The trial in ASIC’s complex share market manipulation action against Whitebox Trading began Monday, with an opening submission by the corporate regulator that at times had even the presiding judge scratching his head.
Barrister for the Australian Securities and Investments Commission, John Halley, SC, gave the court a crash course in the index arbitrage trading at the centre of the case, detailing how Whitebox and its sole director Johannes Boshoff allegedly created spikes in the price of securities on the S&P/ASX 200 Index on five occasions in 2012.
But confusion abounded when Halley presented the court with a detailed table describing the use of share price index (SPI) futures and XJO stocks to cause price spikes, with Justice David Yates conceding he was “not quite sure what’s happening”.
Whitebox barrister Richard McHugh, SC, commiserated: “If it’s any comfort for Your Honour, we’ve been dealing with this for five years and we both struggled with this,” he said.
ASIC commenced proceedings against Whitebox in March 2016, claiming the firm and its director, as contractors for National Australia Bank, contravened the Corporations Act by artificially inflating prices for trading index securities, and manipulating the market by making false orders for securities when they did not wish to trade.
Halley told the court that Whitebox was suspected of making the placement and cancellation or amendment of “very large orders which had no realistic prospect of trading” within microseconds of a futures auction, a move which could artificially inflate the profitability of the transactions.
“Whitebox well understood the impact of withdrawing or cancelling its orders immediately prior to the opening single price auction,” he told Judge Yates.
The case went before the Full Federal Court in June last year on the question of whether ASIC was required to prove fault under Chapter 2 of the Criminal Code in order to gain civil remedies under the Corporations Act for offering securities without a current prospectus.
The appeals court ruled that Chapter 2 “is not engaged in, and does not apply to, proceedings brought for a contravention of a civil provision, including a civil penalty provision”.
The regulator is seeking penalties paid to the Commonwealth as well as orders that both Whitebox and Boshoff be banned from offering financial services.
In December 2013, NAB entered into an enforceable undertaking regarding the price spike allegedly caused by Whitebox’s conduct. The bank agreed to the adoption of ASIC-supervised monitoring and control systems for its direct market access trading over three years and made a voluntary contribution of $2 million to fund independent financial literacy projects in Australia.
Halley will continue his opening submission tomorrow.
ASIC is represented by Johnson Winter & Slattery. Whitebox is represented by Thompson Eslick Solicitors.
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