FEDERAL COURT OF AUSTRALIA 

SECURITIES – Wash trades – index arbitrageur establishes arbitrage position – allows index futures contracts to go to expiry – gives instructions to sell a large volume of securities aggressively near the close of trading on the Australian Stock Exchange (“ASX”) on the expiry date – placement of a “Bid Basket” at prices well below market levels – sell orders “hit” bids in the Bid Basket – sale of shares without any change of beneficial ownership – whether defences in Corporations Law, ss 998(6) and 998(8) available in civil proceedings – whether any contravention of Corporations Law, ss 998(1) or 998(3). 

Sale orders relate to thinly traded securities –whether placement of sale orders, in combination with placement of Bid Basket, constituted conduct intended to create a false or misleading appearance of active trading on the ASX in illiquid securities – meaning of “any securities” – whether conduct was likely to create a false or misleading appearance with respect to the price of securities – meaning of “likely” – whether any contravention of Corporations Law, s 998(1). 

Whether index arbitrageur intended to determine the closing price of illiquid securities on the ASX on the expiry date for futures contracts – whether it thereby intended to influence the cash settlement price of futures contracts going to expiry – whether it intended to create a false or misleading appearance with respect to price for dealings in a futures contract in a futures market – whether contravention of Corporations Law, s 1260(1)(b). 

Index arbitrageur places orders designed to prevent “high ticking” near close of trading – orders intended to support strategy of depressing prices at the close – whether intended to create a false or misleading appearance with respect to the price of securities – whether contravention of Corporations Law, s 998(1). 

TRADE PRACTICES – Misleading and deceptive conduct – whether sale orders on the ASX likely to mislead or deceive – placement of “Ask Basket” designed to confuse broker – whether contravention of s 52(1) of the Trade Practices Act 1974 (Cth). 

 

Corporations Law, ss 9, 24(1), 25(1), 55, 72, 92, 995(2), 995(3), 995(4), 998(1), 998(3), 998(5), 998(6), 998(7), 998(8), 998(9), 1114, 1268, 1324, 1260(1)(b).

Trade Practices Act 1974 (Cth), s 52(1).

Sydney Futures Exchange By-Laws, A0I.2(c), A0I.2(d), A0I.3, A0I.4, A0I.7, A0I.10, A0I.15, G13(e)(v),(vi),(ix). 

 

 

A Black ‘Regulating Market Manipulation: Sections 997 – 999 of the Corporations Law’ (1996) 70 ALJ 987. 

 

 

Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353, distinguished.

Briginshaw v Briginshaw (1938) 60 CLR 336, cited.

Endresz v Whitehouse (1997) 15 ACLC 936, cited.

Fame Decorator Agencies Pty Ltd v Jeffries Industries Ltd (1998) 28 ASCR 58, cited.

Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82, cited.

Gould v Brown (1998) 151 ALR 395, cited.

He Kaw Teh v The Queen (1985) 157 CLR 523, cited.

Mutual Home Loans Fund of Australia Ltd v Attorney-General for the State of New South Wales (1973) 130 CLR 103, cited.

News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410, distinguished.

North v Marra Developments (1981) 148 CLR 42, followed.

Parkdale Custom Built Furniture v Puxu Pty Ltd (1982) 149 CLR 191, cited.

Rejfek v McElroy (1965) 112 CLR 517, cited.

State of Western Australia v Wardley Australia Ltd (1991) 30 FCR 245, distinguished.

Stoller v Commodity Futures Trading Commission 834 F 2d 162 (2^nd Cir, 1987), cited.

Tillmans Butcheries Pty Ltd v Australian Meat Industry Employees’ Union (1979) 42 FLR 331, cited.

Vrisakis v Australian Securities Commission (1993) 11 ACSR 162, distinguished.

Walsh v Tattersall (1996) 188 CLR 77, distinguished. 

 

 

 

AUSTRALIAN SECURITIES COMMISSION v NOMURA INTERNATIONAL PLC

NG 3045 of 1997

 

 

SACKVILLE J

SYDNEY

10 DECEMBER 1998

 

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 3045 OF 1997

 

BETWEEN:	AUSTRALIAN SECURITIES COMMISSION Applicant
AND:	NOMURA INTERNATIONAL PLC Respondent

 

JUDGE:	SACKVILLE J.
DATE:	10 DECEMBER, 1998
PLACE:	SYDNEY

 

 

THE COURT ORDERS THAT: 

1.                  The applicant bring in short minutes of order within seven days, in accordance with these reasons for judgment. 

2.                  The matter stood over to 18 December 1998 at 9.30 am for directions. 

 

 

 

 

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

 

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 3045 of 1997

 

BETWEEN:	AUSTRALIAN SECURITIES COMMISSION Applicant
AND:	NOMURA INTERNATIONAL PLC Respondent

 

JUDGE:	SACKVILLE J.
DATE:	10 DECEMBER 1998
PLACE:	SYDNEY

TABLE OF CONTENTS

1. BACKGROUND

1.1 The proceedings

1.2 The Legislation

2. AN OVERVIEW

2.1 Preliminary

2.2 An Outline of ASIC’s Case

March Sale Orders

Bid Basket

Ask Basket

London Bid Side Sell Orders

London Offer Side Sell Orders

Alleged Breach of s 1260 of the Corporations Law

2.3 Illustrative Dealing

2.4 An Outline of Nomura’s Case

3. EVIDENCE

3.1 The Categories of Evidence

3.2 The Evidence of Nomura Officers

Mr Channon

Mr Moss

Mr Mapstone

3.3 A General Observation

4. EXCHANGES AND INDEXES

4.1 ASX and SEATS

4.2 SFE and Futures Contracts

4.3 The All Ordinaries Index

4.4 SPI Contracts

5. STOCK INDEX ARBITRAGE

5.1 The Nature of Arbitrage

5.2 Fair Value

5.3 Closing Out an Arbitrage Position

Unwinding

Roll Over

Expiry

5.4 Arbitrage Risks

Tracking Risk

Delta Risk

Expiry Risk

6. NOMURA’S TRADING ON THE ASX

6.1 Background to the Events of 29 March 1996

6.2 The Decision To Go To Expiry

6.3 Nomura’s Holdings on the ASX and the SFE at the Close of Trading on 28 March 1996

6.4 Sales to Institutions

6.5 Nomura’s Trading Activities on 29 March 1996

6.6 The Bid Basket

6.7 The Ask Basket

6.8 The March Sale Orders

6.9 The London Bid Side Sell Orders

6.10 The London Offer Side Sell Orders

6.11 Nomura’s Sales to Itself

6.12 March 1996 SPI Contracts Go To Expiry

6.13 Additional Sold March 1996 SPI Contracts

6.14 Acquisition of Further June SPI Futures

7. NOMURA’S INTENTIONS AND EXPECTATIONS

7.1 The Expiry Strategy

The Conversations

7.2 The Sold June SPI Contracts

7.3 Mr Mapstone’s Evidence

7.4 Findings on Nomura’s Expiry Strategy

7.5 The Intra-Day March 1996 SPI Contracts

Conversations

Findings on the Intra-Day March SPI Contracts

8. MARCH SALE ORDERS: INSTRUCTIONS TO BROKERS

8.1 Discussions Within Nomura

8.2 Instructions to Brokers

Scott Foster

Were

Bain

ANZ McCaughan

Pru-Bache

BZW

HSBC Capel

Ord Minnett

Patterson Ord Minnett

McIntosh

8.3 Findings Concerning The Instructions To Brokers

9. THE LIKELIHOOD OF THE BID BASKET BEING HIT

9.1 The Temporal Question

9.2 The Experts

9.3 Latent Demand

9.4 The Likelihood of the Bid Basket Being Hit

9.5 Would the Bid Basket Have Been Hit?

9.6 Individual Stocks

9.7 Summary of Findings

10. THE ALLEGED CONTRAVENTIONS: CORPORATIONS LAW s 998

10.1 Section 998(1) of the Corporations Law

10.2 The Principal Authorities

North v Marra

Fame v Jeffries

The Meaning of “Intended”

“Any Securities”

“Likely”

10.3 The Self Trades

The ASIC’s Case on s 998(1) of the Corporations Law

Nomura’s Contentions

Some Brief Legislative History

Does s 998(6) Apply to the Present Proceedings?

The Factual Basis for the Application of s 998(6)

Section 998(3) of the Corporations Law

10.4 The Bid Basket and the March Sale Orders

Intentional Conduct: Submissions

Intentional Conduct: A Contravention?

Likelihood of a Misleading Appearance: Submissions

Likelihood of a Misleading Appearance: A Contravention?

Likelihood of a Misleading Appearance: Mens Rea

11. OTHER ALLEGED CONTRAVENTIONS

11.1 Section 1260 of the Corporations Law

11.2 Section 995(2) of the Corporations Law and Section 52 of the TP Act

11.3 Ask Basket

11.4 The London Bid Side and Offer Side Sell Orders

The Context

The Offer Side Orders

London Bid Side Orders

12. CONCLUSION

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 3045 of 1997

 

BETWEEN:	AUSTRALIAN SECURITIES COMMISSION Applicant
AND:	NOMURA INTERNATIONAL PLC Respondent

 

JUDGE:	SACKVILLE J.
DATE:	10 DECEMBER 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. BACKGROUND

1.1 The Proceedings

In these proceedings, the applicant (“ASIC”) seeks declaratory and injunctive relief against the respondent (“Nomura”), a company incorporated in the United Kingdom. The proceedings have been brought pursuant to ss 1114, 1268 and 1324 of the Corporations Law.

In 1996, Nomura was a stock index arbitrageur. It had no permanent presence in Australia. The ASIC’s claims arise out of orders placed and transactions carried out on behalf of Nomura on 29 March 1996. On that day, Nomura placed orders to sell securities worth a little under A$600 million in the last half-hour or so of trading on the Exchange conducted by Australian Stock Exchange Limited (“ASX”). These orders were was designed, at least in part, to unwind an arbitrage position Nomura had established in index futures traded on the Sydney Futures Exchange (“SFE”) and in securities traded on the ASX. On the same day it also conducted transactions involving futures contracts known as “All Ordinaries Share Price Index Contracts” or “SPI Contracts”. In particular, it allowed a large number of SPI Contracts to go to expiry.

The ASIC alleges that Nomura placed orders and carried out transactions on 29 March 1996 that contravened the Corporations Law and the Trade Practices Act 1974 (Cth) (“TP Act”). In effect, it says that Nomura manipulated the market, taking advantage in particular of the opportunities provided by lower liquidity and trading volumes on the ASX compared with some overseas exchanges: cf A Black, “Regulating Market Manipulation: Sections 997-999 of the Corporations Law” (1996) 70 ALJ 987, at 987. In substance, the ASIC’s allegations are that Nomura

·        in two instances, sold shares to itself, thereby contravening s 998(1) and s 998(3) of the Corporations Law;

·        created, or did acts calculated to create, a false or misleading appearance with respect to the market for or the price for dealings in futures contracts on a futures market, in contravention of s 1260(1)(b) of the Corporations Law;

·        did acts intended or likely to create a false or misleading appearance with respect to active trading in securities or with respect to the market for, or the price for, securities, in contravention of s 998(1) of the Corporations Law; and

·        in connection with dealings in securities, engaged in conduct that was misleading or deceptive, or likely to mislead and deceive, in contravention of s 995(2) of the Corporations Law and s 52(1) of the TP Act.

 

Nomura denies that its conduct contravened the Corporations Law or the TP Act. It also says that, even if contraventions are established, the ASIC should not obtain injunctive relief. It was agreed between counsel that the question of whether injunctive relief is appropriate and, if so, the form of that relied, should await findings on whether Nomura had contravened the Corporations Law or TP Act. Accordingly, this judgment deals only with the issue of Nomura’s alleged contraventions of the Corporations Law and the TP Act.

1.2 The Legislation

Part 7.11 of the Corporations Law is headed “Conduct in Relation to Securities”. Sections 995 and 998 appear in Division 2, which is headed “Prohibited Conduct”. The material provisions of ss 995 and 998 are as follows:

 

“995(2) A person shall not in, or in connection with:

(a)                any dealing in securities; or

(b) …;

engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

 

995(3) A person who contravenes this section is not guilty of an offence.

 

995(4) Nothing in the following provisions of this Part or in the provisions of Part 7.12 shall be taken as limiting by implication the generality of subsection (2).

 

…

 

998(1) A person shall not create, or do anything that is intended or likely to create, a false or misleading appearance of active trading in any securities on a stock market or a false or misleading appearance with respect to the market for, or the price of, any securities.

 

…

 

998(3) A person shall not, by means of purchases or sales of any securities that do not involve a change in the beneficial ownership of those securities or by any fictitious transactions or devices, maintain, increase, reduce, or cause fluctuations in, the market price of any securities.

 

…

 

998(5) Without limiting the generality of subsection (1), a person who:

(a)               enters into, or carries out, either directly or indirectly, any transaction of sale or purchase of any securities, being a transaction that does not involve any change in the beneficial ownership of the securities;

(b)               …; or

(c)               …;

 

shall be deemed to have created a false or misleading appearance of active trading in those securities on a stock market.

 

998(6) In a prosecution of a person for a contravention of subsection (1) constituted by an act referred to in subsection (5), it is a defence if it is proved that the purpose or purposes for which the person did the act was not, or did not include, the purpose of creating a false or misleading appearance of active trading in securities on a stock market.

 

998(7) A purchase or sale of securities does not involve a change in the beneficial ownership for the purposes of this section if a person who had an interest in the securities before the purchase or sale, or an associate of the person in relation to those securities, has an interest in the securities after the purchase or sale.

 

…

 

998(8) In a prosecution for a contravention of subsection (3) in relation to a purchase or sale of securities that did not involve a change in the beneficial ownership of those securities, it is a defence if it is proved that the purpose or purposes for which the securities were bought or sold was not, or did not include, the purpose of creating a false or misleading appearance with respect to the market for, or the price of, securities.

 

998(9) The reference in paragraph (5)(a) to a transaction of sale or purchase of securities includes:

 

(a)               a reference to the making of an offer to sell or buy securities; and

(b)               a reference to the making of an invitation, however expressed, that expressly or impliedly invites a person to offer to sell or buy securities.”

 

 

A contravention of sub-ss 998(1) or (3), unlike a contravention of s 995(2), is a criminal offence.

The expression “securities” is defined in s 92(1) of the Corporations Law to mean

 

“(a) …;

(b) shares in, or debentures of, a body; or

(c)           prescribed interests; or

(d)           units of such shares or of prescribed interests; or

…”

 

As I have indicated, the present proceedings have been brought pursuant to ss 1114, 1268 and 1324 of the Corporations Law. Section 1114 empowers the Court, on the application of the ASIC, where a person has contravened Chapter 7 (including ss 995-998), to make such orders as it thinks fit, including restraining orders. Section 1268 is in similar terms, but applies to a person who has contravened Chapter 8 (including s 1260). Section 1324 applies where a person has engaged, is engaged or is proposing to engage in conduct that constituted, constitutes or would constitute a contravention of the Corporations Law or an attempt to contravene the Corporations Law. In such circumstances, the Court, on the application of the ASIC, may grant an injunction, on such terms as the Court thinks appropriate, restraining the person from engaging in the conduct.

Section 1260 appears in Part 8.7 of the Corporations Law, which is concerned with offences. Section 1260(1) provides as follows:

 

“1260(1) A person must not, in this jurisdiction or elsewhere, create, cause to be created, or do anything that is calculated to create, a false or misleading appearance:

 

(a)               of active dealing in futures contracts on a futures market in this jurisdiction; or

(b)               with respect to the market for, or the price for dealings in, future contracts on a futures market in this jurisdiction.”

There are a number of definitions relevant to s 1260, including “futures contract” (s 72); “adjustment agreement” (s 9); “deals in a futures contract” (s 25); “disposes of a futures contract” (s 24); “close out” (s 9); “price” (s 9) and “sold position” (s 9). To the extent necessary, I shall refer to these definitions later.

Section 52(1) of the TP Act is as follows:

 

“52(1) A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”

 

 

2. AN OVERVIEW

2.1 Preliminary

There was little or no dispute between the parties as to the orders placed by Nomura and the transactions effected on the ASX in consequence of (and, in some cases, despite) those orders. The ASX maintains electronic data bases which record all orders placed and transactions effective by means of its processes. Thus there was a complete record of all orders placed and transactions carried out by brokers on Nomura’s behalf. Moreover, many telephone conversations between officers of Nomura and between Nomura officers and third parties, including brokers operating on the ASX, were tape recorded, apparently in compliance with regulatory requirements in the United Kingdom. The tapes of the conversations were transcribed and the transcripts admitted into evidence. This still left room for disagreement between the parties as to the intentions and expectations of Nomura’s senior officers in relation to the company’s strategy and the orders given to brokers. It will be necessary in due course to make some findings on those issues. But, save for minor disputes about the transcription of tapes, I have had the considerable advantage of verbatim accounts of important conversations and precise records of when those conversations took place.

It is convenient in these circumstances to commence with an overview of the way the ASIC puts its case. Before doing so, however, there are several peculiar features of the case that need to be understood at the outset. They help to explain why Nomura took some of the actions it did and why its plans were only partially implemented. They also illustrate that transactions planned by sophisticated market participants, involving hundreds of millions of dollars, can readily degenerate, at least in some respects, into a comedy of errors.

The first feature is that Mr Channon, the Nomura trader principally responsible for the strategy pursued on 29 March 1996, laboured under an important misapprehension as to how the key index, the All Ordinaries Index (“All Ords”), was calculated. He mistakenly believed, at the relevant times, that the level of the All Ords was calculated exclusively by reference to the last traded price of each stock comprised in the index. He did not learn until later that, in certain circumstances, the calculations were based on bids or offers for stock current at the close of trading. According to Mr Channon’s own account, had he ascertained the correct information, Nomura’s strategy for unwinding its arbitrage position would have been quite different.

The second feature is that many of the brokers engaged by Nomura simply failed to carry out their instructions. Even allowing for ambiguities in instructions, orders were often not placed in the manner and at the times Nomura required. In some instances, orders placed by Nomura were not implemented at all. Consequently, some transactions involving Nomura occurred at times and in ways Nomura neither expected nor desired. Other transactions that Nomura expected to occur did not eventuate. This was the principal reason why Nomura effected only two trades with itself on 29 March 1996. Had its instructions been carried out faithfully it is very likely that many more self-trades would have taken place.

A further preliminary point should be made. According to witnesses called by Nomura, its strategy on 29 March 1996 involved the sale of a basket of securities having a value of nearly $600 million, not merely within a very short period of time, but in a manner that was largely price insensitive. For reasons connected with the calculation of the All Ordinaries Index that will become apparent later, Nomura was assured of realising a profit from its arbitrage position if it could sell its basket of securities on 29 March 1996, on average, at prices equivalent or higher than the closing price of the securities in the basket. According to these witnesses, Nomura’s intention was not to obtain the maximum price for each of its securities; nor was it to drive down their price. Rather, it wished to sell the securities (which matched its holdings of futures contracts expiring on 29 March 1996) at a price equal to or better than the closing price for each of the securities on that day. Thus, the actual closing price for each of the securities on 29 March 1996 was a matter of indifference to it.

One of the important factual issues in the case is whether Nomura’s dealings were as price insensitive as the witnesses maintained. For present purposes it is enough to observe that, while sophisticated participants in and observers of the ASX might appreciate (now and in 1996) that some large players in the market are price insensitive, this is by no means generally understood by less sophisticated or knowledgeable investors. Indeed the evidence suggests that one reason why Nomura’s instructions were not consistently implemented was that some brokers had difficulty in grasping or accepting instructions that required them to sell stock at very heavily discounted prices at or shortly before the close of the market at 4:00 pm on 29 March 1996.

2.2 An Outline of ASIC’s Case

In order to understand the detailed findings concerning the events of 29 March 1996, it is convenient to set out the ASIC’s case in summary form. The transactions, indexes and systems referred to in this summary are considered at greater length later in the judgment.

Shortly before and on 29 March 1996, Nomura decided that it would attempt to sell a basket of securities on the ASX in the last half-hour or so of trading on that day. The basket of securities, the composition of which almost exactly replicated the composition of the “All Ordinaries Index”, known colloquially as the “All Ords”, was worth about A$587 million at the close of trading on 28 March 1996. Nomura’s decision to sell was part of its strategy designed to unwind an arbitrage position it had previously established by its holdings of the futures contracts known as “All Ordinaries Share Price Index Contracts” or “SPI Contracts” and its matching or offsetting basket of securities traded on the ASX. Nomura had acquired a sold position in SPI Contracts expiring on 29 March 1996. Because Nomura’s basket of securities virtually replicated the weighting of stocks included in the All Ords (which in turn was the subject matter of the SPI Contracts), Nomura held an almost perfect arbitrage position.

Nomura had decided to allow the SPI Contracts to go to expiry on 29 March 1996. In order to capture its arbitrage profit, it was necessary for Nomura to sell the whole of its basket of securities. More importantly, as already noted, Nomura wished to achieve an average sale price for its securities equal to or higher than the closing market price for those securities on 29 March 1996. The significance of the closing price was that the level of the All Ords was determined solely (as Mr Channon wrongly thought) by the closing prices of the securities comprised in that index. The closing level of the All Ords on 29 March 1996 also determined the price of SPI Contracts going to expiry on that day.

The ASIC alleges that Nomura intended to cause the price of securities listed on the ASX to fall at or shortly before the close of trading on 29 March 1996. Such a fall was in Nomura’s interests for a number of reasons. Nomura wished to sell its securities, on average at or better than the closing price and a sharp reduction in prices at the close would achieve that goal. Nomura also stood to gain in other ways from a sharp fall in the price of securities at the close. For example, Nomura acquired a sold position in March SPI Contracts on 29 March 1996. It allowed those SPI Contracts to go to expiry on that day. If the All Ords fell sharply at the close, Nomura would benefit from the commensurate fall in the closing price of the March SPI Contracts.

The ASIC does not contend that it was illegal for Nomura simply to attempt to dispose of a very large quantity of stock within a very short time. The ASIC maintains this position even in a case where the trader knows that the likely effect of such a heavy volume of selling is to cause the market price of most securities to fall and that this will lead to a fall in the All Ords. Rather, the ASIC complains of the five strategies adopted by Nomura which, it says, were prompted by its intention to bring about sharp reductions in the price of securities, especially (but not exclusively) thinly traded securities, at the close of trading on 29 March 1996. Nomura’s five strategies were:

·        the placement of the “March Sale Orders”;

·        the placement of the “Bid Basket”;

·        the placement of the “Ask Basket”;

·        the placement of the “London Bid Side Orders”; and

·        the placement of the “London Offer Side Orders”.

March Sale Orders

Nomura’s instructions to sell its basket of securities on 29 March 1996 were described in evidence as the “March Sale Orders”. Nomura gave instructions for the March Sale Orders to ten broking firms. The initial instructions were given from about 2:10 pm to 2:30 pm on 29 March 1996, but were varied by telephone calls between 3:07 pm and 3:57 pm. Five brokers were allocated the most liquid securities. These were securities in the most highly capitalised corporations (referred to by the witnesses as “high cap stocks” or “high caps”. In general, there is a strong market for high cap stocks and average turnover in those securities tends to be high. Five brokers were allocated the less liquid securities. These were securities in corporations with lower capitalisation (“low cap stocks” or “low caps”). In general, the market for low cap or “illiquid” stocks tends to be relatively thin and average turnover relatively low.

 

The ASIC’s case takes as its starting point that Nomura’s instructions to its brokers, particularly in relation to the illiquids, were likely to drive prices down at the close of trading on the ASX on 29 March 1996. As will be seen, Nomura instructed its brokers, in effect, to sell very aggressively at the close without being concerned about the extent of any drop in price that the instructions would produce. However, the ASIC goes further. It says that Nomura intended to bring about a reduction in the price of the securities in its basket, especially the illiquids. The ASIC contends that Nomura actually intended to bring about “sales” to itself. This was to occur because the brokers entrusted with the March Sale Orders, at least in the case of some illiquids, would unknowingly hit bits for the very same securities placed by Nomura in the form of the so-called Bid Basket. In other words, Nomura intended to drive down prices, in part, by selling securities to itself at depressed prices.

Bid Basket

In addition to placing the March Sale Orders (that is, the orders to sell Nomura’s basket of securities in the last half-hour or so of trading on 29 March 1996), Nomura instructed a broker at 11:18 am on 29 March 1996 to place orders to buy the very same securities in almost precisely the quantities as contemplated by the March Sale Orders. The prices at which the buy orders were to be placed on the ASX were between five per cent and twenty per cent lower than the closing price of the particular security on the previous day (28 March 1996). The percentage discount depended on the degree of liquidity of the security. The lower the degree of liquidity, as measured by market capitalisation, the greater the discount to be incorporated in the Bid Basket. The orders were placed by the broker on the Stock Exchange Automated Trading System, known as “SEATS”, between 12:26 pm and 1:09 pm on 29 March 1996.

According to the ASIC, Nomura’s purpose in placing the Bid Basket was not to buy the securities from anyone wishing to sell them at that price in the market. Rather, Nomura’s object was to purchase the securities from itself at depressed prices, should insufficient or no demand emerge for the securities during the last half-hour of trading. Nomura believed that, in the case of a significant number of the illiquids, no significant intervening demand for the stock would emerge (that is, bids at prices above those recorded in the Bid Basket) once the March Sale Orders were placed. Thus, Nomura would inevitably trade with itself in a number of securities. (A “sale” by a trader to itself, without any change of beneficial ownership, is usually described as a “wash trade”.)

On the ASIC’s case, Nomura fully intended that it would trade with itself, because it wished to take advantage of profit opportunities that such trades at discounted prices for illiquids presented. These opportunities included obtaining a profit from the likely fall in the All Ords brought about by the sudden drop in prices of illiquids at the close of trading and a consequent fall in the price of SPI Contracts. It was common ground that Nomura acquired a sold position in March SPI Contracts on 29 March 1996, which it allowed to go to expiry on that day. It thereby realised a profit of about $1.3 million.

In the event, because of the failure of brokers to implement Nomura’s instructions fully, and perhaps for other reasons, Nomura traded with itself pursuant to the Bid Basket in only two securities. According to the ASIC, these wash trades contravened subss 998(1) and 998(3) of the Corporations Law. Since there had been no change in the beneficial ownership, Nomura was deemed by s 998(5)(a) of the Corporations Law to have created a false or misleading appearance of active trading in these securities. Sub-section 998(3) was also breached because the self-trades had the effect of reducing the market price of the two securities.

Further, the ASIC contends that the placing of the buy orders in the Bid Basket, in the context of Nomura’s overall plans, contravened s 995(2) and s 998(1) of the Corporations Law, as well as s 52(1) of the TP Act. The placement of the Bid Basket, in combination with the March Sale Orders, was intended or likely to create the appearance that securities had been bought and sold by reference to the forces of supply and demand. In truth, that appearance would have been false or misleading, at least to the extent that Nomura purchased its own securities through the Bid Basket.

Ask Basket

Nomura’s third strategy was to place an “Ask Basket” on 29 March 1996. Nomura instructed the same broker which placed the Bid Basket to place sell orders for the same securities as were covered by the Bid Basket. The quantities were in substance the same, but the sell orders were to be placed between five and twenty per cent above the previous day’s closing price, again depending on the liquidity of the particular security. The Ask Basket was the mirror image of the Bid Basket.

The reason for this apparently remarkable strategy was Nomura’s concern that well-informed market participants would realise that Nomura (or some other trader) was about to become a heavy seller of securities. Nomura was concerned about “front running”, whereby other participants in the market, realising that heavy selling is about to occur, sell ahead of the market. If this had occurred on 29 March 1996, there was a risk that the price of securities would rebound before the close, particularly if the “front runner” tried to buy back the securities it had previously sold.

According to the ASIC, the purpose of the Ask Basket was avowedly to confuse. The traders acting on Nomura’s behalf admitted that their purpose in placing the Ask Basket was to conceal their strategies from the broker entrusted with the Bid Basket. Nomura had created an extraordinary situation whereby

·        from about 1:00 pm to 4:00 pm on 29 March 1996, buy orders for securities in the All Ords were placed through the Bid Basket at a discount to the previous day’s prices;

·        from about 2:00 pm to 4:00 pm on the same day the sell orders for the same securities in the All Ords were placed through the Ask Basket at a premium to the previous day’s prices; and

·        between about 3:30 pm and 4:00 pm Nomura caused its “real” sale orders to be entered for the same securities in approximately the same quantities.

According to the ASIC, this strategy created the impression that there was a genuine seller in the market pursuant to the Ask Basket, whereas Nomura was simply intending to confuse the market (especially the broker entrusted with the Bid Basket) about its intention with respect to the “real” sale orders and their likely intersection with the Bid Basket. Mr Heydon QC, who appeared with Mr Gleeson and Mr Diethelm for the ASIC, accepted, however, that the Bid Basket was at the core of the ASIC’s case and that the Ask Basket could fairly be described as an “ancillary part” (Ts 999) of the case.

London Bid Side Sell Orders

The fourth and fifth of Nomura’s strategies were designed to deal with the risk that Nomura would be “high ticked” at the close of trading on 29 March 1996. In general terms, high ticking refers to a last moment rebound in price after a seller has disposed of securities at a lower price. At about 3:20 pm on 29 March 1996, Nomura officers in London instructed a broker to sell 10,000 of each of the top ten securities in the All Ords as assessed by market capitalisation. These instructions were referred to in the proceedings as the “London Bid Side Sell Orders”. The broker was required to effect the sale as the last trade of the day and to do so by hitting the bids (that is, offers to sell) recorded on the bids schedule of SEATS. The stock required to fill those orders were intended to come from Nomura’s holdings maintained as a hedge against SPI Contracts expiring in June 1996. In fact, the broker placed only nine orders and did so only after the close of trading at 4:00 pm. Six orders resulted in trades.

According to the ASIC, Nomura’s intention in placing the London Bid Side Sell Orders was to ensure that the closing prices for the ten securities was lower than otherwise might be the case. By hitting the bid side (rather than, for example, offering to sell at a slightly higher price by entering an offer to sell in the Ask Schedule of SEATS), Nomura increased the chances that the closing prices of the ten securities would be lower. It also minimised the risk that the prices of these securities would rebound after Nomura had disposed of its holdings of the same securities. In short, Nomura was attempting to fix the closing market price of these securities.

London Offer Side Sell Orders

The final strategy adopted by Nomura, through its London office, was to instruct a broker to place further sale orders for the same top ten securities in the All Ords. The instructions were given at about 3:30 pm on 29 June 1996. The orders, referred to as the “London Offer Side Sell Orders”, were for much greater volumes than the London Bid Side Sell Orders. The broker was required to place the orders on SEATS at the level of the best ask (that is, the lowest offer to sell). None of these orders resulted in trades.

According to ASIC, Nomura was not really intending to sell the securities covered by the London Offer Side Sell Orders. Rather, its intention was to provide a protective mechanism against a rebound of the market price for the securities after Nomura had disposed of its holdings through the March Sale Orders. Because of the offer side orders, the market price for the securities would meet a barrier on the way up. In effect, the fourth strategy was an insurance policy against the failure of the other strategies. Nomura’s actuating purpose was to fix the closing market price. Its conduct was likely to mislead the market, since Nomura was not a genuine seller.

Alleged Breach of s 1260 of the Corporations Law

The ASIC alleges that Nomura, by putting in place the five strategies outlined, contravened s 1260(1)(b) of the Corporations Law. It claims that Nomura’s activities on the ASX were calculated to create a false or misleading appearance with respect to the price for dealings in futures contracts on a futures market. The ASIC says that Nomura’s activities were calculated to have this effect because they were designed to reduce the closing price of the All Ords on 29 March 1996 and, as a necessary consequence, to reduce the expiry price of the SPI Contracts in which Nomura held a sold position.

2.3 Illustrative Dealing

As an illustration of the implementation of Nomura’s strategy, ASIC provided the following summary of Nomura’s dealings in BHP on 29 March 1996, then the highest cap stock in the All Ords. By way of background, the following should be noted:

(i)                  Nomura’s March Sale Orders required the broker to sell 3,637,500 BHP shares. The BHP sell order represented 11.3 per cent of the March Sale Orders by value, the same or very close to BHP’s weighting in the All Ords.

(ii)                BHP’s closing price on 28 March 1996 was $18.17. Its closing price on 29 March 1996 was $18.22, although there were fluctuations during the day.

(iii)               A number of the transactions involving BHP took place after the close of trading on the ASX at 4:00 pm on 29 March 1996. There included some sales of BHP shares pursuant to the March Sale Orders and the recording of the London Bid Side Offers in respect of BHP shares. The delay was the result of the brokers concerned failing to implement fully the instructions conveyed on behalf of Nomura.

The following chart, prepared by the ASIC, summarises Nomura’s transactions or dealings relating to BHP on 29 March 1996.

 

Time [AEST] Buy/Sell Price Amount

12:52 B $17.26 3,659,100

(5% down on (Bid Basket)

previous close)

13:29 S $19.08 3,659,100

(5% up on (Ask Basket)

previous close)

15:49 S $18.26 First entry of

March Sale

Orders

15:56:57 S $18.30 1,000,000

(London Offer

Side Sell Order)

15:58:46 S $18.24 250,000

(London Offer

Side Sell Order)

16:00 CLOSE $18.22 2,367,385 of

March Sale

Orders completed

At prices between

$18.26 and $18.22

16:02:13 S $18.21 10,000

(London Bid Side)

(this trades at 16.07)

16:00-18:09 S $18.22 1,270,115 of March

Sale Orders completed

At prices of $18.22

 

 

 

2.4 An Outline of Nomura’s Case

Nomura submitted that neither the placement of the Bid Basket, nor the implementation of its expiry strategy, involved any contravention of the Corporations Law or the TP Act. While there was some common ground between the parties, Nomura’s submissions raise factual questions on which it will be necessary to make findings. Nomura said that, like other index arbitrageurs, it wished to sell the whole of its matching portfolio by the close of trading on the expiry day (in this case, 29 March 1996) – that is, it wished to achieve “volume convergence”. It also wished to avoid the risk of high ticking, namely, that if it sold all or most of its holdings in particular securities before the close of trading on 29 March 1996, the price of those securities could rebound to higher levels just prior to or at the close. If high ticking occurred, Nomura’s goal of selling the securities in its basket at or higher than the closing price on the day would be jeopardised.

According to Nomura, the purpose of the Bid Basket was to provide a mechanism whereby a closing price could be achieved for securities comprised in the March Sale Orders, in the event that demand for the securities failed to emerge once the orders were placed. In particular, the object was to ensure that there was a closing price for the illiquids in the March Sale Orders. In the words of Mr Channon, who was responsible for devising Nomura’s expiry strategy, the Bid Basket “was the liquidity of last resort”.

Nomura’s case was that it did not want the Bid Basket to be hit by the March Sale Orders; it was merely a contingency plan. Nomura did not see the Bid Basket as a means of creating a further profit opportunity over and above that created by the arbitrage position. The intra-day dealings in March SPI Contracts were speculative in character, but were independent of the Bid Basket. Furthermore, contrary to the claims of the ASIC, Nomura’s strategy was intended to and did provide an adequate opportunity for demand to emerge in relation to illiquids included in the March Sale Orders. That is, although the March Sale Orders required Nomura’s basket of securities, including the illiquids, to be sold within a short period, the time was enough for so-called “latent demand” from prospective purchasers to absorb the volume of Nomura’s sale orders.

It followed that it was not Nomura’s sole, dominant or activating purpose to sell the March Sale Orders into the Bid Basket to create or realise profit opportunities. Nomura was a genuine buyer in respect of all orders comprised in the Bid Basket and the mere placing of the Bid Basket did not create any appearance of active trading or any false or misleading appearance with respect to the market or price for any securities.

Nomura argued that the object of the Ask Basket was simply to ensure that Were, the broker placing the Bid Basket, did not know whether Nomura planned to buy or sell securities at expiry until Nomura chose to tell the broker. Nomura was a genuine seller, had anyone chosen to sell at the prices recorded in the Ask Basket. The object was not to “confuse the market” or to give any false appearance with respect to the market for securities.

In relation to the London Bid Side Sell Orders and the London Offer Side Sell Orders, Nomura argued that its intention was merely to increase the chances that, for the top ten All Ords securities, the last sale would be on the bid side and that Nomura would not be exposed to an “offer side high tick”. Again, Nomura was a genuine seller and its orders gave no false or misleading appearance with respect to the relevant market.

Nomura also advanced a number of arguments relating to the construction, in particular, of s 998 of the Corporations Law. It will be necessary to deal with those in due course.

3. EVIDENCE

3.1 The Categories of Evidence

There were three main categories of evidence in this case.

 

First, a tender bundle of nineteen volumes was admitted into evidence, together with a number of other documentary exhibits. The tender bundle included transcripts of internal conversations between officers of Nomura and of conversations between Nomura officers and third parties such as brokers. It follows that there was no dispute between the parties as to the content of the most important communications, although the parties disagreed as to the significance and meaning of certain conversations.

The “documentary” evidence included a computer diskette comprising an electronic record of dealings on the ASX on 29 March 1996. This electronic record was used extensively at the hearing, particularly in the evidence of Mr Francis, a Principal Markets Analyst with ASIC, who examined Nomura’s trading activities on the ASX and SFE, particularly on 29 March 1996. Since the proceedings were conducted in an “electronic courtroom”, the diskette enabled counsel, witnesses and the Court, to observe the SEATS screen as it was at any particular moment on 29 March 1996.

Secondly, evidence was given by the three officers of Nomura most closely involved in the March expiry, namely, Mr Channon, Mr Mapstone and Mr Moss. Each of these witnesses was cross-examined and questions of credit were raised in relation to Mr Channon and Mr Moss. I refer in more detail to their evidence shortly.

Thirdly, a number of experts provided affidavits or reports. Not all were cross-examined. The following gave oral evidence, in addition to providing affidavits or reports:

·        Dr Blackwell, who has experience in the securities and derivatives markets, was called by the ASIC. He gave evidence concerning index arbitrage and expressed opinions on Nomura’s expiry strategy.

·        Mr Francis, addressed a series of questions relating to Nomura’s trading activities on the ASX and the SFE.

·        Mr Hosking, the Chief Executive of the SFE, gave evidence concerning the closing single price auction mechanism introduced by the ASX in 1997 as a means of unwinding arbitrage positions.

·        Mr Sisson, who has experience in the securities and financial markets, was called by the ASIC. He gave his opinion that there was a real chance that, if the brokers had carried out their instructions in full, Nomura would not have been able to sell its holdings in each of the securities comprised in the March Sale Orders without hitting the Bid Basket.

·        Mr Hollick, who has experience in the securities industry in Australia, was called by Nomura. He disagreed with Mr Sisson on a number of issues, including the likelihood of Nomura hitting the Bid Basket if the brokers had carried out their instructions.

·        Mr Lemmerman, who has experience as a trader in derivatives and equities markets in Japan, the United States and elsewhere, was called by the ASIC. He explained aspects of stock index arbitrage and analysed Nomura’s commercial motivation for holding an arbitrage position during the period from September 1995 to June 1996. Much of his evidence countered arguments no longer pressed by the ASIC.

 

3.2 The Evidence of Nomura Officers

Because ASIC challenged the reliability of some aspects of the evidence given by Mr Channon and Mr Moss, both officers of Nomura, it is appropriate to make some comments about their evidence. I also refer briefly to Mr Mapstone’s evidence, although his credit was not challenged.

Mr Channon

Mr Channon joined Nomura in October 1992 to run its existing volatility trading business and to set up a portfolio trading business. He was appointed the Head of Equity Derivatives Trading at the level of director. In March 1996, Mr Channon, who was based in London, reported to Mr Mapstone, the Head of the Equity Division within Nomura. A number of Equity Derivatives Traders reported to Mr Channon. These included Mr Moss, Mr Usher, Mr Tatters and Mr Jones. In April 1996, Mr Channon was promoted and in July 1996 he became co-Head of Equity Trading. He resigned from Nomura in May 1997.

It was common ground that Mr Channon was responsible within Nomura for the trading of Nomura’s Australian position in March 1996. He devised Nomura’s overall strategy for the unwinding of Nomura’s arbitrage position on 29 March 1996, although he consulted with Mr Moss and others in the course of developing the strategy. Mr Mapstone gave uncontradicted evidence that he (Mr Mapstone) was not involved in the details of Nomura’s approach on 29 March 1996.

Mr Channon is clearly an extremely intelligent person who, at the relevant times, was a very successful trader. This success at trading was not, however, always matched by attention to detail. I refer elsewhere to his failure to ascertain the precise manner in which the All Ords – the index at the heart of Nomura’s Australian trading activities – was calculated and his explanation for that failure. More significant for present purposes is his failure to inquire about or learn of ASX Rule 2.8(2), which prohibited a broker from placing an order for the purchase or sale of securities the execution of which would involve no change of beneficial ownership (unless the broker had no knowledge that the transaction would involve no change of beneficial ownership). Having regard to the fact that Mr Channon, at the least, well appreciated that placing the Bid Basket was likely to involve Nomura in purchasing some of its own shares, it is curious that he made no inquiries as to whether such an occurrence would contravene the ASX Rules. Nor did Mr Channon at any stage prior to or on 29 March 1996 tell Nomura’s compliance section of his plans for that day. He omitted to take this course notwithstanding that he was aware that the SFE made inquiries on 26 or 27 March 1996 as to Nomura’s intended approach to the unwinding of its arbitrage position.

Mr Channon’s failure to notify Nomura’s compliance department is especially curious because he was aware (as he acknowledged) that Nomura had used an ask basket in the course of an earlier convergence strategy in Japan and that Nomura had required official approval for that strategy. Mr Channon’s explanation was that he had not adverted to the need for an inquiry because other brokers had used the technique and he regarded Nomura as “particularly bureaucratic” (Ts 703) about this sort of issue. He also said that he saw Australia as a “much more Western-style market” (Ts 716). I did not find those explanations convincing.

In my view, Mr Channon’s failure to make inquiries of the kind to which I have referred demonstrated, at the least, an insensitivity on his part to the compliance aspects of the strategies he was devising and implementing. That insensitivity does not necessarily indicate that his evidence was unreliable. However, it is consistent with an impression I formed of Mr Channon as a witness. In my view, once he became aware (after the event) that Nomura’s unwinding strategies had created legal difficulties, he was inclined to engage in reconstruction of the significance of conversations and of his intentions at the relevant times. I do not mean that Mr Channon necessarily intended to mislead the Court. Rather, his evidence was heavily coloured by the emergence of the legal difficulties he had not addressed at the time he devised Nomura’s strategies.

This case is unusual because transcripts existed of most important conversations and thus there was no controversy as to their contents. It was the interpretation of these conversations and assessment of the contemporaneous intentions of Mr Channon and Mr Moss that gave rise to controversy. The process of reconstruction to which I have referred led Mr Channon to adopt certain explanations for communications and actions that I think owed more to his understanding of the regulatory concerns of the ASIC (and perhaps other bodies) than to a clear recollection of contemporaneous understandings and motivation. I do not accept, for example, his statement (Ts 709) that he had never done enough homework to have an expectation as to whether there was a real risk that Nomura would buy a lot of illiquid securities from itself through the Bid Basket. While additional homework might have allowed the risks to be assessed more precisely, I think it clear that Mr Channon was perfectly capable of forming a view on this question and that he did so.

It follows from what I have said that, although much of Mr Channon’s evidence was not in dispute, there are some important issues on which I cannot and do not accept his account.

 

Mr Moss

Mr Moss commenced work at Nomura in London in 1989. He subsequently became a trader on Nomura’s Equity Derivatives Trading Desk. He was the trader for Nomura’s index arbitrage book for the Australian markets in March 1996. Mr Moss reported directly to Mr Channon.

Mr Moss took over the arbitrage book for Australia in November 1995, having previously performed that role for a short period before undertaking other responsibilities. He was based in Hong Kong in July and August 1995 and again after taking over the arbitrage book in November 1995. In March 1996 he was employed by Nomura International (Hong Kong) Ltd, but his activities at that time were carried out on behalf of Nomura. Mr Moss worked closely with Mr Jones, who was also based in Hong Kong at the time. (Mr Jones did not give evidence.) Mr Moss received instructions from Mr Channon and was the person primarily responsible for giving instructions to brokers to effect the expiry on 29 March 1996, although he was assisted in this task by Mr Jones.

 

Like Mr Channon, I thought that Mr Moss was prone to engage in reconstruction when giving his account of events. In my view, his evidence was also coloured by his perception of the regulatory problems raised by Nomura’s expiry strategy. He was rather too ready to dismiss troublesome passages in transcripts of conversation as “joking” (although doubtless some comments were jocular). Mr Moss also put forward interpretations of certain conversations that are very difficult to reconcile with the language actually used, even making due allowance for the informal character of the conversations. I found some other aspects of his evidence unconvincing. For example, he asserted at one point that he had given no thought to the Bid Basket between 3 pm and 4 pm (Sydney time) on 29 March 1996. Not only was that assertion inherently improbable, having regard to the key role of the Bid Basket in Nomura’s strategy, but it was contradicted by the fact that, in a conversation of 3:38 pm with Mr Crabb of J B Were, Mr Moss was specifically warned of the danger that Nomura would hit its own Bid Basket.

 

As with Mr Channon, I do not think that my reservations about Mr Moss’ evidence leads to the conclusion that all of his evidence was unreliable. However, I do not accept his account on some important matters.

Mr Mapstone

Mr Mapstone joined Nomura in July 1994 as Head of Equity Trading and Equity Derivatives Trading and Sales. In 1995 he was promoted to Head of the Equity Division. He resigned from Nomura in July 1996. As I have noted, Mr Channon reported directly to Mr Mapstone, who was also based in London.

Mr Mapstone joined Nomura with the objective of turning its derivatives business into a profitable venture. He proposed to senior management, and it was agreed, that Nomura would concentrate on a number of derivatives activities, including index arbitrage. In his view, index arbitrage, with relatively low risk and defined returns, provided a “solid core business”.

As I have already said, it was not disputed that Mr Mapstone had not been involved in the details of Nomura’s unwinding strategies on the ASX in March 1996. His credit was not challenged. However, his evidence, although relevant on some issues, was less central to the issues in the present case than that of Mr Channon or Mr Moss.

3.3 A General Observation

As I shall explain later, the present proceedings are civil in character, not criminal. Nonetheless, in making findings on disputed factual questions, I have taken into account that the ASIC’s case is that Nomura contravened provisions of the Corporations Law, notably ss 998 and 1260. These provisions create criminal offences. I have therefore borne in mind the principles stated by the High Court in cases such as Briginshaw v Briginshaw (1938) 60 CLR 336, esp at 362-363, per Dixon J, and Rejfek v McElroy (1965) 112 CLR 517.

 

4. EXCHANGES AND INDEXES

4.1 ASX and SEATS

The Australian Stock Exchange Limited is the single body governing stock market trading in Australia. The ASX provides the public market-place for the trading of securities in listed companies.

SEATS is a computerised trading system owned and operated by ASX Operators Ltd, a wholly owned subsidiary of the ASX. Apart from trading undertaken directly between parties themselves (that is, without the intervention of brokers), all trading in securities listed on the ASX is conducted through SEATS. The following account deals with the operation of SEATS as at March 1996.

In order for a member of the public to buy or sell securities through SEATS, it is necessary to engage the services of a member of the ASX (the “Member”) to act as agent for the client. Each Member is allocated an individual broker identification number by the ASX and that number is used on SEATS to identify the broker. The broker number is automatically displayed on SEATS when a broker makes an entry into the system. The ASX also allocates a code to all listed securities.

By way of illustration, the following are some of the companies referred to in this judgment and their ASX code at the relevant times:

Company ASX Abbreviation

Broken Hill Proprietary Ltd BHP

Metal Manufacturers Ltd MMF

National Mutual Property Trust NMPN

National Australia Bank Ltd NAB

Western Mining Corporation Ltd WMC

Members trade in securities on behalf of clients by matching buyers and sellers on SEATS. Trading in listed securities during the “normal trading” phase is conducted through SEATS from 10.00 am until 4:00 pm on each trading day. SEATS trading takes place via on-line computer terminals to which Members have access under licence from the ASX. Each Member has at least one SEATS computer terminal. Access to SEATS can be effected only by a person approved by the ASX as an operator. The operator must enter a PIN and operator number, each entry being recorded by SEATS.

Upon receiving instructions from a client to buy securities, the Member directs the operator to enter what is known as a “bid” into SEATS, at a price that accords with a client’s instructions. The operator enters into SEATS the price and the number of shares specified by the client. Similarly, where a Member receives instructions from a client to sell securities, the Member directs the operator to enter what is known as an “ask” into SEATS, at a price that accords with the client’s instructions. The operator will enter into SEATS the price and the number of shares specified by the client in the sell order.

If a client wishes to buy or sell a volume of securities exceeding a certain value, the operator may specify that the volume be displayed on SEATS as “undisclosed”. Where this occurs, the letter “U” appears on SEATS under the heading “Quantity”, where the volume of the relevant order would normally appear. In March 1996, the minimum value for undisclosed entries on SEATS was $25,000.

SEATS is a priority based trading system. All bids entered into SEATS are, until transacted as trades, given priority and displayed on SEATS in the following order:

·        First, price. That is, the bid with the highest price is displayed first and that with the lowest price is displayed last. Accordingly, a bid with a higher price will be transacted as a trade before a bid at a lower price.

·        Secondly, time of entry of the bid into SEATS. That is, bids at the same price are recorded in the order in which they are entered in SEATS.

The bids recorded on SEATS at any given time in respect of any given stock comprise what is usually known as the “bid schedule”.

All asks entered into SEATS are, until transacted as trades, given priority and displayed in SEATS in the same order:

·        First, price. That is, the ask at the lowest price is displayed first and that at the highest price is displayed last. Accordingly, an ask at a lower price will be transacted as a trade before an ask at a higher price.

·        Secondly, time of entry of the ask into SEATS.

The asks recorded on SEATS at any given time in respect of a particular stock are usually known as the “ask schedule”.

A trade in a security occurs automatically when the prices of a bid and an ask for that security overlap on the SEATS system. This will occur when a bid is at the same price as an ask, or when a bid is at a price greater than an ask. A broker wishing, for example, to effect a trade at the highest bid can cause an ask to be entered at the price of the bid and the system will effect the transaction (the bid will “be hit”). If the ask comprises a greater volume of securities than the highest bid (and there are no other bids at that price) the ask will appear in the ask schedule with a volume equal to the surplus over the volume already traded.

A SEATS terminal displays information in four distinct sections:

·        The Market section, in which bids and asks are entered, amended or cancelled and trades are executed.

·        The Book section, in which a member places bids and asks in anticipation of these being entered into the market section.

·        The Watch section, which allows the Member to select securities and monitor entries made into SEATS and any trade executed in respect of them.

·        The Trade section, which lists, in order of time for any given trading day, all trades and securities recorded on SEATS, providing a time stamp to 1/100th of a second for each entry into SEATS.

All bids and asks entered into SEATS immediately appear on the SEATS monitor in each Member’s office.

An operator or Member viewing a SEATS screen is able to ascertain the following information concerning each traded security:

·        the broker number of each broker offering to buy or sell securities;

·        the relevant security’s ASX code and name;

·        where disclosed, the quantity of the relevant security in respect of which a bid or ask has been recorded;

·        where the quantity to be traded is undisclosed, the fact that the value of the bid or ask exceeds the minimum ($25,000);

·        all bids and asks;

·        the time, quantity and price of the last trade; and

·        depending upon the volume of trading in each particular listed security, details of the trades that have occurred during the relevant day’s trading.

SEATS terminals are located only in brokers’ officers. However, institutions and large dealers have computer systems displaying ASX data supplied by vendors. These systems display all relevant SEATS information, other than broker codes.

The Surveillance Division of the ASX can produce, by means of a computer program, a diskette recording all entries into and trades on SEATS for any security during any particular period of time. The program has the facility to permit a replay of all entries (including trades and the entry, amendment, cancellation and deletion of all bids and asks) made in SEATS in respect of any security during any particular period of time. As I have noted, a computer diskette recording, inter alia, entries made into SEATS on 29 March 1996 in relation to the securities comprised in the All Ords on that day was admitted into evidence.

The Surveillance Division also has the capacity to produce a “snapshot”, which reproduces the status of the market in relation to a particular security at a particular time (a “SEATSCAN snapshot”). SEATSCAN snapshots relating to the securities included in the All Ords on 29 March 1996, as at 4:00 pm on that day, were in evidence. An example is the SEATSCAN snapshot for the first (alphabetically) of the securities in the All Ords, namely, Acacia Resources Ltd, the code for which is AAA.

The following is an explanation of the columns of data reproduced in the above SEATSCAN Snapshot:

 

“’Brk’: refers to the individual broker identification number of the relevant broker;

‘Price’: refers to the price of the bid, ask or trade;

‘Vol’: refers to the volume of the relevant security which is available for trading and which is disclosed;

‘Vol (U): refers to the volume of the relevant security which is available for trading and which is undisclosed. The letter ‘U’ will appear on the screen. That letter signifies that the volume of the relevant security had, as at 29 March 1996, a value of at least $25,000.

‘OpRef’: refers to the Operator’s reference;

‘BIDS’: refers to orders to buy; and

‘ASKS’: refers to orders to sell.”

 

 

It will be seen that the lowest ask is at a price of $3.07, for a quantity which is undisclosed on the screen, but is in fact 65,000 shares. Although a SEATS operator will not see the undisclosed volume, that information is available on screens viewed by officials of the ASX. It will also be seen that the highest bid is at a price of $3.06 in respect of a disclosed volume of 27,229 shares. The recorded bids range all the way down to $2.45, almost twenty per cent lower than the last recorded sale of $3.06. The bid from broker 361 at $2.60, in respect of an undisclosed parcel (in fact amounting to 411,900 shares), was part of Nomura’s Bid Basket placed on SEATS on its instructions on 29 March 1996. It will be seen that the bid had its counterpart in the ask schedule at a price of $3.52. This was part of Nomura’s Ask Basket” placed on the same day.

4.2 SFE and Futures Contracts

The SFE provides facilities for the trading of futures contracts and options for future contracts. These facilities comprise a trading floor and an electronic dealing system known as the Sydney Computerised Overnight Market (“SYCOM”).

A futures contract essentially takes one of two forms. A deliverable futures contract is an agreement to buy or sell, on a given date in the future (the “expiry date”) a specified amount of a commodity or financial instrument at a price which is fixed at the time the agreement is made (the “contract price”). A “cash settled futures contract” is an agreement to pay or receive on settlement (depending on price movements) the difference between the contract price and the settlement price for the futures on the expiry date (the “settlement price”).

A person who enters a futures contract as a purchaser is said to have acquired a “bought futures contract” or to hold a “bought position” or a “buy position”. Such a purchaser, in the case of a deliverable futures contract, is obliged to pay the contract price and accept delivery on the expiry date of the agreed quantity of the commodity or financial instrument. In the case of a cash settled futures contract, the purchaser is obliged to pay or entitled to receive the difference between the contract price and the settlement price. If the settlement price is greater than the contract price, the purchaser is entitled to receive the difference; if the settlement price is less than the contract price, the purchaser must pay the difference.

A person who enters a futures contract as a seller is said to have acquired a “sold futures contract” or to hold a “sold position” or a “short position”. The seller, in the case of a deliverable futures contract, is obliged to deliver on the expiry date a particular quantity of the commodity or financial instrument in return for payment of the contract price. In the case of a cash settled futures contract, the seller is obliged to pay or entitled to receive the difference between the contract price and the settlement price. If the settlement price is lower than the contract price the seller is entitled to receive payment of the difference. If the settlement price is higher than the contract price the seller is obliged to pay the difference.

Among the futures contracts traded on the SFE are SPI Contracts. Essentially, SPI Contracts are futures contracts the subject of which is a sum of money equal to a multiple of the All Ords Index maintained by the ASX. I shall explain shortly the operation of the All Ords and SPI Contracts.

In order for a member of the public (the “client”) to buy or sell a futures contract on the SFE, the client must engage the services of a member of the SFE. Of the several types of members of the SFE, only floor members and their representatives are allowed to trade on the floor on behalf of a client.

Trading on the floor of the SFE occurs each trading day. In March 1996, SPI Contracts were traded during the periods 8:30 am to 12:30 pm and 2:00 pm to 4:10 pm. A floor member receiving an order is required to record details of the order. Trading on the floor takes place by open outcry: that is, offers to buy and sell are communicated verbally and agreements are made orally. However, the seller’s brokers must complete a trading chit which must be submitted to the SFE within a short time after the transaction.

The SYCOM market is conducted on a computer system operated by the SFE. The system matches bids and offers placed on the market from members located in the offices of floor members. In March 1996, trading on SYCOM in respect of SPI Contracts took place each trading day from 4:40 pm to 7:00 am.

The Sydney Futures Exchange Clearing House Pty Limited (“SFECH”) is a wholly owned subsidiary of SFE. Under the By-Laws of the SFE, SFECH becomes a party to all futures contracts traded by SFE members and this, in effect, guarantees the performance of all such contracts.

4.3 The All Ordinaries Index

The ASX maintains the index known colloquially as the All Ords. The All Ords represents more than 90 per cent of the domestic market capitalisation of those entities which are listed on the ASX. An entity covered by the All Ords may have more than one class of securities included separately in the index. As at 29 March 1996, the All Ords comprised 326 entities and 353 securities.

The number of securities included in the All Ords changes from month to month as more (or fewer) entities become eligible (or ineligible) for inclusion. The Index Services Division (“ISD”) of the ASX reviews eligibility of securities on a monthly basis. As at March 1996, any adjustments were made on the second last trading day of the month. In March 1996, that day was 28 March. In addition, the ISD may change the composition of the index by reason of changes made by a company to its own shares, for example in consequence of a bonus or rights issue. In these cases, provided any new securities are eligible for inclusion in the All Ords, the ISD adjusts the index on the day the change occurs.

The Index Market Capitalisation for each entity at the close of trading on any day is determined by multiplying the number of quoted securities or units of the entity by their Index Price and respective Weighting Factors. (The Weighting Factor is usually 100 per cent.) The Index Price of the security or unit on a particular day is calculated as follows:

·        If a trade in that security has been recorded on SEATS prior to 4:00 pm on the day, the Index Price is the last of the following to occur –

(i)                  the last trade of that security which is recorded on SEATS as at or prior to 4.00 pm on the day;

(ii)                any bid (that is, offer to buy) the security made after the last trade but before 4.00 pm, which is at a higher price than the last trade and, as at 4.00 pm, is the highest bid in the bid schedule of SEATS; or

(iii)               any ask (that is, offer to sell) the security that is made after the last trade but before 4.00 pm, which is at a lower price than the last trade and is, as at 4.00 pm, the lowest ask in the ask schedule of SEATS.

·        If no trade of the security has been recorded on SEATS prior to 4:00 pm on the day, the Index Price is the last of the following to occur –

(i)                  the last trade in the security recorded on SEATS prior to the day;

(ii)                any bid for the security made after the last trade which is at a higher price than the last trade and, as at 4:00 pm on the day, is the highest bid in the bid Schedule of SEATS; or

(iii)               any ask for the security made after the last trade which is at a lower price than the last trade and, as at 4:00 pm on the day, is the lowest ask in the ask schedule of SEATS.

It will be recalled that Mr Channon did not appreciate that the Index Price could be determined not merely by trades but (depending on the circumstances) by bids or asks.

Each of the securities comprising the All Ords is allocated a percentage, reflecting its weighting within the Index. The percentage can vary from day to day, although the method of calculation was not precisely explained in the evidence. For example, on 29 March 1996, BHP comprised 11.3 per cent of the All Ords, while NAB comprised 5.27 per cent. By contrast, a number of securities each represented 0.01 per cent of the All Ords.

 

According to Mr Feldmayer, the value of the All Ords at the close of trading on a particular day is calculated by the following formula:

 

Today’s Closing Index Market Capitalisation

“Today’s All Ords = Yesterday’s All Ords x .

Today’s Start of Day Index Market Capitalisation

 

Where:-

 

Today’s Closing Index Market Capitalisation is the aggregate of the Index Market Capitalisation of each company that is covered by the All Ords as at the close of trading Today; and

 

Today’s Start of Day Index Market Capitalisation is the previous day’s Closing Index Market Capitalisation adjusted for any overnight changes to the securities which are covered by the All Ords, such as delistings, additions, new issues and capital reconstructions. These overnight adjustments to the number and prices of securities which make up the All Ords do not affect the level of the All Ords Index.”

 

 

In the course of trading, details of all entries into SEATS are continuously forwarded electronically into a computer system known as CORE, which is owned and operated by the ASX. In March 1996, CORE automatically calculated the All Ords continuously during the period from 10:00 am to 4:00 pm on each trading day. During the same month, the All Ords was published (among other means), by electronic transmission, once every minute:

·        directly from CORE to SEATS computer terminals, permitting a SEATS operator to access the data; and

·        to subscribers, including electronic information providers such as Bloomberg and Reuters (which operate on a world-wide basis).

4.4 SPI Contracts

SPI Contracts are regulated by the By-Laws of the SFE. The description that follows is based on the By-Laws as in force in March 1996.

 

The subject of each SPI Contract is a sum of money equal to a share price index multiplied by A$25: By-Law A0I.1(a). The effect of an SPI Contract is that the parties must make an adjustment between them at a specified future time (the “cash settlement day”)

 

“according to whether a Cash Settlement Price is greater or less than the price at the time of the making of the contract…”. (By-Law AOI.1(b).)

By-Law AOI.2 provides as follows:

 

“(a) The value or worth of a contract at the time of making that contract (hereinafter referred to as ‘the contract value’) shall be the price agreed to by the parties at that time and multiplied by twenty-five and expressed as Australian dollars.

(b) The value or worth of a contract on the cash settlement day thereunder (hereinafter referred to as ‘the cash settlement value’) shall be the numerical value of the index quoted by the Clearing House for that cash settlement day (to one decimal place) multiplied by twenty-five and expressed as Australian dollars.

(c)           For each cash settlement day the Clearing House shall declare the numerical value of the index, which shall be the Cash Settlement Price. Such value shall be the same as the closing quotation for the Australian Stock Exchanges All Ordinaries Price Index on the last day of trading and shall be calculated to one decimal place. For this purpose the closing quotation on the last day of trading shall be the adjusted quotation provided by the Australian Stock Exchange (Sydney) Limited by notice in writing to the Exchange (with, unless otherwise agreed by all parties, a copy of the notice being forwarded to the Clearing House) by 12.00 noon on the business day following the last day of trading.”

 

 

The cash settlement day is the second business day following the last day of trading in a cash settlement month. The last day of trading in the cash settlement month of March 1996 was Friday, 29 March. Accordingly, the cash settlement day for that month was Tuesday, 2 April 1996.

It follows from these provisions that the SFECH must declare the numerical value of the index to be the same as the closing quotation for the All Ords on the last day of trading in the calendar month immediately preceding the month in which cash settlement is to take place: By-Law. A0I.2(c), 7. The numerical value of the index declared by the SFECH must be accepted as final: By-Law A0I.2(d). However, if in the opinion of the Board of the SFE or of the SFECH “a situation is developing or has developed which is capable of preventing the [SFECH] declaring a numerical value of the index in accordance with By-Law A0I.2(c)”, SFECH may take any steps it deems necessary to correct the situation to enable it to declare a numerical value: By-Law A0I.10.

On the cash settlement day, if the contract value is less than the cash settlement value, the seller is liable to pay the difference and the buyer is entitled to receive the difference. If the contract value is greater than the cash settlement value, the buyer is liable to pay the difference and the seller is entitled to receive the difference: By-Law A0I.3. Payments are made or received by the SFECH: By-Law A0I.4. The effect of these provisions, which were described in evidence as “novation” of the SPI Contracts, is that each party to an SPI Contract is assured of performance by the other party, since the SFECH makes the payments to the party entitled to them and collects the moneys due from the party required to make the payments.

It follows from what has been said that an SPI Contract is a cash settled futures contract. In other words, on expiry there is no delivery of the underlying subject of the contract, namely, the stocks represented by the All Ords. Rather, SPI Contracts are cash settled at the difference between the initial price and the expiry price, the latter being calculated by reference to the numerical value of the All Ords at the close on the Expiry Date.

The By-Laws make the obligation of the parties to make a cash adjustment subject to the powers of the SFE Board “in the event that an undesirable situation within the meaning of General By-Law G.13 is developing or has developed in relation to futures contracts”: By Law A0I.15. The powers of the Board in these circumstances include deferring settlement of SPI Contracts, directing that contracts be closed out forthwith and requiring contracts to be settled at a price other than that determined in accordance with the By-Laws: General By-Laws G.13(e)(v),(vi),(ix).

SPI Contracts are traded on the SFE according to the last month in which they may be traded. Those months are March, June, September and December in each calendar year: By Law A0I.7, Schedule. An SPI Contract which may be traded last in the month of March is known as a “March SPI futures contract” (or some variation on that expression). In the ordinary course, the expiry date of an SPI Contract is the last business day of the relevant calendar month. The SPI contract expires at the close of trading on that day. On any given business day, the following SPI Contracts may be traded on the SFE:

·        SPI Contracts which are to expire on the next expiry date (if the business day is in, say, February, the next expiry date is the last trading day in March);

·        The SPI Contracts which are due to expire on any of the five expiry dates that immediately follow the next expiry date (in the example given, the last five expiry dates are the trading days in June, September and December of the same year and in March and June of the following year).

It follows that an SPI Contract may have an expiry date up to eighteen months ahead.

From an economic perspective, an SPI Contract (like other stock index futures contracts) allows an investor to acquire a position equivalent to purchasing each of the stocks comprised in the All Ords in the same proportions as the stocks are represented in that index. As I have explained, this is known as a “bought” position or being “long” in futures. It was described by Mr Channon as

 

“buying on day one a slice of the index at the initial trading price of the contract that is to be sold…at the closing price on the expiry day”.

Every futures contract has two equal and opposite counterparts. Thus an SPI Contract has as a party an investor who acquires a “sold” position or who is “short” in futures. The sold position is the converse of the bought position. As Mr Channon explained, it can be seen as selling on day one, at the trading price, the same index slice that is to be repurchased at the closing price on expiry. The position is synthetically equivalent to having sold a portfolio made up of all securities in the All Ords, in the proportions in which they are represented in the All Ords, and investing the proceeds.

5. STOCK INDEX ARBITRAGE

5.1 The Nature of Arbitrage

Arbitrage aims to capture a risk free profit arising from price differences between two commodities that, although different in form, are essentially the same. Stock index arbitrage involves the acquisition of bought or sold positions in futures contracts derived from a stock index and the simultaneous (or nearly simultaneous) taking of an offsetting position by buying or selling (as the case may be) the physical stocks which make up the index. The object is to take advantage of disparities in pricing between the futures or physical markets at any given time, taking into account potential dividend income and relevant transaction costs (including the cost of acquiring and selling the securities and of holding them for the required period).

In the case of index arbitrage of the kind undertaken by Nomura in the Australian market, the first of the two commodities comprises the SPI Contracts derived from the All Ords. As I have said, in March 1996, the underlying value of each SPI Contract was determined by multiplying the price of the contract in points by A$25. Thus if the price of the SPI Contract was, say, 2,200 points, the underlying value was $55,000. The second commodity comprises a basket of stocks traded on the ASX. In theory, the perfect offsetting position is one in which the arbitrageur holds all stocks in the All Ords in precisely the same proportions as they are represented in the All Ords. The disparity of which the arbitrageur takes advantage is that occurring between the value of the SPI Contract and the value of the corresponding basket of stocks.

There was no dispute that futures arbitrage is a legitimate form of economic activity. As Dr Rutledge, one of the expert witnesses explained it, futures arbitrage makes an important contribution to establishing a rational economic relationship between the physical and futures markets. This in turn expands the range of participants and volume of capital attracted to the markets. For example, one of the primary uses of a stock index futures contract is to provide fund managers with a cost-effective way of taking a position in the stock market. According to Dr Rutledge, the closer the futures contract resembles the benchmark, the more useful it is for this purpose. Moreover, futures markets provide the opportunity for physical market participants to reduce their exposure to price risk, by taking an opposite position on the futures market to that which they hold in the physical market. Those hedging opportunities depend on the maintenance of an “explicable statistical relationship” between prices in the futures market and those in the underlying physical market.

5.2 Fair Value

Opportunities for index arbitrage arise when the price of the index futures contract deviates sufficiently from its “fair value”. An SPI Contract has a theoretical fair value at any given time, which is derived from the prevailing value of the underlying stocks comprised in the All Ords (although different traders might calculate the fair value differently). Whether an arbitrageur considers that the differential between the fair value and the price of an SPI Futures presents a profit opportunity depends on whether the differential is sufficiently great to generate profits after allowing for the costs of the transactions required to realise any gains.

The fair value of an index futures contract is usually calculated by arbitrageurs using a technique known as “cash and carry”. In essence, this involves calculating the cost to the arbitrageur of borrowing money to buy the stock required for an offsetting position and to hold that position for a period of time, taking into account any dividends or other returns from holding the stock. At a simple level, the fair value of an SPI Contract is equal to the level of the All Ords (allowing for any multiplier), plus the costs of borrowings to purchase the matching stock, less the dividends to be received.

Mr Channon provided a useful illustration of a case where a futures price is trading higher than fair value (a position known as “trading rich”).

 

“Assume on day one:

 

·                The index level is 1,000 points;

·                The SPI futures price is 1,070 points;

·                The SPI futures contract has a life of 12 months…with a futures multiplier equal to $1 (rather than the actual $25);

·                The arbitrageur’s cost of funds is 10% per annum;

·                The value of dividends to be received on the stock is equivalent to 50 index points; and

·                There are no other factors affecting fair value.

 

In those circumstances:

 

Fair Value (FV)= Index + (Index x Interest Rate x Time) – Dividend

= 1000 + (1000 x 10% x 1) – 50

= 1000 + 100 – 50

= 1050

 

Profit Margin = SPI Futures Price – Fair Value

= 1070 – 1050

= 20”

 

 

When an SPI Contract price is trading at a premium to fair value, the arbitrageur has an opportunity to make profits from a long stock/short futures position (also known as “premium arbitrage” or “positive” or “buy” arbitrage). The arbitrageur borrows money to buy stocks representing those comprised in the All Ords. The arbitrageur must pay interest on the borrowings, but will receive dividends from the stocks. More or less simultaneously, the arbitrageur sells SPI Contracts (that is, acquires a sold position as party to SPI Contracts). If the arbitrageur has calculated fair value correctly, it can lock in a profit which can be realised at any time that SPI Contracts are trading at or below fair value, regardless of movements in the All Ords. This is subject to a proviso, namely, that the arbitrageur must be able to liquidate both positions at substantially the same time (or as close thereto as possible) and at substantially the same price.

Subject to the proviso, the theoretical reason the arbitrageur must realise a profit is because it has sold SPI Contracts (that is, acquired a sold position) at a time when the price is at a premium to fair value.

·        If the All Ords moves down between the date the arbitrageur sells the SPI Contracts and simultaneously (or as close to simultaneously as possible) buys a matching stock position, the arbitrageur makes a profit on the SPI Futures (from their fall to fair value from a premium). That profit is greater than the loss from the sale of the physical stock (the loss merely reflecting movements in stock values without the premium).

·        If the All Ords moves up, the profit made by the arbitrageur on the sale of the physical stock is greater than the loss on the SPI Futures (the loss being cushioned by the inbuilt premium).

When SPI Contracts are trading at a discount to fair value, an arbitrageur sells stock and acquires a bought position in the SPI Contracts. The arbitrageur might sell stock that it already holds or it might “borrow” stock for the purpose under a commercial arrangement with a third party. In the latter case, the effect is to “sell short”. The position is called “short stock/long futures arbitrage”, also known as “discount arbitrage” or “negative” or “sell” arbitrage.

The calculation of fair value is not an automatic or purely mechanical process. Arbitrageurs, for example, may incur differential costs in borrowing funds and their tax position may vary in relation to the franking of dividends. Thus, the assessment of the fair value of SPI Futures may vary from arbitrageur to arbitrageur depending on such factors as the following:

·        the cost of capital to fund the arbitrageur’s position;

·        the cost of borrowing money;

·        the cost of borrowing securities (in relation to a discount arbitrage position);

·        expectations of dividend;

·        tax considerations; and

·        the pricing of some underlying stocks where there is a discontinuous market, that is no bids or offers in respect of the stocks.

In determining whether to take advantage of an arbitrage opportunity, the arbitrageur has to take account of the transaction costs incurred in establishing and maintaining the arbitrage position, including brokerage fees. The arbitrageur normally calculates arbitrage boundaries, representing those transaction costs. The buy arbitrage boundary (“buyarb boundary”) is the point above which it is profitable for the arbitrageur to initiate a premium arbitrage (by selling SPI Contracts and buying stock). The sell arbitrage boundary (“sellarb boundary”) is the point above which it is profitable for the arbitrageur to initiate a discount arbitrage (by buying SPI Contracts and selling stock).

The arbitrageur also has to take into account that, in practice, there are risks and uncertainties in establishing an arbitrage position. The object is to acquire SPI Contracts and physical stock positions that are balanced or hedged. However, both “legs” in practice cannot be established simultaneously, for example because the requisite volume of a particular stock is not immediately available. Nor is it practicable to complete one leg before proceeding to the other, since this exposes the arbitrageur to the risks of the market. Thus, the exercise of judgment in establishing the respective positions is unavoidable.

 

5.3 Closing Out an Arbitrage Position

The arbitrageur has three basic options to close out an arbitrage position:

·        unwind prior to expiry;

·        roll over the SPI Futures position to a later expiry, while maintaining the physical position; or

·        allow the SPI Futures to expire on the closing day (in 1996, the last trading day of the quarter) and close out the physical position on that day.

Unwinding

The arbitrageur can unwind a futures position prior to expiry by assuming an equal and opposite position in both the physical and the futures market. In the case of a premium arbitrage, the arbitrageur unwinds by selling the physical stock and acquiring a bought position in SPI Contracts, thereby cancelling out the sold position. Unwinding a premium arbitrage position becomes attractive as the price of the SPI Contracts returns to fair value. If the price of the SPI Contracts has fallen to a discount to fair value, unwinding from a premium arbitrage position becomes even more profitable.

 

Roll Over

The arbitrageur may choose to roll over its SPI Futures position to a later expiry, while maintaining its physical position. In the case of a premium arbitrage position, the arbitrageur closes out its SPI Contracts for the spot month and the contracts are settled by the SFECH. The arbitrageur also sells SPI Contracts expiring on the next expiry date (known as the “near month”). The arbitrageur effectively replaces its current SPI Contracts with a sold position in SPI Contracts for the next expiry.

A rollover may become attractive if the SPI Contracts price does not return towards fair value as the date of expiry approaches. Since unwinding in these circumstances will generate little or no profit, or a loss, the only viable options may be to proceed to expiry (when the SPI Contracts price will return to fair value) or to hold the position open by rolling the SPI Contracts position to the near month.

A rollover may also be attractive if the rollover is “rich”. An arbitrageur can calculate the fair value of the roll, by calculating the fair value of both SPI Futures Contracts and determining the difference between them. If the difference on points is greater than the fair value of the roll, the arbitrageur has the opportunity to lock in the premium from the roll and avoid the risks of going to expiry.

 

Expiry

As has been noted, SPI Contracts are settled at the closing level of the All Ords on the expiry date. The fair value of the SPI Contracts at the close of business on the expiry date equals the All Ords closing level, since there is no holding period left and thus no interest to pay or dividends to be received. The SPI Contracts price and fair value therefore converge at expiry. The arbitrageur, accordingly, can achieve the fair value of the SPI Contracts on expiry.

To allow the SPI Futures Contract to go to expiry does not, of itself, realise the profit theoretically locked in to an arbitrage position. The arbitrageur holding a sold position on SPI Contracts receives (or pays) the adjustment required on expiry, but (unless further action is taken) retains a long position in the physical stock. Accordingly, in order to realise its theoretical profit from the arbitrage position, the arbitrageur must dispose of all its physical stock, ideally at or better than the closing price for each stock (since that is the price reflected in the closing price of the All Ords).

The arbitrageur, on expiry of a premium arbitrage position, seeks two forms of convergence. As I have already noted, the first is price convergence. This means that the arbitrageur wishes to trade its physical stock at a price equal to (or better than) the price used to determine the final settlement price of the SPI Contracts. If the arbitrageur fails to achieve price convergence in this sense, the potential profit from the arbitrage position will be reduced. The second form of convergence, volume convergence requires the arbitrageur to sell the entirety of its physical matching stock. To the extent it fails to do so, the arbitrageur is exposed to the market risks of holding a long position in the physical stock. While some investors are prepared to accept such a risk, an arbitrageur aims to secure a risk-free profit.

 

There was no dispute between the parties that an arbitrageur, in attempting to achieve price and volume convergence, will often act in a price insensitive manner. In other words, in order for the arbitrageur to achieve price and volume convergence on expiry, it may be concerned to sell (or buy) at a particular time and quite indifferent to the price at which the transactions take place. Dr Blackwell, for example, conceded that there was nothing improper, for example, in an arbitrageur selling down shares to meet the close (Ts 349-350, 356):

 

“Q. Whilst I’m not suggesting for a moment that they are entirely price sensitive, there are considerations other than price?

A.                 Yes, absolutely, yes. There are considerations other than price.

 

Q.                The fact that those considerations may influence a buyer or a seller doesn’t, in your view, mean that any purchase with those considerations in mind is one that would in any way be seen to lead to an improper distortion of the market?

A.                 I guess my answer to that is that, individually, they are not but I would have – and I am sure the Stock Exchange would also have a concern if the dominant volume of trading was of that form, because then the prices at which stocks are operating on the market would not be any kind of fair reflection of the economic value of those shares.

 

Q. Having said that, from the perspective of the individual trades, you would not see a trade, in your experience by, for example, a price-insensitive arbitrageur as amounting to an improper distortion of the market?

 

…

 

THE WITNESS: The answer to the question is that I don’t see anything improper about the arbitrageur operating at the price they need to trade it.

 

…

 

Q.                If an arbitrageur with a desire to meet the close was prepared to sell down BHP to a very substantial extent, that, you would regard, as a perfectly legitimate activity for the arbitrageur to undertake?

A. Yes, I don’t see – yes, I agree. I don’t see that as an unreasonable thing to do.”

It will be seen that, in this passage, Dr Blackwell was asked about the propriety of an arbitrageur selling down to “meet the close”. He was not asked whether there was anything improper in an arbitrageur attempting to fix the closing price for securities sold by it when unwinding its position.

5.4 Arbitrage Risks

Although an arbitrageur seeks to capture a risk-free profit, arbitrage involves a number of risks. Some of these flow from what has already been said. If, for example, an arbitrageur under-estimates the costs of borrowings or over-estimates future dividends, its assessment of potential profit will prove over-optimistic. There are three other principal risks:

·        tracking risk

·        delta risk

·        expiry risk.

Tracking Risk

Tracking risk is the risk that the price of physical stocks held in the arbitrage position will move in a different direction from the price of All Ords. Unless the arbitrageur holds physical stock which replicates all stocks in the All Ords in precisely the same proportions, there will almost invariably be some discrepancy, or tracking error, between the price movements of the physical position and the movements in the All Ords. This is because the price of each stock does not move exactly parallel to movements in the index itself.

One means of managing the tracking risk is to replicate fully the stocks comprised in the All Ords. This involves buying all stocks comprised in the All Ords, in exactly the proportions that each stock is represented in the index. Another is to buy a selection of stock that is representative of the All Ords, but does not comprise all stocks in the All Ords. Of course, to the extent the representative portfolio does not precisely match the composition of the All Ords, the arbitrageur has not eliminated the tracking risk.

Delta Risk

“Delta risk” arises from having physical stock the dollar value of which does not match the dollar value of the SPI Contracts held by the arbitrageur. To the extent that the two positions do not match, the arbitrageur has a net long or net short exposure to the Australian share market. Thus the arbitrageur is exposed to the risks of adverse movements on the market.

Expiry Risk

As I have explained, the arbitrageur seeks to achieve price and volume convergence on expiry. If the arbitrageur does not achieve volume convergence, it runs the risk of retaining an unhedged position in stock after the close of trading and therefore exposed to movements in the physical market. If the arbitrageur does not achieve price convergence, it runs the risk (in the case where it holds sold SPI Contracts) of selling its physical stock at an average price lower than that used to determine the final settlement price of the SPI Contracts. This would reduce or, perhaps, eliminate the profit inherent in the arbitrage position. For example, if the arbitrageur sells most of its securities prior to the close of trading on the expiry date, it is at risk that the closing prices for the securities will be higher than the prices it had achieved for its own securities. The difference, in effect, represents a loss for the arbitrageur.

The conversations involving Nomura officers before and on 29 March 1996 reveal their concern that Nomura should not be high-ticked at the close. This expression, as Mr Sisson explained, specifically refers to the upward movement in price which occurs as a result of a buyer transacting the last trade on the offer side by hitting the ask of a seller in the ask schedule, after a seller has transacted trades at a lower price by selling to bids in the bid schedule. Often, if a seller has sold down stock against a number of bids in the bid schedule, the spread between the best ask and the best bid widens. If after the seller has finished selling stock, a buyer transacts a trade by accepting the best ask, the price is likely to move upwards, perhaps quite sharply.

6. NOMURA’S TRADING ON THE ASX

6.1 Background to the Events of 29 March 1996

Prior to 1995, Nomura traded in securities and futures contracts in markets located in a number of different countries. In February 1995, Nomura began to engage in stock index arbitrage trading by dealing in SPI Contracts on the SFE and in securities on the ASX.

During the period from February 1995 to March 1996, Nomura’s “Australian book” progressively increased, as Mr Mapstone approved increases in limits. As at 3 July 1995, the size of the Australian book was £23.5 million, but that had increased to £60 million by 27 July 1995. By 26 September the book had reached £152 million, and by early December it was in the order of £250 million.

In a memorandum of 14 August 1995, Mr Channon advised Mr Mapstone that he was re-evaluating the strategy and risks to determine an appropriate size for the book. Mr Channon noted (6862) the following

 

“As we have no experience of expirations in Australia we urgently need to gather the information necessary to make a judgment about the risks involved. We need to workout whether increased size gives us an advantage or puts us at more risk. We need to develop a strategy for a large unwind perhaps using a large number of brokers. With this in mind Duncan Moss is visiting a number of brokers for stock and futures in Australia at the beginning of next week.”

 

 

He also recorded (6861) that there had been a problem in acquiring “the tail” of the All Ords because “the stocks below the top 50 capitalised are extremely illiquid”.

On 26 September 1995, Mr Channon sent another memorandum to Mr Mapstone. The memorandum was prepared after Mr Moss had visited Australia and had discussions with brokers. Mr Channon was the principal author, but Mr Moss contributed to the document. Under the heading “Proposed Trading Strategy”, the memorandum said this (6865):

 

“The only serious risk in the book is the non-convergent nature of the expiry process of the futures contract. As Australia has never witnessed a seriously disrupted expiry its rules are still like those used in European markets four years ago. Our experience in Europe has been that every market as it introduced derivatives has ended up suffering a market disruptive expiry and has then adjusted its mechanism.

 

We believe that the Australian expiry mechanism will not stand the test of time. However, while it exists we believe that the larger position you have going into the expiry the more probable you will be to match/beat the expiry level (ie the close). As the market is an electronic order matching system, if we were to unwind our position we would just send in wave after wave of selling orders at the end of the day. To make sure that all our stocks close we would put a series of buy orders in the market down 10%+. This would mean that our stocks would close down 10%+ and we would be long at that level. This level should give us a good starting point from which to unwind these positions the following day.

 

We propose to test this strategy with a smaller basket in this coming September expiry. Given that the roll is rich we would do this by overrolling and then buying on the expiry. We would like to use a size of £25 to £50 million as this would allow us to trade a very broad basket and try to move the close.” (Emphasis added.)

It will be seen that this passage contemplates the placing of “buy orders in the market down 10%+”. This suggestion was the precursor to the Bid Basket. The passage also clearly contemplates that Nomura would purchase its own stock at discounted prices and that it could unwind the long position the following day. Mr Moss, in his evidence, referred to this as the “worst case scenario”, but acknowledged that the memorandum said no such thing. Mr Channon accepted that he was contemplating that Nomura would take a risk on “any shares picked up…at a price that was down by 10% plus” (3679).

The memorandum also recorded the following (6866):

 

“The Australian book has grown into a substantial opportunity and risk. It has become our most profitable arbitrage book and we believe offers us the greatest opportunity. What we are proposing is to make it our biggest single index arbitrage commitment. We cannot do this without a dedicated resource. We therefore propose to post Duncan Moss to Hong Kong on a full time basis at the earliest time after Scott Usher has returned.”

 

 

Mr Channon requested an increase in the limit on the inventory of the Australian book to £300 million ($472 million).

At the end of September 1995, Nomura bought back all of its September 1995 SPI Contracts and acquired sold December 1995 SPI Contracts, thereby “overrolling”. Because of the expiry of the September 1995 SPI Contracts and the sale of December 1995 SPI Contracts, Nomura had to buy about $100 million worth of extra securities to obtain a matching position. Nomura also bought additional September 1995 SPI Contracts just before the expiry. This was a speculative position which was entered into in the expectation of a rise in the market. In fact, the market did rise and Nomura made a profit from the intra-day trades. These trades appear to have been the precursor of the sale of March 1996 SPI Contracts on 29 March 1996 (although the later transactions contemplated a downward move in the market on the expiry date).

Mr Channon said in his evidence that, among other things, he learned from the September expiry that

·        brokers did not understand the price insensitivity of Nomura’s orders; and

·        by allowing a full day to trade illiquid stocks no additional liquidity was generated.

The first of these lessons was repeatedly referred to in conversations involving Mr Channon and Mr Moss in the days leading up to the March 1996 expiry.

On 28 November 1995, Mr Mapstone approved a request from Mr Moss, which was endorsed by Mr Channon, that the limit in respect of arbitrage activity in Australia should be increased from A$500 million to A$650 million. Mr Moss handled the December 1995 expiry from London, although on that occasion Nomura rolled its position.

In late February and early March 1996, Mr Moss (who had by then been posted to Hong Kong) visited Australia and met a number of brokers. According to Mr Moss, he did not discuss with the brokers the possibility of Nomura’s March SPI Contracts going to expiry. Nor did he discuss the role the brokers might play in relation to such an expiry. In his evidence, however, he accepted that by the time he returned from Australia, he recognised that there was a possibility that Nomura’s March SPI Contracts might be allowed to go to expiry (Ts 428). The possibility was adverted to in a conversation between Mr Channon and Mr Moss on 4 March 1996.

On 6 March 1996, Mr Channon and Mr Moss reported in writing to Mr Mapstone on the Australian arbitrage book. By this stage it had grown to USD650 million and had made a net profit of USD 6.2 million, of which USD 1.7 million was set aside as a provision against liquidation costs. The report expressed concern about the poor tracking performance. This poor performance had mainly been caused by the fact that Nomura had been underweight in low capitalised stocks, which had strongly outperformed market leaders. A longer term calendar strategy (that is, longer than a quarterly period) required “as close to no tracking risk as possible”. Mr Channon and Mr Moss expressed the view that Australia offered very attractive opportunities for index arbitrage which they wish to “exploit…to the maximum”.

Nomura, on 6 March 1996, held 15,284 sold March and June SPI Contracts. Shortly after that date, the price of the SPI Contracts dropped to a significant discount to fair value. Nomura took the opportunity partially to unwind its book. Between 11 March and 28 March 1996, it bought approximately 2,700 March SPI Contracts although it also acquired during this period about 200 further sold March SPI Contracts. Most of the unwinding occurred during the period 11 to 14 March 1996, when SPI Contracts were trading at a heavy discount to fair value. As Nomura partially unwound its position, it sold the equivalent amount of securities (amounting in value to $118 million over the four days of trading from 11 to 14 March 1996). Nomura also chose to roll approximately 2,000 SPI Contracts during the period of unwinding.

6.2 The Decision To Go To Expiry

Mr Channon’s evidence was that, after the ASX closed on 26 March 1996, he believed that Nomura would have to go to expiry on some of the March 1996 SPI Contracts. He based this belief on his assessment of the prospects for a roll of the March 1996 SPI Contracts. He had discussions with Mr Moss and others after the close of trading on 27 March 1996 to plan for the sale of stocks as part of going to expiry on 29 March 1996. He said that it was not until trading concluded on 28 March 1996 that he formed the view that it was very likely that Nomura would allow all its March 1996 SPI Contracts to proceed to expiry.

 

Some of the cross-examination of Mr Channon and Mr Moss suggested that the decision to go to expiry had been made earlier than late March 1996 and that the decision flew in the face of powerful commercial reasons favouring a decision to sell the March futures. As I followed the cross-examination, the suggestion appeared to be that the decision to go to expiry was explicable only on the basis that Nomura expected to realise profits over and above those associated with closing out its arbitrage position. Mr Heydon QC who appeared with Mr Gleeson and Mr Diethelm for the ASIC, accepted in his final submissions that Mr Channon formed the view that it was very likely that Nomura would go to expiry only after trading had concluded on 28 March 1996. Mr Heydon also accepted that Nomura had sound commercial reasons for electing to go to expiry rather than rolling its March futures position.

6.3 Nomura’s Holdings on the ASX and the SFE at the Close of Trading on 28 March 1996

Immediately after the close of trading on the ASX and SFE on 28 March 1996, Nomura held, legally or beneficially, the following:

 

·        securities traded on the ASX with a market value at that time of A$730,062,165;

·        10,912 sold March 1996 SPI Contracts with a market value of A$608,344,000, based on the closing price of 2,230 points on that date; and

·        2,154 sold June 1996 SPI Contracts worth A$121,270,200, based on the closing price of 2,252 points on that date.

The great majority of the 352 securities held by Nomura were held by it in the same proportions as those securities were represented in the calculation of the All Ords. The main exception was that Nomura was slightly “underweight” in respect of seven of the top ten securities by market capitalisation in the All Ords. It also held shares in seven companies which did not form part of the All Ords on 28 March 1996.

Subject to these minor exceptions, Nomura’s SPI Contracts position and physical position reflected an almost perfectly weighted arbitrage position. The physical position (that is, the stock holdings) matched the SPI Contracts position in total dollar amounts. This substantially eliminated the delta risk that would otherwise have arisen from exposure to adverse movements in the physical market. Each security represented the same proportion of Nomura’s physical position (measured by dollar value) as its proportion of the All Ords (measured in the same way). This substantially eliminated the tracking risk arising from disparity between the performance of stocks in the portfolio and the performance of the All Ords as a whole.

It was plainly advantageous to Nomura to have largely eliminated delta and tracking risk. However, as Mr Channon said in evidence (Ts 756) the almost perfect replication of the All Ords increased the difficulty of achieving volume convergence given Nomura’s decision to allow its March SPI Contracts to proceed to expiry.

Because Nomura’s physical position was almost identical in value to its futures position, and because it had virtually eliminated tracking error, Mr Francis expressed the view that the physical position could be apportioned as to A$608,791,965 against the March futures position and as to A$121,270,200 against the June futures position. Subject to a slight disparity in the figures, this view was consistent with Nomura’s admission in its defence that its physical position was associated in part at particular times with its March futures position and at times with its June futures position. In any event, there was no dispute that Nomura notionally adopted an apportionment of this kind, although it did not actually allocate its physical stock to one or other of the futures positions.

If the position is viewed as at the close of trading on 28 March 1996, Nomura had four major options available to it for its trading on the following day, 29 March 1996, being the last trading day of the quarter. These were the following:

·        to allow the 10,912 sold March 1996 SPI Contracts go to expiry and sell its matching basket of securities (having a value on 28 March 1996 of A$608,344,000);

·        to roll the 10,912 sold March 1996 SPI Contracts by acquiring the same number of bought March 1996 SPI Contracts and selling an equivalent number of June 1996 SPI Contracts (while maintaining its holding of securities);

·        to close out its position, by acquiring 10,912 bought March 1996 SPI Contracts and selling the matching holding of securities; or

·        to adopt a combination of the above strategies.

In essence, Nomura adopted the first option, although it also engaged in other transactions on 28 and 29 March 1996.

 

6.4 Sales to Institutions

Mr Channon formed the view that Nomura would probably go to expiry with its sold March 1996 SPI Contracts after the close of business on the ASX on 28 March 1996. Shortly after reaching that conclusion, Mr Channon arranged for contact to be made with US institutions offering to sell them Australian stocks at the closing price on 29 March 1996. He offered them a “particularly good deal” (Ts 675), advising them that Nomura prepared to pay stamp duty and “to sell any index provided it was capitalisation weighted”. Mr Channon was aware that some institutions use indexes other than the All Ords. He advised the institutions that Nomura was prepared to sell indexes even though they did not precisely match Nomura’s risk.

This strategy enjoyed only limited success. Some trades were effected in Europe, including the UK. The total value of sales through the institutions, based on the closing prices on 28 March 1996, was A$26,658,808. Most of these sales were effected through a single institution, namely, Legal and General, which took securities valued at A$22,907,740. It is clear from telephone conversations involving Mr Moss during the morning of 29 March 1996 (Sydney time) that he was aware by 10.15 am of the orders placed by Legal and General. It is probable that he also knew that other institutions had placed small orders, although he probably did not know the precise quantities. He took the institutional sales into account in determining the size of the March Sale Orders to which I refer shortly.

6.5 Nomura’s Trading Activities on 29 March 1996

On 29 March 1996, Nomura placed five different kinds of orders with brokers for execution on the ASX. These were the following:

 

(i)                  it placed 346 orders with Were Stockbroking Ltd (“Were”) to buy parcels of 346 individual securities at BIDS substantially below the closing prices for the securities on 28 March 1996 (this was the Bid Basket);

(ii)                it placed 346 orders with Were to sell parcels of the same 346 individual securities at ASKS substantially above the closing prices for the securities on 28 March 1996 (this was the Ask Basket);

(iii)               it placed 345 orders to sell parcels of 345 individual securities with ten different brokers (these were the March Sale Orders);

(iv)              it placed ten orders with Paul Morgan Securities Pty Ltd to sell on the bid side parcels of 10,000 of each of the top ten securities by market capitalisation on the ASX (these were the London Bid Side Sell Orders); and

(v)                it placed a second group of orders with Paul Morgan Securities to sell on the ask side much larger parcels of the same top ten securities (these were the London Offer Side Sell Orders).

On 29 March 1996 Nomura also engaged in three principal transactions on the SFE. These were the following:

(vi)              it allowed the 10,912 March 1996 SPI Contracts to go to expiry;

(vii)             it sold a further 2,620 March 1996 SPI Contracts (that is, it acquired a sold position in these contracts) which it also allowed to go to expiry on that day; and

(viii)           it sold a further 990 June SPI Contracts (that is, acquired a sold position in these contracts) (the “further June SPI Contracts”).

There was a question a to whether Nomura sold 2,620 March SPI Contracts or a slightly lower number (2,607), but nothing turns on this.

I shall describe each of these eight transactions or sets of transactions in more detail. However, it is appropriate to note that Mr Channon’s evidence was that the overall strategy underlying the trading on the ASX was to enable Nomura to achieve price and volume convergence. He said that what was important on 29 March 1996 was for Nomura to sell its offsetting stock at a price on average matching or beating (that is, at a higher price) the closing price of the stocks. This would enable Nomura to capture its arbitrage profit and contain the expiry risks. Mr Channon said that the actual level of the All Ords and the price at which Nomura sold its stock was quite immaterial. In other words, Nomura, in its dealings on the ASX on 29 March 1996, was price insensitive.

6.6 The Bid Basket

At 11.18 am on 29 March 1996, in accordance with directions given by Mr Channon, Mr Moss sent a fax from Hong Kong to Were instructing the broker to place on SEATS the buy orders specified in the fax. Mr Channon described the Bid Basket as an “essential part” of the strategy for Nomura to go to expiry with its March SPI Contracts.

The instructions required Were to place bids for 346 securities. Each bid was to be for the same or approximately the same volume of the particular security already held by Nomura as a matching position for its March SPI Contracts. Clearly Nomura intended that the volumes of securities to be included in the Bid Basket should correspond exactly or very closely to the volumes to be included in the March Sale Orders.

The orders in the Bid Basket were to be placed at prices between five and twenty per cent lower than the closing trading prices for the stocks on 28 March 1996. Subject to a few exceptions, the following was the position:

·        securities ranked in the top 20 of the All Ords (measured by aggregated market value) were marked down five per cent on the previous day’s close;

·        securities ranked between 21 and 50 in the All Ords were marked down eight per cent on the previous day’s close;

·        securities ranked between 51 and 80 in the All Ords were marked down ten per cent on the previous day’s close;

·        securities ranked between 81 and 184 in the All Ords were marked down fifteen per cent on the previous day’s close; and

·        securities ranked lower than 184 in the All Ords were marked down twenty per cent on the previous day’s close.

The precise “discounts” were decided on by Mr Moss prior to 29 March 1996. He accepted that he had calculated the discounts “by rough ranking in the All Ords” (Ts 493). He also accepted that the ranking had some correlation with the liquidity of the stocks.

The orders comprised in the Bid Basket were entered by Were into SEATS between 12:26 pm and 1:09 pm on 29 March 1996 (with the exception of one order placed later). The buy orders in the Bid Basket were generally entered by Were in SEATS and maintained as undisclosed bids, whereby the volume of the bids was not disclosed on the screen. With several minor exceptions, the orders in the Bid Basket placed by Were were not withdrawn or cancelled on SEATS prior to the close of the market at 4:00 pm on 29 March 1996.

According to Mr Channon, the reason why the Bid Basket was essential to his strategy was that, without it, he could not be sure that the security would register a closing price; nor could he be sure of what would occur if there were an imbalance of sell and buy orders. He maintained that, facing an expiry, Nomura’s most desirable outcome was to be able to sell all stock at or above the closing price either into the market or over-the-counter to institutions. The Bid Basket was “the liquidity of last resort” (par 107). Mr Channon described the Bid Basket as a “contingency” and said that the hitting of the bids was not something that Nomura wished to happen (Ts 681).

Mr Channon acknowledged that his strategy was based on a misconception on his part as to how the All Ords was calculated. As I have already explained, until after the events of March 1996 had concluded, he believed that the All Ords was calculated exclusively by reference to the last traded price of each stock in it. Nomura’s auditing mechanisms had not revealed that this belief was erroneous. Mr Channon learned only later that the All Ords was calculated by reference to any later higher bid or lower offer, provided the bid or offer was current at the close. Mr Channon said that, had he known of the actual method of calculation of the All Ords he would not have placed the Bid Basket, but would have given instructions to brokers, when sale orders were incomplete, to offer below the last traded price. This would have meant that, in the absence of further buying, the last offer became the closing price for the purpose of calculating the closing figure for the All Ords. According to Mr Channon, such a strategy would have had the identical economic impact as the placing of the Bid Basket. (Whether it would have had the identical legal impact is an issue not explored in argument.)

At first blush, it seemed to me rather remarkable that the dealer primarily responsible for developing the complex and detailed strategy put into place on 29 March 1996 should not have ascertained precisely how the key market index actually worked. The more so, given Mr Channon’s obvious sophistication and well-rewarded success as a trader in international derivatives market. Nonetheless, Mr Channon was not cross-examined on this aspect of his evidence. Moreover, the transcripts of conversations support his claim that he laboured under a misapprehension. I accept his evidence on this point.

6.7 The Ask Basket

At 11.51 am on 29 March 1996, Mr Moss sent a fax to Were instructing it to offer for sale specified quantities of the 346 securities identified in the fax. In substance, the stocks included in the Ask Basket were those included in the Bid Basket and the volume of each stock was the same as in the Bid Basket. The premium for any given stock precisely matched the discount for that stock to be included in the Bid Basket.

The Ask Basket offers were entered into SEATS by Were between 1:14 pm and 1:55 pm on 29 March 1996. Subject to minor exceptions, the sell orders were not withdrawn or cancelled prior to the close of the market. Like the buy orders in the Bid Basket, the sell orders in the Ask Basket were entered undisclosed.

According to Mr Channon, the Ask Basket was placed because he and Mr Moss knew that Were was aware of Nomura’s index arbitrage position. The object was to prevent Were ascertaining whether Nomura planned to buy or sell at expiry until such time as Nomura chose to tell them. Mr Moss said this in evidence (Ts 477):

 

“Q. What was the purpose of the ask basket?

A. Just basically to hopefully disguise from Weres the fact that we were going to be doing anything on the expiry.

 

Q. Was it to, in effect, confuse Weres?

A. To disguise it from them.”

 

 

6.8 The March Sale Orders

The March Sale Orders placed on 29 March 1996 were for the sale of 155,837,100 shares having a value of A$587,075,028, at closing prices on 28 March 1996. The orders included sell orders for two securities not included in the All Ords, having a value of approximately A$2.4 million.

Nomura gave instructions for the sale of shares to ten brokers as follows:

·        by fax from Mr Moss to Mr Crabb of Were at 2:20 pm (Sydney time), covering 25 named securities out of the top-weighted 75 securities on the All Ords;

·        by fax from Mr Jones to Mr Rezek of BZW Australia Ltd (“BZW”) at about the same time, covering 25 different named securities out of the top-weighted 75 securities on the All Ords;

·        by fax from Mr Moss to Mr Summerfield of Bain Securities Ltd (“Bain”) at about the same time, covering the remaining 25 securities out of the top-weighted 75 securities on the All Ords;

·        by a telephone call from Mr Moss at 2:10 pm to Mr Gregory of Scott Foster & Partners (“Scott Foster”), advising him that Nomura wished to sell five named securities ranked 76 to 80 in the All Ords;

·        by fax from Mr Jones to Mr Olsen of Patterson Ord Minnett Ltd (“Patterson Ord Minnett”) at 2.27 pm, covering 44 securities below the top-weighted 80 securities in the All Ords;

·        by fax from Mr Jones to Mr Annikin of HSBC James Capel Australia Ltd (“HSBC Capel”) at 2.41 pm, covering a further 44 securities below the top-weighted 80 securities in the All Ords;

·        by fax from Mr Jones to Mr Carter of McIntosh & Company Ltd (“McIntosh”) at 2.14 pm, covering a further 44 securities below the top-weighted 80 securities in the All Ords;

·        by a fax from Mr Jones to Mr Hoey of Ord Minnett Ltd (“Ord Minnett”) at a time not identified, covering a further 45 securities below the top-weighted 80 securities in the All Ords;

·        by fax from Mr Moss to Mr Hyden of ANZ McCaughan Securities Ltd (“ANZ McCaughan”) at an unidentified time, covering 44 securities below the top-weighted 80 securities in the All Ords; and

·        by fax from Mr Jones to Mr Gray of Prudential-Bache Securities Ltd (“Pru-Bache”) at approximately 2.30 pm, covering 43 securities below the top 80.

The instructions at this stage were limited to advising brokers of the securities and the volume of each security to be sold. The volume advised to each broker was one third of the total Nomura actually intended to sell.

By a series of telephone calls made to each of the brokers by Mr Moss and Mr Jones, between 3:07 pm and 3:37 pm Sydney time, each broker was told to treble the quantity of each stock to be sold. Those instructions brought the quantity of stock to be sold to the levels already identified. The purpose of trebling the orders in this manner (as Mr Moss explained [Ts 495]) was to reduce the risk of “front running”. By not revealing the full size of the orders until relatively late in the day, this risk was reduced. There was no dispute that Nomura, through Mr Channon and Mr Moss, desired and intended that all of the securities comprised in the March Sale Orders should be sold by the close of trading on the ASX on 29 March 1996, although (as will be seen) they intended that some “sales” would occur by Nomura hitting its own Bid Basket.

In the course of the telephone calls between 3:07 pm and 3:37 pm, and in other telephone conversations between Mr Moss and Mr Jones and the ten brokers, instructions were given as to how the stocks were to be offered and sold. It will be necessary to return to the precise instructions later, as there was a dispute between the parties as to the meaning and intention of the instructions conveyed to brokers. In general terms, however, the brokers were told to go to the offer side at or soon after 3:30 pm or 3:45 pm and to hit the bids aggressively shortly before the close of trading with a view to disposing of all of the stock prior to the close of trading.

The brokers (other than Were) were not aware of the Bid Basket. However, if insufficient bids appeared or emerged on SEATS above the level of the Bid Basket prior to 4:00 pm to accommodate the quantity of a particular stock to be sold, the instructions given to the brokers contemplated that they would hit the bids aggressively so far as necessary to dispose of the stock. This required the brokers to lower the price of the stocks to the extent necessary to meet bids (whether the bids had been recorded on the screen before 3:30 pm or 3:45 pm on 29 March 1996 or emerged thereafter). To the extent that insufficient bids were recorded on SEATS above the level of the Bid Basket for a particular stock, the effect of the instructions was that Nomura’s selling brokers would hit Nomura’s own Bid Basket. The parties were at issue over the chances of the Bid Basket actually being hit had the instructions been faithfully carried out by brokers.

I should interpose that, unlike the other brokers, Were was aware both of the existence of the Bid Basket and of the fact that Nomura had placed substantial sale orders. There is nothing in the evidence to suggest that Were specifically advised Nomura of the risk that its strategy might have resulted in the purchase of its own shares in possible contravention of the Corporations Law or of ASX Rule 2.8(2) (to which I have previously referred). As I have mentioned, Mr Crabb warned Mr Moss at 3:38 pm of the danger that Nomura would hit its own Bid Basket, but regulatory issues were not expressly raised in that conversation. It may be that Were’s apparent failure to address the regulatory issues resulted from the fact that its share of the March Sale Orders related only to liquids, and that the risk of hitting the Bid Basket in respect of those securities was considered remote.

It was common ground that most of the brokers did not implement their instructions fully. The reasons for this were not explained in depth in the evidence. Some brokers, as Mr Channon and Mr Moss apprehended prior to the event, probably did not completely understand that Nomura’s selling orders were intended to be implemented notwithstanding that the inevitable consequence would be a fall in the price of some securities. Others may have had reservations about the propriety of implementing instructions which called for the bid stack to be hit aggressively very near to the close, with the obvious consequence of producing a fall in the closing price of securities. There were also other factors at work, such as the jamming of screens that prevented BZW from implementing its instructions near the close of trading.

Whatever the explanation, most brokers did not hit bids very aggressively in the last few minutes before the close of trading in the apparently price-insensitive manner contemplated by their instructions. (I say “apparently” because the intentions underlying the instructions were not as price insensitive as Nomura maintained.) There were also significant differences among the brokers as to the manner in which they acted (or did not act) on their instructions. In the case of seven securities, the selling broker actually failed to enter any ask on SEATS. In the case of a further fifteen securities, the selling broker simply failed to effect any trades at all pursuant to the March Sale Orders.

In the result only 74.35 per cent of the 155,837,100 shares comprised in the March Sale Orders (that is, 115,865,251 shares) were sold on 29 March 1996. Of those sold on 29 March 1996, 65,997,516 (56.96 per cent) were sold on-market, that is prior to 4:00 pm on the day. Another 46,611,503 shares (40.23 per cent) were sold off-market, that is after 4.00 pm on 29 March 1996. The remaining 3,256,232 shares (2.81 per cent) were not sold on the ASX, but were recorded in contract notes as having been sold on behalf of Nomura. Of the 345 securities comprised in the March Sale Orders, the orders in respect of 158 were not completed on 29 March 1996.

A further 9.31 per cent of the shares comprised in the March Sale Orders (that is, 14,507,090 shares) were sold on 1 and 2 April 1996 by two brokers, namely, BZW and Were. This left a balance of 16.34 per cent of the March Sale Orders (25,464,759 shares) unsold.

Only two brokers (Pru-Bache and Scott Foster) sold 100 per cent of their allocation of shares on 29 March 1996. Even then, both brokers traded shares after 4.00 pm. One other broker (BZW) ultimately sold 100 per cent of its allocation, but it sold nearly half of the securities allocated to it after 29 March 1996.

As I have already noted, the March Sale Orders related to shares worth A$587,075,028 as at the close of trading on 28 March 1996. The brokers ultimately sold shares comprised in the March Sale Orders yielding gross proceeds of A$513,856,579.

6.9 The London Bid Side Sell Orders

In a telephone conversation at 3:20 pm on 29 March 1996 (Sydney time), Mr Usher of Nomura, London, instructed Mr Conn of Paul Morgan to sell 10,000 shares in ten named companies. These comprised the top ten securities in the All Ords by market capitalisation and constituted approximately 40 per cent of the aggregate market value of all securities comprised in the All Ords. The instruction given by Mr Usher was as follows (10/3578):

 

“Conn: Any limit on the price?

Usher: No….

Conn: …A tenner of everything?

Usher: A tenner of everything. We are a seller, we want to basically, to hit the bid on the close you know we want to get as close to smacking the close with that, I know its only quite a small size but we just want to low tick it on the close.

Conn: Yeah, alright so let’s just go through it: on the close we’re hit to 10,000 BHP, sorry sell 10,000 BHP, sell 10,000 NABs, sell 10,000 Newscorps, sell 10,000 CRA, sell 10,000 Westpac, sell 10,000 Western Mining, sell 10,000 ANZ, sell 10,000 CocaCola Amatal, sell 10,000 Newscorp DP and sell 10,000 Amcorp.

Usher: Yeah, and that’s it.”

 

 

In a conversation between the same parties at 3:49 pm Mr Usher reiterated the instructions (10/3624):

 

“Usher: On those we really just want to make sure we do just go at market on the death.

Conn: On the death…

Usher: Yeah we want to be that last tick, that’s vitally important.

Conn: That will be at market.

Usher: Yeah, at market no limits whatsoever, just wherever.

….

Alright wherever it is just hit down we just don’t want it high ticking on the close.”

 

 

In an earlier conversation between Mr Channon and Mr Moss, at 2:13 pm on 29 March 1996, Mr Channon had advised Mr Moss as follows (9/3114):

 

“OK. Just – you know with the stuff we are going to put in with just those top names we are just going to put in some token size to sell at market on the close. Now the other thing we were thinking about doing is getting, you know, as you are smacking it down, just get some offers in behind it to make sure that it doesn’t high tick off, you know, right on the close.”

 

 

The instructions given by Mr Usher were referred to in the proceedings as the “London Bid Side Sell Orders” because the instructions, in effect, were to sell at close “on the bid” and because the orders were placed directly from London and not from Hong Kong. Mr Moss, although not involved in the execution of these London orders, knew they were going to be done. He agreed (Ts 475) that any securities required to satisfy buyers would have had to come from a source other than securities held as part of Nomura’s hedging of its March 1996 SPI Contracts. Of course, Nomura also had securities which, at the time, were retained as a hedge against its sold position in June 1996 SPI Contracts.

 

Mr Channon said that the object of the London Bid Side Sell Orders was to increase the chances that, for the top ten All Ords securities, the last sale would be on the bid side. The bid side was likely to be where Nomura would sell most of its orders (that is, the March Sale Orders). A bid side close for a particular stock would increase Nomura’s prospects of achieving price convergence at the close (presumably because a sale on the offer side would be more likely to result in Nomura being high ticked) (par 112.).

 

Despite the instructions from Nomura, Paul Morgan did not place any orders until after 4.00 pm. The first offer was placed on SEATS at 4:02:22 pm (for 10,000 NAB shares) and the last (for 10,000 WMC shares) at 4:14:28 pm. Only nine orders were placed; the tenth stock was simply not offered. Of the nine orders entered, six resulted in trades after the market closed. The trades occurred during the period 4:04:59 pm and 4:16:58 pm. The failure to implement Nomura’s instructions meant that the London Bid Side Sell Orders, as placed, were incapable of effecting Nomura’s intentions.

 

6.10 The London Offer Side Sell Orders

In a telephone conversation at 3:30 pm on 29 March 1996, Mr Usher in London instructed Mr Conn of Paul Morgan to place on SEATS offers to sell quantities of between 125,000 and 300,000 of the top ten securities by market capitalisation in the All Ords. Mr Usher was acting in accordance with directions given by Mr Channon. These instructions were referred to in the proceedings as the “London Offer Side Sell Orders” because the instructions came from London and required Paul Morgan to make offers, rather than hit the bid side.

 

The substance of the instructions given to Paul Morgan was as follows:

 

·        the broker was to enter the offers a minute and a half prior to the close at the then lowest ask price (that is, joining the lowest ask);

·        if the lowest ask moved down the broker was to join the new best ask at each such new price level by placing an identical sell order, leaving the original and any subsequent asks in place on SEATS; and

·        the offers were not to affect the London Bid Side Sell Orders which, as Mr Usher said in the conversation, required Paul Morgan “to hit the bids on those right on the death” (10/3598).

 

These instructions were conveyed by Mr Usher in the following terms (10/3597-3598):

 

“SU: I’ll give you instructions afterwards but I’ll just give you the sizes for the time being, NAB 250,000 again.

 

TC: NABs you want to sell how many?

SU: I was going to say it’s not really a sell, I’ll tell you what we need to do, but 250,000.

…

SU: Newscorp 300,000

…

SU: CRA 150,000

…

SU: Westpac Banking 250,000

…

SU: WMC a quarter of a million

…

SU: ANZ a quarter of a million

…

SU: Coca-cola 125,000

…

SU: Newscorp preferreds 250,000

…

SU: Amcorp 250,000

…

TC: Now what do we do with these ones now are we able to do that now or..

SU: No, what we want to do is put those on the offer towards the close, so as we’re coming into the close we want to basically go offer side and hold, we just want them there so that things don’t get high ticked…

…

SU: …like a protection so we just want to join the offer with one slice of those, OK so maybe a minute and a half before we’ll put in an offer where the offer price is ok?

TC: So what happens if there is stock already there on the offer?

SU: That’s fine just join it

TC: Just join it

SU: Just put that in so that we’ve got that protection and at the same time if, as stocks move down just leave those orders where they are when you start. OK but then as it moves down put in the same size on the offer side. So you have basically have double that size in the market.

TC: …so in other words what you’re saying you want me to do is put this in a minute and a half before the close, right, for these sizes, on the offer, right, so some of it is going to get done and some of it isn’t, right?

SU: Yeah, exactly. It’s really a protection for us we don’t want things to high tick on the close.

TC: At the same time the other orders, these other tenners that you want done, we’re to hit the bids…

SU: No, I want you to hit the bids on those right on the death

…

SU: But also with the bigger ones, one should join the offer if the market moves down then leave the offers in where you’ve got them OK, but put in the same size again on the offer where it is.

TC: At the same price?

SU: No, no at the new offer price, so say…this starts at 8-10 we’re offered it at 10 for a quarter of a million.

…

SU: And then if it moves down to 6-8 then join the offer at 8, if it moves down to 4-6 then take the 8 out and put that down at 6 but leave the 10 in

…

SU: Yeah, so you’re going to have double that size but just follow the offer down and keep it offered

TC: Just follow the offers down?

SU: Yeah.”

 

(Emphasis added.)

 

 

Mr Channon had advised Mr Moss at 2:13 pm (Sydney time) on 29 March 1996 of his intention to place the London Offer Side Sell Orders. He did so in these terms (10/3112):

 

“GC: …you know with the stuff we are going to put in with just those top names we are just going to put in some token size to sell at market on the close. Now the other thing we are thinking about doing is getting, you know, as you are smacking it down, just get some offers in behind it to make sure that it doesn’t high tick off, you know, right on the close.

DM: Yeah.

GC: Now what – could you just quickly give me a run of what is a reasonable size in some of these names? BHP, what is that? A few hundred thousand?

…

DM: What size are you targeting?

GC: I’m talking a frame – like a size you don’t expect to trade but just to make sure that some token order coming in the end won’t wipe it out.”

 

 

Shortly afterwards, at 2:23 pm, Mr Tatters in London also told Mr Moss of the plan (9/3118-3119):

 

“ST: sounds good, what we’ve done we’ve put a little basket together like with just a few thousand shares to tick the bid at the close and we’ve put another one of…it’s worth about 13,000,000 quid of the top ten names just to protect the offer just to sort of if you are moving down through the bids just to leave offers sort of, you know, a little way above you, then if somebody does try and buy it back then they have got to go through those offers, but its only on sort of the top ten names. So, we’ll control that one and sort it out after the close.”

 

 

Mr Channon said in his affidavit that the object of the London Offer Side Sell Orders was to lessen Nomura’s exposure to an “offer side high tick” (para 113). Nomura’s instructions to its brokers to sell through the March Sale Orders meant that, as the close approached, they would be hitting bids in the bid stack for each of the securities. This would have the effect of widening the bid-ask spread on the screen (that is, “live” bids would be falling in price as higher bids were hit, while asks recorded on SEATS would remain at the same level unless new asks were entered). Mr Channon said that he envisaged that the Side Sell Orders would be placed on the offer side and that, to the extent that bids were being hit, they would follow the bid side down. He also said that the placing of the London Offer Side Sell Orders created a risk of tracking error if Nomura were obliged to deliver stock pursuant to the orders. However, this risk was

 

“less significant than the risk that high ticking in these stocks could adversely affect Nomura’s prospects of achieving convergence” (par 115).

 

 

Mr Channon observed that he did not believe that the instructions in the London Offer Side Sell Orders had been carried out as he had envisaged. It is not clear whether Mr Channon meant to say that the instructions given by Mr Moss were not as he (Mr Channon) had envisaged or whether he was suggesting that the brokers had failed to carry out the instructions. He was not asked in his oral evidence to clarify this point.

 

In addition to the instructions to which I have already referred, Nomura instructed Paul Morgan to place two further sale orders. In a telephone conversation at 3:55 pm on 29 March 1996, Mr Usher instructed Mr Stuart Crow of Paul Morgan to place offers to sell one million BHP shares at $18.30 per share, the volume to be undisclosed. At 3:57 pm Mr Tatters of Nomura London instructed Mr Crow by telephone to place an undisclosed offer in SEATS for 500,000 shares in NAB at $11.52 per share. Mr Tatters told Mr Crow this (10/3638):

 

“Again the object is not to trade it, just a bit of extra protection just in case somebody’s there at the close.”

 

 

Mr Channon, in his evidence, explained these two offers on the basis that he was concerned that the bid and ask stacks in BHP and NAB were thinning out, and that if a major expiry buyer (that is, a trader holding bought March SPI Contracts going to expiry) came in right at the close their prices might rise substantially. If this occurred, Nomura would, or might be, high ticked in those stocks.

 

Paul Morgan placed all but two of the orders, as instructed. They did so between 3:56:57 pm and 3:59:41 pm. None of the offers resulted in a trade. The only securities held by Nomura that could have satisfied the London Offer Sell Side Orders (had they resulted in trades) were those representing Nomura’s physical position in relation to its June SPI Contracts.

 

6.11 Nomura’s Sales to Itself

It was common ground that one consequence of the orders placed on behalf of Nomura was that, in two instances, selling brokers carrying out the March Sale Orders entered into trades with Were acting on behalf of Nomura pursuant to bids the Bid Basket. The first of the trades was in MMF; the second was in NMPN; a property trust company. The trades occurred in the circumstances outlined below

 

In the case of MMF, at 3:59:56 pm on 29 March 1996, McIntosh acting on behalf of Nomura entered an ask on SEATS for the sale of 10,000 shares at a price of $2.61 per share. This order transacted as a trade with an existing buy-order recorded as a bid by Were in SEATS pursuant to the Bid Basket. That buy order had been placed as a bid in SEATS for 354,600 shares in MMF (although the quantity was undisclosed on SEATS), at $2.61 per share. The trade effected was for 10,000 shares in MMF at $2.61 per share.

 

This was the last trade to occur on SEATS in MMF prior to the close of trading on 29 March 1996. The price of the previous trade in MMF recorded on SEATS was $3.02. The effect of the transaction on 29 March 1996 was that Nomura sold 10,000 shares in MMF to itself in SEATS at a price of $2.61 per share, twenty per cent below the last recorded sale of shares in the company.

 

The trade of 10,000 shares formed part of sales of 47,100 shares in MMF effected by McIntosh prior to the 4:00 pm close on 29 March 1996. The remainder of Nomura’s March Sale Order for MMF (that is, 305,400 shares, being the sale order of 354,600 shares, less the 47,100 shares sold before 4:00 pm) was sold after 4:00 pm, the last sale being effected at 4:22:06 pm. There was no evidence as to why McIntosh entered an ask on SEATS at 3:59:56 pm for only 10,000 shares, as distinct from entering an ask for the balance of the sale order. The latter course would have accorded with McIntosh’s instructions.

 

In the case of NMPN, at 3:52:05 pm on 29 March 1996, Paterson Ord Minnett entered in SEATS an order to sell 3,600 units in NMPN at $0.72 per unit as part of the March Sale Orders. This order transacted as a trade with an existing buy order recorded as a bid on SEATS by Were pursuant to the Bid Basket. It is also not clear why the bid placed on SEATS was for 3,700 units in NMPN, since the evidence suggests that Nomura’s sell order for NMPN was 3,600 units. In any event, the sale recorded at $0.72 was for the whole of Nomura’s sell order relating to NMPN.

 

Were had earlier placed a bid on SEATS for 3,700 units in NMPN at $0.72 per unit. The trade effected was for 3,600 units in NMPN at $0.72 per share. This was the last trade to occur in SEATS on 29 March 1996 in respect of NMPN. No NMPN units had previously traded on 29 March 1996. The closing price on the previous day was $0.90. Thus the “sale” of NMPN units by Nomura to itself was at a price twenty per cent below the previous closing price for the units.

 

On 9 April 1996, Nomura sold the MMF shares for $3.01 per share and the NMPN units at $0.89 per unit.

 

It should be noted that Nomura’s defence admits that the sale of the MMF shares and NMPN units did not involve any change in beneficial ownership of the respective securities.

 

6.12 March 1996 SPI Contracts Go To Expiry

Trading closed on the SFE at 4:10 pm on 29 March 1996. All 10,912 March 1996 SPI Contracts which Nomura held at the close of trading on 28 March 1996 went to expiry at close on 29 March 1996. They were subsequently cash settled in accordance with the procedures of the SFE that have already been explained. In accordance with those procedures, the ASX provided to the SFE at the closing quotations for the All Ords as at 4:00 pm on the last trading day, namely, 29 March 1996. That quotation was 2225.6 points, down from 2236.5 points at the close on 28 March 1996 (7/2577).

 

The chart reproduced below was annexed to a report by Dr Rutledge, tendered by Nomura. (Dr Rutledge was not cross-examined.) The chart shows the intra-day movements in the All Ords, on 29 March 1996:

 

6.13          Additional Sold March 1996 SPI Contracts

During trading on 29 March 1996 Nomura instructed brokers on the SFE to sell a further quantity of March 1996 SPI Contracts (that is, to acquire a sold position in the SPI Contracts). Mr Francis was able to identify 2,607 such contracts, having a total value of $146,098,475. The SPI Contracts were sold at prices ranging from 2,230.0 to 2,248.0.

On 29 March 1996, Nomura did not acquire any bought March 1996 SPI Contracts to offset the further March 1996 SPI Contracts sold on that day. Nor did Nomura buy SPI Contracts expiring on any later date. Similarly, Nomura did not acquire on 29 March 1996 any securities in the ASX (other than the self-trades in MMF and NMPN). Accordingly, it is clear that the further SPI Contracts were not sold pursuant to an arbitrage strategy. In fact, Nomura allowed the further SPI Contracts to go to expiry at the close of trading on the SFE, at 4:10 pm on 29 March 1996. The contracts were subsequently cash settled in the manner already described.

Since the SPI Contracts were sold by Nomura during 29 March 1996 at prices above the expiry price for such contracts on the day (2,225.6), Nomura realised a profit on the transactions. Mr Channon estimated that Nomura had made a profit of about $1.3 million to $1.4 million from the “intra-day” futures trades (as he described them). This was broadly consistent with Mr Francis’ estimate of a profit of $1,044,095.

Mr Channon said that Nomura lost about $900,000 if its activities on 29 March 1996 were considered on their own. Against the profit of about $1.3 million from its intra-day futures trades, Nomura had to offset commission and stamp duty of about $1.5 million. In addition, Nomura, in the end, failed to “beat the close”, on average by about four basis points. This represented a “cost” of about $240,000. Mr Channon was not asked to explain the rest of his calculations leading to the loss of $900,000 on 29 March 1996. He did say, however, that a provision of $1.2 million by way of arbitrage profit was realised against the $900,000 loss and that Nomura recorded a profit from its Australian book, for the year ended 31 March 1996, of about $8 million. The fact that, as events turned out, Nomura failed to beat the close and that it necessarily incurred transaction costs in unwinding its position, does not detract from the conclusion that it realised a substantial profit from its intra-day futures trades on 29 March 1996.

According to Mr Channon, the sale of the additional March 1996 SPI Contracts was separate from the “unwind” strategy being implemented by Nomura. Mr Channon said that during discussions on 29 March 1996, Mr Moss informed him that the market seemed to be expecting buying activity at the close. This was consistent with the fact that the market was rising. According to Mr Channon (par 117):

 

“There did not seem to me to be any indication that the market expected Nomura’s unwinding trade. Based upon this I decided to escalate the March sales, which I did by way of instructions to [Mr Moss and Mr Wong].”

 

 

I shall deal later with the suggestion that the sale of the additional March SPI Contracts was separate from Nomura’s unwinding strategy.

6.14 Acquisition of Further June SPI Futures

On 29 March 1996, Nomura acquired 940 sold June SPI Contracts. The value of these contracts, based on the prices at which they were traded was $55,956,225. Nomura did not acquire any bought SPI Contracts that might have offset the further June SPI Contracts. Nor did it acquire on 29 March 1996 any securities other than the two “purchases” resulting from the hitting of its own Bid Basket.

7. NOMURA’S INTENTIONS AND EXPECTATIONS

The parties were in dispute as to Nomura’s intentions with respect to the strategy ultimately implemented by it on 29 March 1996 (albeit imperfectly). Much of the dispute revolved around Nomura’s intentions and expectations in placing the Bid Basket and giving the other instructions required to implement the expiry strategy devised by Mr Channon on behalf of Nomura. In this connection, four matters are particularly important. They are the following:

 

·        First, the conversations in which Mr Channon and Mr Moss discussed between themselves or with others the strategy for Nomura’s March expiry. These conversations provide the most direct contemporaneous evidence of their intentions, especially those of Mr Channon, the architect of the strategy. Some of the conversations concerned the instructions to be given to brokers, and I deal separately with these.

·        Secondly, Nomura’s acquisition of a sold position in March 1996 SPI Contracts on 29 March 1996. These were referred to in evidence as the “intra-day” March SPI Contracts, because they were allowed to go to expiry on the day Nomura acquired its sold position The intra-day SPI Contracts are important because, in conjunction with other evidence, they shed light on the intentions and expectations of Mr Channon and Mr Moss.

·        Thirdly, the discussions involving Mr Channon and Mr Moss concerning the instructions to be given to brokers in relation to the March Sale Orders.

·        Fourthly, the instructions actually conveyed by Mr Moss and Mr Jones to the brokers.

 

The last two matters are important both in assessing Nomura’s intentions and expectations and in providing a factual sub-stratum for the application of the statutory provisions to which I have already referred.

 

7.1 The Expiry Strategy

The Conversations

The transcripts of the conversations shed light on the intentions and expectations of the principal participants, notably those of Mr Channon, concerning Nomura’s expiry strategy. However, the transcripts do not always speak with complete clarity and it is necessary to take into account the evidence of Mr Channon and Mr Moss in particular, (including my assessment of them as witnesses). I have also taken into account the context in which the conversations must be interpreted. For example, as the ASIC ultimately accepted, Mr Channon did not finally decide to allow Nomura’s March 1996 SPI Contracts to go to expiry until after the close of trading on the ASX on 28 March 1996, although both he and Mr Moss clearly recognised that expiry was a distinct possibility before the final decision was made. Some of the discussions in which Mr Channon participated preceded that decision. Thus, in those conversations, the expiry strategy was discussed, to some extent, on a hypothetical basis.

 

In the course of the conversations, much discussion occurred about the placing of the Bid Basket and the likelihood that it would be hit through the placement of the March Sale Orders. For example, the following exchanges occurred in a conversation between Mr Channon in London and Mr Moss in Hong Kong on 26 March 1996 (2905-2907):

 

“DM …I think the average daily volume is 600 million Aussie dollars, you know, we’ve got 750 [million]…. [T]he positions we’ve got on the book at the moment one thing we’re going to do, we’re going to come out…long and we’re going to come out long a lot of crap…we’re going to own it down whatever….

 

GC We’ve got to own it down enough to make it sensible so that the bid in for those names goes in down 20% or so. We, maybe we bid for a 100 million basket 20% below the market and leave that in there and then…if we do own those names we own them down 20%. I’m…not uncomfortable with that, given… the way the long term small cap position looks like….

 

GC So you prefer to smack the close down. So, I think even if the size is big we shouldn’t go that early [ie during the day] – but in some of the small names we can try to but I just think we’ve got to accept that we are going to be left with them and leave them to the close and mark them down 20%, almost just don’t try to trade them throughout the day because it would just be too obvious.

 

DM …I think those names should probably start at the beginning of the week, you know, seriously they’re like….

 

GC Or maybe we just accept we don’t sell them so we, we own them down – you know, because if you start offering it all across during the beginning of the day, if someone’s on the other side…its like putting off [up?] a big flag…saying ‘oh here we come’ OK ‘well how many shares of those are they offering? Umm, yes divided by the weight, times by that, oh, they’ve got £400 million to do’. So, why don’t we just say well we know we don’t think we’re going to get anything done in or…just do them at market on the close and have a bid in the other way round, down 20%, at your positions are down 20%, you know sort of, start doing them you know with half an hour to go.

 

…

 

DM I mean, I can envisage that we are left long sort of £40 million, something like that. Some of these names are like….

 

GC OK I think…£40 million would be not too bad. It could be up to £100 million or so. By leaving it late, you know if you say…76% is the top 60 names, they are pretty much all tradeable but if you leave them late, you may get caught in some of those even…. say you got all of those done, you’re talking about the other 24% and it’s possible you would get hardly anything of the other 24% done, so one quarter of what you do um may be left over, so that would be, you know, £100 million. So, but if you own £100 million down 20%, that’s not a bad thing at all.”

 

 

Mr Channon in his evidence acknowledged that the expression “own them down” in these extracts referred to the March Sale Orders hitting what ultimately became the Bid Basket. In the conversation of 26 March, Mr Channon was clearly contemplating that Nomura would be left long in securities to the extent of £40 million and even £100 million (although he described the latter in his evidence as the “worst case” hypothesis). The long position could only come about, given the existence of the Bid Basket and the instructions to mark down some securities twenty percent or more, as securities in the Bid Basket were hit in the course of the mark down. Mr Channon acknowledged in his evidence that he did not expect any third party to hit Nomura’s Bid Basket (Ts 759):

 

“I didn’t expect it to happen, certainly not significantly.”

 

 

Mr Channon claimed in his evidence that he did not seriously expect at this time that Nomura would “have a significant expiry” and that he was merely intending to “hypothesize” [Ts 725]. In my opinion, this claim owed more to Mr Channon’s reconstruction of events than to an accurate account of his understanding and intentions at the relevant time. It is true that, on 26 March 1996, the expiry strategy was not in place. But the conduct of the expiry was receiving close and detailed consideration from experienced traders who had previously been involved in similar exercises, including an expiry in which Nomura had actually acquired its own shares.

 

Mr Moss gave evidence on the same topic. He gave this answer to an officer of the ASIC during an interview in June 1996 (Ts 458):

 

“Q. Was it any part of the function of the bid basket to actually acquire stocks from anyone else at that price?

A.                 No.”

 

 

Mr Moss sought to resile from this answer, claiming that he had misunderstood his import. I do not accept that claim. I think the answer he gave in June 1996 reflects his understanding in March of that year.

 

The language used by Mr Channon and Mr Moss in the conversation of 26 March 1996 strongly suggests that, if Nomura allowed its SPI Contracts to go to expiry, they expected that the marking down of illiquids would result in Nomura being “left long” in securities to the value of something like £40 million. Mr Channon expressed the view that such an outcome “would be not too bad”. Of course, given the strategies being discussed, this outcome could only come about by reason of the Bid Basket being hit. It must be remembered that Nomura ultimately adopted the contemplated strategy of marking down illiquids twenty percent.

 

Moreover, Mr Channon expressed his preference to “smack the close down”. In context, he was clearly contemplating that the price of illiquid securities would be marked down sharply at the close and that, in a large number of cases, the markdown would occur by means of Nomura hitting its own Bid Basket. This was consistent with the memorandum of 26 September 1995 (quoted earlier in this judgment) which referred to Nomura using a bid basket to “try to move the close”. It is also consistent with a statement made by Mr Channon in a conversation with Mr Moss at 10:36 am (Sydney time) on 29 March 1996, that (3094)

 

“we want to ensure there’s a closing price so that we can, we know that we’re going to expire our futures about level”.

 

 

There are other references in the conversations to expectations that Nomura would be left long in up to £40 million worth of securities. Thus in a conversation between Mr Channon in London and Mr Jones in Hong Kong on 28 March 1996 apparently at about 2:30 pm London time (1.30 am on 29 March 1996, Sydney time), the following was said (3021-3022):

 

“MJ: I think that the subsequent 2, 3, 4, 5 days [after 29 March 1996] could be very choppy because you know we’re going to be left with, you know, very very shitty names, and you know the other issue is how many Junes should we sell, versus our estimated long position, or should we sell any, should we do 20/30 million pounds worth, the hedge versus the unsold portion.

 

GC: Yeah, I think we need at least to make that calculation, I think we can always assume there’s a whole bunch we can assume is not going to be done and we should be basically doing as much of that as possible really. We don’t want to come out with a massive market risk, we’re going to make our money by buying names down 20% that go back to their old price.

 

MJ: Yeah, yeah. Duncan was saying, you know, he thought that we’d probably come out £30/40 million long, assuming, you know, well on the actual unsold portion – so you know, we prepare a £300 and x million basket, you know, probably £20/30/40 million wouldn’t get sold in those you know shittier names.”

 

 

Mr Channon, in the course of his cross-examination, admitted that he placed the Bid Basket with the expectation that it would get hit by Nomura itself, although he denied that he intended this result (Ts 740):

 

“Q. In the answer you have just given, you referred to the fact that you expected we would get hit in some of the bid basket, and you placed the bid basket, among other reasons, with a view to being hit in some of the bid basket, did you not? Your answer was, ‘Back in – no’. Then I said, ‘You say that was no part of your intentions?’ You said, ‘Sorry, I may have answered your question wrong’?

 

A.     I placed it with the expectation that it might – that it would get hit.

 

Q.     With the intention that it would get hit as well, didn’t you?

 

A.     Well, no, if I could avoid it getting hit, that would be much better.”

 

 

It is clear from the conversations that Mr Channon and Mr Moss considered that Nomura would gain profit opportunities from the Bid Basket being hit at substantial discounts from previous prices. Mr Channon, in the conversation of 26 March 1996, thought that Nomura “could make more money out of buying down 20% rather than converging with the close on BHP” (2911). This remark, viewed in isolation, might refer to Nomura’s chances of beating the closing price of securities held by it. However, in another conversation Mr Channon suggested that “buying down 20% [was] going to be a good profit opportunity” (2951). In context, Mr Channon’s reference to the profit opportunity reflected the consequence of hitting the Bid Basket, namely, that “some businesses are going to be worth 20% less at the end of the day than at the beginning” (2952).

 

I accept that some caution must be exercised in interpreting those remarks. While I do not think that all remarks sought to be explained by Mr Channon and Mr Moss were as jocular as they suggested in their evidence, it is clear enough that Mr Channon did not think that the price of all illiquids would simply bounce back over the next few trading days. Moreover, there is little doubt that Mr Moss viewed with distaste the prospect of being responsible for selling a large volume of illiquids over a considerable time. It is also true, as Mr Channon said in his evidence, that any decision to exploit a particular profit opportunity would depend on the opportunity cost having regard to Nomura’s record of high returns on capital (Ts 741). Nonetheless, I think it clear that Mr Channon, not necessarily enthusiastically supported by Mr Moss, saw a clear profit opportunity arising from the Bid Basket being hit in the course of Nomura’s expiry strategy.

 

Not surprisingly, these sentiments were reflected in comments made by other members of Nomura’s team. Thus in a conversation between Mr Moss and Mr Tatters on 29 March 1996 at 10:15 am Sydney time, the following exchange occurred (3084):

 

“ST: …you should have got the average daily volume, so you can see what it’s like….I think it’s about 178 per cent of average daily volume. So, basically, you know, 1.7 times a 30 day average.

…

DM: OK. So, that is, that, those 200 names then are pretty f… illiquid.

ST: Yeah, huge.

DM: So, we probably are going, we are [pause]…

ST: Yeah, we will buy some 20% down, no doubt about that.

DM: Yeah.

ST: Some of them are, like, 30 days volume.”

 

 

The reference in this passage to “178 per cent of daily volume” is to the fact that the volume of Nomura’s March Sale Orders was equivalent to 178 per cent of the thirty day average turnover on the ASX. Mr Tatters, who prepared the estimates, had no doubt that Nomura would “buy” some stock twenty per cent down.

 

In his evidence, Mr Channon acknowledged that he had addressed the profit opportunities arising from Nomura hitting its Bid Basket. He was specifically asked about his comment that more money could be made out of buying down 20 per cent than converging with the close on BHP (Ts 729):

 

Q.                But I am interested in the other part of the question, what had you in mind?

A.                If we get hit in the bid basket, I think we will make a return out of that, but—

Q.                Make a return out of hitting the bid basket?

A.                Yes, because if we come out long of stock down 20 per cent, some of that 20 per cent fall is market impact and the rest is just a cost of immediacy. I think no matter how long it takes us to get out of that, we will be able to make a return…. Convergence itself is potentially much more expensive or risky than any potential returns from the bid basket….

Q.                 But if you attain convergence with the illiquids and you have also acquired them at 20 per cent below the previous close, then you may have a further profit opportunity?

A.                 Yes, I think I expected to the extent we were hit that we – well, given especially we determine where we were comfortable putting those bids in, that it ought to be at a level that would compensate us for all the negatives. The negatives are that it uses up much more capital owning stock that is not indexed, and it uses a lot more time. It’s going to take years for Duncan to trade out of them, and it’s in an area where we don’t know. A single stock risk – we don’t know the single stocks. But taking that into account, we would make a return.”

 

 

It is of some significance that Nomura’s written submissions asserted that Nomura’s intention in placing the Bid Basket was (par 23)

 

“to ensure that a bid would be recorded in circumstances where there was otherwise insufficient demand to fill Nomura’s orders.”

 

 

Although this extract uses the word “bid” rather than “sale”, it was common ground that Mr Channon believed that only a final sale on 29 March 1996, as distinct from a bid, could affect the price of securities for the purpose of calculating the closing level of the All Ords. In the absence of sufficient demand emerging on SEATS to fill all Nomura’s March Sale Orders, it is difficult to see how the unfilled orders could have been satisfied without Nomura hitting its own Bid Basket.

7.2 The Sold June SPI Contracts

The conclusion that Nomura explicitly contemplated making profits out of a strategy which involved it hitting its own Bid Basket is supported by the plans (ultimately implemented) to sell June SPI Contracts on 29 March 1996. The idea was discussed by Mr Channon on 27 March 1996, in the context of a “good profit opportunity”. Further discussion took place on 28 March 1996, in the conversation between Mr Channon and Mr Jones from which I have already set out extracts.

 

In the end, Nomura sold 990 June SPI Contracts on 29 March 1996, having a value of approximately $56 million. The sold June SPI Contracts were obtained through two brokers, namely, BZW Futures and HSBC Futures Australia Ltd. A chart of the sold June SPI Contracts acquired through BZW Futures showed that Nomura sold those futures contracts between 2:18 pm and 4:09 pm on 29 March 1996.

 

Mr Channon acknowledged in his evidence, albeit somewhat reluctantly, that the sale of the June SPI Contracts was designed to provide protection against the risk associated with Nomura’s acquisition of its own illiquids (Ts 734):

 

“Q. And you subjectively thought it [buying down twenty percent] would be a good profit opportunity?

 

A.            I thought to the extent it got hit, it would be—

 

Q.            And you engaged in hedging of a type on the 29th to cover yourself against the acquisition of illiquids in the bid basket, which could be later sold at a profit, didn’t you? Do you remember – earlier you told us about the $60m or so worth of June futures?

 

A.            Yes, I also told you that the hedge was not properly worked out. We hedged actually off the hypothesis without doing the homework. But it was our intention to eliminate the market risk, so that during the time period while we were unwinding, we wouldn’t have market risk.”

 

 

In this and other parts of his evidence Mr Channon placed some emphasis on the fact that Mr Tatters failed to carry out the work required to refine the quantity of June SPI Contracts that should be sold as a hedge. Indeed, Mr Channon said this (Ts 709):

 

“Q. Because you certainly had the expectation of a real risk that in the so-called illiquids there might be quite a lot of stocks that would be bought by Nomura for default of anyone else to buy them?

 

A.            Unfortunately, I never actually did enough homework to have a proper expectation either way.”

 

 

As I have already said, I do not accept that the absence of “homework” prevented Mr Channon having the expectation attributed to him by the cross-examiner. The lack of detailed homework might have prevented Mr Channon or Nomura determining with greater precision the quantity of futures contracts that should be sold, but it did not alter Mr Channon’s belief that the Bid Basket would be heavily hit if the expiry strategy were pursued. Nor did it alter his belief (whether or not wholly shared by Mr Moss) that the acquisition of illiquids presented a profit opportunity, albeit one that was not necessarily fully realisable in the short term.

A further point should be made. At one stage it appears to have been suggested on behalf of Nomura that the acquisition of the sold June SPI Contracts was inconsistent with an intention to acquire illiquid securities with a view to realising profits subsequently, as the illiquids returned towards their previous levels. However, Mr Bathurst QC, who appeared with Mr Leeming for Nomura, acknowledged in argument that there was no such inconsistency. The sold June SPI Contracts provided a hedge against general movements in the market. They did not affect Nomura’s opportunity to take advantage of profits arising from a “rebound” in the price of illiquids beyond general market movements.

7.3 Mr Mapstone’s Evidence

As I have noted, Mr Mapstone was not involved in the full detail of planning for Nomura’s expiry strategy. Nevertheless, his actions and evidence support the proposition that he expected the Bid Basket to be hit. Mr Mapstone had a telephone conversation with Mr Macey, the Head of Equities at BZW, at 11:43 pm Sydney time on 29 March 1996 (that is, after the close of trading on the ASX on 29 March 1996). In that conversation, Mr Mapstone complained about BZW’s failure to fill orders by not going down aggressively enough. Mr Mapstone made the following observations (3906):

 

“RM: There was…a bid for every single stock that we are talking about. Every single stock had a bid and were very happy it would have been hit. That did…not bother us in the slightest, and that’s the worst point, we made it very clear.

…

PM: So are you happy with your executions then of Metal Manufacturers where brokers had driven the stock from basically $3.00 something down to $2.60.

RM: $2.61. Yeah absolutely no problem with that at all.”

 

In his oral evidence, Mr Mapstone acknowledged that he appreciated before the event that Nomura might acquire its own securities through the Bid Basket (Ts 618).

7.4 Findings on Nomura’s Expiry Strategy

In my view, it is clear that Mr Channon intended that Nomura’s strategies should bring about a decline in the closing price of the All Ords on 29 March 1996, compared with its price before the implementation of the March Sale Orders. In other words, as had been foreshadowed in the memorandum of 26 September 1995, Nomura intended to “move the close”.

The means by which Nomura intended to achieve this result will become clearer when I examine the instructions Nomura gave to its brokers. However, in my opinion, the evidence strongly supports a finding to the requisite degree of satisfaction that, both before and during the implementation of Nomura’s expiry strategies, Mr Channon expected and intended that the combination of the March Sale Orders, the aggressive selling of illiquids near the closing and the existence of the discounted Bid Basket would result in Nomura acquiring a substantial volume of its own shares. He appreciated that this would occur by means of the March Sale Orders hitting a substantial number of bids for illiquids in the Bid Basket. It is true, as Mr Bathurst submitted, that neither Mr Channon nor anyone else within Nomura could identify precisely which securities within the Bid Basket would be hit. Nor could they identify the quantities of any given security that might be hit. It is also fair to conclude that Mr Channon did not form a precise view as to the volume or value of likely hits by Nomura in its own Bid Basket. But he expected that the value of securities that would be “acquired” in this way would be in the order of tens of millions of dollars.

Mr Channon formed the view that Nomura’s acquisition of its own illiquids presented it with an opportunity to obtain a profit over and above arbitrage profits. The opportunity was by no means straightforward to exploit and (as Mr Bathurst argued) was not seen by Mr Channon as likely to be realised by taking advantage of an immediate “bounce back” of the illiquids. Nonetheless, Mr Channon regarded the profit opportunity as a significant element in the expiry strategies. The selling of June futures on 29 March 1996 was consistent with the exploitation of the profit opportunity, since the sale protected Nomura’s long position in illiquids against general movements in the All Ords, but allowed Nomura to take advantage of any return of the illiquids “bought” at a discount to their earlier levels (albeit over time).

Mr Channon saw a further profit opportunity in the likely fall of the All Ords on 29 March 1996. He expected the fall to be bought about, in part, by the “sales” of illiquids as the Bid Basket was hit. Nomura exploited the anticipated falls by its intra-day sales of March SPI Contracts. I explain later why I reject Nomura’s submission that the intra-day sale of March SPI Contracts was separate from and uninfluenced by Nomura’s expiry strategy.

Moreover, Mr Channon appreciated that depressed prices for the last recorded sales of illiquids on 29 March 1996 (or, for that matter, depressed prices for any securities within the All Ords) increased Nomura’s chances of “beating the close”. This is because a very late and very marked downward movement in the price of securities would increase the chances that any sales prior to the close, on average, would be at prices higher than those prevailing at the close.

Nomura argued that its strategies were designed to achieve volume convergence. I think it more accurate to say that they were designed to achieve apparent volume convergence. This is a more accurate description, because a necessary consequence of Nomura hitting the bids in its own Bid Basket was that Nomura would retain a long position on those securities. The appearance of volume convergence would not have been the reality.

I am prepared to accept, as Mr Bathurst argued, that Mr Channon may not have engaged in these strategies if he could have been assured in advance of disposing of Nomura’s entire basket of securities at or better than the average closing price for the securities. But he could not be assured of any such result. Mr Channon was not operating at a theoretical level. He was operating in a particular market, on the basis of his own understanding of how that market operated (and of his appreciation of the regulatory risks, or lack of them). His strategies were designed to achieve Nomura’s goals in that market. He saw the Bid Basket, in combination with other elements of the strategy, as providing profit opportunities that Nomura should exploit.

Mr Channon, in my view, was perfectly content that the Bid Basket should be hit so that Nomura “acquired” its own securities to the extent of tens of millions of dollars. This provided what he saw as a practical means of achieving price and (apparent) volume convergence. But the existence of the Bid Basket, in combination with the other components of the strategy, was the means by which Nomura could achieve its goal of ensuring the price of the All Ords would decline at the close of trading on 29 March 1996. This provided Nomura with the profit opportunities to which I have referred. Mr Channon fully appreciated this and intended that the closing price of the All Ords should decline near the close. He intended and expected that this would occur, at least in part, by Nomura hitting its own Bid Basket in illiquid securities.

Of course, it is one of the ironies of an elaborate strategy characterised by misunderstandings and not a little ineptitude, that Nomura came close to achieving price and volume convergence when its position was finally unwound, even though the Bid Basket was hit only twice and brokers frequently failed to implement their instructions.

It follows from what I have said that I do not accept Mr Channon’s evidence that the Bid Basket was simply designed to provide “liquidity of last resort”. Nor do I accept that he did not intend that the Bid Basket should be hit by brokers executing the March Sale Orders. Mr Channon fully expected that the Bid Basket would be hit and that Nomura would “acquire” securities worth tens of millions of dollars in this way. Largely because of his own insensitivity to regulatory issues, he saw no significant difficulties in this course being followed. He was content for the Bid Basket to be hit in this way, because of the profit opportunities it presented to Nomura.

I should add two points. First, if it is relevant, Mr Mapstone and Mr Moss shared, with minor variations, Mr Channon’s understanding of the position and his intentions in devising the expiry strategy. Secondly, although it is not a matter of great significance, I decline Mr Heydon’s invitation to find that Mr Channon was motivated in devising the expiry strategy by a desire to maximise or protect his bonus. While I think there are grounds for suspicion, I am not prepared to reject his explicit denial on this point.

I should also make it clear that I have not overlooked other submissions made by Mr Bathurst concerning Mr Channon’s intentions and expectations. Mr Bathurst pointed out that Mr Channon, in a conversation with Mr Moss on 29 March 1996, at 10:36 am Sydney time, said that he would tell the regulators, if they inquired, the following (9/3094):

 

“Our concern…is that there is no closing price. Now, we’re going to go in and execute in that market on close and our concern will be not enough liquidity. We don’t expect that order to be done. We hope its not done at all.

 

…we want to ensure that there’s a closing price so that…we know we’re going to expire our futures, about level.”

Mr Channon was cross-examined about these comments, which were made in the course of formulating or rehearsing arguments that could be put to regulators if they were to make inquiries. While the comments made in the conversation were by no means entirely inaccurate (Mr Channon did intend to ensure a closing price for all securities), at least so far as they went, they did not, in my view, record fully Mr Channon’s state of mind at the time.

Mr Bathurst also submitted that Mr Channon’s comments in the various conversations prior to 29 March 1996 should merely be regarded as hypothetical. I do not think, however, that the comments can be dismissed on the ground that Mr Channon was merely formulating hypotheses. For the most part, he was engaged in a serious assessment of the likely consequences of a strategy the outlines of which were tolerably clear at a relatively early stage (and which was by no means entirely novel so far as Nomura was concerned). Nor do I regard Mr Channon’s attempts to sell stock to institutions as inconsistent with the conclusions I have reached. It was not suggested by Nomura that Mr Channon believed or had reason to believe that these attempts would achieve price and volume convergence for all or most of illiquids. In fact only a small proportion of the securities was sold to institutions. In any event, it was clear by the commencement of trading on 29 March 1996 on the ASX that relatively few securities had been sold in this way. Nomura nonetheless proceeded to implement the strategies I have described.

Finally, Mr Bathurst suggested that it was inherently unlikely that Nomura would actively seek to acquire speculative positions in illiquids in order to make a profit in their resale. He pointed out that Nomura was concerned to carry out in Australia a commercially orthodox, if very large, arbitrage position and that, to his end, it sought to establish and maintain a fully hedged position. He also pointed out that Nomura had put in place sophisticated monitoring systems to ensure that controls were kept over the risks associated with arbitrage activity and to calculate movements in fair value. Had Nomura intended to speculate in illiquids, it could have been expected to investigate the trading patterns or economic fundamentals of particular stocks.

These arguments were primarily directed towards rebutting ASIC’s contention (ultimately not pressed) that Nomura had formed an intention much earlier than 28 March 1996 to go to expiry, in order to take advantage of the speculative opportunities created by its expiry strategy. However, the arguments also seem to have been relied on to support Nomura’s contentions as to the objectives underlying its expiry strategy, as ultimately implemented on 29 March 1996.

In my opinion, none of these matters requires any findings other than those I have reached. It is clearly correct that Nomura was concerned to develop its arbitrage book and to derive substantial profits from its carefully constructed and monitored arbitrage position. But it is equally clear (and indeed not disputed) that on 29 March 1996 it took a speculative position on intra-day futures as it had on the September 1998 expiry. Moreover, Nomura’s traders considered at some length the profit opportunity presented by the purchase of heavily discounted securities, particularly illiquids. That opportunity was canvassed as early as the memorandum of 26 September 1996. In short, Nomura’s arbitrage position cannot and does not detract from the fact that it engaged in speculative trading on 29 March 1996 and that it not only expected to hit its own Bid Basket in illiquids, but saw an opportunity to derive further profits from the falls in prices resulted from the Bid Basket being hit.

7.5 The Intra-Day March 1996 SPI Contracts

Conversations

It will be recalled that Mr Channon gave evidence that Nomura’s selling of March 1996 SPI Contracts on 29 March 1996 was separate from its unwinding strategies. He also implied that he made the decision to sell additional March 1996 SPI Contracts on 29 March 1996 because of information provided to him on that day by Mr Moss. Other evidence indicates, however, that this was neither a complete nor accurate account of events.

In a conversation of 22 March 1996, Mr Moss and Mr Usher of Nomura discussed making “a little bit of money out of selling the futures” (8/2875). In context, the reference was to taking a position in futures contracts on the last day of trading, as Nomura had done in September 1995. In a conversation between Mr Moss and Mr Channon on 26 March 1996, Mr Channon commented that the selling of “Marches” throughout the day on 29 March 1996 made sense, although he emphasised that it was important to remain flexible. In a conversation on 27 March 1996 between Mr Channon and others in London and Mr Moss in Hong Kong, (8/2967) Mr Channon acknowledged that

 

“I know we are going to sell some Marches anyway against the expiry level”.

 

In that conversation, Mr Channon also discussed selling June SPI Contracts. He then referred to buying down 20 per cent (through the Bid Basket) and said (8/2967):

 

“I think that’s all going to be a good profit opportunity.”

 

The plan to sell March 1996 SPI Contracts was referred to by Mr Channon in a further conversation between Mr Channon and Mr Moss and others at 3.25 pm, London time, on 28 March 1996 (2:25 am, 29 March 1996, Sydney time).

Mr Bathurst submitted that Mr Channon had not been challenged on his evidence as to the rationale for the sale of March 1996 SPI Contracts on 29 March 1996. But Mr Heydon did challenge Mr Channon in this passage (Ts 762-764):

 

“Q. Another piece of evidence you gave yesterday was in answer to this question. You were asked:

 

‘Was it your purpose in placing the bid basket to sell, to mark down the index so as to obtain a profit on the March futures which Nomura had sold on 29 March 1996?

A. No.’

 

Q. Would you agree with me that there are large numbers of references in these transcripts over the days before the 29th to the selling of the Marches; would you agree with that?

A.            Yes.

 

Q. Would you agree that – and I think you have – to make a success of selling the Marches, and letting them go to expiry on that day, the market would have to fall from the time when you bought them – from the time when you entered the transaction?

A.            Yes.

 

Q. Would you agree that you showed interest throughout the day on what was happening with the Marches, the day being the 29th?

A Me – yes.

 

Q. Would you agree that at one point in that day, late at about 15:41, you said:

 

. ‘What’s happening on these Marches ? We assume that we’re going to push it down.’

 

Meaning the All Ordinaries Index; do you agree?

A.            Yes.

 

Q.            And that corresponded to your then state of mind?

A.            At that point in time?

 

Q.            Yes.

A.            Because I change a bit later, but, yes, at that time.

 

Q.            At the very end of the day, you got in touch with Mr Wong and asked how many Marches had been sold, and he told you and said the average price was 42 [ie.2242], and you said that was good.

A.            Yes.

 

Q.            The reduction in the All Ordinaries was a state of affairs which depended in part on the implementation of the bid basket, didn’t it?

A.            No, any reduction would come from selling, which would be our selling orders.

 

Q.            Yes, and selling orders which, in part, you expected would be accepted by bid basket—

A.            Yes, at the bottom end of the index, yes.”

 

 

Mr Moss understood that any self-trades effected by Nomura would generate profits in the sold March SPI Contracts (Ts 595):

 

“Q. You appreciated that any price established because of a trade with yourself through the bid basket would be a price which gave you additional profit on the sold March future contracts entered into on 29 March and expiring at the end of that day?

A.                 It would make up part of the calculation for the index.

 

HIS HONOUR: Q. Upon which that profit was based?

A.                 Yes.

 

Q.                Or from which that profit was derived?

A.                 Yes, yes.”

 

 

Earlier in his evidence (Ts 403), Mr Moss acknowledged that Nomura was effectively determining the closing prices for securities in circumstances where there were insufficient bids from third parties to prevent the Bid Basket being hit.

 

Findings on the Intra-Day March SPI Contracts

In my opinion, the course of events in the days leading up to the implementation of Nomura’s strategy demonstrates that its plan to sell March SPI Contracts on 29 March 1996 was an integral part of Nomura’s overall expiry strategies. As I have already said, both Mr Channon and Mr Moss appreciated and intended that illiquids were likely to decline in price sharply at or very near the close, as the Bid Basket was hit by selling brokers. They understood that the effect of the Bid Basket being hit by the March Sale Orders was that Nomura would determine the closing price for some securities, thereby generating a profit opportunity. They also understood (inaccurately as events turned out) that the value of securities thus “acquired” by Nomura was likely to run into tens of millions of dollars. The sales thus recorded on SEATS, on their understanding, would contribute to the fall in the market which, in turn, would be reflected in the closing level of the All Ords on 29 March 1996 and in the cash settlement value of SPI March Contracts.

As Mr Channon realised, the likelihood of a fall in the market created a profit opportunity which Nomura could exploit by its sale of March SPI Contracts. Mr Channon decided in advance of the relevant events to exploit that opportunity. He made this decision notwithstanding that the sale of the intra-day March SPI Contracts took Nomura away from its role as an arbitrageur. Indeed, after the event, Mr Channon described the intra-day sale of March SPI Contracts as “speculative” in character. This departure from arbitrage activities came about because Mr Channon, doubtless encouraged by Mr Moss, fully appreciated the commercial opportunities created by strategies designed to produce a late fall in the All Ords. Of course, no other market participant was aware of those strategies until after Nomura had implemented them.

8. MARCH SALE ORDERS: INSTRUCTIONS TO BROKERS

8.1 Discussions Within Nomura

Despite the existence of verbatim transcripts of relevant conversations, the parties were in dispute both as to Nomura’s intentions when placing the March Sale with brokers and as to the effect of the instructions communicated to brokers. Mr Channon and Mr Moss discussed the instructions that were to be given to brokers in a series of conversations that took place on 29 March 1996 between 2:25 am and 3:41 pm (Sydney time).

In the first conversation, at 2:25 am Sydney time (11:25 pm on 28 March 1996, Hong Kong time), Mr Moss proposed that he should commence selling the illiquids (the bottom 200) half an hour before the close (at 3:30 pm), and move to the “big stuff” five or ten minutes later (at 3:35 to 3:40 pm). Mr Channon agreed.

In a conversation between Mr Channon and Mr Moss on 29 March 1996, at 1:30 pm the following exchange took place:

 

“GC: When you say to them about selling on the close…. You know, going offer and then, initially, they are going to go offer side and then just at the last minute they are going to go at market yeah? Have they got any kind of limit to how far down they can sell?

DM: No.

GC: So they could just basically change the price limit to what zero or something?

DM: Yeah. I don’t know if they can change it to zero, but they can put the limits down 10%, or whatever. So, we start 20 minutes beforehand. We are just offer side. Obviously this is if things aren’t rallying strongly, offer side, and then, not even participating on the bid. And then, at the close, bag, just through the stack.

…

GC: I mean, but just go straight down, at market on the close, not even down 10%, down 25%. You want to just take it straight out.

DM: Right.

GC: You got so [?] go through, bang, change the limit to whatever, change the limit, change the limit. Just hive them all off you know, down 25% will do.

DM: Okay.

GC: Alright. You just keep selling Marches.”

 

In a conversation at 2:56 pm, Mr Channon and Mr Moss reiterated that the selling of illiquids would commence at about 3:30 pm, although Mr Moss acknowledged that it would probably be 3:35 pm by the time the brokers were told to treble their sale orders, in accordance with the plan previously discussed. Mr Moss said this (3124):

 

“…so they change the order and then they will be able to go, offer it and then at the close…you can have a limit of down, whatever, fifty per cent, whatever. Doesn’t matter. Just…sell it.”

 

 

A short conversation between Mr Moss and Mr Channon took place at 3:05 pm (Sydney time). By this time Mr Moss had been alerted by Mr Gregory of Scott Foster to the possibility that a smaller arbitrageur might be operating in the market on the other side. Mr Channon said this was better for Nomura because “we don’t mind converging on these big names”. He also said (at 3129):

 

“Got to make sure we cross those small names…we get that timing right”.

 

Mr Bathurst suggested that this comment was a reference to the danger of high ticking presented by the activities of market participants. Nonetheless, Mr Moss, as he said in his evidence, understood the comment to mean that Nomura so far as necessary, would buy the illiquids through the Bid Basket (Ts 518).

At 3:14 pm (Sydney time) Mr Channon, concerned about the activity of another arbitrageur trading the other way, made a suggestion to Mr Moss (3130):

 

“GC: …maybe you tell them not to put it in until 10 minutes before the close.

DM: On everything?

GC: Yeh – because they are not going to get anything done so until they start to sell at market. I know you have got to call them, start calling them at half past but, you know, if we just go out there half an hour beforehand they are going to be able to work out just how big we are going to be in the big names.

DM: Yeh. OK.”

After some uncertainty in his evidence, Mr Moss ultimately accepted (Ts 561) that he understood this instruction to require a change in the time at which offers were to be put on the market, both for liquids and illiquids. However, it seems that Mr Moss failed to tell Mr Jones (who was dealing with five brokers) about the change of plans. If he did, Mr Jones did not follow the instructions. Thus, as will be seen, the brokers to whom Mr Jones gave instructions, four of whom were dealing in the less liquid securities, were not informed of the change of timing for the placement of the offers.

8.2 Instructions to Brokers

The instructions to brokers in relation to the March Sale Orders were conveyed to five brokers by Mr Moss and to the remaining five by Mr Jones. There were some disparities in the instructions communicated to brokers, in part because Mr Jones did not tell “his” five brokers to postpone their entry into the market. The following material recounts the terms in which instructions were communicated to the brokers.

 

Scott Foster

At 2:10 pm on 29 March 1996, Mr Moss telephoned Mr Julian Gregory of Scott Foster and gave him the sell orders for the five stocks ranked from 76 to 80 in the All Ords. Mr Moss told Mr Gregory that he would call when the orders were to be executed.

At 3:01 pm Mr Moss had a further telephone conversation with Mr Gregory. The conversation included the following exchanges (3541-3542):

 

“JG: Now the only thing I’m going to say here is advice on these stocks are pretty thin as you probably realise.

DM: Yep.

JG: How aggressive do you want me to be?

DM: Very aggressive. I don’t care…

JG: I’ll just be aggressive until I get…

DM: Until you get completed. I’m not really worried if, you know, we sell it down twenty per cent.

JG: Okay.

DM: But you should, I mean, you should average on the way down. That’s what I mean. What we don’t want is to be high-ticked. Obviously I know you can’t guarantee that but…

JG: But what you’re saying is don’t knock it down straight away…

DM: No.

JG: …do it in stages but if we have to knock it down aggressively, knock it down and see what happens, that’s what you’re saying…

DM: At about twenty to one, go on the offer side, okay, just start offering stock, yeah?

JG: You’re talking about twenty to four my time?

DM: Twenty, sorry, twenty to four, sorry…twenty-to one [laughs] – yeah, just start offering stock. No need to be aggressive there, and then going into the last sort of minute and a half, then you start taking a bid or two, then at the close just hit the bid.

JG: Yep, you’re cashing out basically aren’t you?

DM: Yeah. Okay?

JG: …that’s why you’re doing it. I understand. Okay.”

 

 

At 3:37 pm Mr Moss instructed Mr Gregory to treble the quantities of the sale orders. He also gave effect to Mr Channon’s instructions to delay the start, although in fact Mr Gregory had begun to place orders very shortly before the conversation:

 

“DM: Okay. And sort of look to go about quarter to, ten to…okay, probably about…

JG: I’ve already started putting…okay fine, no worries.

DM: Alright, okay?”

Scott Foster entered its first offers between 3:35:48 pm and 3:38:13 pm. With one exception, its action when entering the March Sale Orders was to hit the first bid. Thus its first trades, subject to that single exception, occurred at the time it entered its first offers.

Were

Were was dealing in liquid securities. At 2:35 pm, Mr Moss informed Mr Crabb of Were that a basket of sale orders had been faxed to him. He was to be told when to go ahead.

 

At 3:38 pm Mr Moss instructed Mr Crabb to “triple everything”. The conversation continued as follows (10/3612):

 

“DM: I want to go…basically, I don’t want to go before quarter to.

PC: Yep.

DM: I wanna go in, be offering, and then at the close I wanna be aggressive and knock it down.

PC: Aggressive and knock it down.

DM: Yeah, I wanna knock it down…

PC: No matter how far?

DM: Yeah, I don’t care. I mean I really if its down 20%, 30%, 50%…

PC: Some of these stocks you might hit yourself in…that doesn’t matter does it?

DM: No that doesn’t matter, doesn’t matter at all. I think we’ve got enough volume there that we shouldn’t be high ticked, you know if we go in there and try to jam the bid.

PC: Knocking it down…”.

 

 

It will be seen that in this conversation, to which I have referred previously, Mr Moss expressed his lack of concern about the likelihood of Nomura hitting its own Bid Basket. (Were of course had placed the Bid and Ask Baskets and thus, unlike other brokers, was aware of their existence.)

At 3:49 pm Mr Moss and Mr Crabb had a further short conversation in which Mr Moss told Mr Crabb to go on the offer in the next two minutes (10/3621):

 

“PC: Yeah, mate, Bains come in, selling a few things huge – just hit MIM, and a couple of other stocks. Now I haven’t gone yet, I was just waiting for you.

DM: Yeah, ok next couple of minutes. Sort of, in the next two minutes, yeah, in the next two minutes go on the offer. OK?”

 

By the time of this conversation, Mr Crabb had not placed any part of the sale orders on the screen, since he had been told in the previous conversation that Nomura did not want to go before 3:45 pm. Immediately after the later conversation, Were entered offers by joining the best ask in SEATS at that time (except in one case, where it joined the second best ask).

By 3:54 pm Mr Crabb had not traded much stock. A further conversation occurred at that time between the same parties (10/3630):

 

PC: … We’re on the off but we’ve hardly done much stock anywhere. Do you want me to go to bid side?

DM: No not yet – I mean as late as possible. OK you know we can be a bit more aggressive offer side but as you can see the cash is coming off quite sharply.

PC: Yeah, sharply. So at the moment I’m on the offer in all of those things. OK?

DM: OK.

PC: I’ll make sure we just follow the offers. OK?

DM: OK.”

 

According to Mr Moss, the expression “we’re on the off” meant “we have already started making offers”. Mr Moss in his evidence was asked about the significance of Mr Crabb’s question “Do you want me to go on the bid side?”. Mr Moss denied that this amounted to an instruction not to go on the bid side at all. He said (Ts 529) that the subsequent reference to being “more aggressive offer side” showed that Mr Crabb could “offer over” so as to hit the highest bid (with the unfilled portion of the offer remaining in SEATS as the best offer). Mr Moss said he envisaged that Mr Crabb could hit the highest bid, but not trade down through the bids.

At the closing stages of trading Mr Moss and Mr Crabb remained in contact, by means of a telephone conversation that commenced at 3:55 pm (10/3634):

 

“PC: …we’re getting a little bit of stock out, not a lot. We’re up to 4 million plus now.

DM: OK.

PC: …we’re up to about 5 and a half or 6 million, OK?

DM: OK.

PC: Now we’re on the current offers with everything.

DM: OK…. As we start to get nearer the close then you can start dipping your toe in on some of the bid side. OK – but we still don’t want to just lean on it I mean, just want to take bits and pieces, just accumulate some more stock, because at the very close you know that stock’s going to go anyway, so, OK?

…

PC: Look we just got hit for 900 Hills just then, ok so we’re doing a bit of size now – that’s about 20 million bucks worth of stock.

DM: Right, ok.

PC: At five, last sale now four.

DM: Right – you want to hold some back because like we don’t want to be hit in all of it before the actual close.

PC: Yeah, OK.

DM: You want enough volume for the close

PC: Yeah, OK.

DM: So if that means they’ve got to back off, then tell them to back off – I don’t want to get hit in the stock.

PC: Yeah, OK….Just before you bolt, we’ve done about 23 million now. OK, most of the stocks are a cent or two under where you’ve already sold at…

DM: Okay – I’ve got to stress that with minutes to go I don’t want to sell all my stock, alright. You’ve got to have stock left for the close….I mean that still leaves us with a couple of million BHP, so I don’t think its…

PC: …it’s a huge problem…(silence)…yeah, still not much else happening…yeah, some of these stocks are slipping away a little bit…

DM: OK well let’s move with the market.

PC: Yeah, sure [off phone] Move with the offers right? Lower offers, keep moving…

DM: I wanna try…yeah, we can move with the offers, you can dip your toe in on the bid side, you know…sell a little bit of the bid…maybe offer it over…just gotta keep yourself with enough ammunition to go at the close.

…

PC: Alright, we’ve still got two minutes to go mate.

DM: Two minutes to go … how much have you done?

PC: We’ve done 3.8…plus 26.

DM: OK, so they’re going to have enough, so

PC: Start leaning now?

DM: Yeah – you don’t want to go through the stack yet. I mean they can just start maybe you know, move it down a cent….they don’t have to be way aggressive yet, Paddy, but they can just start to average stock down.

PC: Yeah. Last minute, so…

DM: Last minute, yeah?

PC: Yeah.

DM: OK, well basically when they think they’ve got to go

PC: OK.

DM: OK, well…alright Paddy I’m going to go OK? So its now down to their call, when they want to go they go, huh?…and get rid of the rest.”

 

 

In his evidence, Mr Moss explained that “on the current offers” meant being the best offer or equal to the best offer. He rejected the suggestion that the statement

 

“nearer the close…you can start dipping your toe in on some of the bid side”

 

 

implied that it was impermissible for Were to have done this earlier. Mr Moss also explained that the reference early in the conversation for accumulating stock was an error (since Nomura was selling securities) and that the instruction for the last minute of trading was intended to mean sell down through the bid stock as appropriate.

According to the material prepared by Mr Francis, Were was recorded by SEATS as having first effected a trade by hitting a bid at 3:52:58 pm and continued to hit bids until 3:59:39 pm. The first hitting of a bid appears to have predated by a very small margin the 3:54 pm conversation, assuming the timing of that conversation was accurately recorded. Interestingly enough, the Hills sale referred to in the 3:55 pm conversation appears to have related to a sale of shares in Hills Industries Ltd (HIL), which was recorded in SEATS as having occurred at 3:57:51 pm. This suggests that the recorded timing of the conversations may have been slightly out. However, this was not explored in evidence or submissions.

Bain

Bain’s instructions related to less liquid securities. The initial faxed instructions to Bain required it to sell the nominated securities by close of market at 4:00 pm.

At 3:22 pm Mr Moss told Mr David Summerfield that he would call him with instructions to sell, but that he should be ready at about 3:45 pm. Mr Moss continued (10/3582):

 

“DM: …just one thing, be ready for quarter to four, and basically we’re going to go offer side, I’m looking for the market on close…

DS: Right.

DM: I don’t care to what level I sell these down, I expect with this sort of volume to be able to match market on close, I don’t expect to be high-ticked because we can put an order in to say right, right at the close sell, sell it down twenty per cent and we should be able to absorb anyone trying to high-tick that with like a thousand shares or something like that.

DS: Okay.”

 

 

At 3:26 pm a further conversation took place, in which Mr Moss advised Mr Summerfield that he should “go in on the offer” at 3:45 pm and that the sell orders was to be trebled (10/3587-3588):

“DS: Now, how exactly do you want us to do this?

…

DM: At about quarter to, I’m going to call you and say right, go offer side on these names…

DS: Right, sell side.

DM: Sell side. Start working these offer side, and then basically what I want to do is I want to beat the, you know, I want to, match the closing price or beat it. Now I know these orders are quite, I know people are going to be buying, but these orders are quite good size, so I expect us to be able to do that.

DS: So you just want to crunch them?

DM: Yeah, I do, but, you know, ‘cos hopefully if we, if we get right to the end…

DS: When you say match the closing price, I mean if you’re crunching them you probably will be the closing price.

DM: …if we’re crunching them we should beat the closing price because if you trade down through the stack then you should average all the way down and close it at the bottom price. See what I mean?

DS: OK. Yeah.

DM: See what I mean or not, no?

DS: I’m just, I’m just sort of a bit…you want on quarter to we just go in on the offer and start hitting the bid all the way down.

DM: No. Not at quarter to. You go in on the offer. You’re offering stock so if you’re trading stock at the offer, great, fine.

DS: Yeah.

DM: Then, I mean, if you go at quarter to…

DS: And then, and then as the market drops the bids drop, you just tick the offer down with the bid.

DM: You don’t want to start hitting bids till say the last sort of thirty seconds. If you start hitting bids at quarter to what you’re going to do, you’re going to sell all our stock and then someone’s just going to high tick it.

DS: That’s what I’m saying. So we just keep…at quarter to start feeding into the offer…

DM: Yeah.

DS: Trying to get priority but as the bid moves down, or someone offers in front of us, we just jump in front and get priority on the offer again.

DM: Yep.

DS: Okay.

DM: And then, so then, in the last, I don’t know how late you can leave it, in the last minute or so, then, that’s when you want to sell it down. If you sell it down five or ten per cent I don’t mind, I don’t care, I don’t want to be left with any of these positions. Okay?

DS: You want to get out of all of them.

DM: Yeah.

DS: Okay mate.

DM: What I don’t want to happen is, is we go with five minutes to go, you hit all the bids, we sell all our stock, and then someone comes in and says oh…

DS: I’ll buy it back up again.

DM: Yeah, and they high-tick it.

DS: Leave a bid in the barrel.

DM: Yeah.

DS: For the last.

DM: Yeah, okay, because in actual fact that, no that basket you’ve got, can you do three times the amount?

DS: Three times the amount on each?

…

DM: So I expect the close, or I expect to beat the close.

DS: …well effectively you say you want to beat the close, you want to be the closing price?

DM: Yeah I know but you should be able to beat the close, do you understand what I’m saying? If you’ve got a stack of stocks you’ll be offering out, you average all the way down and then you’ll trade through the stack. So if the bottom price, if the top price is, point ten the bottom price is a basis point, then we’re not, and it closes at a basis point we’re not going to get filled the whole amount there because we would have sold down and averaged out.”

 

In his cross-examination, Mr Moss rejected a suggestion that he was holding off Mr Summerfield from hitting by bids until the last thirty seconds. The following exchange then occurred (Ts 540):

 

“MR HEYDON: Q. Can you point out to me any words in what you have read indicating that he should do anything different from, first, at a quarter to 4, putting up an offer and, secondly, in the last 30 seconds or minute hitting the bids?

A.             No.

 

Q.            Mr Summerfield would have been perfectly entitled to respond to the words you used to him by not doing anything other than putting up the best offer and, at the end, the last 30 or 60 seconds, hitting the whole of the bids, would he not?

A.             I don’t think that was my intention. I think that he would have known he would try to get the closing price for the amount of stock we were selling, and over the period of time – and I think that he would have known that he should have been trading that through that period.

 

Q.            Whether he would have known it or not, he would not have known it from any words you used in this conversation, would he?

A.             I don’t know. I don’t know how he would have interpreted it.”

 

 

Following Mr Moss’ conversation with Mr Summerfield, Mr Claridge telephoned Mr Moss at 3:35 pm seeking clarification of the instructions. Mr Claridge indicated that Mr Summerfield was uncertain as to what was intended (10/3607-3608):

 

“DM: Okay, basically about quarter to, or…about just after quarter to I just want to go, you know, just be offering these stocks, be on the offer in these stocks and participate, and then I’m trying to, you know, I want to sell at the close basically.

CC: Right.

DM: Okay?

CC: So how aggressive do you want to be?

DM: I’ll be very aggressive, but, you know, the thing I was trying to say to David [Summerfield], I don’t want to get highticks on the close that’s what I’m trying to say so if you, its basically going as late as possible with enough left to, to trade down through the stack, I mean I don’t if stocks go down five, ten per cent, twenty per cent, thirty per cent, I really don’t mind…

CC: Yeah, I mean you’ve got a couple of stocks here like Caltex, which you’ll sell bugger all mate, you’ve got a hundred and seven thousand five dollars.

DM: …if you know there’s a bit there and you can sell it, and its down forty per cent then sell it.

CC: So if we can sell them we sell them.

DM: Yeah. Seriously…, if David comes back and says well we didn’t sell that stock because it was down twenty-five per cent and we think its cheap then I’m going to expect him to take the fill because I am saying that I don’t mind what level, I think with the size of some of the positions I respect people who are going to be buying but we should be able to have some sort of impact with some of the names at the close.

CC: Right. You want to do them in the screen?

DM: Yep.

CC: I mean, you know you don’t want to cross them up if we can cross them up?

DM: Well not really, not unless I can be guaranteed the closing price.

…

DM: You see what I’m just trying to do, if we, we piece stock out and then go through the stack at the end, you know just go to bid side at the last possible moment, then we should actually, as long as no-one comes in bigger and hi-ticks it we should actually get an average price better than the close, in theory, because we’d be averaging down, yeah?

CC: Correct. I understand what you’re doing.”

 

 

Mr Moss explained that the expression “cross them up” referred to a crossing with one of Bain’s own clients. He also said that his use of the word “participate” in the early part of the conversation indicated that Bain could move over to the highest bid. He rejected a suggestion that the instruction

 

“just go to the bid side at the last possible moment”

 

meant that Bain was not to drop the offer to the level of the highest bid until the last possible moment. Mr Moss also said that the expression “piece stock out” meant the same as participate and allowed Bain to hit the highest bid.

Bain, with three exceptions, entered all their bids on SEATS between 3:43:22 pm and 3:47:31 pm. In all cases except five, Bain’s first action was to hit the first bid. Consequently, Bain (despite Mr Moss’ instructions) effected most of their first trades in securities between the times mentioned.

ANZ McCaughan

ANZ McCaughan received instructions in relation to less liquid securities. At 2:45 pm Mr Rob Hyden of ANZ McCaughan confirmed that he had received the list of stocks. Mr Moss said that he would give a further call, but it was “going to be a market on close order”.

At 3:12 pm Mr Moss informed Mr Hyden that he was to go at about 3:30 pm or 3:35 pm. The conversation continued as follows (10/3563-3564):

“RH: So it won’t be at the close, it’ll be just…

DM: … it will be at the close, …when I give you a call and say, right go, I want you to offer the stock, just keep offering it and then near the close, I want to trade bid side…

RH: Yeah, understood. So…we can sit on the offer with the orders and if we get taken out that’s fine, if not, you’ll give me the go ahead…

DM: Yeah, I want to save, if we get taken out I still want to save a bit of ammunition for the close. So for example if we’re sitting there and we’ve got two hundred thousand offered in a stock and someone takes us for twenty thousand or fifty thousand, I don’t want to then do the whole lot at that level, I want you to leave some size so that at the close you can trade the bid side.

RH: Yeah, so we keep at least half is it, sort of, will you be happy or…

DM: Well, I mean, you know, I don’t know you tell me, it’s what, it’s what the traders are happy with, I’m basically trying to achieve the market close.

RH: Yeah, okay.

DM: …the ideal scenario for me is that you offer stock out, we offer the market down because we’ve got some size in some illiquid names, we offer the market down, we get an average that way, and then as near to the close as possible we then just trade down through the whole if there is a stack there, through the whole of the stack….

RH: Yeah.

DM: …and if that means the stock’s down forty per cent, I don’t care, okay, I don’t want positions left, okay?

RH: Understood. Well, to give you an idea, out of the lines, we’ve got…fourteen at the moment that at some point we’ll have buying interest, so it’s just a matter of…

DM: Yeah, but I don’t if you’ve got buying interest, that’s great, but what, you know, I’m trying to achieve the market on close order…so I want to trade it in the market…so if your client is happy to sell, to buy at the end of the day at the market close…

RH: Yeah.

DM: Then that’s up to them but I don’t want to be filled at one and the market closes at two, okay, that’s no interest to me.

RH: …I understand.…if we’re going to cross anything we’ll keep it right at the end.

DM: Yeah, but just to bear in mind that I want impact on the close, okay, to trade bid side.

RH: Yeah, no.

DM: Alright, I don’t want stocks hi-ticked if possible and I think we’ve got enough size there for that not to happen.

RH: …there’s no problem as I say if we actually cross any stock to clients, we’ll make sure its done effectively, at the closing low…

DM: Okay.

RH: If you’re happy with that….

DM: Yeah, I’m happy with the closing price. Okay?”

 

 

In his evidence, Mr Moss agreed that his words “seem[ed] to say” that the broker should keep on the offer side until near the close and then move to the bid side. However, he maintained that he intended that the broker should try to trade stock during the period but “not to basically go at market until the close” (Ts 558).

The following exchange also occurred in relation to Mr Moss’s “ideal scenario” (Ts 559):

 

“Q. Pausing there, can I suggest that you were saying: we keep making offers which, if accepted, will lead to trades; and, if the market goes down in that way, you will build up an average of prices achieved. Am I right in reading the words that far?

A.             Yes for those individual names.

…

Q.            Those concluding instructions are a reference, really, to activity in the last minute or so, are they not?

A. Yes.”

At 3:33 pm Mr Moss conveyed instructions that he now did not want to start until about 3:50 pm and that the quantities were to be trebled. The conversation continued (10/3604):

 

“RH: Obviously, it’s the end of the quarter and we understand your instructions, there’s no ambiguity there, there are some arbs that’ll be unwound at the end of the quarter, and they will be trying to push the market up, Macquarie had a program yesterday that will be going again trying to do the same….I’ll do our best but it is a manual system and hence we can’t leave every stock until the last split second….

DM: I understand that but to be totally honest with you Rob, the names that we’re selling I don’t think, they’re [ie the other arbitrageurs] going to have many positions in that…. I don’t think there’s going to be any way they’ve got the size position we have in these names…. So on that basis I should expect you at the last possible moment to just be able to hit the stack and take everything out and absorb any high tick, okay?”

 

 

ANZ McCaughan entered offers for all their March Sale Orders between 3:47:36 pm and 4:00 pm, except for two that were entered earlier and seven that were entered after 4:00 pm (no offer at all being entered for one security). With some exceptions, ANZ McCaughan’s first action when entering the March Sale Orders was to hit the first bid. Consequently, again subject to some exceptions, ANZ effected its first sales when entering its first offers.

Pru-Bache

Pru-Bache’s instructions related to the less liquid stocks. At 3:10 pm, Mr Moss had a conversation with Mr Mark Gray of Pru-Bache, including the following passages (10/3560):

 

“DM: …basically we’re probably going to be sort of starting around about half past…We’ll be going on just the offer side….And basically I’m after a market on close. So at the close obviously or as near to it I want to sell these names.

MG: So you want to do them as late as possible, sort of thing then?

DM: Yep, as late as possible that’s exactly what I want to do. Now…I’m aware that some of these names are illiquid okay?…I’m saying now that if you come back and say, well we didn’t sell that name because it meant it was going to be down 15% on the day, then, as far as I’m concerned…that’s your position because I don’t mind at what level its sold at.

MG: Okay so you want to going as close to the market at the end of the market as possible.

DM: Yep.”

 

 

The instruction to start on the offer side at 3:30 pm reflected Mr Channon’s instructions prior to the change effected in his 3:14 pm conversation with Mr Moss. Mr Moss was cross-examined as to the instructions given to Mr Gray (Ts 564-565):

 

“Q. Can I put to you that your instructions are really two: one, to commence on the offer side at 3.30; two, to go over to the bid side as close to the end of the market as possible, but you do not give him any instructions about going to the bid side before that time?

A.                                    No.

 

Q.                                   You agree with me?

A.                                    Yes.”

 

 

At 3:28 pm Mr Moss instructed Mr Gray to treble the quantities of the selling orders. No other change was made in the instructions. Thus Pru-Bache was apparently not told to postpone placing the March Sale Orders.

 

Nonetheless, Pru-Bache in fact entered offers for most of their March Sale Orders between 3:47:46 pm and 3:54:18 pm, with a few being entered later. In general, the first action undertaken by Pru-Bache was to hit the first bid (although sometimes the action involved hitting the first two, three or four bids and in certain cases different action was taken). Accordingly, most of Pru-Bache’s first trades occurred between the times referred to above.

 

BZW

BZW’s instructions related to the liquid securities. At 3:04 pm Mr Jones told Mr Peter Bezek of BZW that the sell orders were to be placed at 3:40 pm and that the client is “looking to get a very very good execution versus the close”.

 

At 3:22 pm Mr Jones gave Mr Bezek further instructions, including trebling of the volume of the sell orders (10/3580-3581):

 

“MJ: …trading instructions what I want you to do is for that basket if you could just basically go best offer 15 minutes prior to the close….and then basically right market on close I want you to start hitting bids very very aggressively OK so I mean it will probably be 2 or 3 minutes prior to the closing bell…so any stock that you haven’t got done by that stage by being best offer start hitting bids very very aggressively OK.

PB: …where the price

MJ: Obviously Peter, it doesn’t matter where the price goes you know I don’t mind if a stock is down 15…the two things that I would say to you would be firstly I am looking to sell the stock OK. Secondly the price really doesn’t matter obviously you know what I’m looking to do is for my gross executions to look very very good versus the close and I’m also looking to have some market impact.

PB: Basically you want us to go best offer 15 minutes prior to the close as per the numbers given here.

MJ: Yes….basically any stock that you haven’t sold by offering from the first basket hit bids on those and then do two more baskets….

PB: …best offer 15 minutes prior 3 minutes prior just hit very aggressive the bids for whatever hasn’t been sold in the original basket, finally twice that basket.

MJ: Exactly exactly Peter you’ve got it. Obviously, we are looking to be very very good versus the actual closing price so you can basically smash straight through the bid stack, effectively.

…

PB: …if we happen to find buyers you’re more than happy to cross that option is that what you want to do?

MJ: Yeah exactly but not like the whole position so if you’ve got a buyer for now for 2 million I really don’t want to cross that up because what I’m looking to do is to have market impact at the close.” (Emphasis added.)

 

 

In a conversation at 3:29 pm, Mr Bezek expressed concern that the screens might lock up towards the end and suggested that it might be safer to go a little earlier. Mr Jones replied as follows (10/3595):

 

“MJ: …the only problem with that Peter is obviously we are looking to be as late as possible what I don’t want to do is go too early and then someone else to top the stock price up. I mean that is absolutely crucial to me OK so basically I really need to leave it as late as possible….and I’m obviously looking to have major market impact.” (Emphasis added.)

 

 

Mr Bezek asked for confirmation at 3:35 pm that he was to hit “the bidder” fifteen minutes out, but stay at the best offer. Mr Jones replied (10/3606):

 

“No, what it means is basically to join the best offer fifteen minutes prior to the close”.

 

 

Further conversations occurred between Mr Bezek and Mr Jones prior to the close, but they do not add anything material, except that the screens did jam and in consequence BZW lost the opportunity to hit the bid stack as Mr Jones requested in a conversation at 3:58 pm.

BZW entered offers for all their March Sale Orders between 3:44:47 pm and 3:51:41 pm. In general, its action was to hit the first bid. Thus BZW executed the majority of their first trades between those times.

 

HSBC Capel

HSBC-Capel was given instructions relating to the less liquid securities. Mr Jones had a conversation with Mr Craig Annakin of James Capel Sydney at 3:09 pm. Mr Jones advised Mr Annakin to treble the sell orders. The conversation continued as follows (10/3556-3557):

 

“MJ: …half an hour prior to the closing bell, can you start offering out stocks best offer OK?….

CA: Very nominal.

MJ: Exactly, now I would like you to basically stay there for say 20 minutes 20 or 25 minutes and then in the last 5 minutes I want you to sell very very aggressively at the bid OK?….

CA: A lot of these [stocks] are very thin of course…[You mightn’t be able to do anything].

MJ: …OK you know further to the previous instructions I am obviously looking to do as much as possible….First of all, and the other crucial factor is, I am not at all concerned about the price where I sell, so I’m not concerned if the stock price is down 5,10,15% you know I basically really need to sell this basket of stocks virtually at the close effectively. OK?

CA: Right.

MJ: …obviously, I do appreciate that some of these names will be quite lumpy but we are looking to be very very aggressive during that last 5 minutes and you know I really need you to start hitting the bid very very aggressively for me.

…

CA: we sit there for 20 minutes – 25 minutes see how we go and then in the last 5 to 10 minutes we just hit the bids aggressively and do our best.

MJ: Hit the bids very very aggressively yeah.”

With a few exceptions, HSBC Capel entered offers for their March Sale Orders between 3:31:28 pm and 3:38:31 pm. In general, HSBC Capel’s action when entering the March Sale Orders was to join the best ask. Most of the first trades occurred later, between 3:51:28 pm and 3:59:36 pm, as HSBC Capel reduced the ask price in order to execute a trade. In some cases, however, trades occurred because bidders increased their prices and in others no trade was effected because the brokers did not reduce the ask price sufficiently.

Ord Minnett

Ord Minnett was given instructions relating to the less liquid securities. At 3:16 pm, Mr Jones instructed Mr Wai Hoey of Ord Minnett to treble the sell orders. The conversation included the following (10/3570):

 

“MJ: …what I want you to do is from…basically half an hour prior to the close be best offer and then about five minutes prior to the closing bell I basically want you to be very very aggressive hitting bids. OK now the crucial point is that…I’m really not concerned if the stocks [are] down 5,10,15,20%. [T]o me the crucial thing is selling stock and impacting the price versus the close effectively OK?

WM: I know what you mean, half an hour prior to closing to be best offer.

MJ: Best offer and then 5 minutes start hitting bids very very aggressively…. [T]he crucial thing you know don’t be concerned about hitting bids that could very very possibly be 15% 20% down…[w]hat I’m looking to do is to get very very good fills on the close and also to have market impact.” (Emphasis added.)

 

 

At 3:38 pm Mr Hoey reported that Ord Minnett was progressing with the more liquid stocks, getting one quarter of them out at best offer. Mr Jones reiterated that the crucial thing was to be aggressive five or ten minutes prior to the close.

With one exception, Ord Minnett entered offers for their March Sale Orders between 3:34:08 pm and 3:43:58 pm. In general, the broker’s action was to join the best ask, although in six cases the action was to hit the first bid. The majority of Ord Minnett’s first trades occurred between 3:45:29 pm and 3:59:41 pm, usually in consequence of the broker reducing the ask price to execute the trade.

Patterson Ord Minnett

Patterson Ord Minnett’s instructions related to the less liquid securities. At 3:07 pm, Mr Jones told Mr Errol Olsen of Patterson Ord Minnett to treble the sell orders. He instructed Mr Olsen to start offering out the stocks at 3:30 pm and at ten or five minutes before the close to become very aggressive. The conversation included the following passage (10/3552):

 

“MJ: Exactly, and the crucial thing Errol is that…I basically don’t mind where I sell stocks, even if I’m selling stocks down 15%, my reference price is basically versus the close OK.

EO: You want the last price in the close?

MJ: Yes, well what I’m looking to do is to sell stocks very very aggressively during the last 5 minutes so the price is down by 10%, OK?” (Emphasis added.)

 

At 3:55 pm Mr Jones telephoned Mr Olsen and asked him to go straight for volume. Mr Olsen observed that there was a problem with one stock since there might be a stock exchange query if it were hit at $6.27. When asked why, he replied (10/3638):

 

“Because its got such a wide range on the price.”

 

Nonetheless, Mr Jones told him to keep being aggressive.

With two exceptions, Patterson Ord Minnett entered offers for all its March Sale Orders between 3:34:27 pm and 3:39:58 pm. In general, the broker’s action when entering the selling orders was to join the best ask. It effected the majority of its first trades between 3:47:25 pm and 3:59:56 pm, usually by amending the initial offer to reduce the ask price, thereby executing the trade.

McIntosh

McIntosh’s instructions related to the less liquid securities. At 3:19 pm Mr Jones told Mr Boyd Carter of McIntosh to treble the sell order. He also told Mr Carter to be the best offer about half an hour prior to the close and at five minutes before the close to become very aggressive hitting bids. In substance Mr Jones repeated the instructions he gave to other brokers. At 3:44 pm Mr Jones told Mr Carter to “plough in there hitting bids” in about ten minutes – that is, about five minutes before the close.

McIntosh entered offers for most of its March Sale Orders between 3:31:14 pm and 3:42:46 pm. In general, its initial action was to hit the first bid, although in about twenty seven cases it took a different course. Because its initial action was to hit the first bid, McIntosh effected the majority of its first trades between the times mentioned.

8.3 Findings Concerning The Instructions To Brokers

It is not altogether an easy task to interpret the discussions and instructions relating to the March Sale Orders. One reason is that, as the account of events shows, misunderstandings or simple failures to implement instructions frequently occurred. For example, some brokers failed to carry out instructions, in that they did not enter certain offers into SEATS until after the close of trading on 29 March 1996 or, indeed, in certain cases, at any time. Similarly, Mr Jones either did not receive or did not implement Mr Channon’s instructions to advise the brokers with whom he (Mr Jones) dealt to delay placement of the March Sale Orders.

Another difficulty is that the instructions to brokers were not conveyed uniformly. In part, this flowed from the fact that instructions were given verbally, and under great time pressure, during a period of intense activity. Moreover, the activity was being orchestrated by dealers who were operating in Europe and Asia and who (on their own evidence) did not have a full appreciation of the workings of the ASX. Nonetheless, some of the differences in instructions do not appear to be simply the product of these pressures and difficulties. Mr Moss, for example, used rather different language from Mr Jones when giving instructions to brokers. Mr Moss used language like “just go to bid side at the last possible moment”, while Mr Jones appeared to give more leeway by instructing brokers “around ten or five minutes prior to the close [to] start being very very aggressive”.

Mr Heydon submitted that Mr Channon (and Mr Moss) intended that the brokers should merely go on the offer side at about 3:45 pm or 3:50 pm and should stay there until the concluding minute or two of trading. On this argument, Mr Channon intended that brokers would go to the bid side only at the very end of trading. Mr Heydon further submitted that, in any event, regardless of Mr Channon’s intentions, the effect of the instructions conveyed to brokers was to require them to stay on the offer side until the last two minutes or so (Mr Moss) in the last five or ten minutes (Mr Jones).

Mr Heydon pointed out that Mr Moss had agreed in evidence that he had not explicitly conveyed to the five brokers to whom he gave instructions that they could trade on the bid side before the last two minutes or so of trading. Mr Heydon also relied on Mr Moss’ own affidavit, in which he said this:

 

“In relation to the smaller cap stocks below 75 in the index, the instructions given to the brokers were to offer at the existing ‘best offer’ and remain the best offer from about 3.30 pm, and then from about 3.50 pm to start to sell bid side so that the whole position was sold, regardless of how far down the price went. In relation to the larger cap stocks, the instructions to JB Were, Bains, and BZW, were to be the ‘best offer’ and remain the best offer from about 3.45 pm to 3.55 pm, but to start selling bid side in the last one to three minutes of trading.”

 

As has been seen, Mr Moss ultimately conceded in evidence that Mr Channon told him to change the instructions concerning the time at which the March Sale Orders were to be placed, to be given to the brokers dealing in “smaller caps”, as well as to the brokers dealing in “larger caps”. Mr Heydon submitted that, in the light of that concession, the second sentence in the extract from Mr Moss’s affidavit accurately reflected both his intentions and the substance of his instructions.

Mr Bathurst, on the other hand, submitted that I should accept Mr Moss’ evidence that he always intended to draw a distinction between a broker hitting the first bid and going down through the bid stock. According to Mr Moss, he intended to convey to the brokers that they could participate in trading before the last two minutes or so by hitting the highest or first bid. Mr Bathurst relied on the fact that a number of brokers had interpreted the instructions given by Mr Moss and Mr Jones as permitting them to hit the first bids before the last two minutes of trading. He pointed out that all brokers instructed to sell outside the seventy highest capitalised stocks hit bids no later than 3:50:53 pm. Furthermore, as I have already explained, seven brokers entered their first offers by hitting bids (Scott Foster, Bain, ANZ McCaughan, Pru-Bache, BZW and McIntosh).

But for the actions of the brokers, I think that Mr Heydon’s submissions would have been irresistible. The substance of the conversation between Mr Channon and Mr Moss, at 1:30 pm (Sydney time) on 29 March 1996, was that brokers should remain on the offer side until very near the close and at that point should aggressively hit the bid side. As Mr Heydon submitted, it is very difficult to read the transcript of that conversation as having any other meaning. In his evidence, Mr Channon made this acknowledgment (Ts 744):

 

“Q. Would you agree with me that it was your contemplation around 28 and 29 March that, in the smaller stocks, the moment at which Nomura dropped its selling price near the close would have left little time for someone interested in those stocks to put a bid on before your sell order hit your bid basket order?

A. Yes, yes.”

Moreover, as Mr Moss came close to conceding in his evidence, it is not easy to interpret his instructions to brokers as giving them the latitude he claimed was intended. Similarly, Mr Moss’s conversations with Mr Crabb of Were, to use Mr Sisson’s language, amounted to “holding the broker back from hitting bids” until very shortly before the close. Furthermore, this interpretation of the instructions is consistent with my earlier findings concerning Mr Channon’s intentions and expectations.

The circumstance that has caused me some hesitation is the conduct of the brokers. Seven brokers entered offers by hitting bids before the point at which the instructions to them envisaged that they would commence their aggressive selling. This might suggest that, although their language indicated otherwise, Mr Channon and Mr Moss intended that brokers should trade prior to the period of aggressive selling by hitting the highest bids in the bid schedule.

On reflection, however, I do not think that the conduct of the brokers justifies concluding that Mr Channon and Mr Moss did not mean what they said to each other and that Mr Moss and Mr Jones did not mean what they said to the brokers. It must be remembered that the brokers, with certain exceptions, failed to carry out the explicit instructions conveyed to them in a number of important respects. The fact that some hit the highest bids earlier than the instructions contemplated does not demonstrate that the instructions could reasonably have been understood so as to permit such conduct. Much less does it demonstrate that Nomura intended to give the brokers leeway to hit bids earlier than the last period of trading identified in the instructions.

I have taken into account that the evidence of Mr Sisson and Mr Hollick (dealt with in more detail later) is difficult to reconcile with Mr Bathurst’s submission that the instructions could reasonably have been understood as permitting brokers to exercise a discretion as to whether to hit the bids or not. Mr Hollick was called by Nomura as an expert witness, but was a principal at HSBC Capel when the broker was given its instructions in relation to the March Sale Orders. In his evidence, he was asked about the instructions given to Mr Annakin of his firm (Ts 852):

 

“HIS HONOUR: Q. By the way, Mr Hollick, you remember the assumption as to instructions that were given to your firm – 30 minutes before close, start offering stocks best offer’?

A.                 Yes.

 

Q.                Was that done – assuming the material on this page is correct?

A.                 I think, your Honour, if the best offer was 4.17, they have joined them at 4.17.

 

Q.                That gives effect to the instruction?

A.                 I go back to my earlier comments. You could argue it is either 4.17, because that’s where the market was, or 4.16.

 

Q.                Either, on your view, would implement the instruction?

A.                 Yes.”

 

 

The offer of $4.16 was at a price higher than the then highest bid of $4.15. Mr Hollick did not suggest that it would have been appropriate to hit the highest bid (and indeed HSBC Capel did not adopt this course). Mr Sisson, who had read the instructions to the brokers, plainly did not understand them to have permitted bids to be hit prior to the period of aggressive selling.

In my opinion, Mr Channon and Mr Moss understood and agreed that the brokers should be instructed to stay on the offer side until near to the close when they were to commence aggressive selling. Mr Channon and Mr Moss were motivated by their desire that the brokers should retain sufficient volume in each security, especially the illiquids, to enable them to hit the bid stock very aggressively near to the close. Mr Channon intended that the very aggressive selling at the close should have the effect of pushing down closing prices for the securities held by Nomura, especially the illiquids. This would increase Nomura’s chances of selling securities at or better than the closing price. Mr Channon also wished to avoid the risk of high-ticking, which would jeopardise the strategy pushing down prices . Hence the instructions to brokers to reduce the price of securities so far as necessary – even by forty per cent or more – to dispose of the securities at the close.

With some variations, the instructions to brokers gave effect to the intentions of Mr Channon and Mr Moss. They were to remain on the offer side at best offer and to start hitting bids very aggressively near the close. The brokers were generally told to reclaim sufficient volume in each security to enable aggressive selling to take place shortly before the close. Mr Moss required the aggressive selling through the bid stack to be conducted during the last two minutes or so of trading. Mr Jones instructed the brokers to be very aggressive in the last five to ten minutes of trading, particularly the last five minutes. Mr Jones’ instructions also tended to be somewhat more cryptic than those conveyed by Mr Moss. Otherwise, the substance of their instructions to the brokers was similar.

As I have noted, the findings concerning the instructions given to brokers are consistent with these findings I have made concerning Nomura’s intentions and expectations in relation to the placement of the Bid Basket and the expiry strategy as a whole. In this connection, Mr Jones’ instructions to the brokers expressed a desire to move prices down (shown most clearly in his comments to Mr Olsen of Patterson Ord Minnett). Mr Bathurst submitted that there was nothing to show that Mr Jones (who did not give evidence) acted on instructions in this respect. Having regard to the close working relationship between Mr Moss and Mr Jones I think the inference is inevitable, in the absence of evidence to the contrary, that Mr Jones acted in conformity with instructions given to him. Indeed, Mr Moss’ instructions to the brokers are entirely consistent with a desire on his part to drive down the price of securities in the All Ords, especially the illiquids, at the close.

9. THE LIKELIHOOD OF THE BID BASKET BEING HIT

The parties identified as an important factual question whether Nomura’s conduct in placing the Bid Basket, when reviewed objectively and considered in conjunction with the instructions relating to the March Sale Orders, created a likelihood or “real chance” that Nomura would hit its own Bid Basket. The significant of this issue will become clearer when I discuss the application of s 998(1) of the Corporations Law to Nomura’s trading activities.

9.1 The Temporal Question

Mr Heydon said that the question of whether Nomura was objectively likely to hit its own Bid Basket could be addressed at any one of four points:

·        At the commencement of trading on the ASX on 29 March 1996, when Nomura’s expiry strategy had been agreed, although not yet implemented.

·        At about 3:30 pm when, in accordance with Nomura’s instructions, the first March Sale Orders were to be placed (specifically those allocated to Pru-Bache and to the brokers contacted by Mr Jones).

·        At 3:50 pm, 3:55 pm or 3:59 pm when, depending on the specific instructions given to individual brokers, the brokers were to trade aggressively through the bid stock.

·        At 4:00 pm, having the benefit of all knowledge which had come available by that time (especially the extent to which further demand for the securities had emerged during the period the brokers had placed Nomura’s securities on offer).

 

The significance of the temporal issue is that the expert witnesses, Mr Sisson and Mr Hollick, agreed that the nearer to the close of trading on 29 March 1996, having regard to the events which occurred, the more likely it was that, had Nomura’s brokers acted in accordance with their instructions, the Bid Basket would have been hit. Mr Bathurst submitted that the latest time at which the likelihood of the Bid Basket being hit should be considered was 3:30 pm which he described (par 88) as “the time at which the final instructions were given to the brokers”. It is not quite accurate to say that the final instructions were given to all brokers at that time, although the instructions to brokers dealing in less liquid securities were largely completed by that time (the conversation with Mr Summerfield of Bain was a little later). In any event, I am content to approach the question as at about 3:30 pm on 29 March 1996.

 

9.2 The Experts

As Mr Bathurst acknowledged in his written submissions, there was ultimately little difference between the conclusions reached by Mr Sisson and those of Mr Hollick. This is, perhaps, not surprising given that both were knowledgeable witnesses giving opinions honestly held. Nonetheless, there were some differences between them.

 

To the extent that their evidence diverged, I prefer Mr Sisson’s assessment of the likelihood of Nomura hitting its own Bid Basket. Mr Sisson impressed me as a careful witness who supported his opinions persuasively when tested. He gave close consideration to the circumstances of the case, including the precise instructions conveyed by Nomura to the brokers. Although he relied in part on information compiled by Mr Francis, he undertook a more detailed analysis of the factors bearing on the likelihood that Nomura would hit its own Bid Basket than had Mr Hollick. Perhaps in consequence, Mr Hollick tended to be a little less precise in giving his opinions on certain issues. I accept, as Mr Bathurst submitted, that Mr Hollick had greater experience, at least in recent times, in dealing in illiquids. However, I do not think that this provides a basis for preferring Mr Hollick’s evidence on the relatively limited range of issues on which his evidence was in conflict with Mr Sisson.

 

9.3 Latent Demand

If attention is confined to the demand for particular securities recorded on SEATS (that is, in the bid stacks for various stocks other than the Bid Basket itself), it is clear that, looking ahead from 3:30 pm on 29 March 1996, the March Sale Orders could not have been satisfied in their entirety simply by the brokers hitting those bids. Moreover, as the evidence of Mr Francis demonstrated, the volume of securities included in the March Sale Orders (matched by the volumes in the Bid Basket) were often multiples of average daily turnover in particular stocks. In other words, in the case of some of the illiquids, Nomura’s March Sale Orders required the sale within half an hour or less of a quantity of securities equivalent to at least several times the average daily turnover of the stock.

 

It was common ground, however, that these facts could not of themselves establish that Nomura’s Bid Basket was likely to be hit in consequence of the placement of the March Sale Orders. This is because the demand for a particular security is not limited to Ords recorded on SEATS at any given time, but includes “latent demand”. It is therefore necessary, in determining whether Nomura’s Bid Basket was likely to be hit, to take into account the emergence of latent demand for securities comprised in the March Sale Orders. Such demand may be stimulated by activity on SEATS or by other factors affecting the market for securities.

 

According to Mr Sisson, “latent demand” falls into three general categories:

 

·        where an investor has given instructions to brokers, but the instructions have not been entered in SEATS, for example for tactical reasons;

·        where an investor has not yet decided to buy securities, but may be prepared to do so if circumstances change, for example if the price asked for a particular securities falls; and

·        where trades occur off-market.

 

A large-scale seller of securities will often wish to explore the possibilities of latent demand by requiring brokers to telephone institutions or other potential buyers. The inquiries can include those of the brokers’ own clients who may be interested in acquiring large parcels of securities.

 

As Mr Sisson said, it is impossible to be certain in advance of the extent of latent demand, both in respect of individual securities and the market as a whole. However, the extent to which latent demand for particular securities will be attracted depends on such factors as the degree of price movements; whether the stock has a history of lack of liquidity and, if so, the reasons for that lack of liquidity; the amount of time available to allow latent demand to be stimulated and to surface; the time of day at which the activity takes place (latent demand is more likely to emerge towards the close on expiry days); and the volume of shares the seller wishes to dispose of.

 

9.4 The Likelihood of the Bid Basket Being Hit

Mr Sisson in his written report, addressed the following question (3577):

 

“In your opinion, was there a real chance that, if the brokers had carried out their instructions in full, Nomura would not have been able to sell its holdings in each of the stocks the subject of the March Sale Orders in the time allotted without hitting its own Bid Basket?”

 

 

In doing so, he analysed information prepared by Mr Francis concerning entries on SEATS from 3:30 pm on 29 March 1996 in relation to securities comprised in the March Sale Orders.

Mr Francis identified 87 securities in respect of which there was adequate demand at all times until the close of trading to absorb the volume of the March Sale Orders offered by Nomura at 3:30 pm. Mr Sisson concluded that there was very little chance that Nomura would transact a sale with its own Bid Basket in relation to any of these securities.

Mr Sisson reached the same conclusion in respect of 92 securities where there was insufficient recorded demand at 3:30 pm to absorb the volume of the March Sale Orders, but where sufficient volume came into the market before 4:00 pm to absorb the selling orders. Mr Sisson expressed the view that, although other sellers might have entered the market ahead of Nomura and “taken out” the buying demand for these securities, it was highly likely that Nomura could have satisfied the March Sale Orders out of bids recorded on SEATS. Thus, Mr Sisson concluded that it was unlikely that Nomura would have hit the Bid Baskets in respect of those 92 securities.

This left 165 securities in respect of which there was insufficient demand recorded on SEATS (other than the Bid Basket) at any time between 3:30 pm and 4:00 pm to absorb Nomura’s selling orders. Mr Sisson identified 100 of these securities which could be classified by reference to capitalisation and liquidity (measured by daily turnover) as follows:

medium liquidity, medium capitalisation (MM)

medium liquidity, low capitalisation (ML)

low liquidity, high capitalisation (LH)

low liquidity, medium capitalisation (LM)

low liquidity, low capitalisation (LL)

He considered that if the brokers had carried out their instructions correctly, it was probable that about half of these 100 securities would have been traded through the Bid Basket. He expressed this view from the standpoint of an observer considering the position before trading commenced, although the hundred stocks were selected in part by reference to the absence of sufficient demand in fact emerging between 3:30 pm and 4:00 pm to absorb the Nomura March Sale Orders.

Mr Sisson considered that Nomura would have been most likely to hit its own Bid Basket in the 78 securities classified as “LL”. Of these, 39 were stocks in respect of which there was insufficient demand recorded on SEATS (other than the Bid Basket) at any time between 3:30 pm and 4:00 pm to absorb all of Nomura’s selling volume. Mr Sisson gave the following opinion:

 

“it is fairly certain that a substantial proportion of those 39 securities would have traded with the Bid Basket if the brokers had transacted their orders more aggressively, in line with the instructions they were given.”

 

 

As Mr Sisson explained in his oral evidence, this opinion was expressed in the light of information as to actual trading patterns after 3:30 pm in relation to the securities.

In cross-examination, Mr Sisson was asked about the likelihood of Nomura hitting its own Bid Basket, from the perspective of an observer looking forward from 3:30 pm on 29 March 1996. To follow the relevant passage from the transcript it is necessary to extract the opinion expressed by Mr Sisson in par 1.2.43 of his report:

 

“If Nomura had sold the stock slowly and methodically over the last half hour, say 3 per cent of the position every minute for the last 33 minutes, in my opinion there would only be a likelihood of their hitting the Bid Basket in around 20 stocks.”

 

 

In par 1.2.44 of his report, Mr Sisson expressed the view that, if Nomura had instructed its brokers to sell down the bid schedule in the last 30 seconds, there would have been no opportunity for latent demand to emerge and, therefore, the Bid Basket would have been hit in a larger number of cases.

The relevant portion of Mr Sisson’s cross-examination is as follows (Ts 272-274):

 

“Q. …what I want to ask you to do is to, as it were, take the middle road between 1.2.43 and 1.2.44 and assume an instruction to go on the offer side, thus announcing there is a seller, at about 3.30, but, rather than sell methodically, sell aggressively in the last five to 10 minutes?

A.                  Look, I think the answer to the question is that you get a result somewhere between the two, in other words, you would end up hitting your bid basket in significantly more than 20 stocks, but not nearly as many as you would if you followed the policy in 1.2.44, where you would have probably hit yourself in 100 stocks.

 

Q.                To the extent that it would be more than 20 is really, would you not agree with me, a matter of speculation?

A.                 I would say it is a matter of judgment rather than speculation.

 

Q.                That’s a judgment on which minds might certainly differ?

A.                 I think it is fair to say that somebody else – I mean, just taking the 1.2.43 case, I said around 20. If you asked half a dozen other market practitioners, they are not all going to say ‘around 20’. I would vouch that some of them would have a lower number and some would have a higher one. I don’t think any would be down below 5, for example. You will have a range. My estimate of 20 would be in the range. But I’m just saying I don’t think…anybody would be saying…the number at which you hit the bid basket would be as low as 1 or 2.

 

Q.                The range that you just then suggested, as you say, if you go around half a dozen market practitioners, may go down to as low as 5?

A.                 If the policy under 1.2.43 had been followed, it is conceivable somebody might be validly of that opinion.

 

Q.                It is conceivable that, had the policy which I have suggested to you been followed, namely, to go on the offer side but to sell aggressively in the last five to 10 minutes, persons may take a view as to the extent that the bid basket would be hit, which would again be over a fairly wide range?

A.                 While it would be over a fairly wide range, it would certainly be greater than the figures than they estimated under that 1.2.43 hypothesis. In other words, if we’re saying how many would you expect to be hit under 1.2.43, then you move on and say, how many would you expect to be hit under your trading scenario, the second answer certainly may be higher than the first.”

 

Q.                But would you agree with me, assuming that strategy – and I’m talking about prior to the transactions taking place, you understand—

A.                 Yes.

 

Q.                --it would not be possible to nominate, as a matter of probability, any particular stock which would be hit?

A.                 As a matter of certainty, it wouldn’t be possible. As a matter of probability, it probably would. I think it is fair to say it is probable this stock would be hit. But you can’t say with any certainty which ones would be hit.

 

Q.                The range of persons to whom you’ve just referred may take very different views as to which stocks would be probably hit?

A.                 …to be honest, I think most people would tend to come up with a fairly similar list. They might have a variation as to the length of that list, but I’m not sure the list would be terribly different. The stocks which you would expect to be hit are the fairly obvious ones of low liquidity and where the volume that was being sold was a high multiple of daily turnover, and also where, at the time of 3.30, there were very few bids on the screen. If we hypothesise that the decision is being made at 3.30, I think that the people drawing up such a list would have quite a degree of similarity in their lists.

 

…

 

HIS HONOUR: Q. In your report, you give some examples of stock which you analysed from the perspective of what actually occurred on 29 March with respect to each of those stocks?

A.                 Yes.

 

Q.                You were discussing earlier, I think, the Countrywide Retail contributing shares – at least you were asked questions about that – appearing at annexure 11, and you express a view there as to whether the selling could have been expected to trigger additional demand, in the light of what actually happened. Now, you have been asked by Mr Bathurst about whether there are particular stocks in respect of which it might be said that it would be probable that the bid basket would be hit?

A.                 Yes.

 

Q.                If I have understood your evidence correctly, you say there would be a list of stocks, low liquidity stocks, in respect of which you would say that those individual stocks, each of them, it was more probable than not that the bid basket would have been hit. Have I understood your evidence correctly?

A.                 That’s right.

 

Q.                Is that looking at it from the perspective of somebody who was informed of all of this information but not the actual trades at, say, noon on 29 March, or are you giving that evidence from the perspective of somebody who knows what actually happened on 29 March between 2 o’clock and 4 o’clock, or whatever?

A.                 What I was assuming was that somebody – if the clock stopped at 3.30 and the person who is being asked to give this opinion knows, first of all, the quantity that the various brokers are looking to sell on behalf of Nomura; secondly, what the daily average turnover of the stock has been historically; and, thirdly, how much quantity is in the screen on the bid side at 3.30 – they would be the three pieces of information which I assume he’s got.

 

Q.                When you have that evidence, you were giving it from that perspective looking ahead?

A.                 Yes.”

 

 

 

9.5 Would the Bid Basket Have Been Hit?

I interpret Mr Sisson’s evidence as supporting the proposition that, viewing the circumstances at 3:30 pm on 29 March 1996, Nomura would probably have hit at least 30 to 40 securities in its own Bid Basket. That is, Mr Sisson’s evidence (which I accept) supports a finding that on the information available at that time, the likelihood was that Nomura would have hit its own Bid Basket in relation to at least 30 to 40 securities in total. I deal separately with the likelihood that any specific securities in the Bid Basket would have been hit if the brokers had carried out their instructions.

Mr Sisson’s evidence, in my view, is supported by the finding I have already made, namely, that Mr Channon and Mr Moss believed that the Bid Basket would be hit in a large number of securities. While neither had an intimate knowledge of trading patterns on the ASX in respect of particular securities, they could hardly be regarded as naive traders. They had of course followed closely movements in the All Ords and Mr Moss had visited Australian brokers. In addition, Mr Moss had received a document from Mr Patterson the morning of 29 March 1996 which detailed average daily turnover of securities within Nomura’s portfolio. While this document was inaccurate in certain respects, it revealed that the March Sale Orders contemplated trading in illiquids equivalent in some instances to multiples of the 30 day average daily turnover in the particular security. The document also showed that Nomura’s portfolio, which was to be the subject of the March Sale Orders, represented 178 per cent of the 30 day average daily turnover on the ASX.

I am satisfied that Mr Sisson considered the relevant features of the market when making his assessment. In particular, he took into account the opportunity afforded to the brokers to effect crossings with their own clients. That opportunity was limited by the terms of the instructions conveyed to brokers and the relatively short time in which they had to interest clients in crossings following the placement of the orders.

Mr Hollick’s evidence also provides some support for Mr Sisson’s analysis. For example, Mr Hollick agreed that, in assessing the likelihood at 3:30 pm of Nomura hitting its own Bid Basket, it would be relevant to know the degree of illiquidity of each security comprised in the March Sale Orders; the multiple of average daily turnover of each security that had to be disposed of (although in re-examination he sought to qualify his answer on this point); whether there was time to give the market a clear price signal; and the actual level of demand recorded on the bid schedule on SEATS at 3:30 pm. Mr Hollick also gave the following evidence (Ts 847):

 

Q.                And would you then agree that, if you had a stock where you were trying to get rid of stock which was two or more multiples of average daily turnover, and, at 3.30, there was very little demand in the screen, and you weren’t going to start aggressive selling until 3.55, then there would be a real chance that you would be left with some of that stock at 4 o’clock?

A.                 I think it depends on how you defined ‘aggressive selling’. Assuming this is one of my assumptions, you’ve got 25 minutes to be out there talking to the clients. If you don’t do that and you hit the screen at 5 to 4 and you’ve done no discussions with potential buyers, the answer is yes.

 

Q.                I’d like you to assume that, to the extent that it is reasonably possible on the last half hour of this extremely busy quarter, your team of Mr Annakin and others are speaking to the clients between 3 o’clock and 3.55, but not able to hit the bid aggressively until the last five minutes, making that assumption, and otherwise making the same assumptions as before, namely, you are trying to sell more than two days average daily turnover and there is very little demand on the screen at 3.30, would you agree that there is a real chance that, in these stocks, you will still be holding some of the stock at 4 o’clock?

A.                 Yes.”

 

 

If the question is considered at 3:55 pm (or such other time as particular brokers were required to commence selling aggressively), the probabilities are that Nomura would have hit its own Bid Basket in a larger number of securities. This is because by that time it had become apparent either that no demand had emerged during the previous 25 minutes or so or such latent demand as had emerged was likely to be insufficient to prevent the Bid Basket being hit. The ASIC identified 54 stocks, each of which was likely to be hit as at 3:55 pm (or thereabouts). I deal with the likelihood of individual securities being hit later. However, the trading pattern of the securities identified by ASIC as consistent with the evidence that by 3:55 pm or thereabouts the probabilities were that at least 40 to 50 securities in total would be hit in the Bid Basket if the brokers had carried out their instructions.

If all events occurring up to 4:00 pm are taken into account in assessing the probabilities at 3:30 pm (or thereabouts), it is likely that Nomura would have hit at least a total of 50 securities in its Bid Basket, assuming its instructions would have been carried into effect. If the same exercise were undertaken in assessing the probabilities at 3:55 pm, it is also likely that Nomura would have hit at least 50 securities in the Bid Basket.

9.6 Individual Stocks

In his written report, Mr Sisson analysed the dealings in ten securities on 29 March 1996. Only two of these were classified as LL (low capitalisation, low liquidity). In all but one case Mr Sisson concluded that, if Nomura’s broker had sold the balance of the March Sale Orders in the last five minutes of trading in accordance with Nomura’s instructions, it was virtually certain, very probable or probable that Nomura would have traded with its own Bid Basket. These opinions were expressed from the perspective of an observer considering the position at about 3:55 pm with knowledge of trading activity and the bid schedules on SEATS to that point. In cross-examination he did not alter his opinion in any material respect.

Mr Sisson also said he could prepare a list of low liquidity stocks which were likely to be hit by Nomura in its Bid Basket. Viewing the matter prospectively at 3:30 pm, he said that he would be able to identify a number of securities in respect of which Nomura would probably hit its own Bid Basket, had the brokers carried out their instructions. Mr Sisson did not nominate the securities that would be included in this list, but he did specify the factors that he would consider in order to make the selection. As has been seen, the relevant factors were the quantity of the security to be sold; the relationship between that quantity and recent average daily turnover, and the volume of recorded demand (in the form of bids in SEATS) at 3:30 pm on 29 March 1996.

For his part, Mr Hollick was asked in cross examination about the likelihood that Nomura would hit each of seven nominated securities in its own Bid Basket. These seven were drawn from the 39 securities that Mr Francis and Mr Sisson had classified as LL (low capitalisation, low liquidity). Mr Hollick was asked to consider the likelihood that the Bid Basket would be hit, both at 3:30 pm and at the point at which aggressive trading was to commence in accordance with Nomura’s instructions. Mr Hollick’s answers took account of the opportunity available to brokers, having regard to the time constraints, to talk to market participants to effect trades in securities covered by the March Sale Orders.

Viewing the question prospectively at 3:30 pm, Mr Hollick accepted, in the case of one of the securities, that it was more probable than not that the Bid Basket would be hit. In the case of shares in two New Zealand based companies, he accepted that there was a “real chance” that the Bid Basket would be hit. He qualified this answer by saying that he would expect an informed broker to check with the New Zealand market for a buyer, but he acknowledged that because of time differences it was unlikely that potential buyers could be contacted. In the case of two securities, Mr Hollick thought there was “chance” that the Bid Basket would be hit. (In one of these he was asked to consider the position at 3:45 pm, the time at which the particular broker was to commence placing offers on SEATS.) In two instances, Mr Hollick’s answers were equivocal.

Mr Hollick accepted that, if the question were to be considered at a point near the close of trading, in the light of events which had occurred by that time and the instructions given to the brokers, the probabilities were that Nomura would have hit in the Bid Basket each of the securities put to him.

I have already said that I prefer Mr Sisson’s evidence to the extent that his opinions were in conflict with those of Mr Hollick. In giving his evidence as to the position at 3:30 pm, I think that Mr Hollick was rather too optimistic about latent demand emerging in the last half hour of trading having regard to the instructions conveyed to brokers and the intense activity required in each of their parts to give effect to those instructions. Indeed, his description of the dealing operations in his own firm on the relevant day illustrated the difficulties facing brokers in exploring demand for particular stocks outside SEATS. As Mr Sisson acknowledged, it was impossible to predict with certainty the extent to which latent demand would emerge for any particular security. But the factors he identified make it feasible to make an assessment as a matter of probability that the Bid Basket would be hit in relation to particular securities.

The position should first be considered at 3:30 pm on 29 March 1996, having regard to the information available at that time and the instructions Nomura conveyed to its brokers. On that basis, it was probable that Nomura would have hit its own Bid Basket in respect of a number of specific, identified securities. ASIC provided a list of 46 securities, each of which was said to be “at the very least a real chance [if not a likelihood] that Nomura would be unable to sell its stock without hitting the Bid Basket”. ASIC submitted that the other securities would satisfy the same criteria.

I do not think it can be said that it was probable (as distinct from there being a real chance), as at 3:30 pm, that each of the securities nominated by the ASIC would have been the subject of hits in the Bid Basket. Nor do I think it necessary to identify each specific security in respect of which it was probable that the Bid Basket would be hit. It is enough to say that there were more than a few securities that fell into this category. The list would include at least five of the securities put to Mr Hollick (namely, SCN, SCR, FLLBS, FLCES and GETIN). That is, as at 3:30 pm on 29 March 1996 it was more probable than not that the March Sale Orders in respect of each of these securities, if carried out by the brokers as instructed, would have resulted in Nomura hitting its own Bid Basket. The list would also include a number of the other securities classified as “LL” by Mr Spencer and Mr Sisson.

 

Considering the position at 3:55 pm (or such slightly different time at which Nomura’s instructions required brokers to engage in aggressive selling), there were a larger number of identifiable individual securities in respect of which it was more probable than not that Nomura would have hit its own Bid Basket. The securities in this category included each of the securities put to Mr Hollick in cross-examination and those identified by Mr Sisson in his report as certain or likely to be hit.

If the position were to be considered at 3:55 pm (or thereabouts) on 29 March 1996, in the light of the events which in fact occurred by 4:00 pm, there would be a greater number of individual securities likely to be hit in the Bid Basket, assuming the brokers faithfully carried out their instructions. I do not think it is necessary to identify each of them, although they would be drawn from the list compiled by ASIC in Annexure 3 of its submissions. Much the same would be true if the position were considered at 3:30 pm on 29 March 1996, in the light of the events which in fact occurred by 4:00 pm.

9.7 Summary of Findings

Viewing the position at about 3:30 pm on 29 March 1996, in the light of information known at that time and the instructions conveyed to the brokers (assuming those instructions would be carried out) faithfully:

·        it was probable that Nomura would hit its own Bid Basket in at least 30 or 40 securities in total;

·        it was more probable than not that the March Sale Orders would result in Nomura hitting its own Bid Basket in respect of each of a number of specific, identified securities.

Viewing the position at about 3:55 pm, in the light of information known at that time as the instructions conveyed to the brokers (assuming those instructions would be carried out)

·        it was probable that Nomura would hit its own Bid Basket in at least 40 or 50 securities in total; and

·        it was more probable than not that Nomura would hit the bids for each of a larger number of specific, identified securities in its own Bid Basket.

If the position were assessed at 3:55 pm on 29 March 1996, in the light of events which in fact occurred by 4:00 pm on that day:

·        it was probable that Nomura would hit its own Bid Basket in at least 50 securities in total;

·        it was probable that Nomura would hit each of an even larger number of specific, identified individual securities in its own Bid Basket.

10. THE ALLEGED CONTRAVENTIONS: CORPORATIONS LAW s 998

10.1 Section 998(1) of the Corporations Law

Section 998(1) of the Corporations Law provides that a person shall not

 

(i)                  create; or

(ii)                do anything that is intended to create; or

(iii)               do anything that is likely to create

a false or misleading appearance

(iv)              of active trading in any securities on a stock market;

(v)                with respect to the market for any securities; or

(vi)              with respect to the price of any securities.

A contravention of s 998(1) is a criminal offence.

Section 998(1) is the current counterpart to s 70 of the Securities Industry Act 1970 (NSW) (“SI Act 1970”) and s 124 of the Securities Industries (New South Wales) Code (“SI Code”) enacted in 1981. Section 70 of the SI Act 1970 provided as follows:

 

“A person shall not create or cause to be created or do anything which is calculated to create, a false and misleading appearance of active trading in any securities on any stock market in the State, or a false or misleading appearance with respect to the market for, or the price of, any securities.”

 

 

Section 998(1) of the Corporations Law removes the phrase “cause to be created” and substitutes “intended or likely to create” for “calculated to create”.

It was common ground that elements (i), (ii) and (iii) of the prohibition in s 998(1) of the Corporations Law are alternatives. Thus, in order to establish a contravention of s 998(1), it is enough to show that the alleged contravener did something that was intended or was likely to create a false or misleading appearance in one of the three respects specified in the sub-section. If that is established, it is not necessary also to show that the alleged contravener actually created a false or misleading appearance. While this was common ground, much else was in dispute.

10.2 The Principal Authorities

It is convenient at the outset to refer to the two principal authorities bearing on the construction of s 998(1). These are the decisions of the High Court in North v Marra Developments Ltd (1981) 148 CLR 42 (a case involving s 70 of the SI Act 1970) and of the New South Wales Court of Appeal in Fame Decorator Agencies Pty Ltd v Jeffries Industries Ltd (1998) 28 ASCR 58 (a case arising under s 998(1) of the Corporations Law).

 

North v Marra

In North v Marra a stockbroker advised a public company, M. The shares in M were closely held and were traded very lightly. M was thought to be vulnerable to takeover because the price of its shares was low in relation to the value of its assets. The broker suggested that M should undergo a capital reconstruction and that it should take over another company, S. Because of trading patterns in S’s shares, it was material to the success of the takeover proposal that S’s shareholders should be persuaded that M’s shares had a real market value of about $16.50 per share, rather than some lower figure.

The broker and the directors of M agreed to a scheme whereby transactions on the Sydney Stock Exchange would “establish a market” for M’s shares at about $16.50 per share. Immediately prior to the takeover announcement, the broker purchased shares on behalf of itself and M’s directors in M at $16.50 and $16.00 per share. These prices were substantially higher than the last traded price for M’s shares.

The broker sued M for fees in respect of its advice connected with the reconstruction and takeover. Their action was dismissed by the trial judge on the ground that it arose out of an agreement in contravention of s 70 of the SI Act 1970. The New South Wales Court of Appeal dismissed the appeal, Hope and Samuels JJA doing so on the same basis as the trial judge: North v Marra Developments Ltd [1979] 2 NSWLR 887. The High Court dismissed a further appeal.

The appellant in the High Court (the broker) argued that there had been no misleading conduct because the market is not concerned with the identity or motivation of purchasers, so long as the purchasers are genuine, in the sense of satisfying a legitimate market activity of the purchaser. Mason J, with whom the other members of the Court agreed, addressed the argument this way (at 58-59):

 

“In terms the statutory prohibition is directed against activity which is designed to give the market for securities or the price of securities a false or misleading appearance. In this setting, ‘calculated’ means ‘designed’ or ‘intended’ rather than ‘adapted’ or ‘suited’. It is not altogether easy to translate the generality of this language into a specific prohibition against injurious activity, whilst at the same time leaving people free to engage in legitimate commercial activity which will have an effect on the market and on the price of securities. Purchasers or sales are often made for indirect or collateral motives, in circumstances where the transactions will, to the knowledge of the participants, have an effect on the market for, or the price of, shares. Plainly enough it is not the object of the section to outlaw all such transactions.

 

It seems to me that the object of the section is to protect the market for securities against activities which will result in artificial or managed manipulation. The section seeks to ensure that the market reflects the forces of genuine supply and demand. By ‘genuine supply and demand’ I exclude buyers and sellers whose transactions are undertaken for the sole or primary purpose of setting or maintaining the market price. It is in the interests of the community that the market for securities should be real and genuine, free from manipulation. The section is a legislative measure designed to ensure such a market and it should be interpreted accordingly.

 

I agree with Hope and Samuels JJA in rejecting the suggestion that the section strikes only at fictitious or colourable transactions. Transactions which are real and genuine but only in the sense that they are intended to operate according to their terms, like fictitious or colourable transactions, are capable of creating quite a false or misleading impression as to the market or the price. This is because they would not have been entered into but for the object on the part of the buyer or of the seller of setting and maintaining the price, yet in the absence of revelation of their true character they are seen as transactions reflecting genuine supply and demand and having as such an impact on the market.

 

When purchases have been made of shares in a company at or about a particular level for the purpose of setting and maintaining a market price for those shares there is a breach of the statutory prohibition. At the very least purchases have then been made which are calculated to create ‘a false or misleading appearance with respect to the market for, or the price of’ the shares. In reality the purchases are calculated to create a false market or false price. The false or misleading appearance is that the market, in the absence of any disclosure that a market support operation is on foot, appears to be real or genuine, there being no overt sign of market support or manipulation.”

Mason J observed that s 70 of the SI Act 1970 was breached if the relevant activities were “calculated to create a false or misleading appearance” (at 59): He said that

 

“[i]t is not necessary that they do in fact create that appearance.”

 

 

Accordingly, his Honour held that, even if he had accepted a finding that $16.50 per share was not above the true market value, the broker still would have contravened s 70.

Fame v Jeffries

In Fame v Jeffries, F held ordinary and preference shares in J, a public company. A holder of preference shares in J was entitled to convert them into ordinary shares on a particular date. The conversion formula was based on the weighted average price of ordinary shares in J during the twenty days immediately prior to the conversion date. The lower the average price, the greater the number of ordinary shares to be allotted on conversion.

The shares in J were thinly traded on the exchange. During April 1995, the shares traded between 35c and 40c. On 28 April 1995, the last day before the expiry of the twenty day period, there were bids current for shares in J at various prices ranging from 35c down to 13c. Shortly before the close of trading on 28 April 1995, D (the controller of F) instructed his broker to sell 170,000 shares in J down to 13c. The broker did so by hitting all current bids. (The lowest bid of 13c was for 250,000 shares; only 74,000 of these shares were acquired.)

F submitted that there could be no breach of s 998(1) of the Corporations Law, since F had merely taken advantage of a market opportunity not created by it. F had simply mopped up all existing offers, by means of arm’s length transactions. A majority of the Court (Gleeson CJ, Powell JA agreeing) rejected the argument and held that F had infringed s 998(1).

Gleeson CJ quoted part of the passage I have already extracted from the judgment of Mason J. His Honour emphasised that Mason J had excluded from the concept of “genuine supply and demand” those buyers and sellers “whose transactions are undertaken for the sole or primary purpose of setting or maintaining the market price”. Gleeson CJ also pointed out that Mason J had rejected the suggestion that s 70 struck only at fictitious or colourable transactions.

Gleeson CJ continued (at 62-63):

 

“Section 998 aims to preserve the integrity of the share market. Markets, in reflecting the interaction of forces of supply and demand, may suffer from a variety of imperfections, including mismatches of information, without such imperfections destroying their integrity. However, the conduct of a seller of thinly traded shares, calculated to effect sales at the lowest, rather than the highest, obtainable price, and timed so as to deflect the possibility of some purchasers bidding up the price, had both the purpose and effect of creating, temporarily, an artificial market and price.

 

There is a difference between the market and the individual buyers who had current bids immediately before the close of trading on 28 April 1995. The effect of Fame’s conduct upon the market for shares in Jeffries, and the market price, was not merely incidental. The central object of such conduct was to influence the market price.

 

As Mason J acknowledged in North, in individual cases there may be difficulty in determining whether the conduct of a buyer or a seller, unless fully disclosed, falsifies the assumptions upon which a market operates, and damages the integrity of the market. In the present case, however, Cohen J was right to conclude that both the purpose and the effect of Fame’s conduct was to create an artificial market price for shares in Jeffries and that such conduct contravened s 998.”

 

The Meaning of “Intended”

The word “intended” in s 998(1) of the Corporations Law has not been authoritatively construed. In North v Marra, Mason J (at 58) interpreted the expression “calculated to” in s 70 of the SI Act 1970 as meaning “designed or intended”. At one point his Honour implied that the test of whether a state of affairs was “intended” for the purpose of s 70 was whether it was the actor’s “sole or primary purpose” (at 59). At another, his Honour referred to transactions which “would not have been entered into but for the object of setting…the price” (at 59). The latter formulation suggests a less stringent test than that of sole or primary purpose.

In Fame v Jeffries, Gleeson CJ quoted (at 62) the passage in which Mason J used the phrase “sole or primary purpose”. Gleeson CJ later said (at 63) that the “central object” of Fame’s conduct was to influence the market price. It is not clear whether his Honour meant to prefer one approach over another, or was merely summarising the facts of the particular case before him.

Mr Bathurst submitted that, having regard to the fact that s 998(1) creates a criminal offence, “intended” should be construed as referring to the alleged contravener’s “sole or dominant purpose” or “central object”. I do not think it is necessary to express a final view on this issue. I am content to proceed on the basis that Mr Bathurst’s submission is correct.

“Any Securities”

Nomura argued that the expression “any securities”, as used in s 998(1) of the Corporations Law, should be construed as confined to securities in a particular, identifiable corporation. It followed, for example, that the ASIC could not establish a contravention of the third limb of s 998(1) (doing anything likely to create a misleading appearance in any of the specified respects) unless it showed that Nomura’s conduct, at the time it was engaged in, was likely to create the misleading appearance in relation to securities in a particular, identifiable corporation. It was not enough that Nomura’s conduct was likely (or even certain) to create, say, a false appearance of active trading in some securities within an identifiable class, if the particular securities could not be identified at the time the conduct was engaged in.

Section 998(1) uses the expression “any securities” on two occasions. The drafter could not have intended that the expression should bear a different meaning in each instance. It is first used in the context of a prohibition on conduct, inter alia, intended or likely to create a “false or misleading appearance of active trading in any securities on a stock market”. In this context, as a matter of ordinary English usage, the expression “any securities” seems to me to be apt to refer to securities in any one or more of a number of companies. There will obviously be many securities traded on a market such as the ASX. Had the drafter wished to confine the expression to securities in a single, identifiable corporation (as distinct from one or more securities within a defined class) different language would have been used. For example, s 1002G(1) of the Corporations Law refers to “securities of a body corporate”, perhaps suggesting that this provision should be read as confined to securities in a single corporation. However, the drafter did not adopt this course when framing s 998(1).

In my view, s 998(1), on its ordinary construction, applies to a case where the relevant conduct is likely to create a false appearance of active trading in a number of securities within an identifiable class of securities. (The class could comprise, for example, all securities within a portfolio held by the alleged contravener.) I think that this is so notwithstanding that, at the time of the conduct, it is not possible to identify precisely which of the securities within the class will be the subject of a false or misleading appearance of trading. It must be remembered that s 998(1) is not limited to conduct actually creating the relevant misleading appearance (in which case it will be known which securities are in fact the subject of a false or misleading appearance). The sub-section applies to conduct intended or likely to have the proscribed effect, regardless of whether the proscribed appearance was in fact created.

Mr Bathurst drew attention to the use of the word “price” in conjunction with the expression “any securities”, as distinct from the use of the plural “prices”. In my view, the use of “price” is consistent with what I think is the correct construction of the sub-section. Nor do I think the definition of “securities” in s 92 of the Corporations Law assists on the present question.

This construction of s 998(1) seems to me to accord with the object of the section. As Mason J said in North v Marra, in relation to s 170 of the SI Act 1970, the object “is to protect the market for securities against activities which will result in artificial or managed manipulation”. His Honour did not refer to the market for a particular security. Mason CJ also emphasised that s 998 seeks to ensure that “the market” reflects the forces of genuine supply and demand.

As the present case illustrates, a trader may engage in conduct intended or likely to bring about an artificial in managed manipulation of the market (in the form of misleading appearances of the kind identified in s 998(1)), yet it may not be possible to identify precisely which securities within a broader class will be the subject of the manipulation. This is not a reason for giving a prohibition a wider meaning than its language suggests. But it is a reason for giving effect to the ordinary meaning of the language in s 998(1). The fact that s 998(1) creates a criminal offence does not warrant a narrower construction than the ordinary meaning of the language suggests, especially where that meaning accords with the evident object of the provision. Unless this construction is adopted, the sub-section may be unavailable in the case of large-scale market manipulation spreading across many securities, not all of which can be identified in advance.

Mr Bathurst referred to two cases in support of Nomura’s submissions, namely, Walsh v Tattersall (1996) 188 CLR 77 and Vrisakis v Australian Securities Commission (1993) 11 ACSR 162 (S Ct WA/FC). Walsh was concerned with different legislation and depended on the terms of that legislation: see at 91, per Gaudron and Gummow JJ. Vrisakis was concerned with duplicity of criminal charges and is of little assistance in the present context.

“Likely”

In Tillmans Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 42 FLR 331 (FC), Deane J (at 346), in a well-known passage, said this about the word “likely”:

 

“The word ‘likely’ can, in some context, mean ‘probably’ in the sense in which that word is commonly used by lawyers and laymen, that is to say, more likely than not or more than a fifty per cent chance…. It can also, in an appropriate context, refer to a real or not remote chance or possibility regardless of whether it is less or more than fifty per cent. When used with the latter meaning in a phrase which is descriptive of conduct, the word is equivalent to ‘prone’, ‘with a propensity’ or ‘liable’.”

 

 

Nomura submitted that “likely”, as used in s 998(1) of the Corporations Law, has the first meaning. The ASIC submitted that the second was the appropriate meaning. In my opinion, the better view is that “likely”, as used in s 998(1) of the Corporations Law, means more probable than not.

Mr Heydon relied on authorities interpreting “likely” as referring to a real and not remote chance: Tillmanns (construing s 45D(1) of the TP Act); News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 (FC), at 564-565 (s 4D(2) of the TP Act); Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82 (FC), at 87 (s 52(1) of the TP Act). See also State of Western Australia v Wardley Australia Ltd (1991) 30 FCR 245 (FC), at 261 (s 87 TP Act); Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 (NSWCA), at 364 (s 87 TP Act).

The form of the provisions considered in these cases was important to the outcome. For example, Deane J in Tillmanns, at 347, thought it significant that s 45D(1) proscribed conduct that “would have or be likely to have” a particular effect: see also News v ARL, at 565. If, in that context, “likely” meant more probable than not, the words “be likely to have” would have had no work to do. Section 998(1) is couched in different terms.

The context in which “likely” is used in s 998(1) also tends to support Nomura’s contention. A trader commits an offence if he or she creates or does anything intended or likely to create a false or misleading appearance in a relevant respect. The first two alternatives apply if the alleged contravener actually creates the false or misleading appearance or intends to create such an appearance. The ASIC submitted, I think correctly, that the third alternative (conduct “likely to create” the misleading appearance) introduces an objective test into the sub-section. Yet, if “likely” means a “real chance”, a trader who neither creates nor intends to create a misleading appearance, commits a criminal offence if his or her conduct merely creates a real chance of a misleading appearance. In my opinion, the language of the sub-section creates an ambiguity which should be resolved in favour of an alleged contravener. The narrower construction of “likely” does no violence to the object of the legislation, as expounded in North v Marra.

 

10.3 The Self Trades

The ASIC’s Case on s 998(1) of the Corporations Law

The ASIC submitted that on the two occasions Nomura acquired shares or units from itself by hitting its own Bid Basket, it contravened s 998(1) of the Corporations Law. The circumstances of the two self-trades in MMF and NMPN have already been described.

The ASIC’s argument was straightforward:

(i)                  Section 998(1) of the Corporations Law provides that a person shall not create a false or misleading appearance of active trading in any securities on a stock market.

(ii)                Section 998(5)(a) of the Corporations Law provides that a person is deemed to have created a false or misleading appearance of active trading in securities in a stock market, if that person enters into or carries out any transaction of sale or purchase of securities being a transaction that does not involve any change in the beneficial ownership of the securities.

(iii)               There was no dispute that Nomura had entered into or carried out transactions of sale and purchase of securities, namely the shares and units in MMF and NMPN, and that the transactions involved no change in beneficial ownership of the securities. So much had been admitted, in substance, on the pleadings.

(iv)              It followed that Nomura had contravened s 998(1) of the Corporations Law by acquiring its own shares and units in MMF and NMPN.

 

Nomura’s Contentions

Mr Bathurst conceded on behalf of Nomura that, unless the defence provided for in sub-s 998(6) of the Corporations Law was available to it, Nomura’s self-trades in the two securities contravened s 998(1).

It will be recalled that s 998(6) applies only “[i]n a prosecution of a person for a contravention of” s 998(1). Mr Bathurst did not dispute that the present proceedings, in which the ASIC seeks relief pursuant to ss 1114, 1268 and 1324 of the Corporations Law, are civil proceedings. Even so, he submitted that the defence in s 998(6) of the Corporations Law is available in relation to the claim for relief based on a contravention of s 998(1) of the Corporations Law, at least where the deeming provisions of s 998(5) are relied on: cf Endresz v Whitehouse (1997) 15 ACLC 936 (S Ct Vic/FC), at 951, per Ormiston JA. Alternatively, Mr Bathurst submitted that, as a matter of discretion, declaratory relief should be withheld unless the Court were satisfied that the defence provided for in sub-s 998(6) had not been established as a matter of fact.

Mr Bathurst’s concession that these are civil proceedings reflects the terms in which jurisdiction is conferred on the Federal Court in matters arising under the Corporations Law, namely, in “civil matters”: see, for example, Corporations (New South Wales) Act 1990, ss 41(1), 42(3); Corporations Act 1989 (Cth), ss 50(1), 51(1). The overall jurisdictional scheme is conveniently summarised in the judgment of Gaudron J in Gould v Brown (1998) 151 ALR 395, at 416-418, but it is not necessary to consider it in detail here.

Some Brief Legislative History

Mr Bathurst’s argument explained the legislative history of the relevant provisions. It is convenient to refer briefly to that history here.

As I have noted, the predecessor to s 998(1) of the Corporations Law was s 70 of the SI Act 1970. Section 71(1) of the SI Act 1970 also created the offence of “market rigging”, which has its current counterpart in s 997(1) of the Corporations Law. Section 71(2) of the SI Act provided a defence to a prosecution under s 71(1), if the defendant proved that he acted “without malice and solely to further or protect his own lawful interests”. Section 71(2) was thus the forerunner of provisions in the form of s 998(6) of the Corporations Law.

 

At the time the SI Act 1970 was enacted, it was contemplated that the only means of enforcing a breach of the Act was a prosecution or by civil remedies after a successful prosecution: see SI Act 1970, s 75 (providing for convicted persons to pay compensation); Mutual Home Loans Fund of Australia Ltd v Attorney-General for the State of New South Wales (1973) 130 CLR 103, at 110-111, per Barwick CJ (limited circumstances in which injunctive relief is available to restrain commission of criminal offences). Amendments to the SI Act 1970 enacted in 1971 introduced civil remedies that could be pursued independently of a criminal prosecution: see, for example, SI Act 1970, ss 5F, 75A, introduced by the Securities Industry (Amendment) Act 1971 (NSW). Nonetheless, s 71(2) of the SI Act 1970 remained unamended and continued to provide a defence only in a prosecution.

The Securities Industries Act 1975 (NSW) (“SI Act 1975”) retained the false trading and market rigging offences created by the SI Act 1970: SI Act 1975, s 109(1), (2). The form of s 109 of the SI Act 1975 was similar to that of s 998 of the Corporations Law. Section 109(4) of the SI Act 1975 provided that it was a defence to a prosecution for an offence under s 109(1) and (2) if the defendant proved that he or she did the acts for a purpose other than creating a false or misleading appearance of active trading in securities in a stock market. It was therefore in substantially the same terms as s 998(6) of the Corporations Law. The SI Act 1975 also provided for a claim for compensation in respect of breaches of the legislation, including false trading and market rigging, regardless of whether the relevant person had been convicted of an offence: SI Act 1975, s 114.

The Securities Industries (New South Wales) Code (“SI Code”), enacted in 1981, retained provisions similar to s 109 of the SI Act 1976: SI Code, s 124. A person who contravened specified provisions of the SI Code, including s 124, was liable to pay compensation to a person thereby suffering loss, regardless of whether the first person had been convicted of an offence: SI Code, s 130(2). The SI Code also introduced a general injunctive power, equivalent to the current s 1324 of the Corporations Law: SI Code, s 149.

Does s 998(6) Apply to the Present Proceedings?

Mr Bathurst acknowledged that the legislative history summarised above demonstrates that civil remedies have been available for breaches of provisions like s 998 of the Corporations Law, independently of criminal convictions, for nearly three decades. He also acknowledged that s 998(6) of the Corporations Law, like its predecessors, commences with restrictive words that limit the specified defence to prosecutions for an offence. Nonetheless, he contended that unless s 998(6) applied to civil proceedings, a trader could be exposed to civil liability in circumstances where a “wash trade” had a legitimate economic purpose.

Mr Bathurst suggested that some United States authorities recognised a distinction between “wash trades” involving

 

“transactions that were virtually risk-free, often prearranged, and intentionally designed to mislead…or to serve other illicit purposes”

 

and those

“designed only to minimise risk and to fulfil a purpose generally considered legitimate in the industry”:

 

Stoller v Commodity Futures Trading Commission 834 F 2d 162 (2nd Cir, 1987), at 266 (a case involving potato futures contracts). He also pointed out that s 9(a)(1) of the Securities Exchange Act 1934 prohibits wash trades in a security only where undertaken for the purpose of creating a false or misleading appearance of active trading, or a false or misleading appearance with respect to the market for any such security.

In my opinion, Mr Bathurst’s argument amounts to the proposition that, despite the clear limiting language of s 998(6), the courts should rewrite it to achieve the policy objective he identified. The short answer to that submission is that, even assuming that there are policy reasons why a trader should not be exposed to civil liability in circumstances where his or her conduct has a “commercially legitimate” purpose, the courts cannot simply substitute their own view of policy for the clear and unequivocal words used by Parliament.

The fact is that s 998(6) of the Corporations Law is expressed to apply only in a prosecution for an offence under s 998(1). That language does not permit Nomura to invoke the sub-section in the present civil proceedings. There is nothing in the legislative history which supports any contrary conclusion. On the contrary, the distinction between civil and criminal proceedings in respect of alleged contraventions of what is now s 998(1) of the Corporations Law has been recognised for a considerable time. Nor is the different legislation in the United States relevant to the construction of the Corporations Law.

For reasons I shall give shortly, on the facts of this case s 998(6) of the Corporations Law cannot avail Nomura in any event. It is not necessary, therefore, to resolve the question of whether a trader who has engaged in “wash trades”, but who has also acted in a wholly “legitimate” way, inevitably will be exposed to civil liability under s 998(1). There may be reasons, other than those advanced by Mr Bathurst, why s 998(1) of the Corporations Law would not apply, for example, to a trader unwittingly entering into an apparent wash trade. That question, on which I express no view, can safely be left to a case in which it arises.

The Factual Basis for the Application of s 998(6)

Even if, as a matter of construction, the defence provided for in s 998(6) of the Corporations Law were available to Nomura in these proceedings, in my opinion it has failed to make out the defence. As Mr Bathurst conceded, the onus would be on Nomura to establish that the purpose or purposes for which it did the act (that is, the carrying out of a transaction caught by s 998(5)(a)) was not, or did not include, the purpose of creating a false or misleading appearance of active trading of securities on a stock exchange: Endresz v Whitehouse, at 952.

The effect of the self-trades in MMF and NMPN was to create the appearance that genuine sales had occurred in each of those securities between a willing buyer and a willing seller. That appearance was false, since Nomura had simply traded with itself, by causing its own Bid Basket to be hit. As Mr Mapstone acknowledged in his evidence (Ts 666), to the extent that the turnover recorded in a particular security is based on self-trades, an observer of the market would be misled. That was the case here. Similarly, the recorded price for each of the securities created a false or misleading appearance to market observers, since it was a price set by Nomura unilaterally to advance its own ends.

None of this came about merely as an unintended by-product of Nomura’s pursuit of a legitimate commercial objective, namely, the achievement of price and volume convergence on the unwinding of its arbitrage position. Nomura’s strategy contemplated that it would hit its own Bid Basket in a large number of illiquid securities. Nomura intended, through Mr Channon, to achieve a large number of self trades in illiquid securities, at depressed prices. It formed this intention for reasons which included the attainment of profits over and above those to be derived from the unwinding of its arbitrage position. To the extent that Nomura succeeded in hitting its own Bid Basket, it created the appearance, but not the reality, of having achieved volume convergence. As it happened, only two securities sold by Nomura were the subject of self trades. But this result, which surprised Mr Channon, occurred despite Nomura’s strategy, not because of it.

It follows that Nomura’s purposes included bringing about an appearance of active trading in a large number of securities on the ASX by hitting its own Bid Basket. That appearance, had it occurred in accordance with Nomura’s expectations and intentions, would have been false, because it would not have come about by reason of the “forces of genuine supply and demand”: North v Marra, at 59. Market participants or observers would have been misled into believing that the traded volume of the two securities was much greater than would have been the case by the operation of the forces of supply and demand. They would also have been misled into believing that the recorded price for each of the securities on 29 March 1996 reflected the genuine activities of traders on the ASX. To use another phrase of Mason J, Nomura’s self-trades would have come about through activities which resulted in, and were intended by Nomura to result in, “artificial or managed manipulation”: North, at 59.

For these reasons, Nomura has failed to establish the factual basis for the defence, provided for in s 998(6) of the Corporations Law. In these circumstances, there is no basis for withholding declaratory relief in respect of Nomura’s contravention of s 998(1).

Section 998(3) of the Corporations Law

The ASIC submitted that Nomura, by engaging in transactions resulting in the self-trades in MMF and NMPN, contravened s 998(3) of the Corporations Law. Since I have found that the self-trades constituted a breach of s 998(1), it adds little to the case to consider the application of s 998(3) to the same transactions. Nonetheless, the submission having been made, I record that in my opinion, Nomura’s self-trades also contravened s 998(3) of the Corporations Law.

Nomura’s “purchase” of its own shares and units in MMF and NMPN constituted the purchase of securities that involved no change in the beneficial ownership of those securities. The question posed by s 998(3) is whether, by means of the “purchase” of the shares and units, Nomura reduced or caused fluctuations in the market price of those securities.

As I have already found, the effect of the purchase of the MMF shares on 29 March 1996 was that Nomura was recorded as having sold 10,000 shares to itself on SEATS at a price of $2.61 per share. This sale was at a price twenty per cent lower than the last recorded sale of shares in the company (at $3.02 per share). At the time the sale of 10,000 shares was transacted, no bids were recorded in SEATS for this security, except Nomura’s bid of $2.61 per share for (an undisclosed) volume of 352,500 shares. In the case of NMPN, Nomura purchased 3,600 units at $0.72 per unit, twenty per cent lower than the last recorded sale ($0.90 per unit). On 9 April 1996, Nomura sold the shares in MMF at $3.01 per share, and the units in NMPN at $0.89 per unit.

In these circumstances, Nomura’s purchase of its own securities reduced or caused fluctuations in the market price of MMF and NMPN securities. The transactions were not genuine sales between a buyer and a seller. The effect of the “purchase” in each case was to reduce the recorded price of each security at the close of trading on 29 March 1996 by twenty per cent from the previous level. This in turn reduced the level of the All Ords at the close of trading on that day and the expiry price of the SPI March Contracts. The fact that the actual reduction in the All Ords was very small is not to the point.

It seems to have been implicit in Nomura’s arguments that a self-trade will not infringe s 998(3) if it occurs at the market price established by the activities of genuine buyers and sellers. Certainly this point of view was put by Mr Channon in his evidence. He maintained that there was nothing misleading about Nomura’s self-trades. He described them as “real transactions” (Ts 718), because they resulted, on the one hand, from Nomura’s role as a seller unwinding its arbitrage position and, on the other, Nomura’s role as a buyer, committing its capital to buy the stock. Later, he acknowledged that the validity of this view – which is not easy to reconcile with the regulatory structure established by the Corporations Law and its predecessors – depended on whether the market had had a fair opportunity to assess Nomura’s bid. If it had not, he agreed that hitting the bid would produce an “artificial” price (Ts 722).

If, notwithstanding its dubious starting point, Mr Channon’s reasoning is adopted, I do not think it assists Nomura. In my opinion, neither the price of $2.61 for MMF nor the price of $0.72 for NMPN was the product of the market being given a fair opportunity to assess Nomura’s bid as recorded in the Bid Basket. In each instance, the price of the security was twenty per cent down on the last recorded trade. In each instance, within seven trading days, the securities were sold at a price very close to the price immediately prior to 29 March 1996. In neither instance, for reasons examined elsewhere in this judgment, did Nomura’s instructions provide the respective brokers with a sufficient opportunity to test the latent demand for each security. I appreciate that Mr McIntosh ultimately disposed of the entirety of Nomura’s sell order in respect of MMF twenty-two minutes after the close of trading on the ASX. But that, if anything reinforces the point that the instructions allowed insufficient time for the broker to test and exploit latent demand by 4:00 pm. Nomura’s instructions to the brokers were a product of its intention to hit bids within its Bid Basket for a substantial number of illiquids.

Nor can Nomura avail itself of the defence in s 998(8) of the Corporations Law. For the reasons I have given, as a matter of construction, s 998(8) cannot apply in the present case. Even if it did, Nomura cannot bring itself within the terms of the sub-section. Its purposes included creating a false or misleading appearance with respect to the market for, or the price of, a large number of securities including MMF and NMPN.

10.4 The Bid Basket and the March Sale Orders

The ASIC contended that Nomura’s conduct in placing the Bid Basket (either of itself or in combination with Nomura’s other actions) contravened s 998(1) of the Corporations Law. For this purpose, Mr Heydon accepted that it was necessary for the ASIC

·        to identify the appearance which is created, intended to be created or likely to be created by Nomura’s conduct; and

·        to analyse whether that appearance was false or misleading in the respects identified in the sub-section.

See North v Marra [1979] 2 NSWLR, at 897.

Within this framework, Mr Heydon put the ASIC’s case in a variety of ways, reflecting the large number of alternatives within s 998(1) itself. Because of the numerous permutations, I do not necessarily refer to all the alternatives advanced in argument. I shall concentrate on two of the alternatives. First, did Nomura do anything intended to create a false or misleading appearance in a relevant respect? That is, did Nomura contravene the second limb of s 998(1) of the Corporations Law? Secondly, did Nomura do anything likely to create a false or misleading appearance in a relevant respect? That is, did Nomura contravene the third limb of s 998(1) of the Corporations Law?

Intentional Conduct: Submissions

The ASIC submitted that Nomura, by placing the Bid Basket, did something intended to create a false or misleading appearance with respect to the market for or the price of each of the securities included in the Bid Basket. This submission was itself put in two ways. Each way of putting the submission viewed the placement of the Bid Basket as part of the broader strategies pursued by Nomura on 29 March 1996.

First, it was said that Nomura’s conduct in placing and maintaining the bids in the Bid Basket on the SEATS screen conveyed an appearance that it was a genuine buyer at the prices specified in the recorded bids. That appearance was false and misleading because

·        Nomura never intended to buy from third parties but only from itself, through the March Sale Orders;

·        Nomura never intended to buy the shares the subject of the bids (since it already held them), but merely wished to secure public registration of an apparent transaction at a price lower than that at which the market would otherwise close on 29 March 1996;

·        Nomura’s intention in placing the bids in the Bid Basket was not to buy the stock from third parties, but to fix (that is, to depress) the closing price for securities in the All Ords.

Secondly, the ASIC argued that Nomura intended that the bids in the Bid Basket would be hit by the March Sale Orders in respect of a significant number of illiquid securities. By placing the Bid Basket and giving instructions for the March Sale Orders, Nomura performed acts intended to result in a significant number of self trades. This was intended to create an appearance that trades had occurred on the ASX in accordance with the forces of supply and demand operating in the marketplace. That intended appearance was false or misleading with respect to the price of the securities and the market for the securities.

Nomura resisted these arguments on both factual and legal grounds. I hope I do not do Mr Bathurst’s arguments an injustice if I summarise them as follows:

·        For there to be a contravention of s 998(1), the purpose of creating the false or misleading appearance must be the sole or dominant purpose.

·        The trading strategies adopted by Nomura were proportionate to the legitimate object of price and volume convergence.

·        The effect of the placement of the Bid Basket was merely to announce to the market that the broker acting on behalf of Nomura was willing to buy the volume (disclosed or undisclosed as the case may be), at the price specified, of the particular securities, subject to the order of trading on SEATS. There was nothing misleading in that announcement.

·        There could be nothing misleading about Nomura’s conduct until its strategy was put in place. Save for the two self-trades which actually occurred, the strategy was never implemented. Section 998(1) could not be read as covering mere attempts.

Intentional Conduct: A Contravention?

It is convenient to begin with the second of the ways in which the ASIC put its case that Nomura did something intended to create a false or misleading appearance of the kind identified in s 998(1) of the Corporations Law. In my view, the findings I have already made lead to the conclusion that Nomura’s sole or dominant purpose, or its central object, in placing the Bid Basket, when considered in combination with its conduct in instructing brokers to implement the March Sale Orders, was to bring about a significant number of self-trades in its illiquid securities. The hitting of its own Bid Basket in a significant number of illiquids was an integral element in Nomura’s strategies as implemented on 29 March 1996. Nomura was motivated by a number of factors. These included its intention to establish a closing price for illiquids well below previous levels; its desire to obtain profits on the expiry of the intra-day March SPI Contracts; and its plan to “resell” illiquids at higher prices than the sales into the Bid Basket.

 

Nomura was aware that the instructions given to the brokers, requiring them to hit the Bid Basket aggressively at or very near to the close, would not allow adequate time for sufficient latent demand to emerge. That is, Nomura was aware that, in the case of a large number of illiquids, the instructions would cause Nomura to hit its own Bid Basket. Nomura intended to bring this result about and failed only because of the unwillingness or inability of brokers to carry out their instructions faithfully.

 

Nomura intended to bring about self-trades in a large number of illiquid securities. Any self-trades were not to be a mere unintended, or inevitable but unwanted, consequence of Nomura’s desire to obtain price and volume convergence. The hitting of the Bid Basket in a substantial number of illiquids was the outcome Nomura desired and intended to achieve in order to advance its economic interests. The placement of the Bid Basket and of the March Sale Orders cannot, in my view, be characterised as “proportionate” to the legitimate objective of seeking volume and price convergence (whatever that might mean). As I have pointed out, the hitting of the Bid Basket would have created the appearance but not the reality of volume convergence. Moreover, the fact that a trader has one objective that can fairly be described as economically legitimate does not necessarily mean that all strategies consistent with that objective are lawful.

 

In my opinion, Nomura’s contention that the placement of the Bid Basket should be seen merely as a genuine offer to buy the nominated securities ignores the commercial context. It is wholly artificial to restrict Nomura’s conduct, for the purposes of s 998(1) of the Corporations Law, to the placement of the Bid Basket, without regard to its other strategies. The placing of the Bid Basket was never intended to be an isolated act; after all, nobody in Nomura expected any sellers (other than itself) actually to hit the Bid Basket. The Bid Basket made sense only in the context of Nomura’s instructions to brokers to give effect to the March Sale Orders. Nomura’s intentions can be assessed only by reference to that broader context.

 

Nomura’s actions were intended to create an appearance of active trading in those illiquids for which insufficient latent demand emerged in the course of implementation of the March Sale Orders. That appearance would have been false. Nomura also intended to create the appearance that trades in those illiquids had occurred at prices agreed between willing buyers and sellers, operating in accordance with the forces of genuine supply and demand. That intended appearance would also have been false. Nomura’s intention was to effect self-trades through the Bid Basket at depressed prices. The prices would not have reflected the forces of genuine supply and demand, but would have been unilaterally determined by Nomura.

 

It cannot be an answer to say that s 998(1) is not concerned with attempts. One of the ways in which a breach of s 998(1) can occur is by a trader doing anything that is intended to create a false or misleading appearance of active trading or with respect to the price of any securities. The contravention occurs when the trader does something intended to create the proscribed appearance. As Mason J said in North v Marra (at 59), in a similar context, “[I]t is not necessary that [the activities] do in fact create that appearance”.

 

It follows that Nomura, in placing the Bid Basket and giving instructions for the March Sale Orders, engaged in conduct intended to create a false or misleading appearance of active trading on the ASX in illiquid securities held by it on 29 March 1996. It also engaged in conduct intended to create a false or misleading appearance with respect to the price of illiquid securities held by it on the same day. Nomura’s conduct therefore contravened the second limb of s 998(1) of the Corporations Law.

 

Having reached this conclusion, it is not necessary to deal with the first of the ways in which the ASIC put its case that Nomura had contravened the second limb of s 998(1) of the Corporations Law. It is enough to say that the findings made elsewhere in this judgment support the ASIC’s contentions.

 

Likelihood of a Misleading Appearance: Submissions

Since I have found that Nomura’s conduct contravened the second limb of the Corporations Law in a relevant respect, it is not strictly necessary to consider the ASIC’s argument that Nomura’s conduct was likely to create a false or misleading appearance in a relevant respect. However, since the issue was argued at length and since I have made detailed findings bearing on the issue, it is appropriate to express my views. I do so on the basis that “likely” in s 998(1) means more probable than not.

 

The ASIC argued that the objective evidence demonstrated that at the relevant times, being from 3:30 pm to just before the close of trading at 4:00 pm on 29 March 1996, it was more probable than not that Nomura’s conduct would cause the bids in the Bid Basket for a large number of illiquid securities to be hit by the March Sale Orders. The ASIC also argued that even if a contravention of s 998(1) required proof that it was likely that Nomura would acquire specific securities in the Bid Basket (a proposition I have rejected as a matter of construction), it had discharged that burden.

 

In addition to the legal arguments to which I have already referred, Nomura submitted that the ASIC had failed to discharge its evidentiary burden. As I have indicated, Nomura did not dispute that the likelihood of its conduct creating the proscribed false or misleading appearance should be assessed having regard to the circumstances as they existed at about 3:30 pm on 29 March 1996.

 

Nomura also contended that the third limb of s 998(1) involves not merely an objective element, but mens rea. To establish a contravention, the alleged contravener must have known, at the time of its allegedly contravening conduct that the proscribed appearance is likely to be created by that conduct. Mere uninformed apprehension that the proscribed appearance could occur is insufficient.

 

Likelihood of a Misleading Appearance: A Contravention?

It is unnecessary to repeat my analysis of the evidence bearing on this issue. Viewed at about 3:30 pm on 29 March 1996, Nomura’s conduct in placing the Bid Basket and the March Sale Orders was likely (in the sense of more probable than not) to cause the bids in the Bid Basket for at least thirty to forty illiquid securities to be hit. Thus Nomura’s conduct, viewed at that time, was likely to create a false or misleading appearance of active trading in those securities. It also was likely to create a false or misleading appearance with respect to the price of those securities. For reasons I have explained, as a matter of construction it is no barrier to the application of s 998(1) of the Corporations Law that it may not have been possible at 3:30 pm on 29 March 1996 to identify precisely which thirty or forty illiquid securities would probably be hit.

 

If I am wrong on the question of construction, the ASIC nonetheless has established that Nomura contravened the third limb of s 998(1). Viewed at about 3:30 pm on 29 March 1996, Nomura’s conduct made it likely (in the sense of more probable than not) that bids in the Bid Basket for each of a number of identifiable securities would be hit. Thus, even if Nomura’s submissions as to the meaning of the expression “any securities” in s 998(1) are correct, the ASIC has established a contravention of the third limb of the sub-section.

 

Likelihood of a Misleading Appearance: Mens Rea

Mr Bathurst argued that these findings were not enough to establish a contravention of the third limb of s 998(1) of the Corporations Law. He submitted that the third limb of s 998(1) does not create a strict liability offence, but requires proof of mens rea. In particular, there could be no contravention of s 998(1) in the absence of proof that Nomura knew, at the time of the allegedly contravening conduct, that the specific false and misleading appearance was likely to be created by the conduct. According to Mr Bathurst, the evidence did not support a finding to this effect.

Assuming that Nomura’s suggested construction of s 998(1) of the Corporations Law is sound as a matter of law, I think the submission fails on the facts. I find that Nomura, at the relevant time, knew that its conduct was likely to create a false and misleading appearance of active trading in illiquid securities for which bids had been placed in the Bid Basket. As I have already said, it was an essential element in Nomura’s strategy that the Bid Basket be hit in respect of a significant number of illiquid securities. Mr Channon knew and appreciated that this would occur. He also knew that an appearance of active trading would be created when the Bid Basket was hit. If it is relevant, he was also aware of the factual elements that made the appearance of active trading false, including the fact that Nomura’s instructions to its brokers allowed insufficient time for sufficient latent demand for illiquid securities to emerge to avoid hitting the bids in its own Bid Basket.

In addition, in my view, Nomura knew that its conduct was likely to create a false or misleading appearance with respect to the market for the price of securities. Mr Channon knew that, when the Bid Basket was hit, there would be an appearance that the relevant securities had been sold and purchased at a price determined solely by Nomura. Mr Channon was aware of all the factual elements that made that appearance false.

It follows that it is not necessary to address the question of construction raised by Nomura’s submission. However, my present view is that s 998(1) does not require proof that Nomura knew, at the time of the allegedly contravening conduct, that the false and misleading appearances were likely to be created by the conduct. It is true that, as Brennan J said in He Kaw Teh v The Queen (1985) 157 CLR 523, at 567:

 

“[h]owever grave the mischief at which a statute is aimed may be, the presumption is that the statute does not impose criminal liability without mens rea unless the purpose of the statute is not merely to deter a person from engaging in prohibited conduct but to compel him to take preventive measures to avoid the possibility that, without deliberate conduct on his part, the external elements of the offence might occur.”

 

Nonetheless, his Honour recognised (at 567) that the question of whether mens rea is an essential element of an offence is “after all, a question of statutory construction”. Brennan J also pointed out (at 568) that mens rea may “connote different states of mind in respect of the several external elements of the same crime”; see also Gibbs CJ, at 530.

As Mr Bathurst accepted, s 998(1) embodies alternatives. The sub-section specifically proscribes the conduct intended to create a false or misleading appearance of active trading or with respect to the price of any security. The introduction of the expression “likely to create” in s 998(1) of the Corporations Law was clearly designed to cover conduct other than conduct intended to create and misleading appearance. By the words “likely to create”, the drafter sought to prohibit conduct which, objectively assessed, was likely to create a false or misleading appearance and thus be likely to detract from the operation of the ordinary forces of supply and demand. The severity of the consequences attaching to a breach of s 998(1) are sufficiently recognised by construing “likely” to mean more probable than not.

This does not mean, of course, that the third limb of s 998(1) involves no mental element. Doubtless, it is necessary to show that the alleged contravener intended to carry out the conduct relied on as creating the likelihood of a misleading or deceptive appearance. But I do not think it is necessary to prove that the alleged contravener was aware that the conduct would be likely to have a false or misleading appearance of the kind specified in s 998(1). However, as I have already indicated, it is not necessary to express a final view on this issue.

 

For these reasons, I conclude that Nomura engaged in conduct likely to create a false or misleading appearance of active trading on the ASX in illiquid securities held by it on 29 March 1996. It also engaged in conduct likely to create a false or misleading appearance with respect to the price of illiquid securities held by it on the same day. Nomura’s conduct therefore contravened the third limb of s 998(1) of the Corporations Law.

 

11. OTHER ALLEGED CONTRAVENTIONS

 

11.1 Section 1260 of the Corporations Law

Mr Heydon identified the elements of a contravention of s 1260(1) of the Corporations Law, insofar as relevant to the present case, as follows:

(i)                  the doing of one or more acts;

(ii)                that is calculated to create;

(iii)               a false or misleading appearance;

(iv)              with respect to

(a)                the market for futures contracts on a futures market; or

(b)               the price for dealings in futures contracts in a futures market.

The essence of the ASIC’s case under s 1260 was pleaded in par 117 to par 119 of the amended statement of claim:

 

“117. …Nomura, in placing, or alternatively in giving instructions to place, all of, or alternatively each combination of, the Bid Basket, the Ask Basket, the London Bid Side Sell Orders and the London Offer Side Sell Orders, together with the placing of the March Sale orders…did acts calculated to create an appearance with respect to the market for, or alternatively the price for dealings in, March 1996 SPI Futures contracts on the SFE, namely, an appearance that the settlement price for March SPI Futures on 29 March 1996 was genuine and therefore was a reflection of forces of genuine demand and supply in respect to shares comprised in the All Ords traded on the ASX on 29 March 1996.

 

118.Each of the appearances referred to in paragraph 117 were false or misleading.

 

Particulars

 

(a)           the closing value of the All Ords on 29 March was calculated to be artificially lowered by reason of the conduct of Nomura alleged herein.

(b)           …

 

119.In the premises, Nomura, in placing, or alternatively in giving instructions to place, all of, or alternatively each combination of, the Bid Basket, the London Bid Side Sell Orders and the London Offer Side Sell Orders, together with the placing of the March Sale Orders, did acts calculated to create a false or misleading appearance with respect to the market for, or alternatively, the price for dealings in, March 1996 SPI Futures in contravention of section 1260(1) of the Corporations Law.”

 

 

The ASIC submitted that the elements of s 1260 had been satisfied. The submissions were as follows:

 

(i)                  The conduct referred to in s 1260 need not be done on a futures market. Acts done on the ASX are capable of contravening s 1260(1), if they have a sufficient connection with a futures market.

(ii)                There is a sufficient connection if the conduct is “calculated to create” an appearance (which is a misleading appearance) with respect to the market for or the price for dealings in futures contracts.

(iii)               The expression “calculated to create”, which also appeared in s 170 of the SI Act 1970, could be satisfied either by the objective test of “adopted” or “suited”, or by the subjective test of “designed” or “intended”: cf North v Marra, at 58.

(iv)              The March 1996 SPI Contracts were “futures contracts” for the purposes of s 1260(1): Corporations Law, ss 72 (definition of “futures contract”), 9 (definition of “adjustment agreement”).

(v)                The cash settlement of an SPI Contract, including the cash settlement of the March 1996 SPI Contracts, constitutes a “dealing” for the purposes of s 1260(1): Corporations Law, ss 25(1) (par (a) of definition of “deals in a futures contract”), 24(1) (definition of “disposes of a futures contract”), 9 (par (b) of definition of “close out”), 55 (definition of “Chapter 8 obligation” and “Chapter 8 right”), 9 (par (b) of definition of “sold position”). In substance, this is because a party holding a sold position under an SPI Contract has a Chapter 8 right enforceable against the SFECH, under the novation arrangements designed to assure the parties to an SPI Contract, that the futures contract will be performed. Cash settlement in favour of the party with the sold position entails discharge of SFECH’s Chapter 8 obligation. As such, the cash settlement amounts to the “closing out” of the “futures contract” (s 9). The person who closes out a futures contract “disposes” of the contract (s 24(1)) and deals in the contract (s 25(1)). Every of cash settlement of an SPI Contract is therefore a dealing.

(vi)              The cash settlement price for an SPI Contract is a “price for dealings in futures contracts” for the purposes of s 1260(1): Corporations Law, s 9 (definition of “price”). The SFE By Laws, AOI.1 and AOI.2, distinguish between the price and value or worth of an SPI Contract. The value of an SPI Contract at the time it is made is the price agreed by the parties at the time multiplied by 25 and expressed in Australian dollars. The value of an SPI Contract on the cash settlement day is the numerical value of the index declared by SFECH. The numerical value so declared is the cash settlement price. The cash settlement price is the same as the closing quotation for the All Ords on the last day of trading and is declared by SEATS pursuant to By-Law AOI.2(c). Thus, the price of an SPI Contract on the cash settlement day is determined by the closing quotation for the All Ords. The adjustment to be made on the cash settlement day (which is a “dealing”) depends on the difference between the contract and cash settlement price. It follows that the cash settlement price is a “price for dealings in futures contracts”.

(vii)             The level of the All Ords reflects dealings in securities listed on the ASX. An act which determines the Index Price of a security within the All Ords will affect the level of the All Ords. An act which determines the closing Index Price for a particular security on a given day will affect the close level of the All Ords on that day. The act could be any one of a trade, bid or ask, although Nomura laboured under the misapprehension that only a trade would suffice.

(viii)           It follows from the above that an act done on the ASX that is “calculated to” create a false or misleading appearance with respect to the closing quotations for the All Ords on an expiry day for SPI Contracts is an act calculated to create a false or misleading appearance with respect to the price for dealings in futures contracts on a futures market. It therefore contravenes s 1260(1).

(ix)              Nomura’s conduct, as specified in par 117 of the amended statement of claim was calculated to create an artificial closing quotation for the All Ords. In particular, the placement of the Bid Basket and the March Sale Orders, together with the London Bid Side Sell Orders, was calculated to depress artificially the closing prices for many securities and thus for the All Ords. The artificial reduction in the All Ords, in turn, was calculated to create an artificial cash settlement price for the expiry of the March 1996 SPI Contracts. This was so whatever construction was adopted of the expression “calculated to”.

 

I did not understand Mr Bathurst to challenge the legal analysis advanced by the ASIC, subject to one exception. He contended (at least by implication) that conduct “calculated to create” a false or misleading appearance should be construed to refer to conduct intended or designed to create that appearance, rather than conduct adapted or suited to the creation of such an appearance. That contention accords with the reasoning of Mason J in North v Marra, at 58, and I accept it.

 

Mr Bathurst submitted that conduct by Nomura resulting in transactions on the ASX could have no effect on the cash settlement price for the March SIP Contracts. I do not think that this submission is consistent with the relationship between the closing price of the All Ords on an expiry day and the cash settlement price for SPI Contracts expiry on that day. That relationship has already been explained. I think it clear that transactions on the ASX affecting the closing price of securities included in the All Ords do affect the cash settlement price for SPI Contracts. Specifically, the closing prices recorded for securities included in the All Ords on 29 March 1996 directly affected the cash settlement price for March SPI Contracts expiring on that day.

 

Mr Bathurst then submitted that the cash settlement price for the March SPI Contracts was not affected by the Bid Basket or the March Sale Orders. Of course, the fact that Nomura hit bids for only two securities in its Bid Basket means that the actual effect of Nomura’s conduct on the level of the All Ords on 29 March 1996 was very slight. (There was no direct evidence as to the precise impact, although I infer that there was some slight, but measurable impact.) But the question is not whether the closing level of the All Ords was affected to a significant extent. It is whether Nomura intended to create a false or misleading appearance, by depressing artificially the level of the All Ords and thus the cash settlement price for the March SPI Contracts (in respect of some of which Nomura sought to obtain a speculative profit).

 

For reasons I have already given, Nomura did have that intention. It intended that it should hit its own Bid Basket in a large number of illiquid securities. It intended to create the appearance that the closing price for all securities in the All Ords had been determined by the forces of supply and demand. That appearance (as Mr Channon knew) would have been false. Nomura intended that the closing price for some illiquid securities within the All Ords would be the result of self-trades. In short, Nomura intended that the closing price for some illiquid securities within the All Ords should be unilaterally determined by it.

 

This was not merely a case of a price insensitive arbitrageur seeking price and volume convergence. It was a case of a trader seeking to set closing prices of securities in the All Ords at depressed levels. Nomura took this course knowing and intending that the depressed closing prices securities within the All Ords would depress the All Ords and, consequently, the cash settlement price of the March SPI Contracts. To the extent that Nomura intended that the cash settlement price should be determined by the artificial closing price of securities within the All Ords, it intended to create a false and misleading appearance with respect to the price for dealings in futures contracts in a futures market.

 

It follows that I accept the ASIC’s submission that Nomura contravened s 1260(1)(b) of the Corporations Law.

 

11.2 Section 995(2) of the Corporations Law and Section 52 of the TP Act

The ASIC’s case that Nomura had contravened s 995(2) of the Corporations Law was similar to the arguments upon which it relied to support the contention that the placement of the Bid Basket and the March Sale Orders contravened s 998(1) of the Corporations Law. In the case of s 995(2) of the Corporations Law, the ASIC argued as follows:

(i)                  Nomura’s placement of the Bid Basket and of March Sale Orders each constituted “a dealing in securities” for the purposes of s 995(2);

(ii)                Nomura’s actions in placing the Bid Basket constituted conduct likely to mislead or deceive participants in the market, because the likely effect of the conduct was to bring about self-trades in illiquid securities;

(iii)               accordingly, Nomura, in or in connection with any dealing in securities had engaged in conduct that was likely to mislead or deceive.

It is, of course, settled law that “likely” in s 52(1) of the TP Act means a real and not remote chance: Global Sportsman v Mirror Newspapers, at 87. The same construction must apply to s 995(2) of the Corporations Law, since it uses precisely the same language as s 52(1) of the TP Act. Nor does a contravention of s 995(2) involve a criminal offence: Corporations Law, s 995(3). Thus, it is not necessary for the ASIC to show that it was more likely than not that participants in the market would be misled or deceived.

Nomura did not dispute the first step in the ASIC’s argument. In my opinion, findings of fact already made establish that the second and third steps of the argument should be accepted. Nomura’s conduct, in placing the Bid Basket and the March Sale Orders, was likely to misled or deceive market participants. At the time the March Sale Orders were finally put in place, it was probable that Nomura’s conduct would bring about self-trades in a large number of illiquid securities held by Nomura. Had self-trades occurred on the scale which was the probable consequence of Nomura’s conduct, it is not merely likely, but virtually certain that many market participants would have been misled or deceived.

For similar reasons, Nomura’s conduct also contravened s 52(1) of the TP Act.

 

11.3 Ask Basket

The ASIC submitted that, by placing the Ask Basket at 11:51 am on 29 March 1996, Nomura contravened sub-ss 998(1) and 995(2) of the Corporations Law and s 52(1) of the TP Act. Mr Heydon acknowledged that this aspect of the case was ancillary to the main issues. I think it fair to say that this alleged contravention adds little to the case, having regard to the findings already made. I shall therefore deal with the contention briefly, confining myself to the claim that the placing of the Ask Basket contravened s 52(1) of the TP Act.

 

The ASIC contended that Nomura was not a genuine seller of the securities comprised in the Ask Basket and that it placed the Ask Basket in order to confuse the market and, in particular, Were, as to its intentions. The reason for confusing Were was to reduce the chances that Were would realise that Nomura was allowing its March SPI Contracts to go to expiry and intended to sell its portfolio aggressively near the close of trading in the ASX on 29 March 1996.

Nomura contended that the only message conveyed by the instructions relating to the Ask Basket was that it was a seller willing to sell securities at substantially above market prices. That message was true, since Nomura was prepared to deliver securities in the unlikely event of a broker accepting an offer contained within the Ask Basket. It was not Nomura’s purpose to confuse the market. It merely intended to disguise its intentions from Were.

Mr Bathurst also pointed out, correctly, that mere confusion is not the same as misleading or deceptive conduct: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191, at 198, per Gibbs CJ, 209-210, per Mason J. He contended that Were would merely have been left in a state of confusion as the result of the placement of the March Sale Orders. Moreover, there was no evidence that Were’s subsequent conduct had been affected by any of Nomura’s actions.

The evidence establishes that Nomura placed the Ask Basket in order to prevent Were from ascertaining whether Nomura planned to buy or sell shares in accordance with its expiry strategies. As Mr Moss said, the object was to “disguise” Nomura’s true intentions from Were, at least until Nomura chose to reveal more of its plans by giving Were its instructions pursuant to the March Sale Orders.

I agree with Nomura that, if the only evidence were that Nomura had placed a series of asks on SEATS at prices well above the then current market values, there would be no conduct that could be characterised as likely to mislead or deceive. On that evidence, the asks would simply signify to the market that the trader concerned was willing to sell the scrutinies at the apparently inflated prices recorded on SEATS. Market participants, if they observed the apparently optimistic asks recorded on SEATS, would be likely to conclude that the trader concerned was seeking a bargain or, perhaps, that the asks had been recorded for some time and had been by-passed by subsequent market movements.

I also agree with Nomura that, even if the evidence showed that the trader placed the asks in order to disguise his or her trading intentions, that would not necessarily amount to conduct likely to mislead or deceive, for the purposes of s 52(1) of the TP Act. For example, the placing of an offer to buy particular securities in order to divert attention from the trader’s plan to sell large quantities of the same securities, might well be in accordance with the practice of the ASX or other markets. More importantly, it might be consistent with the workings of a market that reflects the forces of genuine supply and demand.

In my opinion, the facts of this case go beyond these examples. Nomura neither intended nor expected that any of the offers contained in the Ask Basket would be accepted by bidders on the ASX. At the time the Ask Basket was placed, Nomura had already decided to sell the securities by means of the aggressive strategy to be embodied in the March Sale Orders. Nomura’s only reason for placing the Ask Basket was to conceal from a particular broker its intention of placing the March Sale Orders in the terms already discussed. I do not think that this is a case of confusion of the kind dealt with in Puxu. Nomura avowedly set out to confuse Were. While Mr Channon and Mr Moss had a number of concerns, including the fear that Were or its clients might engage in front running, their overriding motivation was to protect the strategies to be implemented later that day. The placement of the Ask Basket represented to Were that Nomura, insofar as it was a seller of securities, wished to maximise the price it would receive for those securities. The placement of the Ask Basket represented to Were that Nomura was a seller of securities seeking to maximise the price of those securities. Nomura’s intentions were quite different. It intended to sell the securities comprised in the Ask Basket aggressively at the close of trading, in order to drive down the closing price of the All Ords, in the process hitting the Bid Basket.

The central object of Nomura’s strategies was to produce a fall in the All Ords near the close of trading on the ASX on 29 March 1996. The placement of the March Sale Orders, with the intention of hitting the Bid Basket in a large number of securities, was designed to ensure that the object was achieved. The misleading of Were as to Nomura’s true intentions was an integral element in a series of strategies designed to “move the close”. Nomura was not simply using accepted or standard market techniques to achieve legitimate commercial objectives. Nomura engaged in deliberately misleading conduct as part of strategies designed to achieve illegitimate ends.

It is true that there was no evidence as to whether Were’s conduct was influenced by the representation implicit in the placement of the Ask Basket. However, it is not difficult to infer that Nomura’s deliberate conduct was likely to achieve the desired result. Were did not learn that it was to sell portion of Nomura’s basket of securities until 2:30 pm on 29 March 1996 and did not receive precise instructions (for the sale of liquid securities) until 3:38 pm on that day. It is uncertain what Were would have done had it appreciated before noon on 29 March 1996 that Nomura intended to sell aggressively near the close into its Bid Basket. As it happened, Mr Crabb explicitly adverted to that possibility in his conversation with Mr Moss at 3:38 pm. However, in consequence of the placement of the Ask Basket, Were laboured for three and a half hours under the misapprehension that Nomura intended to maximise the returns from its holdings of securities. If it matters, there was at least a real chance that Were, had it known of Nomura’s true intentions much earlier, would have appreciated the regulatory consequences and taken appropriate action.

In these circumstances, Nomura engaged in conduct which was misleading or deceptive, or likely to mislead or deceive, in contravention of s 52(1) of the TP Act.

 

11.4 The London Bid Side and Offer Side Sell Orders

The Context

Nomura’s submissions approached the placement of the London Bid Side and Offer Side Sell Orders on the basis that it had acted simply as an arbitrageur seeking to achieve price and volume convergence. Nomura also emphasised that (as the evidence showed) index arbitrage is a legitimate form of economic activity. Accordingly, the mere fact that Nomura was a price insensitive seller of securities towards the close on 29 March 1996 could not establish that it had breached s 998(1) of the Corporations Law. Nomura further argued that the London Orders were designed to achieve the legitimate object of price convergence, by guarding against high-ticking at the close. It could not be said that Nomura was not a genuine seller of the securities included in the London Orders, since Nomura was prepared to honour any sales brought about as a result of the London Orders being placed.

In my opinion, had Nomura merely acted as an arbitrageur seeking to unwind its position, there would be much to be said in favour of its analysis. However, a distinction should be drawn between two situations. The first is where an arbitrageur unwinds its position by selling securities in a price insensitive manner, as a means of matching the close. The second is where the arbitrageur adopts strategies designed not merely to match the close, but to move the price of securities down at the close in order to obtain a profit from speculative transactions. The London Orders must be assessed in the context of findings I have already made concerning Nomura’s intentions and expectations in placing the Bid Basket and the March Sale Orders.

The London Orders related to the ten highest capitalised securities, not to the illiquids in Nomura’s basket of securities. Nomura saw its greatest opportunity to “move the close” by means of the sale of illiquids effected through the March Sale Orders. It must also be borne in mind that, because of existing or latent demand for the highly capitalised securities, it was unlikely that the March Sale Orders in respect of these securities would result in the Bid Basket being hit. Nonetheless, the March Sale Orders required brokers to sell a large volume of each of the ten securities comprised in the London Orders within a very short time. It is quite clear from Mr Channon’s own evidence (see Section 6.10 above) that he appreciated that the bid-ask spread for liquids on SEATS would widen as brokers implementing the March Sale Orders proceeded through the highest bids in the bid stack. In other words, Mr Channon appreciated that, by reason of Nomura’s March Sale Orders, the ten highest capitalised securities were likely to fall in price towards the close of trading on 29 March 1996.

In my opinion, it is inappropriate to view the London Orders as though they were unrelated to the other strategies implemented by Nomura on 29 March 1996. Although Nomura saw its main opportunity to “move the close” as resting with the aggressive selling of illiquid securities, it also intended that its aggressive selling of liquids at the close would depress the price of liquids. No doubt Nomura could be less sure of the impact of the March Sale Orders on the price of liquids, given the greater depth of the market in those securities. Nonetheless, there is no reason to view Nomura’s thinking as rigidly compartmentalised.

The Offer Side Orders

The relationship between Nomura’s general strategy and the London Orders appears most closely from the London Offer Side Sell Orders. Several points should be noted about these orders:

·        They required the brokers to place orders to sell a substantial volume of each of the ten securities.

·        The brokers were instructed to join the best ask very near to the close. As the market moved down, the brokers were to follow it down by joining the best asks, leaving the original offer in place.

·        It is clear from Mr Channon’s conversation with Mr Moss at 2:13 pm on 29 March 1996, that he did not expect the asks to result in trades. Mr Usher showed that he was of the same opinion when he said to Mr Conn “it’s not really a sell”.

·        Nomura’s concern was clearly to prevent a rebound in the price of securities at the very close of trading, in circumstances where it intended that the price of those securities would fall by reason of Nomura’s heavy, aggressive selling.

In these circumstances, I think that Nomura’s conduct, in placing the Offer Side Orders, was intended to affect the Index Price for the ten most highly capitalised stocks in the All Ords. Nomura had set in place strategies designed to depress the closing price of securities within its basket, including the ten securities included in the Offer Side Orders. Nomura had no desire to acquire further holdings in the ten securities and, indeed, it was selling its existing holdings by means of the March Sale Orders. It intended that if, despite the Bid Side Orders, trades occurred on the offer side at the close, the Offer Side Orders would prevent bidders moving up further through the offer stack. That was why Nomura instructed Paul Morgan to place offers in such large quantities.

In short, Nomura’s reason for placing the Offer Side Order was to ensure that the price of the ten most highly capitalised securities remained at the relatively depressed levels Nomura intended should be brought about by the March Sale Orders. I therefore agree with the ASIC that Nomura’s central object or dominant purpose, in placing the Offer Side Orders, was to maintain the price of the ten securities at those levels. This constituted an intention to create a false or misleading appearance with respect to the price of the securities. The intended appearance was false or misleading because it was the product of Nomura’s desire to maintain the price of the securities at close of trading on 29 March 1996. The fact that Nomura would have honoured any trade is not to the point.

It follows that Nomura contravened s 998(1) of the Corporations Law in this respect as well.

 

London Bid Side Orders

The ASIC argued that, by giving instructions for the placement of the London Bid Side Orders, Nomura did something intended to create a false or misleading appearance with respect to the price for securities, contrary to s 998(1) of the Corporations Law. According to the ASIC, Nomura intended to increase the probability that the last trade of the day in the ten most highly capitalised stocks in the All Ords would be on the bid side. Indeed, Mr Channon said as much. The reason Nomura wished to hit the bid side at the very close was to depress the closing level of the All Ords, albeit slightly. By using a second broker to sell small quantities of the ten most highly capitalised securities (that is, a broker other than the broker entrusted to implement the March Sale Orders), Nomura increased the chances of achieving its objective.

 

In my view, the Bid Side Orders are closer to the line than the Offer Side Orders. The instructions related to a relatively small volume of securities and, unlike the Offer Side Orders, did not require the broker to proceed down one side of the stack. Moreover, the broker was instructed to effect a trade “on the death”, rather than make offers that it never intended would be accepted. The trades were to be in heavily traded securities. Thus, it was likely the securities would be sold at prices only marginally lower than those that would have been recorded had the last trades of the day occurred on the offer side.

 

Notwithstanding those considerations, I think the ASIC’s submissions should be accepted. The actions of Nomura must be assessed in the context to which I have already referred. Nomura intended the “move the close”, not only in relation to illiquids but more heavily traded securities. I infer that Nomura’s intention in placing the Bid Side Orders was to retain, at the close, some or all of the advantages to it deriving from the expected price movements in the highest capitalised securities occurring just before the close. By attempting to ensure that the very last trade of the day was on the lower side of the bid-ask spread, Nomura sought to keep the closing price of each of the ten securities lower rather than higher.

 

It follows that, by placing the Bid Side Orders, Nomura intended to create a false or misleading appearance with respect to the price of securities on the ASX. The appearance it intended to create was false or misleading because, had Nomura’s instructions been fully carried out, the precise closing price of the ten securities would have been determined by Nomura’s desire to keep the price low. It would not have been determined by the genuine forces of supply and demand. Whether the position would have been different had Nomura been truly indifferent to the closing price of the ten securities, and had it merely sought to match the close, is not something that I need decide.

 

The placement of the Bid Side Orders, in the circumstances of the present case, thus contravened s 998(1) of the Corporations Law.

 

12.              CONCLUSION

This lengthy judgment has dealt with a series of complex transactions carried out by Nomura on the ASX and the SFE. Although the analysis is lengthy, the essence of the case can be stated briefly.

 

Nomura’s position was that, in implementing the strategies described in detail earlier, it was acting as an index arbitrageur, legitimately endeavouring to realise profits from the unwinding of an arbitrage position it had established in index futures traded on the SFE and securities traded on the ASX. As such, Nomura had sold large quantities of securities towards the close of trading on the ASX on the day of expiry of its SPI Futures Contracts, 29 March 1996. It was a price insensitive seller of securities, but that was an inevitable consequence of unwinding the arbitrage position it had established.

 

The flaw in Nomura’s position is that, as I have found, it was not a price insensitive seller of securities on the ASX. Nomura wished to realise a profit from its arbitrage position. But the strategies devised by Mr Channon on Nomura’s behalf were intended to lower the price of securities included on the All Ords at the close of trading on 29 March 1996. In particular, Nomura intended that the combined effect of the Bid Basket and the March Sale Orders would be to lower the price of illiquids at the close of trading. Nomura’s motivation was to obtain “speculative” profits from the expected and intended fall in the price of securities and the consequential fall in the All Ords and the expiry price of SPI Contracts.

 

In short, Nomura endeavoured to “move the close”. That it enjoyed limited success in its endeavours was due to failures of communication, the inability or unwillingness of brokers to implement instructions and a degree of ineptitude on Nomura’s part. The limited success Nomura enjoyed was not for want of trying.

 

The legal questions in the case concern whether Nomura’s conduct contravened the Corporations Law or the TP Act. In summary, I have reached the following conclusions:

 

(i)                  By the combined operation of the March Sale Orders and the Bid Basket, in two cases Nomura sold and purchased securities in a manner that involved no change of beneficial ownership. It thereby contravened s 998(1) of the Corporations Law. It also contravened s 998(3) of the Corporations Law.

(ii)                Nomura, in placing the Bid Basket and giving instructions for the March Sale Orders, engaged in conduct intended to create a false or misleading appearance of active trading on the ASX in illiquid securities held by it on 29 March 1996. It also engaged in conduct intended to create a false or misleading appearance with respect to the price of illiquid securities held by it on the same day. Nomura’s conduct in this respect therefore contravened the second limb of s 998(1) of the Corporations Law.

(iii)               In the alternative to (ii), Nomura engaged in conduct likely to create a false or misleading appearance of active trading on the ASX in illiquid securities held by it on 29 March 1996. It also engaged in conduct likely to create a false or misleading appearance with respect to the price of illiquid securities held by it on the same day. Nomura’s conduct therefore contravened the third limb of s 998(1) of the Corporations Law.

(iv)              Nomura intended to determine unilaterally the closing price on 29 March 1996 for some illiquids within the All Ords. It knew and intended that this would have an impact on the closing level of the All Ords and, consequently, the cash settlement price of SPI Contracts going to expiry on 29 March 1996. Nomura intended to create a false and misleading appearance with respect to price for dealings in a futures contract in a futures market, thereby contravening s 1260(1)(b) of the Corporations Law.

(v)                Nomura’s conduct in placing the Bid Basket and the March Sale Orders also contravened s 995(2) of the Corporations Law and s 52(1) of the TP Act.

(vi)              Nomura’s conduct in placing the Ask Basket contravened s 52(1) of the TP Act.

(vii)             The placement of the London Bid Side Orders and London Offer Side Sell Orders contravened s 998(1) of the Corporations Law.

 

I think it appropriate to make declarations that Nomura has contravened the relevant provisions of the Corporations Law and the TP Act. I direct the ASIC to bring in short minutes of order in accordance with these reasons for judgment. As agreed between the parties, I shall hear them as to the further relief, if any, that should be granted.

 

I certify that this and the preceding one hundred and fifty-four (154) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville

 

 

Associate:

 

Dated: 10 December 1998

 

 

Counsel for the Applicant:	Mr J D Heydon QC with Mr J Gleeson and Mr A G Diethelm
Solicitor for the Applicant:	Australian Securities Commission
Counsel for the Respondent:	Mr T F Bathurst QC with Mr M Leeming
Solicitor for the Respondent:	Blake Dawson Waldron
Date of Hearing:	3-25 August 1998
Date of Judgment:	10 December 1998