Australian Securities Commission v Nomura International PLC [1998] FCA 1570

FEDERAL COURT OF AUSTRALIA AUSTRALIAN SECURITIES COMMISSION v NOMURA INTERNATIONAL PLC NG 3045 of 1997 SUMMARY Introduction In accordance with the practice of the Federal Court in other cases of public interest, Sackville J has prepared this brief summary to accompany the reasons for judgment, delivered today. It must, of course, be emphasised that the only authoritative pronouncement of the Court's reasons is that contained in the published reasons for judgment. This summary is intended to assist in understanding the principal conclusions reached by the Court, but is necessarily incomplete. Summary of Judgment The applicant ("the ASIC") seeks declarations and injunctions against the respondent ("Nomura"). Nomura is a company incorporated in the United Kingdom. At the relevant times, it did not have any permanent presence in Australia. The ASIC says that Nomura, by transactions carried out on its behalf on 29 March 1996 on the Australian Stock Exchange ("ASX") and the Sydney Futures Exchange ("SFE"), contravened the Corporations Law and the Trade Practices Act 1974 (Cth). In effect, the ASIC says that Nomura manipulated the market for securities on the ASX, taking advantage of the opportunities provided by lower liquidity and trading volumes on the ASX compared with some overseas exchanges. Nomura was a stock index arbitrageur. Towards the end of March 1996, it had established an arbitrage position in index futures traded on the SFE, known as SPI Contracts, and in securities traded on the ASX. Its holdings were very large. Nomura held 10,912 sold March 1996 SPI Contracts due to expire on 29 March 1996. It held a "matching" basket of securities, as part of its arbitrage position, worth about A$600,000,000. Nomura allowed the SPI Contracts to go to expiry on 29 March 1996. The expiry price of the SPI Contracts was determined by the level of the All Ordinaries Index ("All Ords") on that day. The understanding of Nomura's traders (which was not entirely accurate) was that the closing level of the All Ords was determined by the weighted average of the closing price of the 353 securities comprised within the All Ords. Nomura adopted strategies which, according to it, were designed to capture the profit from the arbitrage position it had built up by 29 March 1996. The strategies adopted by it were complex. The two key strategies, however, were the "March Sale Orders" and the "Bid Basket". The March Sale Orders comprised instructions given by Nomura to ten separate brokers. These required the brokers to sell Nomura's basket of securities very aggressively near to the close of trading on 29 March 1996. The brokers were instructed, in substance, to sell without being concerned about the extent of any drop in price that extremely aggressive selling would produce. An important feature of the case is that many of the securities covered by the March Sale Orders were "illiquids" - that is, they were thinly traded on the ASX. Accordingly, there was a very limited opportunity for "latent demand" for these illiquids to emerge during the brief period of aggressive selling contemplated by Nomura. The second key aspect of Nomura's strategy on 29 March 1996 was the placement of the Bid Basket. This consisted of buy orders for the same securities and in the same quantities as the March Sale Orders. However, the broker responsible for placing the Bid Basket was instructed to record bids at prices substantially below the last traded price of each security. In the case of the most illiquid securities, the bid price was 20 per cent less than the last recorded sales. For a variety of reasons, most of the brokers entrusted with the March Sale Orders did not fully comply with their instructions. Even so, in the case of two securities, Nomura's aggressive selling at the close of trading on the ASX produced the result that it "hit" its own Bid Basket. That is, in two cases brokers implementing the March Sale Orders "hit" bids placed on Nomura's behalf in the Bid Basket. Since the Bid Basket recorded bids well below the previous sales, the effect was that Nomura "bought" its own securities at depressed prices. The judgment finds that, had the brokers responsible for the March Sale Orders carried out their instructions fully, the Bid Basket would have been hit on many more occasions and Nomura would have completed many more self-trades. Nomura's position was that, in implementing these and other strategies, it was merely acting as an index arbitrageur, legitimately endeavouring to realise profits from the unwinding of the arbitrage position it had established. Nomura accepted that it was a price-insensitive seller of securities. However, it contended that the sale of these securities in this manner was an inevitable consequence of unwinding the arbitrage position it had established. The judgment finds that Nomura was not in fact a price-insensitive seller of securities on the ASX. Nomura wished to realise a profit from its arbitrage position. But the strategies devised on its behalf were intended to lower the price of securities included in 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. It intended to bring this about, in part, by self-trades at depressed prices. The judgment finds that Nomura's motivation was to obtain "speculative" profits from the expected fall in the price of securities and the consequential fall in the closing level of the All Ords and the expiry price of SPI Contracts. In short, the judgment finds Nomura endeavoured to "move the close" in its trading on the ASX. That it enjoyed limited success in its endeavours was due to failures of communications, the inability or unwillingness of brokers to implement instructions and a degree of ineptitude on Nomura's part. The judgment reaches the following conclusions on the principal legal questions in the case: (i) In two instances, by the combined operation of the March Sale Orders and the Bid Basket, Nomura both 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 and 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 the illiquid securities held by it on the same day. Nomura's conduct in this respect contravened s 998(1) of the Corporations Law. (iii) In the alternative to (ii), Nomura engaged in conduct likely to create a false and misleading appearance of active trading on the ASX in illiquid securities held by it on 29 March 1996. For this reason, as well, it contravened 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 the price for dealings in contracts in the futures market. It thereby contravened s 1260(1)(b) of the Corporations Law. (v) Nomura's conduct in placing in the Bid Basket the March Sale Orders also contravened s 995(2) of the Corporations Law and s 52(1) of the Trade Practices Act. (vi) Other strategies adopted by Nomura on 29 March 1996 also involved contraventions of s 995(2) and s 998(1) of the Corporations Law and s 52(1) of the Trade Practices Act. The ASIC has been directed to draft declarations to give effect to the reasons for judgment. The parties will have an opportunity to make further submissions on what other orders, if any, should be made. Sydney, 10 December 1998.