Warminger manipulated market, court finds

Fund manager Mark Warminger manipulated the market to move the prices of shares held in his portfolios the High Court has ruled.

The court found he manipulated the market in two of ten counts alleged by the Financial Markets Authority.

The two related to Fisher & Paykel Healthcare and A2 Milk.

The other eight were dismissed.

In a statement, FMA chief executive Rob Everett said it was pleased with the outcome.

“Market manipulation threatens our core objective of promoting fair, efficient and transparent financial markets. For investors to participate confidently in our markets we need to target and respond to misconduct. That is what this case was about. In terms of the broader consequences for conduct within our markets, we need to review and fully consider the judgement before making further comment.”

Mr Warminger’s lawyer Marc Corlett QC said the fund manager was disappointed that the court found against him on two causes.

“However, it would be inappropriate to comment further until we have worked through the judgment and what it means for Mr Warminger. Consequently, neither Mr Warminger nor counsel will be making further comment at this time.”

The judge, Chief High Court Judge Geoffrey Venning, made declarations that Mr Warminger had breached Section 11B of the Securities Act and invited counsel to file a memorandum on whether a penalty should be imposed and if so, how much it should be.

Under the Securities Act, the maximum pecuniary penalty for market manipulation is $1 million.

Milford's reaction

Brian Gaynor, director of Mr Warminger’s employer Milford Asset Management, declined to comment on the implications of the judgment for its portfolio manager, saying the matter was subject to employment law.

The firm issued a statement to its investors saying the case would have no effect on funds invested.

“The civil proceedings were between Mark Warminger and the FMA and concerned certain activity over two years ago. Milford's settlement with the FMA in June 2015 means that Milford was not involved in these proceedings.

“This was a long and technical test case for the industry and we note both parties have the right to appeal the decision.”

In considering the first allegation of market manipulation in the shares of Fisher & Paykel Healthcare, the judge said Mr Warminger used his direct market access to buy small volumes of stock in order to move the market for a later sale.

“Mr Warminger’s argument he was trading around the position makes little sense from a profitability perspective,” said the judge.

Having told a broker on the day in question he was a seller at $4.35 a share, he then entered the market to buy small volumes at prices from $4.32 to $4.34.

“His subsequent DMA purchases resulted in an average profit per share of a modest fraction of one cent on the volume purchased for a total profit of $656. He would have lost money on the last purchase of 5,000 shares at $4.34 after brokerage was taken into account. By contrast, if his DMA activity led to the increased sale price of $4.35 it improved his crossing price by 3c resulting in a benefit of around $16,350.”

“Mr Warminger’s explanation of why he bought the shares makes little sense in the context of his overall selling behaviour.”

The judge said although the FMA did not have to prove Mr Warminger’s motivation for the trades, some of the evidence at the hearing provided some insight.

“Mr Warminger is a goal driven individual. He is motivated by personal performance, the performance of the funds under his management and the targets he has to meet. As Mr Lee [FNZC head of securities James Lee] said, Mr Warminger would regularly remark to brokers that he was so many basis points up (or down) for the day. Mr Warminger has been very successful in a performance driven industry. He was the INFINZ fund manager of the year for three years preceding 2014. He was used to success and took pride in being on the winning side of a deal. His personality provides some explanation why he would engage in such activity.”

“I find that the purpose of Mr Warminger’s buying activity in FPH shares on 27 May 2014 was to raise the price for FPH shares to a level at which he could sell volume … at $4.35. His actions had the effect of creating or causing the creation of a false or misleading appearance of the demand for and price for trading in FPH stock on 27 May 2014. As an experienced market trader with knowledge of the buying interest for large volumes Mr Warminger would have known his trading would have that effect. Indeed that was the purpose behind his trading.”

The other counts

The second count found proven involved trading in A2 Milk shares on July 9, 2014.

That day Mr Warminger entered 26 direct market access buy orders for a total of 709,900 shares, accounting for 67% of total volume in the stock.

The effect was to tick up the share price and although Mr Warminger argued he was simply seeking to buy at volume the judge did not accept that explanation.

Mr Warminger was offered volume at 68c a share and did not take it, preferred to buy on market at 69c and 70c and his trading supported the FMA’s allegation of attempting to manipulate the market, said the judge.

“The fall in the share price of ATM at this time would have been a concern to Mr Warminger given that Mr Warminger’s funds were significantly overweight in ATM compared to the index,” he said.

It was clear from Milford’s employment records that Mr Warminger’s funds were underperforming their benchmark, said the judge.

“He undoubtedly would have felt pressure as a consequence.”

Justice Venning said the FMA had proved its case in this instance.

“The purpose of his trading was to increase the offer, quote and price for ATM and to maintain the price at a higher level than would have been the case in the absence of his orders. It had that effect.”  

The ruling follows a four-week trial in September and October to hear evidence on the civil lawsuit brought by the Financial Markets Authority.

It alleged Mr Warminger, a portfolio manager with Milford Asset Management, breached Section 11B of the Securities Markets Act – a measure that bans activity likely to create a false or misleading appearance of trading in the market.

There were 10 causes of action brought by the FMA involving Mr Warminger’s trading in the shares of Fisher & Paykel Healthcare, A2 Milk, Restaurant brands, Sky TV, Xero, Wynyard and Skellerup between December 2013 and August 2014.

Although the specifics of each cause of action were different, the FMA defined the trading as falling under three categories:

• placing small trades directly on market in one direction, followed by large off-market trades in the opposite direction;
• trading that manipulates the closing price; and
• trading conducted to set the price, rather than for a genuine commercial purpose.

During the trial, evidence was heard from three expert witnesses.

Mr Warminger’s defence called evidence from Professor Michael Aitken, a Sydney-based academic whose company Smarts Group developed the Smarts market surveillance system now used by the NZX.

Prof Aitken told the court in his view Mr Warminger’s trading did not affect the market – a view the defence said meant Mr Warminger could not, therefore, be liable for market manipulation.

The FMA argued this evidence was irrelevant because the issue was whether the trades were likely to mislead the market about the genuine level of supply and demand.

Two expert witness put forward by the FMA – institutional investor John McMahon and experienced equities trader Philip Solarz – told the court that in their view Mr Warminger’s trading was not consistent with genuine supply and demand.

Mr McMahon said Mr Warminger’s trading style, which could involve frequent low-value on-market trades, was “not credible or sustainable.”

In his defence, Mr Warminger argued that all his trading involved genuine investment decisions to buy or sell shares and there was no material advantage to him or the funds in the alleged manipulation.

As well as its allegations against Mr Warminger, the FMA alleged Milford also had liability as his employer.

Milford denied liability but in June last year agreed to pay $1.5 million to settle the matter.

The payment comprised $1.4 million in lieu of a penalty and $400,000 as a contribution to the FMA’s costs.

RAW DATA: Letter Milford has sent to clients today

In September 2016 we updated you on the FMA's civil proceedings against Mark Warminger.

In a High Court decision released this afternoon, Honourable Justice Venning has upheld two claims and dismissed eight claims by the Financial Markets Authority that Mark Warminger breached the Securities Markets Act.

This decision has no impact on your funds invested with Milford.

As a result of our growth Milford has had a program of upgrading systems and processes since April 2013, including implementing in 2015 a world class system and a centralised dealing team which separates the purchase and sale of individual company securities from Portfolio Management responsibilities.

The civil proceedings were between Mark Warminger and the FMA and concerned certain activity over two years ago. Milford's settlement with the FMA in June 2015 means that Milford was not involved in these proceedings.

This was a long and technical test case for the industry and we note both parties have the right to appeal the decision.

If you have any questions please do not hesitate to contact us.

Kind regards
Milford Client Services