FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v State One Stockbroking Limited [2018] FCA 1830

ORDERS

THE COURT DECLARES THAT:

1.    Pursuant to s 1317E of the Corporations Act 2001 (Cth) (Act), the defendant has contravened s 798H(1) of the Act by failing to comply with rule 5.7.1(b)(iii) of the ASIC Market Integrity Rules (ASX Market) 2010 (Cth) (Market Integrity Rules) on 1 and 2 March 2011 by placing 19 bids for shares in Tissue Therapies Limited (TIS) corresponding to 19 orders placed by Mr Thai Quoc Tang through the defendant's automated order processing system (Relevant Orders) where, taking into account the circumstances of each of the Relevant Orders the defendant ought reasonably have suspected that Mr Tang had placed each of the Relevant Orders with the intention of creating a false or misleading appearance with respect to the market for, or the price of, TIS.

2.    Pursuant to s 1317E of the Act, the defendant has contravened s 798H(1) of the Act by failing to comply with rule 5.5.2(b) of the Market Integrity Rules in the period 10 February 2011 to 9 May 2011 by failing to maintain the necessary organisational and technical resources with respect to post-trade alert systems to ensure that it complied with rule 5.7.1(b)(iii) of the Market Integrity Rules.

THE COURT ORDERS THAT:

3.    Pursuant to s 1317G(1C)(b) of the Act, that by reason of its contraventions of s 798H(1) of the Act, by failing to comply with rule 5.7.1(b)(iii) of the Market Integrity Rules, within three months of the entry of this order, the defendant pay to the Commonwealth of Australia, a pecuniary penalty in the sum of $250,000.

4.    Pursuant to s 1317G(1C)(b) of the Act, that by reason of its contravention of s 798H(1) of the Act, by failing to comply with rule 5.5.2(b) of the Market Integrity Rules, within three months of the entry of this order, the defendant pay to the Commonwealth of Australia, a pecuniary penalty in the sum of $100,000.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

COLVIN J:

1    State One Stockbroking Limited (State One) admitted contravening s 798(1) of the Corporations Act 2001 (Cth). The admitted conduct concerns its failure to comply with the ASIC Market Integrity Rules (ASX Market) 2010 (Cth) in relation to the share trading activity of one of its clients, Mr Tang. State One agreed facts and submissions concerning the contravention with the Australian Securities and Investments Commission (ASIC). The parties jointly proposed the terms of declaratory relief and the imposition of pecuniary penalties of $350,000 as being appropriate in all the circumstances. I made the proposed orders on 20 November 2018. These are the reasons why I made the orders. They record the main factual matters agreed between the parties and the main legal principles together with some additional observations as to matters of principle that arise as to the subject matter of the proceedings.

Overarching approach

2    The principles to be applied where there has been agreement reached between a specialist industry or activity regulator with a statutory function that includes seeking civil penalties for contraventions in the public interest and a party who has admitted contravening the legislation supervised by the regulator were stated in Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate [2015] HCA 46; (2015) 258 CLR 482. The rationale for receiving and, if appropriate, accepting agreed penalty submissions was stated by the plurality at [46] and includes predictability of outcome, encouraging the acknowledgment of contravening conduct and the public interest in the efficiencies of freeing the courts and investigating officers to deal with other matters. The Court is not bound by the agreed figure: at [48]. The Court must be satisfied that the agreed figure is appropriate: at [48]. The purpose of a civil penalty 'is primarily if not wholly protective in promoting the public interest in compliance'. It is to be contrasted with criminal penalties which import notions of retribution and rehabilitation: at [55]. Due to the civil nature of the proceedings there is 'very considerable scope for [the parties] to agree upon the appropriate remedy and for the court to be persuaded that it is an appropriate remedy': at [57]. Although there may be exceptions to that general position, civil penalty proceedings should not be treated as an exception: at [58].

3    Subject to being persuaded as to the accuracy of the agreed facts and consequences and that the proposed penalty is an appropriate remedy in the circumstances so revealed, it is highly desirable for the Court to accept a proposed agreed civil penalty: at [58].

4    In agreeing with the result, Gageler J expressed the view that the regulator in proposing a penalty is not bound to be dispassionate and, subject to its statutory charter, 'the regulator is permitted to advocate for a litigious outcome which the regulator considers to be in the public interest': at [78]. In context, this view was expressed as applying to all submissions on civil penalty by the regulator, agreed or not. Keane J, also agreeing with the result, observed that it is because the regulator 'may, on occasion, be too pragmatic in taking such a stance that the court must exercise its function to ensure that the penalty imposed is just, bearing in mind competing considerations of principle, including that of equality before the law and the need to maintain effective deterrence to other potential contraveners': at [110].

Relevant statutory provisions

5    Under s 798H(1) of the Corporations Act there is a statutory obligation to comply with the ASX Market Integrity Rules. The Rules may provide for a penalty amount not exceeding $1,000,000: s 798G.

6    Rule 5.7.1(b) of the Rules provides that a Market Participant must not make a bid or offer for, amongst other products, listed shares on account of any other person where, taking account of the circumstances of the order, the Market Participant order reasonably suspect that the person has placed the order with the intention of creating a false or misleading appearance with respect to the market for, or the price of, those shares. The terms bid or offer are defined terms that apply to the conduct in this case.

7    Rule 5.7.2(b) of the Rules provides that a Market Participant with a trading permission for, amongst other products, listed shares, must have and maintain the necessary organisational and technical resources to ensure that the Market Participant complies at all times with the Rules.

8    State One is, and was at the relevant time, a Market Participant. It had trading permissions for trading on the ASX.

Rule 5.7.1(b): Market integrity

9    I note that r 5.7.1(b), insofar as is presently relevant, imposes an objective standard based upon what a Market Participant 'ought reasonably suspect' when 'taking into account the circumstances of the order'. The language of the provision has not been previously considered.

10    As to the language of r 5.7.1(b) I accept the joint submission of the parties that the following propositions are apposite:

First, "suspicion" means a "state of conjecture or surmise where proof is lacking". It is more than "a mere idle wondering" but less than actual knowledge or belief: George v Rockett (1990) 170 CLR 104 at 115-116.

Second, the suspicion need not be actually held by the relevant Market Participant. As the text of the rule indicates, the appropriate consideration is whether a Market Participant ought reasonably suspect that the person has placed the Order with the intention of creating a false or misleading appearance of active trading in any Product or with respect to the market for, or the price of, the product. That inquiry can be undertaken by asking whether "a reasonable Market Participant" in the same position would have suspected that the relevant trading was undertaken with the intention of creating a false or misleading appearance with respect to the market for, or price for a product: Joslyn v Berryman (2003) 214 CLR 552 at [44] and [47].

Third, the concept of "a false or misleading appearance with respect to the market for, or price for a product" concerns activities which do not reflect genuine forces of supply and demand (here the genuine forces of supply and demand, or the genuine demand, for TIS). As Mason J stated in North v Marra Developments Ltd (1981) 148 CLR 42 at 59:

It seems to me that the object of the section [section 70 of the Securities Industry Act 1970 (NSW)] 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.

His Honour went on to hold that there would be a breach of the NSW statute "[w]here 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" (at 59, emphasis added).

Fourth, these observations were adopted and followed by the New South Wales Court of Appeal in Fame Decorator Agencies Pty Ltd v Jeffries Industries Ltd (1998) 28 ACSR 58 at 62. See also ASIC v Soust (2010) 183 FCR 21 at [83]-[84].

The concept of "a false or misleading appearance with respect to the market for, or price for a product" means that there may be a contravention of rule 5.7.1(b)(iii) even if the placing of Orders does not have an impact on the price for TIS shares. The rule, like s.1041B of the Act, is disjunctive and has two aspects being either a false or misleading appearance with respect to the market for a Product or a false or misleading appearance with respect to the price of a Product.

Fifth, for the purposes of rule 5.7.1(b)(iii) of the ASX Market Integrity Rules, whether the Market Participant has the requisite suspicion (that is, reasonably suspects that a person has placed an Order with the intention of creating a false or misleading appearance of active trading in the Product or with respect to the market for, or the price of, the Product) must be assessed ex ante, namely, as at the time when the Order is placed but, taking into account the circumstances of the Order. This includes what has gone before, particularly having regard to one of the relevant factors under rule 5.7.2 being whether the Order would be inconsistent with the history of, or recent trading in, the product: see in a related context ASIC v Westpac Banking Corporation (No 2) (2018) 127 ACSR 110 at [2089]-[2121] (Beach J).

Rule 5.7.2(b): Necessary resources for compliance

11    The scope of what is sufficient to meet the requirement of 'necessary organisational and technical resources' in r 5.7.2(b) has not been previously considered. It is an objective standard. What is necessary is to be measured by reference to that which is required to ensure compliance at all times with the Rules.

12    Necessity itself indicates that which needs to be done or is required in order to meet the objective or standard: State of New South Wales v Robinson [2016] NSWCA 334; (2016) 93 NSWLR 280 at [41]-[42]. However, in my view, it is the standard of ensuring compliance that assumes operative significance in r 5.7.2(b). To take steps to ensure a particular result is to make it certain or to guarantee that it will occur. Accordingly, r 5.7.2(b) requires steps to be taken that can confidently be expected to result in the Market Participant complying with the Rules.

13    The extent of organisational and statutory resources to be committed will depend upon the nature of the particular Market Participant and its activities. However, what is required are resources to be committed that can confidently be expected to result in compliance.

14    Therefore, policies and procedures, no matter how well crafted they may be, will not be sufficient. In almost every instance they will be required. However, of greater importance, will be training staff in what is required, systems to ensure that questionable conduct is identified and escalated to those with the necessary knowledge and experience to make decisions as to what to do in particular circumstances and a culture that encourages observance and implementation of the policies and procedures. Further, there must be sufficient time available for matters of compliance to be considered and addressed promptly. The policies and procedures must be integrated into day to day practice and reinforced by the way employees are supervised.

15    Particularly important is to ensure that inquiries from ASIC are attended to as a priority and with due seriousness.

16    The contravening conduct in this case concerns the inadequacy of the policies and procedures as well as the resources applied to ensure that the person entrusted with implementing the policy responded appropriately when the circumstances required a response. This tends to focus attention on the content of the policies and procedures. However, in a different case, evaluating whether there were the necessary organisational and technical resources would require a consideration of day to day practices rather than a focus upon the content of policies and procedures. It is only when the policies and procedures are well understood and being implemented that there is the required assurance of compliance at all times by the Market Participant with the Rules.

Admitted contraventions of rules 5.7.1(b) and 5.5.2(b)

17    The parties record in their joint submissions the following admitted contraventions:

ASIC alleges, and State One has admitted, that it has contravened s 798H of the Act by failing to comply with:

a.    rule 5.7.1(b)(iii) of the ASX Market Integrity Rules on 1 and 2 March 2011, by placing 19 bids for shares in Tissue Therapies Limited (TIS) corresponding to 19 orders placed by Mr Thai Quoc Tang (Mr Tang) through State One's automated order processing system (the Relevant Orders) where, taking into account the circumstances of each of the Relevant Orders, State One ought reasonably have suspected that Mr Tang had placed each of the Relevant Orders with the intention of creating a false or misleading appearance with respect to the market for, or the price of, TIS; and

b.    rule 5.5.2(b) of the ASX Market Integrity Rules in the period 10 February 2011 to 9 May 2011 by failing to maintain the necessary organisational and technical resources with respect to post-trade alert systems to ensure that it complied with rule 5.7.1(b)(iii) of the Market Integrity Rules.

Factual accuracy

18    In this case, the final hearing proceeded before me into the second day before certain contraventions were admitted and terms were agreed between the parties. The matter was then adjourned to prepare agreed facts and submissions on penalty. As a result, I have had the opportunity to consider the expert reports filed for the parties and the main documents and hear openings by reference to the documents. I have been taken through the reports and alerts generated by the software program used by State One as its market surveillance system, known as SMARTS.broker (SMARTS). I have also considered matters raised in a transcript of telephone conversations between employees of State One and Mr Tang concerning his share trading in Tissue Therapies Limited (TTL).

19    Further, this is a case in which State One is represented by experienced solicitors and counsel. The matter has been under investigation by ASIC for some time and there is no suggestions that State One has not cooperated in providing information. ASIC has access to its own surveillance information concerning market trading. Experienced counsel have been briefed by ASIC. A statement of agreed facts signed by the solicitors for each of ASIC and State One has been provided to the Court.

20    In the above circumstances, I am satisfied as to the accuracy of the factual matters presented and the information as to the consequences of those matters where relevant to the admitted contraventions.

Relevant events

21    The following account of relevant events is taken from the joint submissions of the parties as to the facts that had been agreed with stylistic changes made to reflect its incorporation in these reasons.

22    State One is an unlisted public company. It is (and was at the times relevant to these proceedings) a small to medium sized stock-broking business.

23    At all relevant times, the directors of State One were Mr Alan Hill (Group Executive Chairman), Mr Preben Hansen (Finance Director), Mr Richard Mollett (Group Compliance and Administration Director) and Mr Philip Wan.

24    State One had a subsidiary known as Amscot Discount Stockbroking Pty Ltd (Amscot) which operated as a division of State One and provided non-advisory stock-broking services to clients using State One's infrastructure and facilities.

25    Throughout 2011, in order to buy and sell securities, State One accessed the ASX Trading Platform using the IRESS AOP system. Clients of State One placed orders via the IRESS AOP system with the resultant bids or offers being entered directly into the Trading Platform.

26    The IRESS AOP system contained a range of pre-trade filter limits, mainly related to price, through which all orders had to pass to be entered directly into the Trading Platform. In particular, the IRESS AOP system contained a 15-price step (half cent steps) from last filter, applicable to products traded between $0.50 and $0.99. The term 'price step' refers to the minimum increment of share price able to be bid or offered on ASX.

27    From 2008, State One used SMARTS to conduct post-trade analysis. The parameters State One had in place in 2011 were based on an initial set of parameters supplied by SMARTS at the time State One started using the program in 2008.

28    In 2011, State One's Responsible Executive, Group Compliance and Administration Director, Mr Mollett, was responsible for the day to day monitoring of the SMARTS Alerts. The SMARTS Alerts were received by State One through Mr Mollett's computer. Mr Mollett was responsible for evaluating the SMARTS Alerts and deciding what action, if any, was required in response to any SMARTS Alert received.

29    Mr Mollett maintained a spreadsheet, which recorded the content of the SMARTS Alerts he received and his notes in relation to them, including any action taken in response to them. Mr Mollett made notes concerning trading on Mr Tang's account on 8 and 9 February 2011, 12 and 18 April 2011 and 2 May 2011. Mr Mollett made no other notes in relation to the SMARTS Alerts he received in relation to trading on Mr Tang's account in the period up to 9 May 2011.

30    In addition to the SMARTS Alerts described above, State One had in place the following policies and procedures documents in 2011:

(1)    Prevention of Manipulative Trading Policy;

(2)    Designated Trading Representative (DTR) Policy;

(3)    Filtering of AOP Accounts Policy; and

(4)    The Responsible Executive Regime and Management Plan,

(together, the Plans, Policies and Procedures Documents).

31    The Prevention of Manipulative Trading Policy provided a list and short explanation of the typical activities which may be viewed as market manipulation. It required staff within State One to bring anomalous trading to the attention of the senior DTR, who could escalate this to Mr Mollett. The policy noted that State One should not assume that SMARTS alone would at all times be capable of identifying and reporting all forms of errant market behaviour.

32    The DTR Policy set out the responsibilities of a DTR within State One. It provided that DTRs were expected to take a responsible role in State One's obligation to comply with the ASX Market Integrity Rules. If a DTR suspected that a client of State One was in breach of the ASX Market Integrity Rules, he or she was required to advise the Group Compliance and Administration Director (ie Mr Mollett), a Compliance Officer, a Senior DTR or a Director. The DTR Policy also set out some guidance in respect of DTR's acceptance of Orders, including having regard to the likely effect the Order will have on the market.

33    The Filtering of AOP Accounts Policy provided that State One would at all times adopt procedures and controls to ensure that it satisfied its primary obligation to comply with Part 5.7 of the ASX Market Integrity Rules. Part 5.7 applied equally to orders entered into the Trading Platform whether manually by a DTR or directly using AOP.

34    The Responsible Executive Regime and Management Plan outlined the management structure and supervisory framework of State One and set out State One's compliance methodology.

35    Mr Mollett was a Director, Responsible Executive of State One and the Group Compliance and Administration Director of State One. He was also a member and chair of State One's Compliance and Administration Committee. He was also responsible for day-to-day monitoring of SMARTS Alerts. He had a Bachelor of Commerce, Graduate Diploma of Applied Finance and Investment and is a Certified Practicing Accountant. He had over 20 years of experience in the stockbroking industry.

36    On or about 7 February 2011, Mr Tang became a client of State One and opened a trading account with State One. As the holder of the account, Mr Tang was authorised by State One to place orders into State One's IRESS AOP system, for entry into the Trading Platform. Mr Tang was the only person authorised by State One to trade on the account.

37    On 7 February 2011, Mr Tang did not have any financial products his account. However, upon opening the account, State One knew that Mr Tang had 250,000 shares in TIS in an account he held with Bell Direct which were transferred over to his State One account soon after it was opened. On 8 February 2011, Mr Tang started accumulating TIS shares and in the period 8 to 28 February 2011, Mr Tang only placed orders to buy TIS shares through his State One account.

38    Between 8 and 28 February 2011, Mr Tang placed 141 orders to buy TIS shares into State One's AOP system, together with amendments to those orders, (Initial Tang Orders) and State One automatically entered corresponding bids for each of the Initial Tang Orders into the Market resulting in the execution of 189 transactions on ASX for TIS shares. By the close of trading on 28 February 2011, Mr Tang held 612,500 TIS shares in the Relevant Account, which were valued at $416,500. Of that 612,500, 362,500 were acquired by trades through State One and 250,000 were transferred to the Relevant Account on 14 February 2011 from an account held by Mr Tang with Bell Direct.

39    During the period 8 February to 2 March 2011, Mr Tang was the only State One client that bought TIS shares.

40    During the period of the Initial Tang Orders, State One received 59 SMARTS Alerts triggered by Mr Tang's trading in TIS shares (Initial Trading Alerts). The Initial Trading Alerts included:

(1)    driving the price of TIS shares,

(2)    significant volume in last two minutes of trading;

(3)    price ramping; and

(4)    creating a pattern of price driving.

41    Mr Mollett made two notations on his spreadsheet prior to 1 March 2011 with respect to the Initial Trading Alerts.

42    The first notation was made on 8 February 2011 with respect to the 'Price Driver' SMARTS Alert and 'Significant volume in Last 2 minutes of trading' SMARTS Alert both received at 4.13 pm that day. The notation was simply 'client buying'.

43    The second notation was with respect to the 'Price Driver' SMARTS Alert received on 9 February 2011 at 4.13 pm. There he noted 'discussed with amscot manager, trading ok - client accumulating stock'. The reference to 'amscot' is a reference to State One's subsidiary, Amscot, which, as noted above, operated as a division of State One and provided non-advisory stock-broking services to clients using State One's infrastructure and facilities.

44    It may be inferred from these notations that Mr Mollett:

(1)    reviewed the SMARTS Alerts triggered by Mr Tang's trading on 8 and 9 February 2011;

(2)    gave some consideration to potential explanations for Mr Tang's trading;

(3)    contacted the Amscot manager (Mr Nofal) for an explanation; and

(4)    was given, and accepted, Mr Nofal's explanation for the trading.

Mr Tang's trading on 1 and 2 March 2011

45    On 1 and 2 March, Mr Tang placed further orders, including amendments to the Initial Tang Orders, new orders to buy TIS shares and amendments to those new orders. Those orders comprised six amendments to the Initial Tang Orders, 17 new orders to buy TIS shares and 15 amendments to those new orders. State One entered corresponding Bids for each of the Relevant Orders into the Market.

46    During the period 1 to 2 March 2011, State One received 10 SMARTS Alerts triggered by Mr Tang's trading in TIS shares, five of which were received on 1 March 2011.

Mr Tang's trading in the period 3 March to 9 May 2011

47    During March 2011 (including 1 and 2 March 2011), Mr Tang purchased 363,500 shares in TIS through State One and State One received 88 SMARTS Alerts in respect of this period. In April 2011, Mr Tang purchased a further 158,500 shares in TIS through State One and State One received 67 SMARTS Alerts. Also between 1 and 9 May 2011, Mr Tang purchased 99,500 shares in TIS and State One received 21 SMARTS Alerts.

The specific nature of the contravening conduct: Rule 5.7.1(b)

48    The parties agreed that the contravention by State One of r 5.7.1(b) of the Rules was properly described in the following terms:

Having regard to certain of the matters identified in rule 5.7.2 of the ASX Market Integrity Rules, at the times Mr Tang placed 19 of the Orders on 1 and 2 March 2011 (the Relevant Orders), ASIC alleges and State One now admits that it ought reasonably to have suspected that those Orders were placed by Mr Tang with the intention of creating a false or misleading appearance with respect to the market for, or price of, TIS shares.

In particular, having regard to:

a.    the concerns and suspicions raised by the Initial Tang Orders (referred to in paragraphs 65 to 71 below);

b.    the circumstances of the Relevant Orders (referred to in paragraphs 73 to 76 below),

a reasonable Market Participant in the position of State One ought to have suspected that each of the Relevant Orders had been placed with the intention of creating a false or misleading appearance with respect to the market for, or price of, TIS shares.

Therefore, State One contravened rule 5.7.1(b)(iii) of the ASX Market Integrity Rules when it entered Bids into the market pursuant to the Relevant Orders at a time when it ought reasonably to have suspected that Mr Tang had placed those Orders with the intention of creating, a false or misleading appearance with respect to the market for, or the price of, TIS shares.

The Initial Tang Orders

The circumstances of the Relevant Orders include Mr Tang's trading in TIS in the period before 1 and 2 March 2011, in particular his trading in TIS between 8 and 28 February 2011 (the Initial Orders), and the SMARTS Alerts triggered by the Initial Orders.

In that regard:

a.    On the first day of Mr Tang's trading, 8 February 2011, two SMARTS Alerts were triggered. The first was a "Price Driver" alert which noted that the Relevant Account accounted for a disproportionally large number of price increases compared to the volume bought, that is 70% of price increases compared to 23.6% of buying volume. The second alert was a "Significant volume in the last 2 minutes of trading" alert noting that in the last two minutes, Mr Tang initiated trades for 37,000 TIS (being 66.1% of his total daily volume).

b.    On 9 February 2011, Mr Tang's trading in TIS shares triggered a further 4 alerts. While two of the alerts received that day were identical - namely the "Price Driver (House) (Up)" and "Price Driver (Account) (Up)" alerts which noted that Mr Tang's trading had accounted for a disproportionally large number of price increases compared to the volume bought - they were not the only alerts triggered on that day. There were a further two "Pattern" alerts which suggested there might be a pattern of trading over 8-9 February 2011 period.

c.    On 10 February 2011, Mr Tang's trading in TIS shares triggered a further 5 alerts;

d.    On 11 February 2011 Mr Tang's trading triggered 5 more alerts.

Following the receipt of the above alerts, by mid-February 2011, a reasonable Market Participant would have undertaken a preliminary review of the Tang account.

Had this preliminary analysis been undertaken - which would have involved reviewing the trading that triggered the above alerts (using SMARTS) - that would have indicated to a reasonable Market Participant in the position of State One that Mr Tang was responsible for price increases in TIS for the 4 trading days as follows:

a.    8 February 2011: 7 out of 10 price increases (that is 70% compared to 23.6% of buying volume);

b.    9 February 2011: 10 out of 10 price increases (that is 100% compared to 15.5% of buying volume);

c.    10 February 2011: 9 out of 9 price increases (that is 100% compared to 8.9% of buying volume); and

d.    11 February 2011: 7 out of 7 price increases (that is 100% compared to 17.9% of buying volume).

That preliminary analysis would not have dispelled the concerns created by the 8-11 February 2011 SMARTS Alerts, such that a reasonable Market Participant in the position of State One thereafter would have communicated its concerns to the client and sought explanations from its client, questioned staff and would have analysed Mr tang's trading in more detail.

Had that further analysis been undertaken, in the period up to 1 March 2011, a reasonable Market Participant in the position of State One would have identified by that time (i.e. prior to the commencement of trading on 1 March 2011) that Mr Tang's trading in TIS in the period 8-28 February 2011:

a.    appeared inconsistent with the history of or prior recent trading in TIS;

b.    materially altered the market for, or price of, TIS;

c.    appeared to have been timed to restore or increase the price of TIS; and

d.    generally exhibited the following patterns:

i.    the entry of a low price Bid which was later amended, shortly after a fall in the price for TIS, to the priority offer price at reduced volume, resulting in a trade at the priority offer price;

ii.    the entry of a low volume Bid which was subsequently amended, shortly after a fall in the price of TIS, to the priority offer price with no change in volume, resulting in a trade at the priority offer price;

iii.    the entry of a low-price Bid and then a subsequent amendment to the price of the Bid to a price above the priority offer price at a sufficient volume to buy all the volume on offer at the priority offer price together with small volume of TIS at the next higher priority offer price, resulting in a trade at the higher priority offer price;

iv.    the entry of a Bid at the priority offer price for TIS at a level that was higher than the last trade price for TIS, resulting in a trade at the priority offer price; and

v.    setting the closing price for TIS,

(together the Trading Patterns).

By reason of its identification of the matters specified above, a reasonable Market Participant in the position of State One would have suspected by no later than the commencement of trading on 1 March 2011 that Mr Tang had been placing the Initial Orders with the intention of creating a false or misleading appearance with respect to the market for, or price of, TIS. Upon forming that suspicion, a reasonable Market Participant in the position of State One would have immediately suspended Mr Tang's access to State One's IRESS AOP system and required all of his trades to be approved by a DTR.

In the present case, Mr Mollett's notations in his spreadsheet indicate that a senior person at State One monitored the SMARTS Alerts, considered those alerts and made the notations on 8 and 9 February 2011. However, a significant problem with State One's handling of Mr Tang's trading was Mr Mollett's continued reliance on an initial discussion with Mr Nofal. State One failed to take the action outlined in paragraph 67 above, in respect of subsequent continued trading that triggered alerts.

The Relevant Orders

State One did not take this action. Rather, it allowed Mr Tang to access State One's IRESS AOP system (and trade in TIS on 1 and 2 March 2011). On those days, Mr Tang placed 6 amendments to the Initial Orders, 17 new orders to buy TIS and 15 amendments to those new orders. State One through its AOP, entered corresponding Bids for each of those orders into the Market.

A reasonable Market Participant in the position of State One would have appreciated:

a.    the Relevant Orders (being 19 of the orders placed on 1 and 2 March 2011) were inconsistent with the history of or recent trading in TIS. In that regard, by reason of the nature of Mr Tang's trading in TIS in the period 8 to 28 February 2011 (which would have been analysed by the reasonable market participant as summarised immediately above), from the commencement of trading on 1 March 2011, a reasonable Market Participant in the position of State One would have observed a pattern of low volume Bids at high prices which was inconsistent with recent (non-Tang) trading on the ASX;

b.    at the time the Relevant Orders were placed, Tang had an apparent interest in creating false or misleading appearance with respect to the market for, or the price of, TIS because of the size of his holding of TIS, which was 612,500 TIS at the commencement of trading on 1 March 2011;

c.    17 of those 19 Relevant Orders:

i.    fell into one or more of the following Trading Patterns, including:

1.    7 (namely Bids 141, 143, 144 on 1 March 2011 and 148, 150, 151 and 156 on 2 March 2011) being the entry of a lower price Bid which was later amended, shortly after a fall in the price for TIS, to the priority offer price at reduced volume, resulting in a trade at the priority offer price;

2.    5 (namely Bids 139, 140, 146 on 1 March 2011 and 147 and 153 on 2 March 2011) being the entry of a low volume Bid which was subsequently amended, shortly after a fall in the price of TIS, to the priority offer price with no change in volume, resulting in a trade at the priority offer price;

3.    4 (namely Bids 142 on 1 March and 145, 152 and 157 on 2 March 2011) being the entry of a low-price Bid and then a subsequent amendment to the price of the Bid to a price above the priority offer price at a sufficient volume to buy all the volume on offer at the priority offer price together with small volume of TIS at the next higher priority offer price, resulting in a trade at the priority offer price;

4.    1 (namely Bid 154 on 2 March 2011) being the entry of a Bid at the priority offer price for TIS at a level that was higher than the last trade price for TIS, resulting in a trade at the priority offer price;

5.    2 (namely Bids no. 142 on 1 March 2011 and 156 on 2 March 2011) that were likely to mark the close; and

6.    11 (namely Bids no. 140, 141, 144 on 1 March 2011) and Bids no. 147, 148, 150, 151, 152, 153, 154 and 156 on 2 March 2011) that had the effect of restoring the price of TIS shares to that which Mr Tang had previously paid before a non-Tang trade caused the price to fall;

ii.    appeared to constitute an unusual series of orders which materially altered the market for and increased the price of TIS shares; and

d.    the remaining 2 of those Relevant Orders were for an unusually large volume of TIS shares and were placed at a price well below the best Bid and thus appeared to lack any legitimate commercial reason for their placement.

By reason of the matters above, ASIC alleges and State One admits that it ought reasonably have suspected that Mr Tang had placed the 19 Relevant Orders with the intention of creating a false or misleading appearance with respect to the market for, or price of, TIS.

Accordingly, in entering into the Market each of the 19 Bids (that corresponded to the 19 Relevant Orders), State One acted contrary to rule 5.7.1(b)(iii) of the ASX Market Integrity Rules.

The specific nature of the contravening conduct: Rule 5.5.2(b)

49    The parties agreed that the contravention by State One of r 5.5.2(b) of the Rules was properly described in the following terms:

ASIC alleges and State One admits that it did not maintain the necessary organisational and technical resources with respect to post-trade alert systems to ensure compliance with rule 5.7.1(b)(iii) of the ASX Market Integrity Rules. That is so for the following reasons.

First, in the period 10 February 2011 to 9 May 2011, State One did not have in place sufficient management and supervisory arrangements to ensure compliance with rule 5.7.1(b)(iii).

Mr Mollett had the qualifications and experience referred to in paragraph 45 above, but State One applied insufficient resources to ensure he would appropriately respond to SMARTS Alerts, particularly those generated by AOP trading. That is evidenced by the way that Mr Mollett dealt with Mr Tang's trading particularly during the period 8 to 28 February 2011. What Mr Mollett did in response to Mr Tang's trading before the Relevant Orders were placed was to make an enquiry with Mr Nofal and made two notations on his spreadsheets. He subsequently did not conduct sufficient analysis or take additional steps to inform himself about Tang's trading.

State One received two ASIC notices in respect of Mr Tang's trading on 15 and 28 April 2011: see SOAF [60] and Annexures "17" and "18" but these did not cause Mr Mollett to investigate further Mr Tang's trading despite the consistent receipt of SMARTS Alerts in respect of that trading throughout the period until 9 May 2011.

The State One Plans, Policies and Procedures, did not provide clear guidance to State One employees responsible for reviewing SMARTS Alerts in the period from 8 February to 9 May 2011 on what to do in response to receiving those alerts. State One's policies and procedures should have informed Mr Mollett that it was necessary to conduct more substantial analysis of trading that triggered multiple SMARTS Alerts over a sustained period.

State One should also have prevented State One from allowing Mr Tang to continue trading after one of its managers (Mr Nofal) had identified substantial concerns. Its failure to do so was not merely Mr Nofal's error. It was also State One's failure.

Further, in the period 10 February 2011 to 9 May 2011, ASIC alleges and State One admits that it contravened rule 5.5.2(b) of the ASX Market Integrity Rules by failing to maintain the necessary organisational and technical resources with respect to post-trade alert systems to ensure that it complied with rule 5.7.1(b)(iii) of the ASX Market Integrity Rules.

Declaratory relief

50    Section 1317E(1) provides that if the court is satisfied that there has been a contravention of a civil penalty provision (which includes s 798H) then it must make a declaration of contravention. On the evidence and given the admitted facts and the character of the contravening conduct I am so satisfied.

Pecuniary penalties: principles to be applied

51    The principles to be applied by the court in determining penalty are well established. It is a discretionary task that requires an appropriate penalty to be determined having regard to the statutory maximum and all relevant considerations by a process of instinctive synthesis rather than a mechanical calculation: Australian Securities and Investments Commission v Adler [2002] NSWSC 483 and Wong v The Queen [2001] HCA 64; (2001) 207 CLR 584 at [74]-[76].

52    A pecuniary penalty order is primarily if not wholly protective in promoting the public interest in compliance and seeks to put a price on future contraventions that is sufficiently high to deter repetition by the contravener and others who might, but for the level of penalty, consider engaging in the same conduct: Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate at [55].

53    Ultimately, if a penalty is devoid of sting or burden, it may not have much or any deterrent effect and will be unlikely to achieve its statutory object: Australian Building and Construction Commissioner v Construction, Forestry, Maritime, Mining and Energy Union (No 2) [2018] FCA 1211 at [116]. However, the penalty should not be so large as to be oppressive or crushing in its totality when compared to the total contravening conduct: Stuart-Mahoney v Construction, Forestry, Mining and Energy Union [2008] FCA 1426 at [60].

54    The factors in the non-exhaustive list propounded by French J (as his Honour then was) in Trade Practices Commission v CSR Limited [1990] FCA 521 have been frequently approved of and applied. I have had regard to those factors. I deal below with the matters of particular significance in this case. However, before doing so it is necessary to consider whether the fact that the agreed penalties in this case are lower than the penalties offered to State One as part of an infringement notice process that preceded the present proceedings is a matter that should cause me to reject the agreed penalties as not being appropriate.

The significance of the amount of an infringement notice penalty

55    Part 7.2A (Division 2) of the Corporations Regulations 2001(Cth) (Regulations) set out an infringement notice scheme under which a person who is alleged to have contravened s 798H of the Act may do certain matters as an alternative to civil proceedings: see reg 7.2A.02. If ASIC has reasonable grounds to believe that a person has contravened s 798H of the Act, ASIC may give the person an infringement notice in relation to the alleged contravention: reg 7.2A.04.

56    On 31 March 2016, ASIC served an infringement notice on State One for contravention of r 5.7.1(b)(iii) and r 5.5.2(b) of the ASX Market Integrity Rules. The infringement notice covered a broader scope of alleged contravention but arose from the same facts as were alleged in these proceedings.

57    The penalty identified in the infringement notice reflected the penalty that the Markets Disciplinary Panel had decided was the appropriate penalty be imposed in respect of its earlier finding that State One had breached r 5.7.1(b)(iii) and r 5.5.2(b) of the ASX Market Integrity Rules. The maximum penalty that could be included in such an infringement notice was $600,000 (ie three-fifths of the maximum penalty) for each of the contraventions: see s 798K(2) of the Act. That is to be contrasted to the $1,000,000 maximum penalty for each contravention that may be imposed by the Court.

58    The parties have agreed the following facts for the purposes of assessment of penalty concerning the infringement notice process:

Commencing in 2011, ASIC reviewed State One in respect of Mr Tang's trading and the organisational and technical resources it had in place to ensure compliance with the ASX Market Integrity Rules.

In the course of its review, ASIC served on State One statutory notices in respect of Mr Tang's trading, including notices on 15 and 28 April 2011, copies of which are annexed and marked "17" and "18".

ASIC referred its investigation to the Markets Disciplinary Panel in August 2014. The MDP is a peer review panel from which sitting panels are drawn to make decisions about whether infringement notices should be issued or enforceable undertakings should be accepted for alleged breaches of the market integrity rules (including the ASX Market Integrity Rules) by Market Participants.

On 8 September 2015, the MDP gave a written decision and concluded that it considered that it "had reasonable grounds to believe that State One has failed to comply" with rule 5.7.1(b)(iii) and rule 5.5.2(b) of the ASX Market Integrity Rules and had thereby contravened s.798H(l) of the Act.

After the receipt of written submissions from the parties as to the appropriate pecuniary penalty, sanction and/or remedy to be imposed, in written reasons provided on 31 March 2016, the MDP decided that the appropriate total pecuniary penalty to be applied in the infringement notice to be given to State One was $425,000 which comprised $275,000 for State One's contravention of rule 5.7.l(b)(iii) of the ASX Market Integrity Rules, and $150,000 for State One's contravention of rule 5.5.2(b) of the ASX Market Integrity Rules.

59    The infringement notice was not paid by State One.

60    In Australian Securities and Investments Commission v Superannuation Warehouse Australia Pty Ltd [2015] FCA 1167, Beach J had to consider the penalty to be imposed upon a respondent in a case where ASIC had issued an infringement notice with a specified penalty of $10,200. The respondent had responded to the infringement by requesting that it be withdrawn. ASIC then conducted an investigation and brought court proceedings.

61    Beach J found at [94] that the infringement notice had been issued in respect of part of the contravening conduct. However, it was an indication that ASIC considered the conduct to be at the lower end of the spectrum. His Honour then found that the fact that the respondent refused to pay the penalty specified was a relevant factor to be taken into account in determining penalty.

62    Then at [95], his Honour said:

Moreover, fixing a pecuniary penalty amount lower than the infringement notice would involve error. The principle of deterrence would not otherwise be adhered to. But as I have said, ASIC accepts that this contravention is at the lower end of offending.

63    His Honour then referred at [96] to other decisions where there had been regard to the amount of a penalty specified in an infringement notice as relevant in determining the quantum of penalty.

64    Then, in concluding the passage, his Honour said:

The relativity in each case between the amount stipulated in the infringement notice and the ultimate penalty imposed is not unhelpful to my consideration of the quantum that should be set in the present case relative to the infringement notice amount in the present case.

65    Later at [108] in summarising his conclusion on penalty, Beach J said that the infringement penalty amount of $10,200 does provide some guide in the present case. His Honour noted that the respondent 'accepts that a lower penalty than $10,200 would be inappropriate'.

66    Therefore, it appears that there was no issue between the parties as to whether there might be circumstances in which a penalty that was lower than the amount in the infringement notice might be appropriate. I do not take the statements by Beach J as indicating that there must be regard to any penalty stated in an infringement notice in every case, nor that the penalty must be greater than the infringement amount. Rather, in the circumstances of that case to set a lower penalty would involve error because it would not operate as effective deterrence. This may well be the position in many cases because the infringement notice process is designed to operate in a way that establishes a penalty that is less than the penalty that would be expected to be imposed if the matter was considered by a court. It is designed to encourage acknowledgement of contravention and resolution of the matter in the public interest.

67    In Australian Securities and Investments Commission v Huntley Management Limited [2017] FCA 770 at [43], Perram J said:

It seems to me that an appropriate penalty having regard to all of these matters is $10,000 for each newspaper advertisement and $20,000 for the website. This makes for a total of $40,000 which is just under twice the penalties specified in the infringement notices. I would reserve for fuller consideration the issue of what the relationship is between this Court's assessment of a penalty and the amount of a penalty appearing in a penalty notice. Obviously enough, ensuring that this Court's penalty is generally larger will give persons receiving an infringement notice an incentive to pay it. There may be two objections to this practice, however. First, it may permit the authority imposing the penalty to set a floor under this Court's penalty. Secondly, it is not necessarily clear that encouraging the payment of penalty notices is within the scope of this Court's functions in imposing penalties. Whilst noting the size of the penalty notices, I have therefore decided that I will treat them as a neutral factor: cf ASIC v Superannuation Warehouse at 219 [94]-[96].

68    In addition to those matters, there are at least two further reasons why there may be objections. First, the prospect that there may not be a complete coincidence between the forensic materials available when the amount included in the infringement notice was considered compared to the evidence upon which the contravention was admitted. Second, the Regulatory Guide that is used to determine the penalty to be included in an infringement notice adopts a structured approach that is different to the instinctive synthesis that is required to be undertaken by the court.

69    In this case, the parties provided the following agreed explanation for the agreed penalty being less than the infringement notice amount, which explanation I accept.

a.    the MDP is not bound by the rules of evidence and the evidence that State One led before the MDP was different to that it led before the Court. State One provided lay and expert evidence before the MDP. In the Court proceedings it proposed to lead materially different evidence from a different expert witness. Further ASIC did not rely on any expert evidence before the MDP;

b.    the Bids the subject of the contravention found by the MDP were referrable to all of the Bids placed by State One on 1 and 2 March 2011 in respect of Mr Tang's Orders for TIS. That is to be contrasted to the present case where ASIC only alleged, and State One has only admitted, that 19 of the Bids placed by State One on 1 and 2 March 2011 were placed in contravention of rule 5.7.1(b)(iii) of the ASX Market Integrity Rules;

c.    the matters guiding the MDP were provided by section E of Regulatory Guide 216 which guided the MDP to determine penalty according to a "tiered" approach. That is not something that binds this Court;

d.    the MDP did not consider the totality principle warranted a reduction of the two pecuniary penalties imposed by it (and reflected in the infringement notice) and considered the separate penalties appropriate. In the present case… the course of conduct and totality principles ought to be applied by the Court.

Important factors relevant to penalty in this case

70    In my view, the agreed penalty is appropriate in this case and the following considerations are of particular importance in reaching that view.

71    First, State One's conduct undermined the integrity and efficiency of the market for TIS shares. However, the contravention involved a failure to investigate a client's conduct rather than a complete disregard of the obligations imposed by the Rules. The contravention of r 5.5.2.(b) was a consequence of an insufficiency in committed resources, rather than a lack or deficit in resources committed to ensure compliance with the Rules.

72    Second, State One did not promptly engage with ASIC's concerns about the trading of Mr Tang when they were raised.

73    Third, State One's conduct was not deliberate.

74    Fourth, State One did not derive a substantial gain from its conduct.

75    Fifth, State One is a small to medium sized business with the consequence that the total penalty (combined with an agreement to contribute $150,000 to ASIC's costs) will have a specific as well as a general deterrent effect.

76    Sixth, although late, State One has cooperated with ASIC since reaching a settlement and the fact of settlement itself lessens concerns about a future compliance.

77    Seventh, State One has taken actions to improve its compliance policies and procedures indicating its preparedness to take constructive steps to prevent a recurrence of similar conduct.

78    Eighth, in the present case there is an inter-relationship between the legal and factual elements of the contraventions which occurred as a result of the same conduct by State One over 1 and 2 March 2011 which is properly viewed as a single episode of wrongdoing.

79    Ninth, the conduct involved Mr Mollett who had a senior role as a director and executive of State One and a member and chair of the Compliance and Administration Committee with responsibility to monitor SMARTS Alerts. Mr Nofal was also a senior executive.

80    Finally, this is not a case where there is shown to be a pervasive culture of failing to commit organisational and technical resources to ensure compliance with the Rules.

Conclusion

81    For the above reasons I accepted the joint submissions and agreed facts and made declarations and orders for payment of pecuniary penalties in the terms agreed between the parties.

Associate:

Dated:    23 November 2018