to a $1 million a trade if any breached market manipulation rules, which he denies.

Milford Asset Management has paid a $1.5 million fine under an agreement with the FMA following a year-long investigation. It also committed to introducing new governance and trading controls as recommended in a PwC review.

Mr Warminger still has a 1.5% shareholding in the 13-year-old firm which has more than $3.5 billion of funds under management and 20,000 clients.

The defence is expected to make its opening tomorrow.

(BusinessDesk)

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