Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Schlaepfer v Australian Securities & Investments Commission [2021] NSWCA 129 Hearing dates: 28 July 2020 Decision date: 30 June 2021 Before: Meagher JA at [1] White JA at [2] McCallum JA at [111] Decision: (1) that the primary judge's order as to costs be vacated; (2) that the appeal otherwise be dismissed; (3) that Mr Schlaepfer pay one third of the costs of the proceedings below and of the appeal. Catchwords: DEFAMATION – Publication – Slander – Where appellant relied on contemporaneous email to prove publication of the words allegedly said – Whether slander proved in the terms pleaded – Whether appellant identified by the matters complained of – Whether imputations complained of by appellant conveyed to the ordinary reasonable listener DEFAMATION – Defences – Defence of qualified privilege at common law and under Defamation Act 2005 – Whether reasonableness required to be proved to establish defence at common law having regard to defence as pleaded – Whether reasonableness established – Defence of justification – Where ASIC sought to establish truth of imputation of market manipulation without attempting to establish the individual trading of any particular trader or pod of traders – Contention that the relevant company had engaged in the impugned conduct on "any one or more" of 23 "occasions" – Expert opinion evidence concerning proof of impugned conduct by the establishment of certain metrics observed in the company's trading – Whether sufficient to establish truth defence Legislation Cited: ASIC Market Integrity Rules (Securities Markets) 2017 (Cth), r 5.6.12 Australian Securities and Investments Commission Act 2001 (Cth), ss 1, 11(4), 12A(2),(6) Civil Procedure Act 2005 (NSW), s 56 Corporations Act 2001 (Cth), ss 761A, 798F, 798G, 1041A,1041B,1308A, 1311 Criminal Code (Cth), s 11.3 Defamation Act 2005 (NSW), ss 25, 30 Supreme Court Act 1970 (NSW), s 101 Cases Cited: Amalgamated Television Services Pty Ltd v Marsden (1998) 43 NSWLR 158; [1998] NSWSC 4 Brooks v Fairfax Media Publications Pty Ltd (No 2) [2015] NSWSC 1331 Chase v News Group Newspapers Ltd [2002] EWCA Civ 1772 Corby v Allen & Unwin Pty Ltd [2014] NSWCA 227 Cush v Dillon; Boland v Dillon (2011) 243 CLR 298; [2011] HCA 30 Director for Public Prosecutions (Cth) v JM (2013) 250 CLR 135; [2013] HCA 30 Dyson v Associated Newspapers Ltd [2020] EWHC 188 Fairfax Media Publications Pty Ltd v Pedavoli [2015] NSWCA 237 J'Anson v Stuart (1787) 99 ER 1357 Lange v Australian Broadcasting Corporation (1997) 189 CLR 520; [1997] HCA 25 Lindholdt v Hyer [2008] NSWCA 264 Papaconstuntinos v Holmes a Court (2012) 249 CLR 534; [2012] HCA 53 Prince v Malouf [2014] NSWCA 12 Radio 2UE Sydney Pty Ltd v Chesterton (2009) 238 CLR 460; [2009] HCA 16 Readers Digest Services Pty Ltd v Lamb (1982) 150 CLR 400; [1982] HCA 4 Reynolds v Times Newspapers Ltd [2001] 2 AC 127; [1999] UKHL 45 Salomon v Salomon [1897] AC 22 Wootton v Sievier [1913] 3 KB 499 Category: Principal judgment Parties: Daniel Schlaepfer (Appellant) Australian Securities & Investments Commission (First Respondent) Greg Yanco (Second Respondent) Representation: Counsel: RG McHugh SC, M Richardson, A Harding (Appellant) J Hmelnitsky, M Lewis, PJ Holmes (Respondents) Solicitors: Mark O'Brien Legal (Appellant) Ashurst (Respondents) File Number(s): 2019/383494 Publication restriction: None Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Common Law Division Citation: [2019] NSWSC 1644 Date of Decision: 26 November 2019 Before: Fagan J File Number(s): 2016/342827 [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] HEADNOTE [This headnote is not to be read as part of the judgment] The appellant, Mr Daniel Schlaepfer, was the principal, director and ultimate beneficial owner of a company, Select Vantage Inc, which traded on stock markets worldwide, and the sole shareholder of Merlito Securities Company Ltd, the company through which Select Vantage traded on Australian stock markets. Select Vantage's trading activity was undertaken by a large number of individual traders, organised across a number of trading locations (pods), whom it permitted to day-trade with its capital. Select Vantage retained a significant portion of the net revenue of its traders and remitted the balance to the manager of the relevant pod for distribution to the traders in that pod. In November 2014, the respondent, the Australian Securities and Investments Commission (ASIC), became concerned that Select Vantage and Merlito were engaging in a form of market manipulation known as "layering". Without notice to Mr Schlaepfer, ASIC sought, successfully, to persuade the companies' existing Australian stockbroker to terminate Merlito's trading account. (A previous broker had closed Merlito's account in August 2014, albeit for reasons which remain unclear on the evidence.) ASIC's head of market supervision, Mr Greg Yanco, then had a series of telephone calls and in person meetings with senior executives of other major stockbrokers to warn them of ASIC's concerns. After all but the last of these conversations had taken place, ASIC published a market surveillance update which noted that an overseas firm had recently had its market access terminated by two brokers. The update also referred to regulatory action for layering taken against Select Vantage in Japan and by the UK Financial Services Authority against another company, Swift Trade Inc, and described a "former trader at Swift" as the founder and owner of Merlito and Select Vantage. Mr Schlaepfer commenced proceedings for defamation. Relying on an email sent by one of the executives shortly after he spoke with Mr Yanco as evidence of the substance of what Mr Yanco had said, Mr Schlaepfer claimed that Mr Yanco's statements on each of the relevant occasions conveyed a number of defamatory imputations, including that Mr Schlaepfer was engaging in unlawful market manipulation, and true innuendoes, including that Select Vantage and Merlito had engaged in stock market manipulation and that they had engaged in market manipulation serious enough to cause two stockbrokers to terminate their relationships with the companies. ASIC denied that Mr Yanco had made statements in the terms pleaded and contended that Mr Yanco's actual statements did not identify Mr Schlaepfer and did not convey any of the pleaded imputations or true innuendoes. It also pleaded the defences of qualified privilege (both at common law and under Defamation Act 2005 (NSW), s 30) and justification (Defamation Act, s 25). As to the latter, ASIC contended that, at the start of the day's trading, Select Vantage traders, acting in concert, would establish a substantial long position in a thinly traded stock. They would then attempt to create a false impression of demand by placing bids for large numbers of shares at prices sufficiently below the highest competing bids to make them unlikely to be filled. The intended effect (so it was contended) was to place upwards pressure on the share price. Over the course of the day the traders would maintain a large volume of these non-genuine bids, cancelling and resubmitting or amending them to ensure they were unlikely ever to execute, and unwind their long position with the benefit of the rising prices. The principal evidence in support of ASIC's justification case was the expert evidence of Professor Putnins, whose conclusion was based on 10 statistical measures of stock market activity (metrics) which, in his opinion, were indicative of layering, and statistical tests for coordination in the trading activity of Select Vantage traders. The primary judge preferred Mr Yanco's evidence of what he had said during the phone calls and meetings to the email relied on by Mr Schlaepfer. His Honour concluded that Mr Schlaepfer was not identified by Mr Yanco's statements; that the words said by Mr Yanco did not convey any of the imputations or innuendoes pleaded; that the statutory and common law defences of qualified privilege were made out and not defeated by malice on ASIC's part; and that although Mr Schlaepfer was not personally involved in any wrongdoing, the innuendo that Select Vantage and Merlito had engaged in stock market manipulation was substantially true, having regard to Professor Putnins' metrics and the evidence of coordinated activity. Mr Schlaepfer appealed. The issues on appeal were: (i) Whether the primary judge erred in not finding the six slanders proved as pleaded (by reference to the contemporaneous email of a party to those communications). (ii) Whether the primary judge erred in finding that Mr Schlaepfer had not been identified, in view of the market surveillance update, issued after all but one of the publications, and evidence that some of the recipients of the publications had identified him. (iii) Whether imputations (b), (c) and (d) and true innuendos (a), (b) and (d) were conveyed (there was no challenge to the findings that the remaining imputation and true innuendo were conveyed). (iv) Whether the defences of qualified privilege at common law and under Defamation Act, s 30 were made out. (v) Whether Select Vantage and Merlito had been engaging in stock market manipulation. Mr Schlaepfer contended that Professor Putnin's 10 metrics were either simply not indicative of layering or explicable as the product of restrictions on Select Vantage traders' activity (such as their inability to short) and the aggregation of the trading activity data of many individual traders. Held, dismissing the appeal (McCallum JA, Meagher JA agreeing and White JA agreeing subject to two reservations) As to issue (i) by McCallum JA at [176] and [181], Meagher JA and White JA agreeing at [1] and [2]: Mr Couper's contemporaneous email should be accepted as an accurate record of what Mr Yanco said to the six brokers. The primary judge erred in not finding that the six slanders were proved as pleaded. As to issue (ii) by McCallum JA at [191]-[194], Meagher JA and White JA agreeing at [1] and [2]: The primary judge erred in finding that Mr Schlaepfer had not been identified by the matters complained of. As to issue (iii) by McCallum JA at [214] and [221], Meagher JA agreeing at [1], White JA expressing a reservation as to that conclusion at [4]-[6]: The primary judge erred in not finding imputations (b), (c) and (d) conveyed. Imputation (b) was conveyed to any person who knew that layering is a form of market manipulation (which, as the primary judge found, would include all of the recipients of the matters complained of). Imputations (c) and (d) were conveyed in the ordinary and natural meaning of the words said by Mr Yanco. It followed from those conclusions that true innuendos (a), (b) and (d) were also conveyed. As to issue (iv) by McCallum JA at [242], Meagher JA and White JA agreeing at [1] and [2]: The primary judge was correct to hold that the defence of qualified privilege at common law was made out. Accordingly, the appeal should be dismissed. by McCallum JA at [260], Meagher JA and White JA agreeing at [1] and [2]: The fact that Mr Yanco's communications were made without any opportunity for Mr Schlaepfer to respond was fatal to the element of reasonableness required to be established in order to make out the statutory defence. Accordingly, the primary judge erred in holding that the defence of qualified privilege under s 30 of the Defamation Act was made out. As to issue (v) by McCallum JA at [307], [368], Meagher JA agreeing at [1], White JA disagreeing: The evidence adduced by ASIC was insufficient to sustain the defence of justification. It did not establish that Select Vantage or Merlito were engaging in market manipulation. by White JA at [109]: The evidence did not establish the truth of the imputations and true innuendoes pleaded. However, the primary judge was correct to find that the evidence of Professor Putnins established that Select Vantage or Merlito were engaging in market manipulation. Judgment 1. MEAGHER JA: I have had the benefit of reading in draft the judgment of McCallum JA and agree, for the reasons her Honour gives, with the orders she proposes. 2. WHITE JA: I have had the very considerable advantage of reading in draft the reasons for judgment of McCallum JA. Subject to two reservations, neither of which is dispositive of the appeal, I agree with her Honour's reasons and I agree that the appeal should be dismissed. 3. These reasons assume a familiarity with the reasons of McCallum JA. 4. My first reservation concerns grounds 5 and 6 of the notice of appeal which challenge the primary judge's conclusion that the imputations alleged by Mr Schlaepfer would not have been conveyed to the stockbrokers to whom the matter was published. Mr Schlaepfer contends that the primary judge ought to have asked whether the imputations would be conveyed to the ordinary reasonable listener. I agree with McCallum JA (at [203]) that the stockbrokers to whom Mr Yanco spoke would be more likely, rather than less likely, to draw the imputations alleged than would an hypothetical ordinary person. 5. Where a plaintiff contends that a defamatory imputation that would not be conveyed to an ordinary reasonable reader, viewer or listener was conveyed because the recipients of the defamatory publication were in a narrow or specialised field, it is necessary for the plaintiff to plead by way of true innuendo the special facts known to those recipients which are alleged to convey the defamatory imputation to them (Readers Digest Services Pty Ltd v Lamb (1982) 150 CLR 400; [1982] HCA 4 at 505-506; Radio 2UE Sydney Pty Ltd v Chesterton (2009) 238 CLR 460; [2009] HCA 16 at [49]-[52], 481-2; Corby v Allen & Unwin Pty Ltd [2014] NSWCA 227 at [180]-[181]). 6. In the present case it was the defendant who contended that the imputations alleged by the plaintiff would not have been conveyed to the particular narrow class of listeners to whom Mr Yanco spoke by reason of special facts known to them. In principle it might be thought that it would be open to a defendant to rely on extrinsic facts that showed that words which, in their natural and ordinary meaning, convey a defamatory imputation did not convey that meaning if these facts were known to all the persons to whom the matter was published (Gatley on Libel and Slander 12th ed at [3.23]). It is unnecessary to pursue this issue as no such extrinsic facts were pleaded by ASIC. In any event, I agree with McCallum JA (at [205]) that the imputations would have been conveyed to the stockbrokers to whom Mr Yanco spoke who had the specialised market knowledge. 7. My second reservation concerns the defence of justification. As McCallum JA observes (at [310]) the only finding this Court is asked by Mr Schlaepfer to review is the primary judge's finding that some orders were placed by Select Vantage traders that were manipulative and in contravention of ss 1041A and 1041B of the Corporations Act though it was not possible to say how many orders were involved or to identify the particular orders or series of orders involved. McCallum JA's decision in Brooks v Fairfax Media Publications Pty Ltd (No 2) [2015] NSWSC 1331 and the authorities to which her Honour there referred establish that that is insufficient to sustain a defence of justification. However, counsel for Mr Schlaepfer said that it was important for his client's reputation for the finding to be addressed by this Court, not only on the sufficiency of the defence raised, but on its merits. I accept that that is so. Mr Schlaepfer submitted that the primary judge had failed to engage with the answers he and Dr Carr propounded to Professor Putnins' evidence. 8. For the reasons which follow, I agree with the primary judge's conclusion. 9. The primary judge summarised the model of trading of Select Vantage's traders as follows: "[20] The business model of Select Vantage involved trading activity of 1,800 individual traders located at various places around the world, each of whom was authorised to use the company's capital to trade on stock markets to which Select Vantage had direct market access through brokers. The company set the parameters of trading. A significant limitation was that only day trading was permitted; that is, each trader could buy and sell shares but had to close out his or her position on each exchange at the end of each trading day. No stock was permitted to be held overnight. [21] The traders were engaged in groups called "pods", each of which had a particular physical location. There was a manager for each pod. A large number of the traders were located in China. Because of the minor difference between that country's time zone and Australian Eastern Standard Time, Select Vantage's Chinese traders were active on the ASX and Chi-X. They were authorised by Select Vantage to trade through Merlito's direct access relationship with Macquarie. The plaintiffs contend that the individual traders were free to place bids and asks and to buy and sell stock according to their individual strategies and decisions. … [81] … About half of Select Vantage's traders were domiciled in China and because of the closeness of the two countries' time zones many of them traded on the Australian market." 1. There was evidence that the traders received a degree of common training and there were remuneration incentives based on group performance. However, there were no incentives for remuneration otherwise than on a pod by pod basis. The performance of multiple pods was not aggregated to calculate remuneration. 2. Both Mr Schlaepfer and Mr Kruyne, an analyst at True North Vantage (a subsidiary in Mr Schlaepfer's group of companies), gave evidence of controls designed to prevent manipulative trading. The primary judge summarised the evidence of Mr Kruyne on this issue (at [249]-[250]): [249] Mr Kruyne said that Select Vantage's trade surveillance team had remained fairly constant at five analysts during 2013 and 2014. Throughout those years, the filters in Select Vantage's software known as Ginger were set to raise an alert if, following execution of a trade, there was a cancellation of orders on the opposite side of the book within 10 seconds. That criterion remained the trigger for identification of layering throughout 2014. In cross-examination it was clarified that an opposite-side cancellation within 10 seconds would not engage the alert if the cancelled order had been resting on the book for a significant period of time. For other types of manipulation another filter was in place. This identified any placements and cancellations of orders in quick succession. The surveillance team also carried out analysis to try to identify collaboration in the placement of orders between traders in different locations around the world. [250] Mr Kruyne said that in 2014 Select Vantage's filters on the entry of orders restricted its traders to 3 orders per side per exchange per stock. Combining the ASX and Chi-X, a trader could have six bids and six asks resting at any time on a particular stock. Attempts by traders to place orders in excess of this limit would be blocked before the orders could reach the broker's electronic placement system. Some traders were granted exemption from this limit and could place a higher number of orders. However Macquarie itself set an upper limit of five orders per side per exchange per stock. 1. It is important to say something more on two of the constraints on the traders. Traders were prohibited from holding stock overnight and were constrained from short-selling. Neither the short-selling constraint nor the prohibition on holding stock overnight was considered by Professor Putnins in analysing the trade data until the hearing. The short-selling constraint was explained by Dr He in his oral evidence: "Q. Were there limitations on short selling? A. Yes. … Q. You tell me what the limitation was. A. So, it's against naked short selling. HIS HONOUR Q. Meaning? A. Meaning that you have to have - you don't have to own the shares, but have to have access to, to borrow those shares." 1. The importance of this constraint was pressed by Mr Schlaepfer on appeal as it did not feature in the reasons of the primary judge. It was said to undercut a number of Professor Putnins' metrics as it was said to explain why the traders entered a significant number of buy orders because they were unable to trade until they had access to stock. The prohibition on holding stock overnight was also said to be relevant for the same reason, as no trader could start the day with a long position. Further, the requirement to revert an inventory to zero before the end of the day was said to explain why there was significant selling activity by the traders towards the end of the trading day and particularly in the last half hour. Challenge to the 10 Metrics 1. The primary judge accepted six of Professor Putnins' metrics, rejected one and did not consider three in detail (at [205]). The metrics were explained in detail in Professor Putnins' report. I shall consider them in turn. Metric 1: Unbalanced Quoting 1. This metric looks to the displayed orders in the limit order book to show whether there is an imbalance between bid side and ask side dollar volume. The metric is expressed as a percentage where 0 per cent is equal dollar volume between bid and ask orders and 100 per cent is all dollar value on one side of the market. A market participant who is layering will generate a quoting imbalance as they use the imbalance to create a false impression of the buying or selling interest in a stock in order to influence other traders and drive the stock price either higher or lower. 2. The primary judge summarised Professor Putnins' evidence in relation to unbalanced quoting (at [207]-[209]): [207] … The dollar volume of each order is derived by multiplying the number of shares by the price at which the order is placed. Professor Putnins found that for each stock/day the total dollar volume of Select Vantage's buy orders significantly exceeded the total dollar volume of its sell orders. He worked out the proportion of this excess, the difference between the dollar volume of buys and sells, relative to the combined total of all orders (buy and sell) for the day, expressed as a percentage. The average across all the stock/days was 85%. Professor Putnins carried out the same exercise for all other traders in each of these stock/days and found that their corresponding proportion was 18.1%. [208] Professor Putnins expressed the following conclusion about this highly unbalanced pattern of Select Vantage's ordering (or "quoting"): The resting (unexecuted) limited orders of a layering strategy a given point in time are likely to be highly unbalanced (more buy volume than sell volume or vice versa). The imbalance is used to create a false impression of buying or selling interest in order to influence other participants and market prices. […] On all of the stock-days, [Select Vantage's] average displayed order imbalance is above 50%, reaching levels as high as 98% on some stock-days, and having an average of 85% across all of the stock-days. These levels indicate a strong tendency for [Select Vantage] to have highly unbalanced displayed orders resting in the limit order book. [209] This was further explained in Professor Putnins' oral evidence as follows: Select Vantage has roughly 12 times more quoting activity on the buy side than the sell side, yet they buy and sell equal volumes on a typical day. In other words, putting the quoting activity in perspective relative to the amount of trading activity, there's 12 times more, in other words there's abnormal quoting activity on the buy side of the market. 1. The primary judge relied on this metric in concluding that there was layering of the market. Mr Schlaepfer argues that this metric is unable to indicate layering as any imbalance is explicable by the constraints placed on the Select Vantage traders not considered in Professor Putnins' reports, and by legitimate trading techniques. 2. It can readily be accepted that the need to establish a long position before entering sell orders and the requirement that the traders commence each day with no inventory is a legitimate justification as to why the traders would enter a number of limit orders to purchase stock at the start of continuous trading. In cross-examination Professor Putnins' was unshaken that the addition of this consideration would not impugn the inference of layering that could be drawn from a trigger of this metric: Q. Assuming that that is right, that individual traders could not short sell, could not put on an ask unless they had the stock in hand through earlier filled bids on the day, with that one exception of that one trading day and one stock. Would that have a bearing upon the capacity of the trader to undertake layering in cycle? In other words, to go back from layering up bids and getting an ask accepted to cycle back into layering up asks in hoping to make a bid? Would the constraint upon short selling affect that? A. Not necessarily, your Honour, because what the individual trader could do if they wanted to engage in a cyclical layering strategy is first establish a long position in the stock, then from that point maintaining inventory at a positive level, cycle that inventory up and down and at the end of the day close out that inventory position. What it would prevent is the cyclical trading strategies that are sometimes seen in markets where there is no need to first establish a long position and one can just cycling with long, short, long, short, long short. Q. But from what Mr Harding is saying about the effect of the evidence to date, and we'll just assume that that's correct, in order for the trader collectively to switch back into layering up a lot of asks behind the touch price, with just one bid on the other side in the hope of moving the price down presumably, the traders who did that collectively again, is it correct, would have had to have acquired a substantial quantity of stock and accept the risk of exposure of holding quite a substantial quantity of stock to put it in as a series of asks at various steps? A. That's correct, your Honour. I think it constrains the ability to run a cyclical layering strategy if your constraint is to keep your inventory in a positive domain, and not being able to place asks that exceed your inventory position. Q. Whereas if they layer up on the bid side, there's no question of having to have stock in hand in order to make as many bids as you like, it's just that as you make them, if they are hit and result in trades and are successful, you're going to have to find the money unless you sell out, correct? A. That's correct, your Honour. 1. Although the need to establish a long position at the start of trading may explain the existence of an order imbalance at the start of the day, and so much was accepted by Professor Putnins, it does not explain a very high score on this metric which is indicative of an imbalance that persisted over the course of a whole trading day, rather than merely the first hours of trading. 2. Professor Putnins accepted that a high result on this metric could be consistent with traders acting as speculators. Speculators, who are traders who have a view about the ultimate price direction of a stock, are likely to be unbalanced as they seek to acquire or sell out a long position consistently with their view as to the stock's price trajectory. 3. Mr Schlaepfer submitted that the justification for that imbalance over the course of the day was that it was legitimate for the traders to leave any unfilled or partially unfilled buy orders from the opening period of trading in the hope that they would be filled later in the day at what would presumably be an attractive price. That is, a speculator who believes that over the course of the day a stock will increase in value may leave a limit order at a lower price on the book meaning that if it was to be filled it could hopefully be sold later in the day when the stock is anticipated to be trading at a higher price. 4. Mr Schlaepfer's counsel put such a scenario to Professor Putnins which was accepted: "Q. On those assumptions it might be a perfectly legitimate strategy for a trader with those constraints at the beginning of the day to place one or more non-aggressive buy orders in the hope of obtaining a fill at a favourable price, mightn't it? A. Okay. Q. Do you accept that? A. Yes. Q. For example, a trader who knows that a stock typically trades in the band 20 to 21 cents might place an order at, say, 19 cents in the hope of obtaining a fill at that price in the expectation that the stock would rebound and the trader would be able to exit at 19.5 cents or higher. Do you follow? A. I do, but why place the order at 19 cents when the market is at 20, 21? Q. In the hope that it might move down. A. Why not place it when the market moves down and execute at 19? Q. There's no reason why you couldn't place it down there and then just let it sit there in the hope that the market moves, and in fact that would be a perfectly sensible idea, wouldn't it, in order to obtain queue priority at that price? A. If you obtained queue priority then you should have high execution rates. Q. No, that's not my question? A. Okay. Q. My question was whether the strategy or the scenario that I explained to you might be perfectly commercially sensible and reasonable for a trader who wishes to obtain queue priority at the lower price of 19 cents? A. Sure." 1. This metric was also challenged on the basis of alleged methodological flaws. Dr Carr challenged the utility of this metric as not accounting for the time relationship between the imbalanced quoting and when trades actually execute. This challenge took two forms. First, the metric treats an order imbalance that arises from a trade entered "five hours earlier in the trading day in the same manner as an identical order that was placed immediately before a trade". Secondly, the metric "gives a higher score for cancelled orders that stayed open for a long period of time". 2. If one were looking to draw inferences about when particular orders were entered and cancelled, or the likely price effects of particular orders, then this metric would not be of assistance for the reasons given by Dr Carr. However, as the case mounted by ASIC is one of persistent unidirectional layering over the course of the trading day, the minutiae of the imbalance at particular points in time is not obviously relevant. It is the fact of the imbalance which may create a false impression of demand or market interest which is of relevance. 3. On its own this metric is unable reliably to indicate layering as it cannot exclude legitimate trading practices. A speculator who has a particular view about the price direction of a stock is likely to be highly imbalanced. That view is reinforced when one considers the constraints on Select Vantage traders. Although this metric cannot exclude the trading activity of legitimate speculators it does demonstrate that Select Vantage traders were on average significantly imbalanced in their trading activity and, albeit consistently with the short selling constraint, that the imbalance was due to substantial bid side limit orders. Metric 2: High Quoting Activity 1. Rather than looking to an imbalance between quoting activity on each side of the market, this metric purports to measure the dollar volume of the resting bids and asks attributable to Select Vantage traders as a percentage of the total bids and asks. The metric was expressed as an average over the course of a day's trading where the constitutive data was calculated each time there was a change in the status of the limit order book (i.e. a trade was made or an order was cancelled etc). 2. Professor Putnins observed that over the course of trading in the impugned stocks Select Vantage traders averaged approximately 20 per cent of the total dollar volume of bids and 1.7 per cent of asks. The total range of bid side activity across the various stocks when taken individually ranged from 10.5 per cent to 28.5 per cent. 3. The primary judge summarised the effect of Professor Putnins' evidence as follows (at [211]): Placing a large proportion of the resting orders on one side of the market (buying or selling) is not a typical characteristic of a legitimate short-term speculative trading strategy. Short-term speculators that have a prediction about future price movements usually want to trade in the direction of the predicted price movement with minimum signalling of their trading intention to other market participants. […] The limit orders of a layering strategy are likely to represent a substantial proportion of the depth … on one side of the market (buying or selling) as the layering strategy is attempting to mislead the market. Using a large volume increases the probability that the layering orders have a substantial effect on the appearance of supply or demand and therefore the desired effect of influencing the price or trading decisions of other market participants. […] On average [… Select Vantage's] quoting on the bid side represents about one fifth (20.3%) of all quoting activity (dollar depth) on the bid side. This share ranges from 10.5% to 28.5% indicating a fairly high quoting activity on the bid side of the market … In contrast [Select Vantage's] share of the quoting activity (dollar depth) on the ask side is a mere 1.7% on average – less than one tenth of its quoting on the bidside. [Select Vantage's] quoting on the ask side puts the bid side quoting level into perspective. [… On] a typical stock-day [Select Vantage] buys and sells an equal volume of shares. Therefore, the high volume of bidding does not reflect a tendency to buy more shares than the amount sold. [… There is] 12 times more quoting activity on the bid side than the ask side, even though the volumes bought and sold are approximately (or exactly) equal. This comparison suggests that [Select Vantage's] quoting activity is excessive (by a factor of 12 times) relative to the volume that it buys. 1. Professor Putnins was challenged on this metric in cross-examination on the basis that the short selling constraint and the aggregation of the trading data of traders who never obtain a fill and those who trade actively on both sides of the market might give rise to a misleading impression: Q. But take the case of the other - I forget how many I gave you. I think I said 100 orders placed at the beginning of the day in various parcels by SV traders, only one of which got filled, for the other 99 who might leave their bids on the order book, on your calculations those bids contribute to your calculation of this metric in a manner that indicates layering, is that right? A. They contribute to the imbalance between the bids and the asks. Q. And the level of quoting activity because those particular traders never get the opportunity to place an ask, do they? A. If, yeah, if they, if they don't end up buying and if there's a constraint then they don't sell, right. 1. It may be accepted that there is a risk that this metric would present an inflated figure due to the aggregation of the traders without excluding those traders who never obtain a fill but leave their limit order standing in the hope of being able to trade later in the day. That being said neither expert demonstrated either way what proportion of traders fell into such a category or whether it was of significance. However, should ASIC's case on collusion be made out then the inclusion of such resting orders would be material. Such orders, although never executed, would be consistent with a wider strategy of inflating the perceived bid side interest and liquidity. 2. It was also said that a trigger on this metric was not necessarily indicative of layering as high levels of quoting would be consistent with legitimate trading. Specifically, it was said that high levels of quoting were a feature of liquidity provision strategies where the trader typically seeks to trade on both sides of the market taking advantage of shifts in the spread by providing liquidity to other traders. High levels of quoting would be consistent with both providing liquidity and leveraging profit to be made through executing economically meaningful trades on both sides of the market. 3. Professor Putnins accepted in cross-examination that high levels of quoting could be consistent with liquidity provision strategies however he did not accept that such a strategy was a likely justification when unbalanced quoting was also present in the trading data (metric 1): Q. Thank you, and just one last question. On this particular metric, I just wish to ask one or two further questions. You accept don't you, and I think this table in exhibit P graphically depicts it, that it is to be expected that certain market participants such as liquidity providers will present a substantial proportion of the depth of the market at any one time? A. That is correct. It wouldn't be, it wouldn't be unbalanced though. A liquidity provider may be a substantial proportion of the market overall across both sides but you wouldn't expect for a liquidity provider an imbalance. So say just the 20% number, that could be a large liquidity provider that accounts for 20% of, of the, of the quoting activity. But the imbalance is not a typical characteristic of a liquidity provider. 1. Dr Carr challenged the basal proposition that there should be, generally speaking, equality between the bid and ask side activity as part of a liquidity provision strategy. The debate between the experts went as follows: Professor Putnins: "… Now why is that comparison a relevant one? It's a relevant one because we know from the analysis, and this is something that I think Dr Carr and myself both agree across, across the reports, that Select Vantage tends to buy and sell an equal quantity of shares in a given security on a given day. In other words, they try and not hold inventory positions overnight. Because that happens to be an empirical feature of the data, then if I compare the quoting activity on the buy side with the quoting activity on the sell side, that is in effect holding constant the amount of buying or selling that is executed. What I find in that particular characteristic in my primary report is that Select Vantage has roughly 12 times more quoting activity on the buy side than the sell side, yet they buy and sell equal volumes on a typical day. In other words, putting the quoting activity in perspective relative to the amount of trading activity, there's 12 times more, in other words there's abnormal quoting activity on the buy side of the market." Dr Carr: "Q. Do you wish to respond to that? A. Right, right, and that's, that's, that's exactly what I was thinking earlier when I said this is very significant. The professor seems to make certain implicit assumptions. In this case there's an implicit assumption over here that the number of bids and asks ought to be equal if you are buying and selling equal amounts through the day. He states that we agree that Merlito bought and sold equal amounts through the day. The data shows that. But for that, he seems to expect that the number of bids and the number of asks also must be equal and then he says, well, Merlito put 12 times more bids than asks. But that's not necessarily so. In fact, the rest of the market put on more bids than asks as well. In fact, statistically significantly so. So the presumption that the bids and asks must be equal is not necessarily true. It's not theoretically true and it's not born by the data as well, even on these days. Q. Does that mean that you disagree with Professor Putnins' statement at transcript 987 line 49 that there's abnormal quoting activity on the buy side of the market? A. Yeah, I don't think we have any basis to conclude one way or another." 1. It may be accepted that simply because more bids were entered than asks one cannot conclude that there was trading activity inconsistent with genuine liquidity provision strategies. However, if the imbalance that ASIC propounds here (12:1) is soundly determined then it would be difficult to conclude that such an imbalance was consistent with liquidity provision strategies. The primary judge did not say (at [239]) that where the disproportion between bids and asks is by a factor of 12:1, the trading is ipso facto consistent with layering. However, that disproportion "in combination with other features" may be consistent with layering. 2. Dr Carr challenged the manner in which Professor Putnins calculated the average imbalance of 12:1. Dr Carr undertook his own statistical analysis of the cancellation rates of bids and asks by reference to how long the respective order remained on the limit book prior to cancellation. Taking the trading in ADO on 15 September 2014 as an example: 1. What this demonstrates is that of the total cancelled orders, the asks were cancelled more than twice as quickly when compared to the bids. Some 67 per cent of eventually cancelled bids remained on the limit book for longer than 10 minutes, where only 51 per cent of eventually cancelled asks remained on limit book longer than five seconds. Dr Carr opines that as Professor Putnins calculated this metric by looking to the percentage of the dollar value of orders on each side of the market attributable to Select Vantage traders at each time there was a change in the order book, the result for the bid side depth is inflated as those longstanding orders would be counted in the metric potentially thousands of times. The inverse is true for the ask side where the majority of orders would only be counted in as many calculations as take place within 30 seconds. 2. This metric presents an average over the course of the day's trading. Dr Carr's challenge would be significant if it were necessary to determine the nature of the imbalance at particular points in time, such as within 30 seconds of a trade actually taking place. That was not the issue. The primary judge rightly considered that at times the utility of Dr Carr's challenges to the evidence of Professor Putnins was undermined by his narrow conception of layering (at [237]). ASIC sought to prove the degree of quoting activity on each side of the market and the inferences that can be drawn from their relative differences over the course of a trading day. 3. However, unless the case for collusion can be established by other means, the failure to exclude the potentially high number of traders who never obtain a fill casts doubt on the utility of this metric to indicate layering on the bid side. Should the case for collusion be established then the colour such bids would take would be consistent with layering. On the trading days in question Select Vantage traders accounted for a significant proportion of the resting bid orders throughout the trading day. Metric 3: Abnormal Cancellations 1. The third metric tests for high levels of cancellations as a proportion of total orders. The logic underpinning this metric is simple. The archetypal feature of layering is the entering of orders that are not intended to be executed. 2. The primary judge summarised Professor Putnins' analysis of this metric (at [212]-[214]): [212] Professor Putnins' third measure is an abnormally high rate of cancellation of orders. He worked out the ratio of Select Vantage's order cancellations to the number of its trades, in each stock on each of the relevant days. He found that this varied between 10:1 and 1.9:1 (expressed in his report simply as ratios of "10" and "1.9"). The average was 3.4. Professor Putnins made the same calculation for all other traders combined and derived an average of 0.8. [213] Professor Putnins' opinions about this metric are as follows: Layering strategies involve abnormally high order cancellation rates (a high ratio of cancellations to trades). This is because the layering orders are not intended to execute so they will typically end in a cancellation, and may also need to be cancelled and resubmitted as market conditions change (such as when the market moves towards the layering orders) to maintain a low execution probability. […] [T]he characteristic of abnormally high cancellation rates is a feature of [Select Vantage's] trading. On all of the stock-days, [Select Vantage's] cancel-to-trade ratio exceeds that of other market participants by a clear margin. [It] is between 251% higher and 1081% higher than that of other market participants depending on the stock-day. [… On] the average stock-day, [Select Vantage's] cancel-to-trade ratio is about 450% higher than that of other market participants. This is a substantial difference in cancellation rates, consistent with the presence of layering orders in the Relevant Order Activity. [214] I am satisfied that Professor Putnins' methodology is effective to ensure that the high cancellation rates do not merely reflect legitimate influences on the market, such as news specific to the stock. He gave this oral evidence: I deliberately construct the [metric so] that it controls various market wide effects that could be specific to a given security or specific to a given day. [… For] example, if different levels of volatility of different securities lead to different cancellation rates, different markets have different cancellation rates, whether there's news flow or not news flow on a particular day can affect the cancellation rate and so forth. So the way to control all of those various factors that can affect the natural, the normal cancellation rates is to conduct the analysis within a given stock within a given day, and within that given stock and within that given day you hold constant things like the particular stock, the characteristics of the stock, the news flows and so forth, and so the relevant comparison holding those factors constant becomes between Select Vantage cancellation rates and the cancellation rates of the rest of the market […]. 1. The general thrust of the reasoning is that the rate of cancellations to trades was economically significant and outstripped the balance of the market on average. 2. Mr Schlaepfer submitted that a high rate of cancellations is consistent with legitimate liquidity provision strategies; a proposition which was accepted by Professor Putnins. However, that by itself fails to explain the significantly higher rate of cancellations when compared to the rest of the market which is presumably made up of traders pursing a range of trading strategies including liquidity provision. Counsel for Mr Schlaepfer put to Professor Putnins that on the particular trading days it is possible that the balance of the market was made up of predominantly speculators or long-term traders. In such circumstances the difference between traders acting as liquidity providers and the balance of the market would be exacerbated: Q. Would you assume please that the rest of the market in these particular stocks on these particular days was heavily comprised of speculators and long-term investors, eg, because they're attracted to the stock or wishing to sell it because of recent news? A. Okay. Q. Would you also assume that Select Vantage traders were predominantly engaged in liquidity provision strategies? A. Okay. Q. On those two assumptions, that may well result in SV, Select Vantage, having a higher cancellation rate than the rest of the market, mightn't it? A. Yes. 1. Dr Carr also suggested that various factors such as information flow may contribute to an explanation as to why the rates of cancellation are comparatively higher. 2. Although the logic may be accepted, the assumption regarding the balance of the market is not established. As Professor Putnins explained in examination in chief the purpose of comparing the trading of Select Vantage traders to the rest of the market is to capture a representation of what "a typical trader" is on the day in question in relation to that particular stock. There was no evidence that that representation would be anything other than a diverse group of traders with various strategies, motives and information. It is unlikely that on the 23 days in question it just happened to be the case that the rest of the market was overwhelmingly employing strategies which would result in low cancellations. This is especially so when one accepts that there were a number of brokers who exhibited higher rates of cancellation than Select Vantage traders on 19 of the 23 relevant dates. 3. The assumption that the "traders were predominantly engaged in liquidity provision strategies" is inconsistent with Mr Schlaepfer's argument that in relation to metric 1 that course of trading conduct could be explained by reference to significant numbers of speculators. In his first report Dr Carr states that the data in his opinion is representative of the traders pursing "diverse strategies". This tension is present throughout the challenge to the metrics and it was not explained how the traders could be predominantly engaged in conflicting trading strategies without that appearing in the data. 4. Counsel for Mr Schlaepfer also put to Professor Putnins that the rate of cancellations might be increased by the short selling constraint, particularly if no fill were achieved by those traders early in the day's trading: Q. But I'm asking you to assume a trader who has no inventory position-- A. Okay. Q. --who has zero stock and yet has some open orders on the market coming into say the last ten minutes of trading. Would it not make sense for that trader subject to the constraint to be flat at the end of the day, in order to avoid obtaining a fill on those open orders, to cancel them? A. I would expect those orders for someone that doesn't hold inventory and knows that they need to be flat at the end of the day to be cancelled well in advance of the last half hour or the last ten minutes because if you go into the last part of the trading day with the possibility of picking a position that you can't flatten, that's a, that's a substantial risk. Q. So you would expect to see cancellations then of open orders? A. You would expect to see cancellations, yes. … Q. The fact that Select Vantage traders are subject to this constraint means that they may legitimately demonstrate a higher cancellation rate than traders who are not subject to that constraint, you would agree? A. It's possible. 1. Counsel's question assumed that traders who did not obtain a long position were not engaging in manipulative conduct. If the finding as to collusion stands then it is possible to infer that those traders who did not obtain a long position but nevertheless entered resting bid orders which were cancelled at day's end played a role in creating an artificial impression of the stock. 2. The final criticism of this metric arose from cross-examination of Professor Putnins: Q. Taking you very quickly back to metric 3, abnormal cancellations, pages 164 to 165, it's the case isn't it that you've also brought to account in this metric dark order cancellations or cancellations in the dark market? A. Sorry, which page are we looking at? Q. 164 and 165. A. So, so in this metric I haven't done additional analysis. This metric is as it stands, this wasn't one that we discussed yesterday, so figure 5, just to try and remind myself exactly how this is constructed, is a cancel to trade ratio taking the number of order cancellations, dividing it by the number of trades in a given stock day. So, this has, it could be each stock activity in both ASX and Chi-X. So, there were no additional constraints imposed on this metric. HIS HONOUR Q. So, in that one do you recall whether you included trades that had been cancelled within the dark market? A. I believe they're included, your Honour. 1. The inclusion in the calculation of orders cancelled in the dark market (the dark market is discussed below at [78]) is said not to be indicative of layering and may result in an inflation of the number of cancellation. By definition an order entered in the dark market cannot create a false impression of demand as it is not visible to other market participants. The cancelling of such orders would, without more, seem to be consistent with bona fide orders which have been subsequently cancelled for non-manipulative reasons. Neither expert gave any indication as to the breakdown between lit and dark market trading although it may be inferred that the majority was conducted in the lit market. Nevertheless, this criticism of the metric is well made and is likely to give an inflated perspective of cancellations. 2. It may be accepted that a liquidity provision trading strategy may result in high rates of cancellations and that dark side cancellations may have inflated the metric. Nonetheless, these are not complete answers to this metric. The primary judge did not err in saying that it can be concluded that on the relevant trading days Select Vantage traders' exhibited rates of cancellation that were significantly higher than the balance of the market on average. Metric 4: Low Execution Probability 1. Orders which are indicative of layering will generally be placed in such a way that they deliberately have low execution probability. Execution probability can be assessed by looking at the number of price steps between an order and the touch price or where in the queue an order is positioned to execute at a particular price point. The ASX and Chi-X give execution priority to an order based first on price and then on a first in time basis at each price step. 2. The primary judge summarised Professor Putnins' conclusion as follows (at [215]-[218]): [215] Professor Putnins' fourth characteristic is a low probability of execution. To measure the probability of Select Vantage's orders being accepted so as to result in an executed trade, the Professor calculated the distance of each of its bids away from the best price on the order book. The distance was allocated one unit where the order was one price step away from the best order; that is, away from the highest price on the bid side or from the lowest price on the ask side. The distance was allocated two units for any order that was two price steps away from the best, and so on. Professor Putnins averaged these distances for all of Select Vantage's buy orders and, separately, for its sell orders. The average across all stock/days for the bids was a distance of 1.8 and for the asks a distance of 0.2. [216] The following are Professor Putnins' conclusions on this measure: Placing orders in the market that deliberately have low execution probability is not a feature of a typical legitimate short-term speculative trading strategy. Short-term speculators that have a prediction about future price movements will generally want to execute trades to try and profit from their predictions and therefore are likely to place orders such that they have a reasonably high probability of resulting in trades. One cannot profit from orders that do not execute, unless those orders are used to obtain favourable execution prices for other orders and are therefore not intended to execute (eg layering orders). […] Layering orders are placed in the market in such a way that they deliberately have low execution probability: either at price steps behind (away from) the best quotes, or at the back of a long queue of orders [with earlier time priority] at a given price step. If low execution probability is achieved by placing orders away from the best quotes, we should see lower price aggressiveness (orders further from the best quotes) on the side that contains layering orders (the side with more quoted volume). […] Given the results for [the second characteristic] indicate excessive bidding activity by [Select Vantage], consistent with layering the bid side of the market but not the ask side, if some of the bid orders are used for layering, we would expect to see lower execution priority [scil probability] for [Select Vantage's] buy orders than its sell orders. The results [for the fourth characteristic] show that the tendency described above is indeed a feature of [Select Vantage's] quoting activity. [Select Vantage's] buy orders tend to be placed further behind the best quotes than their sell orders, giving [Select Vantage's] buy orders lower execution priority [scil probability] than their sell orders. The results indicate that Select Vantage places its buy orders in the market in such a way that they are likely to have lower execution priority/probability than their sell orders. [217] Professor Putnins found that Select Vantage's placement of its buy orders further away from the best quotes than its sell orders correlated with significantly lower execution rates actually achieved for its buy orders, relative both to the average execution rates for all limit orders, buy and sell, of all traders (36.61%) and to the average execution rates for Select Vantage's sell orders (13.33%). In Professor Putnins' opinion: This evidence further supports the notion that most of the buy orders placed by [Select Vantage] behind the prevailing best bid are not intended to execute. [218] Professor Putnins accepted that the further a bid is away from the best price and the lower its execution probability, the less influence it is likely to have on moving the price. However, he considers that bids first placed relatively close to the best price would be influential. Select Vantage traders' high rates of cancellation and amendment of bids led to a large volume moving to positions of low execution probability. 1. Professor Putnins concluded that the rate of bid execution for Select Vantage traders was 3.99 per cent and for ask side execution the rate was 13.33 per cent. In the case of the latter that rate was marginally higher than the average ask side execution rate for the rest of the market (10.42 per cent). Professor Putnins opines that Select Vantage traders are 334 per cent more likely to execute a trade on the ask side than the bid side on average. He also considers that the rate of 3.99 per cent is considerably lower than the execution rate for the balance of the market on the bid side where the limit order is behind the best prevailing bid (11.89 per cent). Only limit orders (as opposed to market orders) were included in this metric. 2. It is said that from the low rate of execution it can be inferred that a large portion of bid orders was not made with an intention to trade and are consistent with layering. When this is combined with the available inferences from metrics one and two it is said that what emerges is an image of persistent layering of non-executing orders on the bid side of the market. 3. Mr Schlaepfer challenges the primary judge's reliance on this metric on the basis that it is consistent with legitimate trading by speculators and is explained by the short selling and inventory reversion constraints. 4. Professor Putnins accepted that speculators who have a view as to where ultimately a stock price may land may enter a number of limit bid orders at the beginning of the trading day at lower price steps in the hope of obtaining favourable executions as a result of having high queue priority at that price point. However, the entering of new limit orders of this kind is less likely as the day progresses where there exists a restriction on carrying stock overnight because, as explained by Professor Putnins, there is a greater risk of adverse outcomes should a bid order be executed towards the end of the day's trading. One would expect that such orders would be cancelled as the day progresses as regardless of the speculators' ultimate view as to the direction of the stock price, if one of these limit orders trades near day's end there may be insufficient time for the stock price to rise before the trader must aggressively reverse his position potentially at a loss. It can be accepted, as Dr Carr opined, that traders may have particular strategies that they implement in the closing auction at the end of the day's trading in order to obtain favourable trades; but the risk remains. 5. Professor Putnins rejected the suggestion that this would provide a total answer to the triggering of this metric, as he was of the view that one would see higher rates of execution if the purpose of the limit orders were to secure queue priority at lower price steps. Professor Putnins' position appears to be borne out when one considers that the rest of the market achieved executions on the bid side three times as often as Select Vantage traders when they placed limit orders behind the best prevailing bid (3.99 per cent compared to 11.89 per cent). Although this might be the result of the rest of the market being more aggressive with their limit orders, that reinforces the idea that limit orders placed at great distance from the touch price are less likely to be legitimate as the chance for execution is extremely low. Furthermore, this casts doubt on whether the entering of the limit order bids are designed to obtain stray favourable executions when they appear to have lower queue priority than the rest of the market which is contrary to their stated purpose. The primary judge put the issue like this during Professor Putnins' cross-examination: "Q. If you measure aggressiveness just by price level, then this comparison of percentages … doesn't necessarily indicate that the rest of market has been putting on its bids behind the best at a higher price than SVs, but it may indicate that just in some other way the rest of the market is acting in such a way to make it significantly more likely that its bids behind the best will in due course be filled? A. That's correct, your Honour. Q. Relative to SVI? A. That's correct, your Honour, right. Q. By a factor of three-fold? A. That's right." 1. It can be accepted that the entering of lower price bids in the hope of stray executions at favourable prices could form part of a legitimate speculative trading strategy. Coincidentally such conduct would generate the appearance of layering the buy side of the market. However, if that were the case then one would expect the traders to achieve rates of execution that are at least remotely similar to other market participants who are placing bids behind the touch price. That has not occurred here. Neither the short-selling constraint nor the restriction on holding inventory overnight explains this particular variance in those execution rates. 2. The rate of execution for ask side orders (13.33 per cent) slightly exceeds the average for the balance of the market (10.42 per cent). When compared to the rate for bid side orders it suggests that Select Vantage traders were more aggressive on the ask side of the market by placing orders closer to the touch price and/or dealing with them in a way differently from bid orders to ensure queue priority. The latter could include not amending orders which has the effect of refreshing the order's position in the queue. But it may be consistent with Select Vantage traders reversing out of long positions aggressively in order to take advantage of inflated prices. It could also be consistent with Select Vantage traders reversing out of the same position in order to comply with the constraint regarding holding stock overnight should the traders be in a long position at the day's end. 3. This metric is capable of supporting an inference of layering conduct. The presence in the data of very low rates of bid execution is consistent with the entering of non bona fide orders in order to build a false impression of demand. The suggested explanation that this metric is consistent with legitimate trading and the short-selling constraint is not compelling in light of the very low rates of execution comparative to the balance of the market when entering bids behind the touch price. 4. I consider this to be a strong indicator of layering which allays the reservations expressed above concerning metrics 1, 2 and 3. Metric 5: Inventory Reversals 1. This metric was rejected by the primary judge and is not the subject of a notice of contention. The primary judge said that this metric could not be relied on (at [219]): Professor Putnins' fifth characteristic is that of buying volume during a trading day being approximately equal to selling volume. I do not put any weight on that characteristic in the present case because, although it is present, it is attributable to Select Vantage having adopted a business model of not permitting its traders to hold any stock overnight and requiring them to close out all positions at the end of each day's trade. There could be sound commercial reasons for limiting activity to day trading in this manner and I do not regard this feature as supporting an inference of market manipulation. Metric 6: Trades oppose Quotes 1. This metric looks to the imbalance between communicated trading intention and actual trades. The metric tests whether, at each time that the Select Vantage traders executed a trade, the dollar volume of resting orders was on the same side of the market as the executed trade. The primary judge summarised Professor Putnins evidence in this way (at [220]-[221]): "[220] Professor Putnins' sixth characteristic is that of trades commonly being executed on the opposite side of the order book to the side on which there is an imbalance of resting orders. He made a count of how many trades were executed by Select Vantage on the sell side at a time when the dollar volume of its resting bids outweighed the dollar volume of its resting asks. Similarly, he counted how many trades were executed on the buy side when the balance of resting orders was the other way. He also counted the number of trades that were executed on the same side as the imbalance of resting limit orders. Professor Putnins then calculated what percentage of the total number of trades was represented by those that were executed on the opposite side to the imbalance. The range was found to be between 25% and 56% with an average of 48%. [221] Professor Putnins expressed these opinions: Executing trades on the opposite side of the market to the traders' resting order imbalance […] is unlikely in a typical legitimate short-term speculative trading strategy. At a given point in time, a speculator with a prediction about the future price movement will typically want to buy or sell, but not be bidding to buy and then actually selling, or vice versa, offering to sell but actually buying the stock. […] Market participants engaging in layering will often have trades executed on the opposite side of the market to their resting order imbalance […]. Put differently, layering often involves trading in a direction that is opposite to what trader's order imbalance would signal as their intended direction of trade because their order imbalance is not a true reflection of their intentions. To put [the average of 48% as measured for Select Vantage] into perspective, note that many legitimate trading strategies will have a score of 0% on this characteristic […]." 1. The existence of a dollar imbalance in favour of resting orders on the bid side as against executed asks is said to be consistent with layering in two ways. First, it is said to aid in the drawing of an inference that the resting bid orders are not intended to be executed as they are inconsistent with actual trading intention manifested by the executed trades. Secondly, it is said to indicate that the trader is executing inflated trades on the ask side as a result of the false impression of bid side demand, thereby changing the behaviour of other market participants. 2. In 2014 Select Vantage had about 1800 traders around the world and they placed approximately 400,000 orders per day. Select Vantage used a surveillance tool called "Ginger" that screened transactions with filters designed to reflect rules and regulations around the world. (at [75], [76]). Mr Schlaepfer gave evidence that that software would raise an alert if collaborative trading were identified where a number of traders in the one pod placed a substantial number of resting limit orders for stock listed on a particular exchange in order to carry out a layering strategy (at [78]). 3. Mr Schlaepfer placed significant weight on the fact that although there were incentives for remuneration within a particular pod, there were no incentives that would follow from the aggregation of the performance of multiple pods. But as a single person or entity could own multiple pods, and then appoint a single person to oversee the pods, this consideration is of little weight. 4. Professor Putnins' opinion was challenged on a number of grounds, one of which was his use of zero as a relevant comparator. In Professor Putnins' view zero was the appropriate comparator by reference to the expected behaviour of speculators and liquidity providers. He said: "Metric 6: 'Quotes opposes trades' Speculators 'Executing trades on the opposite side of the market to the trader's resting order imbalance (e.g., having more buy orders resting in the market but then actually executing sells and vice versa) is unlikely in a typical legitimate short-term speculative trading strategy. At a given point in time, a speculator with a prediction about the future price movement will typically want to buy or sell, but not be bidding to buy and then actually selling, or vice versa, offering to sell but actually buying the stock.' Liquidity Providers 'Liquidity providers will at times execute trades that are in an opposite direction to their resting order imbalance (e.g., buying when they have more sell orders in the limit order book or vice versa) because they typically quote both sides of the market and trades could occur on either side. However, due to the inventory control mechanisms of liquidity providers, they are likely to more often trade in the same direction as the imbalance in their resting orders. Liquidity providers typically modify their resting orders to revert their inventory towards zero. For example, when a liquidity provider has accumulated a long position in a stock, they will typically want to sell the stock and therefore are likely to provide more liquidity on the ask (sell) side and vice versa.'" 1. Mr Schlaepfer argued that the use of zero was inappropriate as genuine liquidity providers could also generate a non-zero result on this metric. Dr Carr opined that many short-term traders could produce results on this metric of around 50 per cent. Professor Putnins was cross-examined on the provenance of the comparator of zero and its utility. In cross-examination he gave the following evidence: "Q. And assume that the liquidity provider places a buy order of 50,000 lots at 89 cents and a sell order for 100,000 lots at 91 cents. Would you make those assumptions? A. 50,000 at 89 and what did you say, 100,000 at 91? Q. 100,000 at 91. So buy order at 50,000 at 89, sell order 100,000 at 91. So on those assumptions, there is a sell side order imbalance at that time, isn't there? A. That's right. … Q. … roughly speaking, over time, over a stock over time, you'd expect to see, wouldn't you, the stock moving upwards about 50% of the time and downwards 50% of the time? A. Over time, yes, but not in a particular circumstance where you're providing a particular order imbalance. That doesn't hold. … Q. But purely by statistical chance, there is a chance that the price will move down to fill the buy order. That's right? Of 50,000 shares. A. There is a chance, that's right. It's not a 50% chance. … Q. So on that circumstance you have a trade on the opposite side of the resting order imbalance, do you not? A. That's correct. … Q. None of the articles that you've referred to in your report provide support for the assertion that you would expect to see 0% for liquidity provider on this score? A. I can find references if you want references. What I'm saying is that my discussion in section 6 that talks about what is likely or unlikely to be observed for various legitimate trading strategies isn't something that I've just created on my own imagination. This is underpinned by the market microstructure literature on how trading plays out in markets. As to while there isn't a specific reference given for this paragraph, these are sort of - this is economic reasoning that is supported by the field. Now, what that implies, right, there's probably no paper that writes down that if you were to compute it to metric with an implied score of zero, what that implies follows by logical reasoning." 1. It may be accepted that the use of the comparator of zero could exclude legitimate trading that inadvertently triggered the metric. Nonetheless it is a question of degree. As Professor Putnins said in cross-examination: "Q. The hypothesis is that anything more than 0% is something that will trigger this metric; is that right? A. Anything significantly above 0% in both a statistical and an economic sense, so small variations from zero we discussed last week would be economically meaningless because by chance you would expect them to be triggered now and then under perfectly legitimate trading strategies. It's when you see a substantial deviation from zero." 1. Mr Schlaepfer also submitted that the metric was consistent with the short-selling constraint on Select Vantage's traders. As with Metric 4, the suggested explanation that the metric was consistent with legitimate trading and the short selling constraints is not compelling in light of the very low rates of execution. 2. Mr Schlaepfer's third challenge was that Professor Putnins' methodology of aggregating all Select Vantage traders' trading activity could generate false triggers on this metric. He submitted: "So one particular point about aggregating all of the traders together is there was evidence which I'll give your Honours the references to shortly, but there was evidence that the traders were prohibited from collaborating with each other. They were told they weren't allowed to communicate with each other; they were not allowed to do that. As soon as one aggregates all of the data, all of the tradings, one is implicitly starting from a proposition that they are collaborating, and yet that was very much in issue as we see later on. So there's a real problem with circularity in the way in which Professor Putnins approached the matter." 1. It is said that if one aggregates all the trading activity the myriad of different trading strategies being employed may result in a false positive which is only consistent with layering if it is found the traders were colluding. It may be, for example, that large numbers of resting bid side orders are attributable to speculators who never obtain fills whilst the comparatively smaller (in dollar volume) ask side trades are attributable to liquidity providers. Professor Putnins conceded that it was possible that false positives would arise on this metric due to this issue. 2. This critique would be well made if there were no evidence or basis for inferring collusion between traders. But if collusion can be inferred as, for the reasons below, I consider it should, then this metric is supportive of the primary judge's finding of layering. Metric 7: Cancels oppose Trades 1. It was said that manipulators engaged in layering would often cancel orders on one side of the market after they executed an order on the opposite side of the market. The logic for this is that if layering orders are never intended to be executed, they will be cancelled once the market has been pushed in the appropriate direction. The primary judge summarised Professor Putnins' evidence regarding this metric as follows: "[222] The seventh characteristic is that of cancelling orders on one side of the market after executing an order on the opposite side. Professor Putnins counted both the number of bid orders cancelled after an ask had executed and the number of sell orders cancelled after a bid had executed. He also counted the numbers of orders that were cancelled on the same side as that on which a trade had been effected. Professor Putnins then worked out what percentage of all orders cancelled following trades was represented by those that cancelled on the side opposite the transaction. The percentage ranged from 40% to 70% and averaged 52%. [223] Professor Putnins gave these opinions about this seventh characteristic: Manipulators engaging in layering will often cancel orders on one side of the market after they execute an order on the opposite side of the market […]. This occurs because layering orders are not intended to execute and once they have served their purpose of pushing the market towards the price of any bona fide orders resulting in executions, the layering orders can be cancelled. […] [This] is unlikely in a legitimate short-term speculative trading strategy unless the cancelled orders were not intended to execute but were instead intended to get the favourable execution price for the trade (layering). In particular if the speculative strategy is an intraday one […] in which the intention is to reverse inventory towards zero by the end of the day, then after having bought the desired quantity a speculator would typically want to sell that position for a profit, or after having sold the desired quantity a speculator would want to repurchase that position for a profit. Such trading would result in the opposite characteristic: placing sell orders after buying (not cancelling sell orders) and placing buy orders after selling (not cancelling buy orders). […] To put [Select Vantage's] numbers into perspective, note that many legitimate trading strategies will have a score of 0% on this characteristic […]. Therefore, cancelling orders following trades on the opposite side of the market, a characteristic of layering, is consistently present in [Select Vantage's] activity on all stock-days and accounts for a considerable fraction of [Select Vantage's] order cancellations on individual stock-days as well as overall." 1. Dr Carr criticised Professor Putnins' approach to this metric on the ground that there was no differentiation between cancellations that took place immediately after an executed trade, and those that were cancelled minutes or possibly hours later. That criticism was misplaced and was due to Dr Carr's description of layering as involving rapid cancellations whereas Professor Putnins was of the view that that was not the only way that layering could be used in markets. He said that layering could be used in markets in a way that did not require cyclical patterns. 2. Dr Carr also criticised this metric for failing to take account of changes in information or other changes in the market which may have led to all market participants adjusting their position. It is unnecessary to consider in any detail Professor Putnins' response to that criticism. Metric 7 is not compelling where ASIC's case was not one of cyclical layering. There was no imperative to cancel orders after a trade as there was no attempt to layer the ask side of the market. Metric 8: Dark opposes Lit 1. The primary judge did not rely on this metric in finding that Select Vantage's traders had engaged in layering conduct (at [224]). His Honour said: "I found Professor Putnins' eighth characteristic, regarding Select Vantage's use of the unlit market, of some additional weight. However, I do not find it necessary to rely upon that element and will refrain from discussing it. To do so would require a description at length of the operation of the unlit market." 1. A dark market is one where the trades and orders entered by individual market participants are not made public to other market participants. This stands in contrast to the lit market where the other participants can observe the trades that take place and see the level of supply or demand in a stock at the various price levels displayed in the limit order book. In this metric Professor Putnins calculates the proportion of times Select Vantage traders' dark order imbalance opposes their lit order imbalance. This is said to demonstrate inconsistent trading intentions, as on the lit market Select Vantage traders may be entering orders on the bid side to a greater degree than the ask side (see metrics 1 and 2) whilst doing the opposite in 'secret' on the dark market. 2. Professor Putnins determined that the percentage of time that Select Vantage traders' positions in the respective markets were inconsistent varied between 8 per cent to 100 per cent over 22 trading days. On 1 January 2019 there were no orders by Select Vantage traders in GCN on the dark market within the best 10 price levels. The average over the 22 days was 43 per cent. This is said to be consistent with layering in general and particularly in this case where it is alleged the lit market imbalance was persistently on the bid side which was said inter alia to create a false impression of demand. The presence of the imbalance indicates that Select Vantage traders were attempting to reverse out the long positions secured in the various stocks in secret so as not to undermine the image of demand on the lit market. 3. Mr Schlaepfer challenged Professor Putnins' use of zero as the appropriate comparator. For the reasons above concerning use of the zero comparator, it is possible that legitimate trading could trigger the metric. Nonetheless, it is a question of degree. Professor Putnins' evidence revealed that on 22 of the trading days, Select Vantage's traders were, 42 per cent of the time on average, entering orders which generated an imbalance inconsistent with the lit market order book. If it can be concluded, as I think it can, that there is collusion between traders, then this metric is a strong indicator of layering as trades executed in this way would not undermine the image of bid side demand. Metric 9: Quoting opposes Inventory Reversion Metric 10: Quoting opposes Trading Intention 1. The primary judge attributed "significant weight" to these metrics (at [224]). Professor Putnins described the rationale of these two metrics as follows: "Metric 9 'A manipulator engaged in layering will tend to layer the bid side of the limit order book when they have a long position in the stock to obtain a more favourable selling price and vice versa … Consequently, the manipulator's order imbalance in the limit order book will tend to mirror their inventory position: a buy-side imbalance (more resting buy orders than sell orders) when they have bought the stock (long position) and a sell-side imbalance (more resting sell orders than buy orders) when they have sold the stock (short position).' Metric 10 'A manipulator that engages in layering will tend to place orders in the limit order book that are opposite to their true trading intention: if they want to sell, they will typically have more buy orders in the limit order book than sell orders (a buy-side imbalance) to push prices up, and vice versa, if they want to buy, they will typically have more sell orders in the limit order book than buy orders (a sell-side imbalance) to push prices down. If the manipulator tends to buy and sell an equal amount in a given day (as per the characteristic "'Inventory Reversals"), then it is possible to infer their likely trading intention at the end of the day. If by the end of the day they have bought more than they have sold, their likely intention is to sell, and vice versa.'" 1. To test for metric 9 Professor Putnins measured the percentage of time during the trading day that Select Vantage traders' lit order imbalance is the opposite to what would be expected from a trader looking to revert their accumulated inventory. Professor Putnins observed such quoting activity between 51 per cent of the time and 100 per cent of the time depending on the stock day with an average of 96 per cent across the stock days. On 16 days the quoting activity of Select Vantage was at all times (100 per cent), inconsistent with inventory reversion. Professor Putnins opined that the appropriate comparator on this metric is zero as neither liquidity providers nor speculators would be expected to score highly on this metric. 2. For metric 10 Professor Putnins looked to the last 30 minutes of continuous trading (3:30pm-4:00pm) to infer likely trading intention from accumulated inventory. Namely if Select Vantage traders had inventory accumulated it would be inferred that they would be looking to reverse their position. That conclusion is irresistible when one considers the constraint regarding holding inventory overnight. Professor Putnins found that 100 per cent of the time during the last half hour on all stock days, [1] except one where it was observed to be 67 per cent of the time, Select Vantage traders' resting order imbalance was opposed to trading intention. In this case that manifested as an imbalance of bid side orders over asks in circumstances where the Select Vantage traders were in a long position and under direction to be flat at day's end. 3. When considered together these metrics provide a view of Select Vantage traders which is consistent with persistent bid side layering throughout the trading day. At times when it is said that the overwhelming inference is that Select Vantage traders would be wishing to revert their inventory positions an imbalance (and when one considers metrics 1, 2 and 4 it can be concluded that that balance was significant and unlikely to trade) existed in favour of the bid side. 4. Mr Schlaepfer challenges metric 9 on the basis that the comparator of zero is unsupported for the same reasons as considered above. Regardless of whether that challenge is well made, it may be accepted that results of 100 per cent or similar are inconsistent with legitimate trading strategies, particularly where there is an inventory holding constraint. In cross-examination Professor Putnins explained why very high results appear incongruous with legitimate trading: "Q. For a liquidity provider, subject to the following constraints, starts the day with zero inventory, can't short sell unless he's had an order filled first, unless he's long in the stock, I'm sorry, can't submit an ask unless he's long in the stock, and thirdly must revert by the end of the day to zero inventory. I wanted to suggest to you that a liquidity provider subject to those constraints, it would be perfectly reasonable to expect that this metric would be activated? A. If by activated you mean non-zero, then I would agree with you. But if by activated you mean substantially above zero to the point where this metric takes a high score, I would disagree, because I think that the example that you provided here under those constraints talks about how these positions are initially opened at the beginning of the day. Now, if I want to mean revert my inventory - sorry, not mean revert, you revert towards zero, my inventory, then the patterns of order activity that I should be seeing as I try and pull that inventory towards zero, which is after it's been established, should be consistent with my quoting trying to revert my inventory. So when calculated across the day, I'm not sure that even in this scenario, under those constraints, you would see this, this take high values. You would see it take non-zero values." 1. When metric 10 is considered alongside metric 9, Professor Putnins' conclusion is reinforced as it is plain that even when one considers the window of time at day's end when the imbalance is most peculiar it remains an overwhelming feature of the data. Dr Carr criticised metric 10 as misleading as rather than showing whether further bids were entered in the last half hour it considers order imbalance which may be attributable to orders from earlier in the day. Professor Putnins responded to this challenge in examination in chief: "Q. Then in paragraph, perhaps it's the same point, perhaps it's a different one, but in paragraph 116 Dr Carr says that if you'd simply counted the number of bids and asks placed in the last half hour rather than averaging the order book in balance, et cetera, you would not have obtained the misleading result that Merlito traders placed orders opposing their true intentions. HIS HONOUR: 100% of the time. HMELNITSKY Q. 100% of the time. What do you say to that observation? A. I, I would say it's similar to the earlier point that we discussed here, which is what matters in my opinion is what you're showing to the market, what you're showing the limit order book in terms of your trading intentions. If you're showing buy orders, you're showing a buying intention. You're showing that there is buying interest, that there's a strong demand side to the market. If you're showing a lot of sell orders you're showing there's a strong sell side. The question is are you showing something that is consistent with your trading intentions? So, in my opinion it's not the actual placement within the last half hour that matters, it's the imbalance that you carry forward and display to the market. Now, would you expect there to be placements of sell orders during the last half hour? Absolutely, if they're going to the last half hour with long inventory, most of the time on the vast majority of the days, you would expect the true trading intention is to sell. Now, if you truly want to sell, you do have to place sell orders to be able to sell those positions. If you already have a buy side imbalance going into the last half hour, there is no need necessarily to increase that imbalance by adding new buy orders to the market. So, I would say that this particular observation doesn't contradict my conclusion when it comes to this particular measure." 1. I do not accept that metric 10 is misleading because it does not account for new bids. Given that at that time of the day's trading Select Vantage traders would be looking to revert acquired long positions, the buying interest that was communicated to the market by the imbalance is consistent with layering. 2. Mr Schlaepfer argues that the triggers on these metrics can be justified by reference to the short selling constraint and inventory holding constraints. But it is the leaving of unfilled or partially unfilled orders on the order book for lengthy periods of time that causes the trigger of metrics 9 and 10. 3. The mere fact of having short-selling constraints does not explain why these orders are left on the books for lengthy periods of time including up to the last 30 minutes. Although it could be argued that the orders are left on the limit book in the hope that a fill could be obtained late in the day Professor Putnins considered such an approach to be risky: "Q. If the trader who places the bids doesn't get filled, it's going to be a high value across the day, you'd agree? A. The trader doesn't get filled, it's going to be a high value across the day, again I don't think that's - that would be what I would be expecting, no. I would be expecting that if the trader is long the stock say by lunchtime, and the trader has to get that long position down to zero by the end of the day because of these constraints that you've mentioned, what should the trader being doing? At that point having bids in the market is risky because I have a long position, I want to get that position down to zero, not extend the position, not make it even further long. I don't want to have buys in there in case the market triggers those buys. What I want to have in the market is sells, so if the market moves up I'm able to sell, get rid of that long inventory and get my inventory back down to zero. So what I would view as my expectations in that particular situation even under those constraints, is not necessarily a high value, but a non-zero value because at the beginning of the day as you pointed out the result of these constraints you would at the inventory building point in time have a non-zero value of this particular metric. Q. It might make perfect sense to leave those orders in the market at the hope that they're filled at favourable prices? A. Not if you have a constraint that you need to go home flat. Q. You might leave them open till lunchtime for example? A. Yeah until lunchtime. Q. You might leave them open till 2 o'clock? A. Yeah, it's getting risky and therefore it's getting unlikely. Q. You might leave them open till 3 o'clock if-- A. And at that point you desperately want to be selling, so you want sells in the market. You do not want to be buying at that point in time. You cannot face the risk of having buys in the market if your firm policies, if your risk controls say you need to be flat by the end of the day. Q. If you're confident that you will still be able to buy low at that time and exit for something, presumably a profit, you might still leave the order open mightn't you? A. I mean we can come up with all sorts of unrealistic hypotheticals here. I don't think the scenarios are likely scenarios. The other thing to note here is if we're talking about a market maker, holding positive inventory is risky in itself. So irrespective of having to flatten the inventory by the end of the day, if you're engaged in liquidity provision market making you do not have a view about whether the stock is going to go up or down. What you want to do is profit from buying low selling high. You want to keep you inventory close to zero at all points in time. So you'd be trying to mean revert this, not just at the very end of the day, but trying to mean revert it earlier as well." 1. Mr Schlaepfer argued that this could be explained by reference to the closing auction. This was put to Professor Putnins: "Q. I want to suggest to you that there's a perfectly rational explanation for why the orders may rest of the order book for a long period of time, indeed, to the end of the day, and that is that the traders in question can cover their position in the closing auction. What do you say to that? A. Possible, but leaving things to the closing auction to cover your position is extremely risky because you have - that's your last opportunity to trade and if you desperately need to trade in the closing auction, the price you are forced to accept could be anything. So if you are willing to accept a loss or a reasonable probability of a loss on that trade, then yeah that is, that is, that is possible, that is hypothetically possible." 1. Dr Carr's submission regarding closing auction strategies was not convincing. The stocks in question were small capitalisation stocks and can be readily accepted to have mid to low levels of liquidity. On the days in question Select Vantage traders went into the last half hour of trading with resting bid orders, at least in one case, totalling in the millions. The suggestion that the traders sitting behind these orders were hoping to obtain last minute fills with the plan of reversing out of those positions within a matter of minutes at favourable price seems dubious at best. This seems even more doubtful once one accepts that the average execution rate for limit asks in these stocks was only 10.42 per cent (above at [53]). Those factors indicate that if a stray fill did occur in the final minutes of trading, in light of the imperative to be flat at day's end, the Select Vantage traders would likely need to aggressively reverse their position. Although it can be accepted that risk is a part of any share trading strategy, risk of this nature militates against accepting Mr Schlaepfer's submission on this issue. 2. Dr Carr suggested that the reason for the cancellation of orders at day's end rather than earlier in the day is due to the unlikelihood that the particular orders would trade causing the above risks: "Q. And the bids hold a risk of execution, and leaving him with more than he wants to get rid of? A. And if, and if, and if, and if, and if, if the SV traders cancel those open bids then his other indicator will punish SV traders for excessive cancellations. And if they don't cancel and keep those bids open, then he's going to say they keep too many open bids, because they have a, they have a positive inventory. In fact, the traders, in fact the traders decision problem at 3.30 is they want to sell the inventory, because obviously they - you know, their risk management policy requires them to end the day at zero. They are looking at the prices, market prices and they are going to place new bids, their new bids - or sorry, new orders are going to be consistent with their inventory and the market prices. But what they do with their existing bids and asks in the order book really is not their primary concern. They, they don't need to, they don't have to cancel them, unless, unless they actually are going to be executed and going to put them in a more difficult position. … Q. No, I understand your answer? A. Right, so, that are, that are sitting orders that no - nobody expects to be executed anymore, possibly, right. Q. That was what I was really interested in. I understand that there's a question of timing, and that one is concerned with the intention of the time when the bid is put on. But be that as it may, after 3.30 if the trader holds stock and wishes to be flat, would you impute that he would no longer intend, no longer wish for those bids to be executed, those ones that are resting there? Whether they've been there all day or for an hour, and with whatever intention he put them on in the first place, would you impute that he would not intend them to be executed after 3.30? A. The buys on, on average, yes. In - as a matter of likelihood, yes, yes. And that's what I find in the data." (Emphasis added.) 1. It can be accepted that if there were no reasonable risk of the orders executing then there would be no imperative to cancel the orders with any degree of expedition. That being said, the conscious ignoring of such orders, particularly if collusion is established, is consistent with ASIC's layering case. Such orders would still contribute to the image of high levels of bid side demand. This explanation is difficult to reconcile with Mr Schlaepfer's submission that the large volumes of resting bid orders are consistent with an intention by traders to act as speculators in the hope of executing favourable trades. If it were truly the case that these orders had no reasonable likelihood of being executed then it makes that particular explanation much less convincing, as there is no evidence that these traders were more likely to trade in the first few hours of trading rather than the last 30 minutes. 2. I accept that metrics 9 and 10 are capable of demonstrating conduct consistent with layering. I also accept that the results, particularly in relation to metric 10, are capable of excluding legitimate trading techniques when the imbalance is as significant as reported here. 3. I would draw the following conclusions in relation to Professor Putnins' metrics: 1. Select Vantage traders were imbalanced in their trading behaviour resulting from substantially more activity on the bid side of the market compared to the ask; 2. the existence of large number of opening bids by Select Vantage traders is consistent with the short selling and overnight inventory constraints; 3. on average Select Vantage traders cancelled orders more often than the balance of the market; 4. on average Select Vantage traders obtained rates of execution significantly below the balance of the market, which is a strong indicator of layering conduct; 5. no inference of layering can be drawn merely because bid orders were left on the limit order books as it would be consistent with speculators hoping to obtain fills at favourable prices with high execution priority. However, where the low execution probability is considered in relation to the balance of the market and where those orders remain on the order book in the final 30 minutes of continuous trading that justification is substantially weaker; 6. Select Vantage traders who entered bid orders but never obtained a fill may lead to an inflation of the results in metric 2, 3, 9 and 10. If ASIC's case on collusion is established then these orders are indicative of layering without those traders engaging in any further trading as the orders may give a false impression of bid side demand; 7. the case on collusion is reinforced as the low execution probability of bid side orders when compared to the balance of the market may place a different colour on the order of Select Vantage traders who never obtain a fill; 8. the use of the comparator of zero in metrics 6, 7 and 8 is appropriate and significant deviations in Select Vantage traders' results on those metrics from zero is able to exclude legitimate trading practices; 9. the existence of trades on the opposite side of the imbalance between 25 per cent and 56 per cent of the time with an average of 48 per cent is consistent with layering behaviour and inconsistent with legitimate trading practices; 10. of the orders cancelled by Select Vantage traders after executing a trade, 40 per cent to 70 per cent, and on average 52 per cent, were on the opposite side of the market to the executed trades. Although consistent with some layering practices, this is not a strong indicator of layering where there was no imperative to cancel orders after a trade as there was no attempt to layer the ask side of the market; 11. the presence of an imbalance in the dark market which was the opposite from the imbalance in the lit market where it is known from previous metrics that the imbalance in the lit market was bid side is consistent with layering as it suggests that the traders were attempting to reverse acquired long positions without undermining the image of bid side demand; 12. the triggers on metrics 9 and 10 are not consistent with legitimate trading in circumstances where Select Vantage traders must be flat at the end of the trading day. Metric 10 is a strong indicator of layering as at a time when Select Vantage traders can be taken to be seeking to reverse their acquired inventory positions a significant bid side imbalance continues to persist; 13. if collusion is not independently established no inference of layering adverse to Mr Schlaepfer should be drawn from metrics 6 and 8; 14. there is no specific sequence or any particular order or orders identified in either expert report which is said to be a non bona fide order. 1. Whether traders within pods and those in different pods were trading independently, or whether Select Vantage's traders acted in concert in placing orders, as the primary judge found, is critical to whether the inferences that can be drawn from Professor Putnins' metrics should be drawn so as to enable the tribunal of fact to be satisfied to the Briginshaw standard of the serious allegation ASIC makes. 2. The primary judge relied in part upon a report of Dr He of ASIC dated 30 October 2014 in which he addressed 10 stock days particularised in Sch A of the defence in which he said that Select Vantage "stacked" the order books of two stocks (at [193]). 3. Ground 14(c) of the Notice of Appeal (quoted by McCallum JA at [265]) was that the primary judge erred: "in relying on the analysis of ASIC's employee, Mr He, of order activity in relation to the stock OIL ([201], [202]), order activity in relation to the stocks GCN and ATO ([197], [198], [200]) and evidence as to 'clustering' of orders ([193], [194]), each of which was disavowed by Senior Counsel for the Respondents at the trial as not forming part of the truth case and/or was outside the particulars of truth;" 1. It is true that the report and file note of Dr He which examined trading data for two stocks were not relied upon by ASIC at the trial to establish its justification defence. The primary judge referred to observations made by Dr He about "clustering" in the order activity of Select Vantage traders that Dr He referred to in those reports. He was cross-examined about what he meant by that term. He said that he was there referring to the entry of orders that shortly followed another order in quick succession. 2. The primary judge summarised some of Dr He's evidence pertaining to clustering as follows (at [192]): "Mr He said he found that at the time these concurrent resting orders had been entered they were sufficiently far away from the price at which the relevant stock was trading that the orders were themselves unlikely to trade and, indeed, a large proportion of them did not trade. Mr He described the placement of these orders as 'self correlation' meaning that numerous orders from Select Vantage's supposedly independent traders were 'clustered' in a resting position, off the likely execution price, in the same stock on the same day. He explained his term 'clustering' as follows: '[W]hat I meant by clustering is when an order is entered, it is shortly followed by another order of a similar nature in quick succession.'" 1. Dr He's reports did not form part of ASIC's justification case. 2. Both Dr He and Mr Veidners (another ASIC employee) described the stocks in question as obscure stocks with low levels of capitalisation. Mr Veidners in cross-examination expanded on this assessment: "Q. These seven stocks that have been nominated, do you classify them as obscure and low cap? A. They were generally - yes, I don't know about obscure, whether that is a fair term, but they were generally smaller capitalised companies, yes. Q. The word obscure has been included in one of the questions you answered. What would your criteria be of a low cap stock that is obscure, as opposed to more prominent? A. Those - I think the measure of those that fall outside of, outside of accepted indices, be they various S&P and other indices, putting a figure on it, it could be anywhere from market capitalisation of $5 million to several, a hundred, 200 million, so the range could vary. … Q. They'd be obscure on that stipulation that you've made, would they not? A. Yes, I accept that. Q. Again, I think you have clarified this, there's nothing untoward about people in China trading in the Australian Stock Market in low cap and let's say outside the index, thus obscure, stock? Nothing wrong with that is there? A. Not in principle, no, but it depends on the manner in which it's done." 1. This particular conclusion was challenged by Mr Schlaepfer on two bases. First, there was evidence that traders like Select Vantage traders would gravitate to small cap stocks like the ones in question, and secondly, that the presence of large volumes of resting orders in these small capitalisation stocks was consistent with the constraints on Select Vantage's traders and with the adoption of speculation strategies. The validity of this justification is at least doubtful in light of the low execution rates and the unlikelihood of such orders remaining on the limit order book as the trading day progresses. 2. Mr Schlaepfer points to evidence of Mr Veidners to support the contention that traders like the Select Vantage traders would gravitate to these kinds of stocks. The argument was that the relevant stock exchanges calculate fees on a basis points system which are in turn "generally a percentage of the value of a security". Mr Veidners explained the point like this: "Q. You would understand, would you not then, that day traders given the fee structure which you've answered about, would be attracted into low cap stocks. A. Yes. Q. Do you agree with that? A. Yes. Q. If the environment as the Australian Stock Exchange fee structure brought about, if the environment made it cheaper for trading those sorts of stocks in this country, rather than world competitors, assume they're charging more, that would be a relevant consideration in understanding day trading strategy, wouldn't it? A. Yes, I think so." 1. It may be accepted that the trading in small cap stocks is not of itself suspicious. The reduced transaction cost is a reason why Select Vantage traders would want to trade in stocks of this kind. What it does not explain is why these stocks, out of some 2000 stocks on the ASX in 2014, many of which would meet the same criteria, were the subject of such interest by supposedly independent traders in China and elsewhere. Dr He was cross-examined with a view to Mr Schlaepfer's establishing that, of itself, a large number of orders resting at the same price did not indicate manipulative trading. He did not agree. He then gave the following evidence: "Q. But, of course, do you agree with this? That built into your analysis it is a view that there must have been coordination to explain the coincidence of the trading. Isn't that a view that you had? A. There were multiple hypotheses and case series regarding this. There were multiple hypotheses and case series regarding this and that-- Q. You said multiple hypotheses? A. Yes, multiple hypotheses. Q. That means various explanations that might fit or might not? A. Might fit, yes. So, so, that's one of the multiple hypotheses. Q. Some of them are, and I take it, innocent hypotheses? A. One is innocent. 5 The other hypotheses are not. HIS HONOUR Q. What is the innocent one? A. The innocent one is the highly unlikely scenario that hundreds of people in various parts of China are interested in submitting large amount of orders highly, you know, approximate period of time in obscure small cap Australian stocks repeated many days and many are just resting and not trading. That is the innocent explanation, if they're all independent." 1. This evidence was available to be considered on the justification defence. 2. The material referred to by Mr Schlaepfer does not support the innocent hypothesis which sought to explain the suspicion arising from the layering case and the correlation analysis. I agree with the primary judge that such an "hypothesis [is] improbable in the extreme" (at [197]). 3. The explanation given by Mr Kruyne to Macquarie Securities summarised by McCallum JA at [330]-[334] explains why Select Vantage traders would focus on low capitalised stocks that would not be saturated with high-frequency trading firms implementing arbitraged strategies and low-price stocks to keep trading costs down and to improve the risk-reward of a trade. But Mr Kruyne's email provides no explanation as to why Select Vantage's traders would select the same low capitalised and low priced stocks. Even if Dr He's evidence is to be disregarded on this issue, that point remains. 4. I consider that the inference of coordination between different traders can be drawn independently of Professor Putnins' metrics. Professor Putnins' metrics enable that inference to be drawn more confidently. Like the primary judge, I am comfortably satisfied to the Briginshaw standard that the behaviour of Select Vantage's traders involved market manipulation. As noted above, because ASIC did not attempt to identify specific orders that contravened s 1041A or s 1041B of the Corporations Act, I agree with McCallum JA that this finding would not establish the truth of the imputations and true innuendoes pleaded. Nonetheless Mr Schlaepfer did not confine his challenge to the primary judge's conclusion that the justification defence was established to this issue. He urged this court to review the primary judge's reasons as he said that the reputation of the businesses carried on by Select Vantage should be vindicated in this court. However, for my part, I would accept the primary judge's conclusions. 5. For these reasons, I agree with McCallum JA that the appeal should be dismissed. As I take a different view on the justification defence, I would dismiss the appeal with costs. 6. McCALLUM JA: Mr Daniel Schlaepfer is the principal, director, president and corporate secretary of a company called Select Vantage Inc, which trades on stock markets worldwide. He is also the ultimate beneficial owner of that company. In November 2014, surveillance officers at the Australian Securities and Investments Commission (ASIC) became concerned that Mr Schlaepfer and Select Vantage (or the company through which it was trading in Australia, Merlito Securities Company Ltd) were engaging in a form of unlawful market manipulation known as "layering". Without notice to Mr Schlaepfer, they sought to persuade the company's existing stockbroker in Australia to terminate Merlito's trading account. ASIC's head of market supervision, Mr Greg Yanco, then made a series of telephone calls to senior executives of other major stockbrokers to warn them of ASIC's concerns. 7. Mr Schlaepfer claims that he was defamed by Mr Yanco in those conversations. He brought proceedings for defamation in the Supreme Court of New South Wales against Mr Yanco and ASIC. After a hearing that went for more than three weeks, the primary judge (Fagan J) dismissed the claim and entered judgment for the defendants: Schlaepfer v ASIC [2019] NSWSC 1644. Mr Schlaepfer appeals from that decision. The appeal is brought as of right under s 101 of the Supreme Court Act 1970 (NSW). The proceedings also included a claim in injurious falsehood brought by both Mr Schlaepfer and Select Vantage. The primary judge dismissed that claim as well, but there is no appeal from that part of the decision. Circumstances in which the claims were brought 1. ASIC's conduct in contacting stockbrokers about the trading activities of Mr Schlaepfer's company must be understood in its regulatory context. ASIC has the statutory function of supervising financial markets in Australia: s 798F of the Corporations Act 2001 (Cth). Stockbrokers are "participants" in those markets within the meaning of s 761A of the Act. The conduct of market participants is closely regulated, including by the Market Integrity Rules promulgated from time to time by ASIC pursuant to s 798G(1) of the Act. Those rules impose onerous obligations on market participants calculated to safeguard the efficiency and integrity of Australian stock markets. 2. Mr Schlaepfer had a background as a trader with a company called Swift Trade Securities Pty Ltd. At the time Select Vantage came onto ASIC's radar in 2014, ASIC was aware that Swift Trade and its principal, Mr Peter Beck, had been the subject of various regulatory action by authorities overseas in previous years, including for allegations of layering. Swift Trade was described in an internal ASIC file note dated 18 November 2014 as the "preincarnation" of Select Vantage and Merlito. The same file note implied a measure of scepticism as to the integrity of Mr Beck: "Peter Beck, a Hungarian-born entrepreneur established Swift Trade Securities in 1998 (by then he'd been a chef, a commercial real estate broker, a bottler of Niagara-falls water, a pet-food delivery-service operator, a long-distance telephone service reseller and an internet porn provider)…" 1. The regulatory misfortunes of Mr Beck and Swift Trade were discussed in detail in the primary judge's judgment at [38]-[79]. For present purposes, it is enough to give a brief summary of the key events. 2. The Financial Services Authority of the United Kingdom investigated Swift Trade for suspected market manipulation during the period from January 2007 to January 2008. Swift Trade was described by that Authority as a "proprietary trading business" which "operated a network of over 50 customers based in over 150 trading locations worldwide which in turn engaged over 3000 traders". Swift Trade received a substantial percentage share of its customer's profits, giving it a direct financial interest in trading profitably. 3. In May 2011, the Financial Services Authority published the results of its investigation of the 2007 activity. It found that, throughout the period the subject of the investigation, Swift Trade had "systematically and deliberately engaged in a form of manipulative trading activity known as layering" on the London Stock Exchange. 4. The topic of layering is addressed in further detail later in this judgment. It was defined in different terms in different parts of the evidence. In short, and at the risk of generalisation or over-simplification, it is a form of concerted trading calculated to manipulate the share price of particular stock by creating a false appearance as to the level of demand for that stock. It is referred to as "layering" because it involves the placement of multiple orders on one or other side of the book (either buy orders or sell orders) at a price that is close enough to the lowest ask or the highest bid (as the case may be) to appear genuine but far enough away from that price point to be unlikely to result in an executed trade. The "layering" of multiple orders skews the appearance of the balance of supply and demand for the stock in question and thus tends to result in small movements of the price of the stock up or down as the market reacts to that picture. If the price moves as intended, the traders take advantage of the move by executing a trade on the opposite side of the book and then rapidly cancelling the layers of orders previously placed. 5. In the case of Swift Trade, the trading activities that attracted the regulator's attention involved placing large numbers of over the counter orders with brokers to buy or sell "contracts for difference". The purchaser of such a contract trades on the movement of the price of the relevant share but does not acquire the underlying shares. However, such contracts are automatically mirrored (by way of hedge on the part of the broker) in orders for shares on the order book. It was the placement of the mirror orders which caused price movements on the London Stock Exchange. Swift Trade defended the allegations on the basis that contracts for difference are a form of instrument that was not governed by the relevant legislation. Because of the automatic hedging, that argument was rejected. The Financial Services Authority considered that it was the purchase of the contracts for difference that had an impact on the share price and determined on that basis that Swift Trade's conduct amounted to unlawful market abuse. It imposed a financial penalty of £8,000,000. 6. The primary judge recorded that, following the disciplinary action of the UK Financial Services Authority in 2011, Mr Beck, Swift Trade and related entities were the subject of formal allegations by the Ontario Securities Commission in 2012. The Commission alleged widespread failures of record-keeping, failure to supervise traders and numerous other defaults, amounting to a "culture of non-compliance". The complaints were settled by an agreement of 20 June 2012 under which, inter alia, Swift Trade and a related entity were prohibited for six years from trading in securities in Ontario. Mr Beck was prohibited for two years from being a director of any securities trading entity. 7. There was also regulatory action in the United States against Swift Trade and Mr Beck at around that time. Mr Schlaepfer formed the view that Mr Beck could not continue to conduct the business of Swift Trade and Mr Beck evidently accepted that to be the case. In due course, the two men agreed on terms on which Mr Schlaepfer would take over the business. 8. Through a series of transactions, the business of Swift Trade was acquired by Select Vantage. Those transactions also involved a subsidiary of Select Vantage called True North Vantage, of which Mr Schlaepfer was the President. Mr Schlaepfer also acquired Merlito at that time. By that time, Swift Trade had a substantial number of traders who traded in "pods" throughout the world. Mr Schlaepfer went through a process of identifying traders whose actions had been the subject of regulatory attention at Swift Trade (summarised by the primary judge at [61]-[65]). Those traders were not taken on by Select Vantage. 9. Notwithstanding the steps taken by Mr Schlaepfer, Select Vantage did not avoid further regulatory attention. The primary judge recorded at [79] that, in 2012, the Japanese regulatory authority (the SESC) identified that two pods of Select Vantage traders were trading together "in an attempt to manipulate the market". The action involved twenty traders, all of whom were located in China. Their services were terminated. Select Vantage was fined the equivalent of $500. 10. In some respects, Select Vantage operated on the same model as Swift Trade – it had a large number of traders, organised into pods, who were confined to day trading but permitted to trade on stock exchanges around the world, including Australia, with Select Vantage's capital. Until 2014, Select Vantage's stockbroker on more than 20 stock exchanges around the world was Morgan Stanley. In February 2014, Morgan Stanley indicated that it proposed to close Select Vantage's accounts, giving Select Vantage a period of grace to find another broker. The accounts were ultimately closed in August 2014. There was an issue in the trial as to whether Morgan Stanley made that decision because of concerns about unlawful trading. Mr Yanco understood that the decision was made as a result of the trading on the Tokyo stock exchange that attracted the attention of the Japanese regulator, but Mr Schlaepfer denied any connection between those events. The primary judge considered that the evidence did not permit him to reach a conclusion as to whether Morgan Stanley's decision was in fact due to regulatory concerns. However, his Honour accepted that Mr Yanco believed that to be the case: at [89]. 11. For the purpose of its trading on the Australian stock market, Select Vantage turned to Macquarie Securities Australia Ltd as its new broker. Select Vantage negotiated an arrangement with Macquarie Securities to conduct its trades through Merlito, the company Mr Schlaepfer had acquired when he took over the business of Swift Trade. Under its arrangement with Macquarie Securities, Merlito was able to submit orders directly to the market through the electronic trading system operated by Macquarie Securities as broker. Direct market access for clients of stockbrokers is a recognised and permissible method of securities trading and was not in itself the subject of any concern. However, stockbrokers who offer direct market access to clients are required under the Market Integrity Rules to have appropriate automated filters to ensure that the use of that method of trading (referred to in the rules as "Automated Order Processing") does not interfere with the efficiency and integrity of the market. 12. Mr Yanco's evidence established that, in accordance with the Market Integrity Rules, ASIC expects stockbrokers who detect suspicious activity on the part of their direct market access clients to take action to stop trading that threatens the integrity of the market. The Market Integrity Rules contemplate that, in a proper case, ASIC may give a formal direction to a stockbroker to deny direct market access to a particular client. Failure to comply with such a direction attracts a penalty under the rules of up to $1 million: r 5.6.12(2). 13. Merlito commenced trading on the Australian stock markets using its direct market access account with Macquarie Securities on 22 August 2014. During August and September 2014, based on surveillance of its trading, ASIC began to suspect that Merlito was using that facility to engage in layering activity. 14. The surveillance was conducted by Dr William He, a senior analyst employed by ASIC. Dr He's evidence-in-chief was given in the form of a written statement, but that was not reproduced in the appeal books. His evidence was not admitted to prove the truth defence but only as being relevant to the defences of qualified privilege. The primary judge recorded at [103] that Dr He concluded that, through its direct market access account with Macquarie, Merlito was "posting, cancelling and re-entering by far the most orders on the bid side" of two particular stocks on two particular days. Dr He considered that, as those stocks were "relatively obscure and illiquid", it was unlikely that the high number of trades was coincidental. He suspected coordination among Merlito's traders: at [104]. Dr He's suspicions were later confirmed by Merlito's trading activity concerning a different stock (OIL) on 17 November 2014. Dr He formed the view that Merlito was engaging in deliberate, coordinated manipulation of the market by layering. Dr He prepared a file note dated 18 November 2014. That was sent to Mr Tom Veidners, the senior manager of market surveillance at ASIC. A formal inquiry was initiated: at [109]. Mr Veidners believed he took that step. At that stage, Mr Veidners was of the view that Merlito was seriously threatening market integrity. Mr Veidners had been keeping Mr Yanco informed of those matters in informal discussions. 15. The primary judge at [120] recorded Mr Yanco's evidence in the trial that, during October and November 2014, he came to the view that Select Vantage and Merlito were engaging in market manipulation and that Mr Schlaepfer was the controlling influence behind those entities and was himself engaged in such manipulation. 16. Mr Yanco formed the view that ASIC needed to engage Macquarie Securities in relation to Merlito's conduct. The primary judge at [123] quoted the following passage from Mr Yanco's evidentiary statement concerning his perception of the position as at 20 November 2014: "At this time, ASIC was pursuing a deliberate strategy of seeking to effect positive behavioural change amongst market participants in order to stop market misconduct and disorderly markets. Part of this strategy was for ASIC to try to influence participants to change their own behaviour, rather than having to wait for ASIC's enforcement mechanisms to be deployed. This strategy included regulating the market by using all the tools available to us, including by having direct conversations with market participants. We wanted to stop disorderly conduct in the first instance, and then analyse it and determine if the enforcement team needed to take action subsequently." 1. By that time, Mr Yanco had reached the view that it was open to ASIC to give Macquarie Securities a direction pursuant to r 5.6.12 of the Market Integrity Rules to cease its provision of direct market access services to Select Vantage (through Merlito). However, he considered that, before any such direction was given, Macquarie Securities should be given the opportunity to take its own action. 2. On 20 November 2014, Mr Veidners and an ASIC Commissioner, Mr Tom Price, had a telephone conference with Mr Paul Packham, the regional compliance head at Macquarie Securities. The following morning, Mr Veidners wrote to Mr Packham: "Following on from our discussion yesterday I would like to point out that we are progressing with our trading analysis and initial observations suggest Merlito's trading is having an influence on the mid-point price in the direction of layered bids. If our further analysis reveals evidence of market manipulation, we will use our compulsory powers under ASIC Market Integrity Rule 5.6.12 to direct Macquarie to cease providing Automated Order Processing (AOP) access for Merlito. Following the direction being made we propose to issue a media release announcing the outcome, in line with our usual practice. This is an issue which poses a threat to market integrity in Australia and ASIC expects Macquarie to take immediate steps to ensure that its trading on Australian markets does not threaten or compromise market integrity." 1. Shortly after that email was sent, Mr Packham contacted Mr Veidners to inform him that, following the telephone conference the previous day, he had taken the information to senior management and that Macquarie had taken the decision to "turn off Merlito" from the close of business that day. Upon being informed of that decision, Mr Yanco congratulated Mr Veidners on the result. In his evidentiary statement, Mr Yanco explained "our attempt at changing the behaviour had worked, and we had succeeded in our goal in having the potentially manipulative behaviour stopped". 2. After learning of Macquarie's decision to cease providing broking services to Merlito, Mr Yanco decided to provide information to other stockbrokers, by means of the publication of a Market Supervision Update and by direct contact with the brokers. Mr Yanco explained that he was concerned that Merlito may approach another stockbroker to seek to continue trading. He said his purpose in providing information to other brokers was "in order to flag with them the type of conduct ASIC was concerned about and emphasise that they should have a heightened sense of due diligence and appropriate filters in place if approached by a new entity seeking to be on-boarded". Mr Yanco consulted a broker at Morgan Stanley (the firm that had closed Select Vantage's account in August) to ascertain which other stockbrokers might be likely to take on Merlito or Select Vantage following Macquarie Securities' termination of their relationship. That broker identified six likely competitors for the provision of broking services to Merlito: UBS, Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, Citi and Goldman Sachs. 3. Later the same day, Mr Yanco made telephone calls to the market compliance executives at four of those firms to warn them of ASIC's concerns. Over the following week, he conveyed the same concerns in two face-to-face meetings. All of the firms Mr Yanco contacted were licensed stockbrokers who, like Macquarie Securities, offered direct market access to clients. Mr Yanco explained that he was concerned to speak to the stockbrokers as he considered it was their obligation as market participants to act as "gatekeepers" by denying direct market access to Merlito. 4. There is a dispute as to the precise words said by Mr Yanco in those telephone calls and meetings, but it is common ground that he at least conveyed the information that ASIC was concerned about a particular "client" or "entity" layering the market, that the client had been "turned off" or "closed down" (denied direct market access) by two brokers and that ASIC wanted the other brokers to be aware of its concerns. Mr Yanco evidently said he could not name the "client" in question. However, Mr Schlaepfer contends that the statements made by Mr Yanco gave enough information to identify Mr Schlaepfer as a person participating in the unlawful conduct. The proceedings at first instance 1. Mr Schlaepfer pleaded six matters complained of based on the statements made by Mr Yanco in the four telephone calls made on 21 November 2014, a meeting on 24 November 2014 and a meeting on 28 November 2014. ASIC admitted that Mr Yanco made those telephone calls and attended those meetings in the course of his employment. It did not take any issue as to its liability for his conduct. However, the defendants denied publication of the slander in the terms pleaded, denied that the words spoken by Mr Yanco identified Mr Schlaepfer, denied that any of the imputations pleaded by Mr Schlaepfer was conveyed by the matters complained of and pleaded positive defences of justification under s 25 of the Defamation Act 2005 (NSW), statutory qualified privilege under s 30 of the Act and qualified privilege under the common law. 2. The defendants' victory in the proceedings was comprehensive. The primary judge found that Mr Yanco had made certain statements but not in the terms of the slanders pleaded by Mr Schlaepfer (at [144]-[153]); that the words said by Mr Yanco did not identify Mr Schlaepfer (at [162] and [165]); that none of the pleaded imputations or true innuendoes was conveyed (at [173], [176]-[178] and [181]-[184]); that in any event the defences of qualified privilege at common law and under s 30 were established (at [285] and [291]); that malice (which would have defeated the qualified privilege defences) was not proved (at [273]); and that two of the imputations were substantially true (at [291]). 3. Mr Schlaepfer's grounds of appeal challenge each of those conclusions apart from the finding on malice. A late application to amend the notice of appeal to challenge that finding as well was rejected at the hearing of the appeal, for the reasons explained below. Publication of the slander 1. As already noted, the statement of claim pleaded six oral publications over a period of about a week. It was alleged that Mr Yanco said substantially the same things on each occasion and he did not dispute that. The first four matters complained of were the four phone calls he made on 21 November 2014. The fifth was based on the meeting on 24 November 2014. Mr Schlaepfer's pleaded case was that, on each of those five occasions, Mr Yanco said the words in annexure A to the statement of claim. The sixth matter complained of was based on the further meeting attended by Mr Yanco on 28 November 2014 at which it was alleged that he said the things set out in annexure B to the statement of claim. The only difference between the two was an additional remark in annexure B referring to the client being "referenced" in a market surveillance update published by ASIC on 25 November 2014, after the telephone calls and the first meeting. 2. Mr Schlaepfer did not call any witness who heard any of the words said by Mr Yanco. The pleading was drawn primarily by reference to an email sent by one of the stockbrokers, Mr Couper, shortly after he received a call from Mr Yanco on 21 November 2014. By reference to that email, it was alleged that Mr Yanco made the following statements on each occasion (annexure A to the statement of claim): "1. ASIC has concerns that a particular Entity is layering the market. 2. ASIC is aware that the Entity has been closed down at two brokers because of their behaviour. 3. ASIC is aware that the Entity would be quite a payer to brokers. 4. This would be a Direct Market Access. 5. ASIC not able to advise the name of the Entity but it is able to advise they are related to Swift Trade, Select Vantage and Merlito. Peter Beck is associated with Swift Trade. 6. ASIC wants you to be aware of our concerns." 1. The additional remark pleaded in annexure B as having been said at the meeting on 28 November 2014 was: "7. The client I am talking about is the same one referenced in Update 53 of 25 November 2014 as having issues with regulators." 1. In each case, it was contended that the defendants were liable for the republication of those statements on the basis that republication was the natural and probable consequence of the original publication and could be taken to have been authorised or intended from the circumstances of publication and the identity and position of the person to whom each call was made. However, in each case, republication was relied upon only as to damages. Accordingly, the issues of defamatory meaning and the defences raised fall to be determined solely by reference to the terms of the six alleged slanders. 2. It was not in dispute that Mr Yanco made the telephone calls and attended the meetings identified. As already noted, however, there was a dispute as to the words said. 3. It may be seen from the evidence summarised above that Mr Yanco made no secret of the fact that his purpose in contacting the stockbrokers was, at the very least, to warn them of the risk of taking on a client he believed was in fact engaging in market manipulation by layering. In making that observation, I am not overlooking the principle that a person's purpose or intention is irrelevant in determining defamatory meaning. However, Mr Yanco's state of knowledge and belief when he contacted the brokers is rationally capable of informing the assessment of the likelihood that he said the words complained of by Mr Schlaepfer. The four telephone calls on 21 November 2014 1. The primary judge noted Mr Yanco's evidence that, before calling any of the stockbrokers, Mr Yanco wrote out by hand what he wanted to say, in the form of dot points. He gave evidence that he does "quite a bit of media" and that it was his habit and his training "to keep one message and stay with the messages". He said he generally writes those messages down in dot points. He no longer had the document he used on this occasion, but his evidence was that he "gave the same messages" in each of the four phone calls. 2. The first call was to Mr Boxall of UBS at 2.55pm. In the absence of his note, Mr Yanco did not claim, over four years after the events in question, to remember precisely what he had said. He gave the following evidence: "I said to Mr Boxall that I was calling because there was a client that had that'd been turned off by a broker, that had previously been turned off by another broker. We were concerned about that client's activities, particularly layering. The client would be coming through DMA, Direct Market Access, they'd be a pretty good client. We couldn't – I couldn't tell you who that client is. But I can tell you that the activities that we're concerned about are similar to the activities that you can read about in the FCA decision on Swift Trade and the Japanese SESC decision on Select Vantage." 1. At 3.22pm, Mr Yanco left a message for Mr Ryan Holsheimer, head of global markets at BA Merrill Lynch. At 3.23pm, he spoke to Mr Kirievsky at BA Merrill Lynch. At 3.32pm he called Mr Couper of Credit Suisse. 2. At 3.53pm, Mr Yanco reported by email to the Commissioners of ASIC and to Mr Veidners and Dr He that he had informed several brokers: "That a client of another broker had been turned off for layering behaviour that ASIC was concerned about – suspected manipulation. I also noted it was similar to trading by Swift Trade and Select Vantage that other regulators were concerned about." 1. At 3.58pm, Mr Kirievsky sent an email within BA Merrill Lynch as follows: "Greg Yanco called just now. There is a client in the market that is likely to be switched off by their current broker today and might be looking for a new broker quite urgently. ASIC is providing heads up to the industry on the basis that regulators (including ASIC) have concerns with the type of trading this client undertakes. In particular, they are concerned that the layering of bids and asks is designed in a way to move the midpoint in a favourable (to them) direction." 1. The primary judge stated at [140] that he accepted Mr Kirievsky's email as a business record of his understanding of ASIC's position but not as a record of the words actually spoken. His Honour said: "So far as the email goes beyond Mr Yanco's evidence of the conversation (for example the reference to layering being "designed in a way to move the midpoint in a favourable (to them) direction"), the Court is not in a position to know whether these parts of the email record things said to Mr Kirievsky or his own interpolations or inferences." 1. With respect, I do not see how Mr Kirievsky could have interpolated or inferred something so specific as that ASIC was "concerned that the layering of bids and asks is designed in a way to move the midpoint in a favourable (to them) direction" if those words were not said or adopted by Mr Yanco during the conversation. The email expressly states that ASIC held that concern "in particular". It is notable that ASIC did in fact hold a concern expressed in very similar terms, as recorded in an email sent by Mr Veidners earlier the same day (21 November 2014) in which he said: "We are progressing with our trading analysis and initial observations suggest Merlito's trading is having an influence on the mid-point price in the direction of layered bids." 1. In any event, that analysis does not resolve the critical question concerning the terms of the slander. 2. At 4.02pm, Mr Yanco sent an email to Mr Holsheimer following up the message he had left at 3.22pm (a minute before he called Mr Kirievsky). Mr Yanco wrote to Mr Holsheimer: "No need to return my call. I spoke to [Mr Kirievsky] to let [BA Merrill Lynch] know that a client of another broker had been turned off for layering behaviour that ASIC was concerned about – suspected manipulation. I also noted it was similar to trading by Swift Trade and Select Vantage that other regulators were concerned about." 1. At exactly the same time (4.02pm), Mr Couper sent an email to two colleagues within Credit Suisse. That is the email by reference to which Mr Schlaepfer pleaded his causes of action. As already noted, Mr Schlaepfer did not call evidence from Mr Couper or any other person who heard any of the words said by Mr Yanco. Accordingly, a critical issue in the proof of the slander was whether Mr Couper's email was an accurate record of what Mr Yanco had said to him. As indicated by the times noted above, the email was sent within 30 minutes of the beginning of Mr Yanco's conversation with Mr Couper, at a time when the conversation would obviously have been fresh in Mr Couper's mind. The email is set out in full below (in the judgment at [137], the primary judge added numbers for ease of reference and those are adopted here): "Just took a call from Greg Yanco – NOTE – this does not involve any actions by [Credit Suisse]. (1) ASIC have concerns about a particular Entity who is layering the market. (2) ASIC is aware that the Entity has been closed down at two brokers because of their behaviour. (3) ASIC is aware this entity would be quite a payer to brokers (fees). (4) This would be DMA [Direct Market Access]. (5) ASIC was NOT able to advise the name of the Entity but were able to advise that they are related to Swift Trade, Select Vantage and Merlito. Peter Beck (or Bec) is associated with Swift Trade. (6) ASIC wanted us to be aware of their concerns. Can you please check if we have any clients with associations with the above entities and be aware of new clients and apply [heightened] diligence." 1. The last conversation Mr Yanco had with a broker that day was with Mr Newton of Deutsche Bank at 4.14pm. He tried to call the head of markets compliance at Citi, Ms Mouhtaris, but was unable to reach her. The meeting with Citi on 24 November 2014 1. On 24 November 2014, Mr Yanco attended a meeting at Citi. He said that, at the end of the meeting he "just went through those same messages" that he had made in his calls to the four brokers. He said he did not have his note with him at that time but that he was "very clear about what our messages were" at that time as they had been preparing another document to disseminate to the market. Market Surveillance Update 53 1. On 25 November 2014, ASIC issued Market Surveillance Update 53. The primary judge explained at [142] that the update was circulated by email to market participants with hyperlinks to the reports referred to (Japan's SESC decision of February 2014 and the UK Financial Services Authority's decision of May 2014). The market update relevantly provided: "Australian market participants terminate client for suspected market manipulation An overseas securities firm providing intermediary services to proprietary traders had its market access terminated by two market participants within a three month period. ASIC's preliminary analysis of order submission and trading patterns in question revealed: large numbers of orders from a single entity resting on the order book of relevant securities, many at the same price step disproportionately large number of orders being entered, amended, cancelled and re-entered by that entity a positive correlation between the change in the entity's contribution to order book imbalance and the mid-point price of relevant securities, and clustering of order submission patterns, which may be indicative of co-ordination between ultimate order placers behind the entity. Overseas regulatory responses to suspected market manipulation In February 2014, Japan's Securities and Exchange Surveillance Commission recommended a fine of 60,000 yen for alleged market manipulation through layering by Select Vantage Inc. Read about Securities and Exchanqe Surveillance Commission recommendation In 2011, the Financial Services Authority in the UK issued a fine of £8 million to Swift Trade Inc, (Swift) for similar instances of market manipulation through layering. A former trader at Swift is the founder and owner of Merlito Securities Company Limited (the intermediary securities firm for Select Vantage Inc) and President of True North Vantage (a subsidiary of Select Vantage Inc). Read about Financial Services Authority fine Market participants are reminded of their obligations to comply with Part 5.7 of the ASIC Market Integrity Rules (ASX Market) 2010 on Manipulative Trading and Part 5.11 of the ASIC Market Integrity Rules (ASX Market) 2010 on Suspicious Activity Reporting." 1. The evidence established that a simple Google search would have established that the President of True North Vantage was Mr Schlaepfer. Meeting with Mr Holsheimer on 28 November 2014 1. On 28 November 2014 Mr Yanco had a meeting with Mr Holsheimer. As noted above, Mr Yanco had sent an email to Mr Holsheimer on 21 November 2014 after failing to reach him by telephone. Mr Yanco gave evidence that, at the meeting, he told him again that ASIC was concerned about a client and that the concern was about the layering activity – that ASIC was "seeing activity that was similar to what we'd seen" in the "Swift Trade report and the Japan SESC report on Select Vantage" and that "they'd be a very good payer, and through DMA [direct market access]". 2. That was the sixth matter complained of. Grounds 1 and 2: failure to make findings in accordance with Mr Couper's email 1. The primary judge found at [153] that the words spoken by Mr Yanco on each of the six occasions were to the following effect: "(1) ASIC is concerned about the activities of a client, particularly layering. (2) ASIC is aware that the client has been turned off by a broker for layering behaviour and had previously been turned off by another broker. (3) It would be a pretty good client. (4) This client would be a direct market access client. (5) ASIC cannot say who the client is but can say that the activities ASIC is concerned about are similar to those that can be read about in the FCA [Financial Services Authority] decision on Swift Trade and the Japanese SESC decision on Select Vantage. (6) ASIC wants you to be aware of our concerns." 1. Grounds 1 to 3 challenge that finding. Grounds 1 and 2 are concerned with the first to fifth matters complained of, as follows: "1 The trial Judge erred in failing to find that the Respondents published slanders to employees of Credit Suisse, UBS, BA Merrill Lynch, Deutsche Bank and Citi on about 21-24 November to the effect of that recorded in the contemporaneous file note of Mr Couper. 2 The trial judge erred in failing to find that the Respondents published slanders to Credit Suisse, UBS, BA Merrill Lynch, Deutsche Bank and Citi on about 21-24 November 2014 containing the words "ASIC was not able to advise the name of the entity but were able to advise that they are related to Swift Trade, Select Vantage and Merlito. Peter Beck is associated with Swift Trade" when: (a) the contemporaneous note of Mr Couper recorded this as having been said; and (b) where Mr Yanco's evidence was that he did not recall whether he said those words." 1. Mr Yanco's evidence as to what he said in the conversations is set out above. The principal difference between his version and Mr Couper's email concerns point (5) in Mr Couper's email. The critical question is whether Mr Yanco said the client or entity was "related to Swift Trade, Select Vantage and Merlito" (as recorded in Mr Couper's email) or whether he only said that "the activities ASIC was concerned about" were "similar to" the activities of Swift Trade and Select Vantage dealt with in decisions of other regulators. A separate question is whether Mr Yanco said anything about Peter Beck being associated with Swift Trade: Mr Couper recorded that fact; Mr Yanco's account omitted it. 2. As to the first matter, the primary judge considered it "improbable" that Mr Yanco would have said that the relevant client was "related to" Select Vantage and Merlito. His Honour explained at [148]: "On any view of the conversation, including Mr Couper's points [1]-[4], Mr Yanco was trying to avoid identifying the relevant client. Further, the form of words written by Mr Couper would have been contrary to Mr Yanco's knowledge. The client in question was Merlito, with Select Vantage trading through it. It would not have been correct to say that the client was "related to" those entities (or to Swift Trade). Mr Yanco's version of this part of the conversation is, again, supported by his emails at 3:53pm and 4:02 pm on 21 November, to the Commissioners and to Mr Holsheimer respectively." 1. I respectfully disagree with his Honour's conclusion on that issue, for three reasons. The first is the reason stated in ground 2: Mr Couper's email is clearly framed as an account of the conversation and was recorded in a contemporaneous record whereas, by the time Mr Yanco gave his account of the conversations, he no longer had his speaking notes and he did not recall precisely what he had said. The cross-examination of Mr Yanco by senior counsel for Mr Schlaepfer, Mr Tobin QC, was effective in demonstrating that Mr Yanco did not actually remember what he had said; there was clearly an element of reconstruction in his account. Contemporaneous records are rightly recognised as being inherently more reliable than the recollection of an interested party facing legal action. I do not mean to suggest that Mr Yanco's evidence was anything other than an honest account, but such accounts are often unwittingly influenced by self-interest. Mr Couper's account accords with what Mr Yanco knew at the time and with what he said was his purpose in contacting the brokers. 2. Secondly, the primary judge's reasoning rests on the assumption that Mr Yanco was using the term "client" to refer to a corporate entity. Only on that assumption was it incorrect to say that the client was "related to" Select Vantage and Merlito (because the corporate client was Select Vantage and Merlito). However, it is necessary to consider the whole of the relevant statement in Mr Couper's email. He wrote "ASIC was NOT able to advise the name of the Entity but were able to advise that they are related to Swift Trade, Select Vantage and Merlito. Peter Beck (or Bec) is associated with Swift Trade". The word "entity" was Mr Couper's word, not Mr Yanco's. Mr Yanco used the word "client" throughout his evidence. The description of a client or entity who was related to Swift Trade, Select Vantage and Merlito makes perfect sense if it was a reference to the person behind the corporate entity, Mr Schlaepfer. So far as the evidence reveals, he was the only common link between Swift Trade, Select Vantage, Merlito and Peter Beck. That is that whole foundation of Mr Schlaepfer's defamation action; that Mr Yanco was talking about him. 3. Thirdly, with respect, the finding that Mr Yanco was trying to avoid identifying the relevant client makes no sense. It may be accepted that he was avoiding naming the client. In the same sentence, according to Mr Couper's email, he did name Swift Trade, Select Vantage and Merlito and possibly also Peter Beck. The point of the calls was to warn brokers off the particular client, or at least to persuade them to apply heightened diligence before taking the client on. For the calls to be effective, he had to go some way to identifying the client. In the absence of any identifying information, Mr Yanco's message would have been reduced to "ASIC has concerns about layering. Be vigilant." 4. Mr Couper's email records a version of the conversation according to which, while Mr Yanco stated that he was not able to name the client, he provided identifying information from which the brokers could work out who he was talking about. That makes perfect sense in circumstances where, as set out above, Mr Yanco openly explained that ASIC's goal was to have the potentially manipulative behaviour stopped. That was achieved, first, by encouraging the previous broker that it should terminate its provision of broking services to Merlito and, next, by warning other brokers of ASIC's concerns. 5. Mr Yanco's version given in evidence is consistent with the email he sent at 3.53pm in which he said he had told a number of brokers the conduct ASIC was concerned about was "similar to trading by Swift Trade and Select Vantage that other regulators were concerned about". However, those remarks are not inconsistent with the content of Mr Couper's email. A reference to the trading that had concerned other regulators may well have been part of a discussion in which it was said that the "client" who had been switched off was related to those entities. In my assessment, the evidence points strongly to the conclusion that what Mr Couper recorded was what he was told by Mr Yanco. 6. As to whether there was any mention of Mr Beck, the primary judge was not satisfied that words to the effect of those recorded in Mr Couper's email were spoken. His Honour postulated at [149] that Mr Couper might have added that information from his own memory of an association between the name Swift Trade and "either Beck or Bec" rather than from anything said by Mr Yanco. His Honour said at [149]: "Mr Yanco did not recall having said, to any of the brokers with whom he spoke, that 'Peter Beck (or Bec) is associated with Swift Trade' (see point [5] in Mr Couper's email). I am not satisfied on the balance of probabilities that words to that effect were spoken. Mr Couper may have had his own memory of an association between the name Swift Trade and either Beck or Bec. The sentence quoted may not have been a notation of anything said to him by Mr Yanco." 1. Mr Schlaepfer submitted that the primary judge's explanation that "Mr Couper may have had his own memory of an association between the name Swift Trade and either Beck (or Bec)" is most improbable given that Mr Couper evidently did not know who Mr Yanco was talking about. That was said to be the inference to be drawn from an email sent by Mr Couper at 4.42pm in reply to one of the recipients of his email on which the pleading was based. In that further email, Mr Couper said: "Dr Healy is doing a little googling. ASIC couldn't tell us the client, must be a confidentiality issue or investigations have begun." 1. I do not accept that submission. If Mr Yanco named Swift Trade, the primary judge's reasoning still holds good: Mr Couper may have known that Mr Beck was involved with that company, whether or not he knew who Mr Yanco was referring to as the client or entity that might approach the brokers. 2. However, as further submitted by Mr Schlaepfer, the suggestion that Mr Couper's recording of that sentence "may not have been a notation of anything said to him by Mr Yanco" is inconsistent with the plain meaning and context of the email. The email differentiates between what Mr Yanco would not say ("ASIC was NOT able to advise the name of the Entity") and what he did say ("but were able to advise that they are related to Swift Trade, Select Vantage and Merlito"). The next sentence follows logically as part of the record of what Mr Yanco did say ("Peter Beck (or Bec) is associated with Swift Trade"). That is confirmed by the alternative spelling, which indicates that Mr Couper was spelling phonetically a name he had been told rather than adding a comment from his own knowledge. 3. My conclusion on that issue is reinforced by the evidence that Mr Yanco had a dim view of trading firms of the kind he understood had been run by Mr Beck, whose activities he had been following since 2011. When he first became aware of the Ontario Securities Commission's interest in Mr Beck, he circulated that information within ASIC, referring to such firms as "bucket shops". He accepted in cross-examination that that was "not a flattering term". It referred to "trading firms where groups of people are put together to day trade, without proper compliance training or regulatory supervision", typically "well-educated people in developing countries" who were allowed "to trade as they like with the firm's capital with little oversight". 4. For those reasons, I would uphold grounds 1 and 2. I am satisfied that Mr Couper's contemporaneous email is an accurate record of what Mr Yanco said to the six brokers. Ground 3: failure to find slander as pleaded 1. Ground 3 concerns the sixth matter complained of. That ground is: "The trial Judge erred in failing to find that the Respondents published a slander to Mr Ryan Holsheimer of BA Merrill Lynch on or about 28 November 2014 consistent with the substance of the words recorded at J [144]." 1. The words referred to are the words in point 7 in annexure B to the statement of claim, as follows: "7. The client I am talking about is the same one referred to in Update 53 of 25 November 2014 as having issues with regulators." 1. The primary judge said at [152]: "With respect to point [7], alleged to have been said by Mr Yanco in his conversation with Mr Holsheimer on 28 November 2014, Mr Yanco had no recollection of saying this but did not deny it. As earlier mentioned, Mr Holsheimer did not give evidence. In an email of 4 December 2014 Mr Holsheimer said that on this occasion Mr Yanco had 'hinted strongly that the client was the same one they reference [sic] had issues with other regulators in' MSU No 53. That characterisation of what Mr Yanco said provides no evidence of the words spoken. There is insufficient evidence upon which the Court could find that words to the effect of point [7] were spoken on 28 November 2014." 1. Contrary to that finding, Mr Yanco accepted that he did say words to the effect of point 7. He was asked whether he said to Mr Holsheimer "the client I'm talking about is the same one referenced in update 53 of 25 November 2014 as having issues with regulators". He said, "I recall words similar to that". He also confirmed that it was his intention to convey that. The only qualification was that he did not recall saying the specific words put to him. 2. In my respectful opinion, the primary judge erred in failing to find the sixth matter complained of proved. I would uphold ground 3. Ground 4: identification of Mr Schlaepfer 1. Ground 4 is: "The trial Judge erred in finding that Mr Schlaepfer was not identified by one or more recipients of the publications." 1. The primary judge noted the principle stated in Prince v Malouf [2014] NSWCA 12 at [102]-[103] (McColl, Basten and Ward JJA) that it is an essential element of a claim in defamation that the plaintiff prove that the published statements were made "of and concerning" him or her. In that decision at [103], the Court noted that, where identification is in issue, it is "common but not essential" to call a witness who says he or she made the connection between the matter complained of and the plaintiff. 2. It is clear from the judgment at [155] that the primary judge's conclusion on the issue of identification flowed from his conclusion on the issue of publication. On the primary judge's finding as to the words spoken by Mr Yanco, no particular corporation or organisation was identified as the "client" referred to. 3. Mr Schlaepfer relied for identification on an email sent by Mr Harni Shalabi of Credit Suisse at 5.23pm on 21 November 2014, in response to Mr Couper's email, in which Mr Shalabi said: "I know this outfit well. They used to trade with [Credit Suisse] in their previous incarnation called Orbixa/Biremis. But we eventually dropped them due to regulatory concerns. Daniel bought the day trading platform from Peter Beck and resurrected it as Select Vantage/Merlito. It was always thought that Peter was the problem and that Dan would clean it up." 1. The primary judge said at [157] that the plaintiff's reliance on that email as some evidence to establish identification "could only have any force if [his Honour] had accepted that Mr Yanco's conversation was as set out in Mr Couper's email, to which Mr Shalabi was responding". As I have found that Mr Yanco did make the statements set out in Mr Couper's email, it follows that Mr Shalabi's email does establish identification of Mr Schlaepfer (referred to by Mr Shalabi as "Daniel" and "Dan"). 2. The respondents submitted that Mr Shalabi's email was irrelevant because Mr Shalabi was not a recipient of the matters complained of; he was responding to Mr Couper's email. However, as submitted by Mr Schlaepfer in reply, the significant point is that Mr Shalabi (who was a member of Mr Couper's team) identified the person to Mr Couper. 3. Mr Schlaepfer relied in that context on the principles stated in Fairfax Media Publications Pty Ltd v Pedavoli [2015] NSWCA 237 at [78] (Simpson JA, McColl JA agreeing at [1]) and [145]-[159] (Sackville JA, McColl JA agreeing at [1]). That was an appeal from a decision of mine. The matter complained of in that case was a salacious article about a teacher. By reason of the inclusion of incorrect information, the article wrongly pointed to the plaintiff as the teacher in question. The principle upheld by the Court of Appeal was that the cause of action may be sustained if identification occurs later than the time of original publication, particularly if the recipient of the information is in effect invited to discover the identity of the person about whom the matter complained of is published. 4. In accordance with that principle in Pedavoli, the result of Mr Shalabi's email was to identify Mr Schlaepfer to Mr Couper, albeit after the time Mr Yanco telephoned him. Indeed, the language of Mr Shalabi's email indicates a common assumption that both knew the "Daniel" or "Dan" referred to by Mr Shalabi was Mr Schlaepfer. 5. The primary judge noted the principle in Pedavoli but indicated at [159] that he did not accept that Mr Yanco's statements to the brokers on any of the six occasions invited them to make their own enquiries to ascertain what "client" he was referring to. His Honour said at [160]: "The communications prompted no enquiry as to the identity of the client because that would become clear enough if a substantial party, recently turned off by other brokers and seeking DMA Services, should make an approach. If there was no approach the identity of the client was of no significance to the listeners." 1. Mr Schlaepfer submitted that, quite apart from the evidence to the contrary, those remarks overlook the force of natural human curiosity. I agree. Mr Yanco, a very senior officer at the national regulator, was contacting major brokers directly to warn them that a significant player in the market (a client who "would be quite a payer to brokers") was layering the market. Leaving aside the obvious potential regulatory concerns, which plainly warranted careful inquiry on the part of the brokers, the information conveyed was such as to excite gossip and intrigue. In my view, the recipients of the phone calls would have been very keen to work out the identity of the trader referred to. 2. The primary judge accepted at [161] that Update 53 came to the attention of each of the brokers with whom Mr Yanco spoke on or shortly after the date of its publication, 25 November 2014. In accordance with the principle accepted in Pedavoli, his Honour accepted that that was sufficiently proximate to Mr Yanco's conversations on 21 and 24 November 2014 for the contents of the market update to be taken into account in determining whether Mr Schlaepfer was identified. Plainly, it was also able to be taken into account on the issue of identification in respect of the meeting with Mr Holsheimer on 28 November 2014, as that was after publication of the update. However, his Honour reasoned at [162] that it would not have been reasonable for the brokers having knowledge of that update to conclude that the client referred to was Mr Schlaepfer. The basis for that conclusion was that Update 53 appeared to refer to an "overseas securities firm" or an "entity". His Honour said at [165] "no listener in the position of any of these brokers could reasonably have conflated an incorporated entity with an individual concerned [in] it". 3. In my respectful opinion, that reasoning reflects an overly lawyerly analysis which in any event assumes a false dichotomy. It would be open to the ordinary reasonable reader to take the market surveillance update to refer both to a corporate entity and to the individual principal of that entity. Indeed, in my view, that is the ordinary and natural way in which Mr Yanco's statements would have been understood. Mr Yanco himself was very much concerned with the personalities behind the corporate entities. That is not to say his understanding or intention is relevant, but only to reinforce the proposition that, on the issue of market integrity, it is the personalities behind the trading entities that matter. 4. As submitted by Mr Schlaepfer, Update 53 referred to an individual who was unmistakably Mr Schlaepfer ("a former trader at Swift is the founder and owner of Merlito"). I am satisfied on the strength of the matters raised by Mr Schlaepfer that the element of identification was satisfied. I would uphold ground 4. 5. I note that ASIC and Mr Yanco contended at the trial that Mr Schlaepfer was estopped from relying on Update 53 for the purposes of establishing his causes of action as a result of an agreement reached to settle an earlier threat of legal action. On the findings made by the primary judge, it was not necessary for his Honour to determine that issue: at [168]. ASIC did not pursue that point in the appeal. Grounds 5 and 6: imputations conveyed by the natural and ordinary meaning of the words 1. The imputations specified by Mr Schlaepfer as arising in the natural and ordinary meaning of the words published were: "(a) [Mr Schlaepfer] was engaging in criminal conduct by layering the stock market. (b) In the alternative to (a), [Mr Schlaepfer] was engaging in unlawful market manipulation. (c) [Mr Schlaepfer] had conducted his business in such a way as to warrant the Head of Market Supervision at ASIC contacting the head of compliance at a large brokering house and warning him of the risks of doing business with both his companies Merlito Securities and Select Vantage. (d) [Mr Schlaepfer] had so mis-conducted his financial business as to deserve having had two brokers terminate relationships with his company Merlito Securities." 1. The primary judge found that none of those imputations was conveyed: at [178]. 2. Grounds 5 and 6 challenge the primary judge's findings only as to imputations (b), (c) and (d), as follows: "5 The trial Judge erred in failing to find that the slanders published by Mr Yanco to the effect of that recorded in the contemporaneous file note of Mr Couper, or alternatively in the terms as found by the trial Judge, conveyed imputations (b), (c) and (d) in their natural and ordinary meaning to the particular listeners to the slander, when the proper test to be applied when considering whether imputations are conveyed is the objective 'ordinary reasonable listener' test. 6 The trial Judge erred at [174] in purporting to consider and then speculating about the particular listeners to the slander, when the proper test to be applied when considering whether imputations are conveyed is the objective 'ordinary reasonable listener' test." 1. Mr Schlaepfer submitted that the primary judge made two critical errors in finding that those imputations were not conveyed. First, it was submitted that his Honour applied a "legalistic and technical approach" instead of applying the test of the ordinary reasonable listener who "reads between the lines". Secondly, as contended in different ways in both grounds, it was submitted that his Honour erred in considering the particular characteristics of the recipients of the matters complained of (stockbrokers in a highly regulated environment). 2. The primary judge correctly identified at [169] that the test for determining whether the matter complained of conveyed the imputations specified by the plaintiff is whether those meanings would have been conveyed to the ordinary reasonable listener. His Honour also correctly identified the characteristics of the ordinary reasonable listener, by reference to the decision of this Court in Amalgamated Television Services Pty Ltd v Marsden (1998) 43 NSWLR 158 at 165 (per Hunt CJ at CL, Mason P and Handley JA agreeing): "The ordinary reasonable reader (or listener or viewer) is a person of fair average intelligence, who is neither perverse, nor morbid or suspicious of mind, nor avid for scandal. That person does not live in an ivory tower but can and does read between the lines in the light of that person's general knowledge and experience of worldly affairs." (citations omitted). 1. However, as contended by grounds 5 and 6, the primary judge's conclusion was instead expressed by reference to the characteristics of a particular audience (stockbrokers in a highly regulated environment). As submitted by Mr Schlaepfer, that is not the test. The ordinary reasonable reader or listener or viewer is a homogenous construct – the question whether a person has been defamed is judged by "hypothetical referees who are taken to have a uniform view of the meaning of the language used, and upon the standards, moral or social, by which they evaluate the imputation they understand to have been made": Corby v Allen & Unwin Pty Ltd [2014] NSWCA 227 at [180]-[181] (per McColl JA, Bathurst CJ and Gleeson JA agreeing at [1] and [191]) citing Reader's Digest Services Pty Ltd v Lamb (1982) 150 CLR 500; [1982] HCA 4 at 505-506. 2. The primary judge's conclusion concerning imputations (a) and (b) is set out at [173]-[174]. His Honour reasoned that elements of the words he had found were said by Mr Yanco "expressly limited ASIC's assessment to the level of 'concerns'; that is, a possibility not yet concluded" (at [173]) and that, in this "highly regulated environment", brokers would be "well attuned to the difference between, on the one hand, ASIC being concerned about a client's trading behaviour and its broker turning it off and, on the other hand, ASIC making an affirmative assertion that such market misconduct had taken place": at [174]. 3. It is not clear to me that the well-informed stockbroker in a highly regulated environment would be any less inclined than the ordinary reasonable listener to understand Mr Yanco's words in a defamatory sense; he or she might indeed be more inclined to read between the lines and to understand a concern expressed by ASIC as probably being well-founded. But in any event, as already explained, the understanding of the particular audience is not the test and it must be accepted that his Honour erred to that extent. 4. It remains necessary to consider whether, applying the correct test, the imputations were conveyed. ASIC put two arguments to support the primary judge's conclusion concerning imputation (b). First, it was submitted that the language of the matter complained of "simply does not lend itself to the meaning that Mr Schlaepfer was personally engaging in [the conduct identified]". I do not accept that submission. On the findings I have made as to the words said, Mr Yanco was talking about a "client" who would have been identified to be Mr Schlaepfer. The primary judge accepted that Mr Yanco used the word "client" rather than Mr Couper's word, "entity". 5. In my view, ASIC's submission on this issue reflects the same overly lawyerly analysis engaged in by the primary judge. I do not accept that the ordinary reasonable listener would pay meticulous heed to whether the language of the matter complained of distinguished between the corporate entity and its principal. A reasonable person of ordinary intelligence, experience and education would not pause to assess the defamatory impact of a statement by reference to the principle in Salomon v Salomon [1897] AC 22. An imputation of deliberate market manipulation would be understood as saying something not only about the company involved but also about the person who runs the company. 6. The second submission put by ASIC, consistently with the reasoning of the primary judge, was that all that was conveyed was a suspicion or "concern", which would not be understood to mean layering had in fact occurred. The distinction between imputations of guilt and mere suspicion is well recognized in the law of defamation. ASIC's written submissions referred in this context to the classification of imputations offered in the decision of the English Court of Appeal in Chase v News Group Newspapers Ltd [2002] EWCA Civ 1772 at [45]: "The sting of a libel may be capable of meaning that a claimant has in fact committed some serious act, such as murder. Alternatively it may be suggested that the words mean that there are reasonable grounds to suspect that he/she has committed such an act. A third possibility is that they may mean that there are grounds for investigating whether he/she has been responsible for such an act." 1. Subsequent English decisions have adopted that classification with the shorthand "Chase levels 1, 2 and 3": see for example Dyson v Associated Newspapers Ltd [2020] EWHC 188 at [10]. ASIC's point was that the slander here could not convey the Chase level 1 imputation. 2. I disagree. In my view, Mr Yanco's words would have conveyed to the ordinary reasonable listener the meaning that the client whom Mr Yanco was careful not to name was engaging in layering. Mr Yanco did not say that ASIC was concerned the client might be layering, or that ASIC suspected the client of layering, or that it proposed to investigate whether layering was occurring. Mr Yanco noted ASIC's concern that the client was layering. The word "concern" suggests something stronger than mere suspicion, in my view. It suggests the identification of wrongful conduct justifying an appropriate response by the regulator. 3. Further, the context suggested a high level of confidence as to the basis for the concern. Why would ASIC think it appropriate to make personal calls to warn major brokers of a mere suspicion? In my respectful opinion, the primary judge's conclusions disregarded the nature of the communication, being a solemn warning from the head of market supervision at ASIC concerning what on any view were very serious matters. Anything short of a well-founded belief that misconduct had occurred would not have warranted that kind of communication from a man in Mr Yanco's position. 4. As to imputations (c) and (d), rather than attempting to summarise the primary judge's reasoning at [176]-[177], it is preferable to set it out in full: "176 The spoken words would not have conveyed to a reasonable person in the position of the brokers an imputation that the business of the 'client' referred to had in fact been misconducted. Imputation (c) is a significant distortion of the meaning actually conveyed by the words. Mr Yanco conveyed no more than that ASIC considered that its 'concerns' warranted the urging of caution by the broker if the client should approach. The expression of the regulator's concerns and the implicit indication that these were sufficient to require a communication of this nature is entirely different from a positive assertion of misconduct of business. Further, even if the words could be taken as conveying an affirmative allegation that the business had been misconducted they certainly did not convey that this had been at the hands of any nominated individual, in particular Mr Schlaepfer. 177 With respect to imputation (d), nothing said by Mr Yanco could reasonably have been taken as a conclusion or assertion by him or by ASIC that the client 'deserved' having had its DMA services terminated by the two brokers. The words conveyed that layering behaviour was the reason the brokers had assigned and, at most, that it was their conclusion. Misconduct of business deserving of such termination was not asserted as a fact. Mr Schlaepfer submits that "the overwhelming inference is that [termination by the other brokers] was warranted". I reject that submission. I find no basis upon which a reasonable listener could read into Mr Yanco's words an assertion that the brokers had made a correct judgment. In conjunction with ASIC's 'concerns' Mr Yanco's words rose no higher than a statement of the view that the other brokers had had formed." 1. In my respectful opinion, as submitted by Mr Schlaepfer, that reasoning was overly technical and did not give due regard to the context of the publications. Imputation (c) is a relatively low-level imputation which merely captures what Mr Yanco said and did. The primary judge has substituted the word "misconducted" for the word "conducted" in that imputation. As to imputation (d), I can do no better in explaining my reasons than to adopt the submission put by Mr Schlaepfer: "if a regulator says it has concerns, and then it buttresses that position by saying two brokers have terminated the object of those concerns, an imputation that the termination was deserved is plainly conveyed." 2. ASIC sought to support the primary judge's reasons concerning imputations (c) and (d) by again referring to the alleged difficulty of establishing that the words conveyed any meaning about Mr Schlaepfer, as opposed to his companies. For the reasons already explained, I disagree. 3. Subject to one qualification, I would uphold grounds 5 and 6. The qualification is that, in my view, the ordinary reasonable listener would not know that the term "layering" refers to a form of unlawful market manipulation. Accordingly, in my view, imputation (b) was conveyed only as a true innuendo (a meaning that would have been conveyed by Mr Yanco's words to persons who knew particular facts extrinsic to the words spoken). That was the alternative case pleaded by Mr Yanco in par 14 of the statement of claim. 4. For those reasons, I would hold that imputation (b) was conveyed to any person who knew that layering is a form of market manipulation (which, as the primary judge found, would include all of the recipients of the matters complained of), while imputations (c) and (d) were conveyed in the ordinary and natural meaning of the words said by Mr Yanco. Ground 8: additional true innuendoes 1. In addition to the imputations considered above, Mr Schlaepfer pleaded a series of additional imputations in par 16 of the statement of claim that were alleged to be conveyed only by way of true innuendo. Those imputations were also rejected by the primary judge at [182]-[184]. 2. There was no challenge in the appeal to the primary judge's rejection of the innuendo pleaded at par 16(c) of the statement of claim. The remaining imputations alleged to be conveyed by way of true innuendo were pleaded in pairs referring to each of Mr Schlaepfer's companies, Select Vantage and Merlito. The primary judge condensed those imputations as follows: "(a) [Mr Schlaepfer's] companies, (i) Merlito Securities and (ii) Select Vantage, engaged in stock market manipulation. (b) [Mr Schlaepfer's] companies, (i) Merlito Securities and (ii) Select Vantage, engaged in stock market manipulation to such a serious extent that two brokers terminated their relationships with [each of them]. … (d) [Mr Schlaepfer] had authorised such serious manipulation of markets as to warrant the Head of Market Supervision at ASIC contacting the head of compliance of a large broking house and warning him of the risks of doing business with [his companies (i) Merlito Securities and (ii) Select Vantage]." 1. The extrinsic facts relied upon by Mr Schlaepfer were: "(a) "Layering" the market is a form of market manipulation whereby large numbers of orders are created, often at various price points, to create a false impression of demand or supply. These orders are then cancelled, or amended, as they move closer to trading. (b) Market manipulation is a criminal offence. (c) ASIC is responsible for investigating and prosecuting market manipulation including layering. (d) "DMA" stands for "Direct Market Access"; whereby investors use a broker's electronic trading system to access the order book of the stock exchange directly. (e) At and before the publication of the defamatory matter, two brokers, Morgan Stanley and Macquarie Securities, had ended their arrangements whereby [Mr Schlaepfer's] businesses had direct access to the Australian market and no other Australian brokers had replaced them. (f) Peter Beck was the principal of Swift Trade Inc. In 2011, Swift was fined £8 million for market manipulation by the Financial Services Authority in the UK. In July 2012, the Financial Industry Regulatory Authority barred Mr Beck and in December 2012, the Securities and Exchange Commission in the United States similarly barred Mr Beck and fined him and his business partner, Charles Kim, $500,000 principally for failure to supervise. All of these sanctions were published throughout the finance industry by the respective regulators on their websites and press releases issued linking to these publications." 1. The primary judge concluded at [180], in substance, that all but (f) were known to the recipients of the matters complained of: "All of these matters have been established as facts by evidence in the proceedings. I infer that each of the brokers to whom Mr Yanco spoke knew the facts in pars (a)-(d) inclusive at the time of the conversations. It has not been shown that they knew the facts in par (e) except to the extent that Mr Yanco told them that two (unnamed) brokers had ceased providing DMA services to an unidentified client. There is no evidence that any of the brokers knew the matters pleaded in par (f)." 1. By ground 7, Mr Schlaepfer initially sought to challenge the findings as to the extent to which the recipients of the matters complained of knew the extrinsic facts, but that ground was not pressed. Ground 8 contends that the primary judge erred in failing to find that the additional imputations other than par 16(c) were conveyed by way of true innuendo by Mr Yanco's words. 2. The primary judge reasoned at [182] that, to the extent that the recipients of the matters complained of had knowledge of the extrinsic facts, such knowledge would not make any difference to his Honour's analysis, which was that Mr Yanco did not make any positive assertion of stock market manipulation by any entity; he merely identified ASIC's "inconclusive concerns". 3. As submitted by Mr Schlaepfer, it follows from my acceptance of his arguments concerning the natural and ordinary meaning imputations that the true innuendo imputations are conveyed. 4. Mr Schlaepfer also relied on Update 53 in this context. He submitted that each of the recipients of the matters complained of, once they read that document, would have known (if it was not already clear to them) that Mr Schlaepfer was the principal and owner of Select Vantage and Merlito. My conclusion is reinforced by that consideration. 5. For those reasons, I would uphold ground 8. Grounds 9 and 10: qualified privilege at common law 1. Grounds 9 and 10 are: "(9) The trial Judge erred in upholding the defence of qualified privilege at common law. (10) The trial Judge erred in failing to consider the occasion of common law qualified privilege actually pleaded and particularised by ASIC which contained a 'reasonable conduct' element." 1. Ground 10 raises a pleading point. For all its ingenuity, the point must be rejected. The argument fastens on the fact that defendants' pleading did not distinguish between qualified privilege under s 30 of the Defamation Act and under the common law. The defences were pleaded together, in the following terms: "Qualified Privilege – section 30 of the Defamation Act and common law (i) The recipients of the matters complained of had an interest or apparent interest in having information on a subject, namely: A. the steps by which ASIC, in its capacity as regulator, monitors and promotes market integrity and consumer protection in relation to the Australian financial system; B. the type of conduct by market participants, those trading or those looking to trade in the market that concerns ASIC in its supervisory responsibilities for activities and conduct in relation to the domestic licensed markets; and C. the type of due diligence required by brokers to comply with their statutory obligations, (Subject) (ii) the matters complained of were published to the recipients in the course of giving to the recipients information on that Subject; (iii) the Defendants had a social, moral or legal duty and/or interest in giving the recipients information on that Subject; (iv) the conduct of the Defendants in publishing the matters complained of was reasonable in the circumstances; and (v) in the premises, the Defendants have a defence, in respect of the publication of the matters complained of, of qualified privilege at both common law and pursuant to section 30 of the Act and, to the extend necessary, pursuant to the corresponding provisions in the defamation legislation of each other Australian State or Territory. 1. The primary judge nonetheless dealt with the defences separately. His Honour did not treat the contention in (iv) (that "the conduct of the Defendants in publishing the matters complained of was reasonable in the circumstances") as an element of the common law defence. With respect, the approach his Honour took was entirely appropriate. 2. As to common law qualified privilege, his Honour referred to the principles stated in the decisions of the High Court in Papaconstuntinos v Holmes a Court (2012) 249 CLR 534; [2012] HCA 53 at [8] (French CJ, Crennan, Keifel and Bell JJ) and Cush v Dillon; Boland v Dillon (2011) 243 CLR 298; [2011] HCA 30 at [12] (French CJ, Crennan and Keifel JJ). In the passage in Papaconstuntinos referred to, the majority said: "The defence of qualified privilege at common law has been held to require that both the maker and the recipient of a defamatory statement have an interest in what is conveyed. This is often referred to as a reciprocity of interest, although 'community of interest' has been considered a more accurate term because it does not suggest as necessary a perfect correspondence of interest. The interest spoken of may also be founded in a duty to speak and to listen to what is conveyed." (citations omitted) 1. The primary judge then summarised the subject of the conversations at [264]. His Honour then said at [265]: "I am satisfied that what Mr Yanco said to the brokers was published to them in the course of giving information on the subjects referred to in the preceding paragraph and, further, that Mr Yanco had a legal duty and interest to convey that information and to make the statements that he did in his capacity as senior compliance officer of ASIC." 1. Mr Schlaepfer submits that, in moving directly to that finding, the primary judge made two errors. The first is the pleading point. Mr Schlaepfer submits that his Honour failed to consider ASIC and Mr Yanco's pleaded case on common law qualified privilege, which "explicitly included an element of reasonable conduct by them in making the publications". The submissions made to the primary judge did not articulate the point with the clarity now brought to it by ground 10. It may nonetheless be accepted that Mr Schlaepfer made submissions to the primary judge in which he contended that the defence as pleaded "in fact reflected the position under the legislation, as the legislation would never have authorised ASIC and [Mr] Yanco to make publications that were unreasonable". 2. The written submissions provided to the primary judge on that issue first summarised the structure of the pleading and then submitted: "The consequence is that the defendants have not articulated a duty at common law that is separate and distinct from the duty arising under the statutory privilege. They particularise reasonable conduct as an element of both the common law and statutory qualified privilege defences. The eleventh-hour protestations at Defendants' closing submissions paragraph [148] (eg "the common law defence has nothing to do with whether the defendants' conduct was reasonable", also [154]) are simply not consistent with the explicit pleaded defence." 1. The submissions at first instance concluded: "The defendants rely on their legislation as supplying their duty in this case. The plaintiffs submit that on no account could the actions taken by Mr Yanco be seen as necessary or reasonably incidental to the statutory functions of ASIC. They were not just unnecessary – they were gratuitous. The legislation cannot be used to legitimise unreasonable conduct on the part of the regulator and it would never permit such conduct." 1. It is true that his Honour did not address the submission that, because of the way the defences were pleaded, the defence at common law could not be upheld unless the judge was satisfied that the conduct of the defendants in publishing the matters complained of was reasonable in the circumstances. However, no harm is done. The submission was nothing short of heretical. Reasonableness is not an element of the defence of qualified privilege at common law. For that reason, the composite manner in which the defendants pleaded the defence should not have caused confusion; it should have been clear to Mr Schlaepfer's legal representatives that the plea of reasonableness related to the statutory defence. Even if the pleading was confusing in that respect, it does not follow that ASIC must prove reasonableness in order to prove the common law defence. The law is not determined by the pleadings; it is supposed to be the other way around. 2. The defence of qualified privilege at common law is concerned with the existence of a "community of interest" which warrants protecting the occasion on which defamatory matter is published from the reach of the tort of defamation. As noted by the respondents, the defence is therefore grounded in notions of public policy. The majority in Papaconstuntinos explained at [50]: "The policy of the law is that freedom of communication may in some circumstances assume more importance than an individual's right to the protection of his or her reputation." The submission that ASIC's statutory jurisdiction could never authorise ASIC to act unreasonably is a distraction in that context. At a simpler level, it could be said that ASIC's statutory jurisdiction does not authorise ASIC to defame people, or to engage in tortious conduct. That does not answer the question whether any particular statement made by ASIC was made on an occasion of qualified privilege. 3. The question raised by the defence is not whether the conduct was authorised by the various statutes from which ASIC derives its powers but whether the statements were published on an occasion of qualified privilege. Whilst it may be anticipated that the answers to those questions would have a large measure of overlap, they are different questions. As noted by the respondents, the essence of the defence is that, on the recognised occasion, the public interest requires a particular recipient to receive frank and uninhibited communication from a particular source: Lindholdt v Hyer [2008] NSWCA 264 at [72] (McColl JA), citing Reynolds v Times Newspapers Ltd [2001] 2 AC 127 at 195 (Lord Nicholls); [1999] UKHL 45. The defence holds that, on recognised occasions, that public interest outweighs the private interest in protection of reputation. 4. For those reasons, I reject Mr Schlaepfer's first contention, that the primary judge erred in failing to consider the inclusion of an element of reasonableness in the pleading of the defence of common law qualified privilege. The respondent's defence at common law did not require proof that their conduct in publishing the matters complained of was reasonable in the circumstances. 5. The second error alleged by Mr Schlaepfer is that the primary judge found a legal duty without considering the scope of ASIC's statutory powers, ASIC's state of mind and the extent of its acquired knowledge at the time of the publication or the various options open to it at the time. Mr Schlaepfer submitted that several "less incendiary options" were available to Mr Yanco rather than the "nuclear option" of calling the major brokers and warning them about Select Vantage and Merlito. He submitted that, in the circumstances, there was no legal duty to make such serious publications. 6. By way of example as to an alternative course available to ASIC, Mr Schlaepfer pointed to clause 5.6.12 of the Market Integrity Rules, which conferred power on ASIC to direct a market participant to suspend a client's direct market access but only if ASIC reasonably considered such action to be appropriate. It was submitted that the primary judge failed to analyse the implications of that rule including the nature of the power and the constraints on it in deciding the defences of qualified privilege. 7. I do not accept that submission. As with ground 10, it overstates what was required to be established in order to make out the common law defence. It also fastens on part only of the primary judge's decision. The primary judge found that Mr Yanco had both a legal duty and an interest in conveying information on the subjects in question. Mr Schlaepfer's argument poses a narrower question, seeking in effect to equate the occasion of qualified privilege with ASIC's statutory legal duties as the regulator. Although the existence of the occasion of qualified privilege was pleaded by reference to the legislative regime, it does not follow that the only protected communications would be those ASIC had a legal duty (under its authorising legislation) to make. The question raised by the defence is whether the relevant community of interest existed so as to warrant protection of the communication. 8. There can be little doubt that, under the regulatory regime, ASIC has extensive responsibilities to protect the integrity of the financial markets. The respondents relied on the objects of the Australian Securities and Investments Commission Act 2001 (Cth), s 1(2) which relevantly provides: (2) In performing its functions and exercising its powers, ASIC must strive to: (a) maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy; and (b) promote the confident and informed participation of investors and consumers in the financial system; and (d) administer the laws that confer functions and powers on it effectively and with a minimum of procedural requirements; and (e) receive, process and store, efficiently and quickly, the information given to ASIC under the laws that confer functions and powers on it; and (f) ensure that information is available as soon as practicable for access by the public; and (g) take whatever action it can take, and is necessary, in order to enforce and give effect to the laws of the Commonwealth that confer functions and powers on it. 1. The respondents also relied on the provisions of s 12A(2) of the ASIC Act, which confers on ASIC the function of monitoring and promoting market integrity and consumer protection in relation to the Australian financial system, and s 798F of the Corporations Act, to which I have already referred. Finally, the respondents relied on ss 11(4) and 12A(6) of the ASIC Act which confer power on ASIC "to do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions." 2. Mr Schlaepfer's submissions did not take issue with the extent of those powers and responsibilities. The burden of the argument was that, upon a close analysis of ASIC's extensive powers, it cannot be concluded that ASIC was under a positive legal duty to make the communications to the brokers as and when it did because it should have taken other "less incendiary" steps. However, although the primary judge found that there was such a legal duty, the respondents correctly submit that they did not need to point to a "legal duty" requiring Mr Yanco to publish the matters complained of in order to succeed on this point. The fact that ASIC had other regulatory options available to it is relevant to the question of reasonableness (discussed below). In my view, however, the primary judge was correct to hold that the relevant community of interest existed. 3. Rightly or wrongly, Mr Yanco had developed a concern that Select Vantage, through Merlito, was layering. Mr Schlaepfer complains that the primary judge did not analyse "ASIC's state of mind and the extent of its acquired knowledge at the time of the publication". While it is true that the primary judge did not discuss that evidence in the section of the judgment dealing with the qualified privilege defences, his Honour did set out the evidence relevant to those matters at great length. He recorded Mr Yanco's evidence that he "came to the view during October and November 2014 that Select Vantage and Merlito were engaging in unlawful market manipulation and that Mr Schlaepfer was the controlling influence behind these entities and was himself engaged in such manipulation" and expressly accepted that evidence and Mr Yanco's defence of the basis on which he had reached that view: at [120]-[121]. As explained below, I do not share his Honour's view that ASIC was under a legal duty to make the communications. However, I see no error in his Honour's conclusion concerning the qualified privilege defence to the extent that it was based on the existence of a community of interest in the information ASIC shared with the brokers. 4. For those reasons, I would reject ground 9. It follows that I would dismiss the appeal. Grounds 11 and 12: statutory qualified privilege 1. In light of that conclusion, it is not necessary to determine the remaining grounds. It is nonetheless appropriate to state how I would have determined those grounds had it been necessary to do so. Grounds 11 and 12 are: (11) The trial Judge erred in upholding the defence of statutory qualified privilege. (12) The trial Judge erred in finding the conduct of the Respondents was reasonable. 1. Section 30 of the Defamation Act provides: 30 Defence of qualified privilege for provision of certain information (1) There is a defence of qualified privilege for the publication of defamatory matter to a person (the "recipient") if the defendant proves that-- (a) the recipient has an interest or apparent interest in having information on some subject, and (b) the matter is published to the recipient in the course of giving to the recipient information on that subject, and (c) the conduct of the defendant in publishing that matter is reasonable in the circumstances. (2) For the purposes of subsection (1), a recipient has an apparent interest in having information on some subject if, and only if, at the time of the publication in question, the defendant believes on reasonable grounds that the recipient has that interest. (3) In determining for the purposes of subsection (1) whether the conduct of the defendant in publishing matter about a person is reasonable in the circumstances, a court may take into account-- (a) the extent to which the matter published is of public interest, and (b) the extent to which the matter published relates to the performance of the public functions or activities of the person, and (c) the seriousness of any defamatory imputation carried by the matter published, and (d) the extent to which the matter published distinguishes between suspicions, allegations and proven facts, and (e) whether it was in the public interest in the circumstances for the matter published to be published expeditiously, and (f) the nature of the business environment in which the defendant operates, and (g) the sources of the information in the matter published and the integrity of those sources, and (h) whether the matter published contained the substance of the person's side of the story and, if not, whether a reasonable attempt was made by the defendant to obtain and publish a response from the person, and (i) any other steps taken to verify the information in the matter published, and (j) any other circumstances that the court considers relevant. (4) For the avoidance of doubt, a defence of qualified privilege under subsection (1) is defeated if the plaintiff proves that the publication of the defamatory matter was actuated by malice. (5) However, a defence of qualified privilege under subsection (1) is not defeated merely because the defamatory matter was published for reward. 1. It was not in dispute that the recipients of the matters complained of had an interest or apparent interest in having information on the subject identified in the pleading or that the matters complained of were published to the recipients in the course of giving them information on that subject. The primary judge found accordingly at [287]. The only contested issue concerning the statutory defence was whether the conduct of the defendants in publishing the matters complained of was reasonable in the circumstances. As noted by Mr Schlaepfer, the primary judge dealt with that issue in just two paragraphs of the judgment at [289]-[290]: "[289] The statements made by Mr Yanco to the brokers were very important to the discharge of his and ASIC's statutory duties. The Market Integrity Rules placed a burden upon the brokers to control the market activity of their clients through direct access utilising AOP. ASIC was empowered to direct the brokers as necessary to try to ensure that their clients did not undermine the integrity of the market. There was a significant public interest in Mr Yanco expeditiously notifying these brokers that they should be wary of taking on an unnamed client whose direct market access via Macquarie had just been terminated. The enquiries that had been made, both by way of Dr He's analysis of Select Vantage's trading and by ascertaining that Mr Schlaepfer was the principal behind Merlito and Select Vantage and had previously been concerned in Swift Trade when it engaged in layering other markets, were in my view as reasonably thorough as could be expected having regard to the urgent need to protect the Australian share market. [290] If Mr Yanco's communications with brokers in the circumstances of this case should be regarded as unreasonable for the purposes of s 30(1)(c), thereby denying Mr Yanco and ASIC the protection of qualified privilege under the Defamation Act, then the defendants would be strongly inhibited against intervening proactively to protect market integrity. If subs (1)(c) should be applied in such a way as to require more thorough enquiry than occurred in this case – as to Select Vantage's misconduct and Mr Schlaepfer's involvement and responsibility – the fairness and transparency of the market could be heavily compromised and its reputation for fair dealing severely damaged by a manipulative trader going from broker to broker while the regulator collected more circumstantial evidence. The difficulty of proving infringements of ss 1041A and 1041B, particularly as against an individual executive, is obvious. A great deal of damage could be done to the reputation of the stock exchange if Mr Yanco should be required to gather more extensive evidence than he did before warning other brokers." 1. Mr Schlaepfer submits that his Honour's decision on that issue was made without any analysis of the whole of the evidence including the following matters to which his Honour did not refer: 1. the failure to make enquiries of Select Vantage or Merlito and to give Mr Schlaepfer an opportunity to respond; 2. Mr Yanco's state of mind and his belief in the truth of the imputations; 3. Mr Yanco's evidence to the effect that he did not intend to convey the imputations; 4. the inadequacy of the individual steps taken in the investigation including particularly the information gathered with respect to Swift Trade and Mr Beck and their connection with Mr Schlaepfer and Select Vantage; 5. the reasonableness of the inclusion of the material concerning the terminations by Morgan Stanley and Macquarie Securities within the slander, and of the material concerning the alleged connection between Mr Beck and Mr Schlaepfer and his companies; and 6. the purpose of the publication and any tension between Mr Yanco's stated purpose of merely alerting market participants to take extra care should they be approached by a new entity for on boarding (on the one hand) and his belief that Select Vantage and Merlito were engaged in unlawful market manipulation and were "not welcome in our market" on the other hand. 1. The primary judge's reasons for concluding that the defendants' conduct was reasonable in the circumstances focused on two matters in particular. First, his Honour considered that the enquiries that had been made as a result of which Dr He concluded that Merlito was layering the market were sufficiently thorough ("as reasonably thorough as could be expected having regard to the urgent need to protect the Australian share market"). 2. Secondly, his Honour had regard to the implications for ASIC of denying Mr Yanco and ASIC the protection of qualified privilege under the Defamation Act in the present case. His Honour considered that, if the defence were made out in the present case, the defendants would be "strongly inhibited against intervening proactively to protect market integrity". It may be noted that, for the purpose of that analysis, his Honour appears to have assumed that the imputations were true and to have taken that into account in his assessment of the reasonableness of the conduct. That is indicated by his Honour's reasoning that the market's reputation for fair dealing could be severely damaged by "a manipulative trader going from broker to broker while the regulator collected more circumstantial evidence". 3. Mr Schlaepfer noted that each of those matters was addressed in his written submissions provided to the primary judge (his Honour did not hear oral submissions). 4. Mr Schlaepfer challenged the finding at [289] that the enquiries that had been made were "as reasonably thorough as could be expected having regard to the urgent need to protect the Australian share market". Mr Schlaepfer submitted that the finding was not supported on an analysis of the evidence. For example, it was noted that Mr Veidners had come to a view that Mr Schlaepfer was closely linked to Mr Beck on the basis of two newspaper articles which could not support that conclusion and that this was one of the matters that influenced his (Mr Veidners') view that Select Vantage's trading was unlawful and should be shut down. 5. As to the primary judge's consideration of the harm that could be done to the stock exchange's reputation if the defence was unsuccessful, Mr Schlaepfer submitted that this amounts to an error of law. The test is the objective reasonableness of the conduct of the defendant in publishing the matter complained of. 6. One of the matters relied upon by Mr Schlaepfer on the question of whether the conduct of the publishers was reasonable was whether Mr Yanco had a proper basis for believing that Morgan Stanley terminated Select Vantage's brokering services for layering conduct. The primary judge addressed that issue in his discussion of the question of malice for the purposes of the common law qualified privilege defence. Mr Schlaepfer submitted that the primary judge's finding on this issue was made without consideration of "significant evidence bearing on Mr Yanco's state of mind" on this issue. Mr Schlaepfer's submissions in this Court provided detailed references to the relevant evidence. The submissions and the evidence referred to may be summarised in the proposition that Mr Yanco should not have concluded that Morgan Stanley terminated its relationship with Select Vantage for layering conduct because Mr Schlaepfer had told Mr Yanco that that was not the reason Morgan Stanley terminated its relationship with Select Vantage. However, Mr Yanco was not required to accept Mr Schlaepfer's assertion about that. He was entitled to rely on the timing of the termination of the relationship, which occurred after the Japanese regulator's action against Select Vantage. 7. The second matter relied upon was ASIC's involvement in Macquarie Securities' termination of its relationship with Select Vantage and Merlito. The relevant evidence is summarised above. That evidence reveals that ASIC was not a passive observer of Macquarie Securities' decision and Mr Yanco did not pretend otherwise. However, the primary judge took the view that, as ASIC's conduct in those exchanges was "not directly the subject of any cause of action", the submissions on that issue were "advanced as a secondary indication of malice on the part of Mr Yanco in his conversations with brokers": at [282]. 8. As submitted by Mr Schlaepfer, that remark misconceived the significance of the evidence on that issue. The question raised by Mr Schlaepfer in his written submissions to the primary judge at [126]-[136] was whether it was reasonable for Mr Yanco to say to the recipients of the matters complained of "ASIC is aware that the entity has been closed down at two brokers because of their behaviour" when, to Mr Yanco's knowledge, that was as a result of increasing pressure put on Macquarie Securities by Mr Veidners in particular and Mr Yanco had congratulated Mr Veidners on the result. No doubt an assessment of the activities of Select Vantage informed Macquarie's decision. However, the point was that the bare statement that a broker had terminated brokering services to Select Vantage did not capture the full extent of the circumstances known to Mr Yanco. On an objective analysis of the evidence, it is difficult to resist the conclusion that Macquarie's decision was to some extent informed by fear of the regulatory consequences for Macquarie of continuing to resist pressure from ASIC to terminate Select Vantage's account. But Mr Yanco represented the position as if the broker in question had independently reached that conclusion and ASIC was merely conveying that information. 9. The respondents noted that the requisite standard of reasonableness a defendant must achieve is "not one of perfection". However, they acknowledged the remarks of the decision of the High Court in Lange v Australian Broadcasting Corporation (1997) 189 CLR 520; [1997] HCA 25 at 574 set out below: "Whether the making of a publication was reasonable must depend upon all the circumstances of the case. But, as a general rule, a defendant's conduct in publishing material giving rise to a defamatory imputation will not be reasonable unless the defendant had reasonable grounds for believing that the imputation was true, took proper steps, so far as they were reasonably open, to verify the accuracy of the material and did not believe the imputation to be untrue. Furthermore, the defendant's conduct will not be reasonable unless the defendant has sought a response from the person defamed and published the response made (if any) except in cases where the seeking or publication of a response was not practicable or it was unnecessary to give the plaintiff an opportunity to respond." 1. The respondents made the ambitious submission that "ASIC did contact SVI/Merlito – through Merlito's agent Macquarie, an approach the trial judge found at [122] was sound and proper in the circumstances." The proposition that Macquarie was Merlito's agent for that purpose is untenable. Macquarie cannot be said to have been Merlito's agent for the purpose of being persuaded to stop being Merlito's agent. The respondents reliance on the primary judge's finding at [122] is misconceived. His Honour was endorsing ASIC's policy of holding brokers responsible as the "gatekeepers" of the market against manipulative and disruptive trading. The endorsement of that proposition only serves to highlight the absurdity of regarding the broker as the agent of the trader for the purpose of seeking a response from the trader before publishing defamatory matter. The contention that ASIC met the usual requirement of reasonableness of seeking a response from the person to be defamed must be rejected. 2. For the reasons already explained, that is not fatal to the defence at common law. The policy underlying that defence recognises occasions on which defamatory matter will be protected by common law qualified privilege in circumstances where it would not be expected that any approach would be made to the person to be defamed. Examples might include reports to police, statements made in response to reference checks for the purpose of employment and complaints to regulators of professional misconduct. 3. But the statutory defence is quite different. It does not require the community of interest necessary to establish the common law defence but it does require the publisher to establish that his or her conduct was reasonable in the circumstances. It may be accepted that the considerations listed in s 30(3) should not be treated as a checklist. So much is plain from the drafting of the section ("a court may take into account…"). 4. In the present context, however, the fact that the communications were made without any opportunity for Mr Schlaepfer to respond was fatal to the element of reasonableness, in my view. The step Mr Yanco took was extremely serious. Whatever his purpose, it was bound to have the effect of warning brokers off Select Vantage as a client. It was a step taken pre-emptively, before ASIC had reached the point of commencing civil penalty action or even directing Macquarie to terminate Select Vantage's account. To go directly to the brokers in that circumstance without making any attempt to take Mr Schlaepfer's side of the story into account was not reasonable. In all of the circumstances, I am not persuaded that the defendants established that element of the statutory defence. For those reasons, had it been necessary to determine grounds 11 and 12, I would have upheld those grounds. Malice 1. The primary judge dealt with the issue of malice for the purpose of the qualified privilege defences only under heading of common law qualified privilege and only in the briefest terms, saying at the conclusion of a paragraph concerned with whether the statements were relevant to the occasion, "I reject the submission of malice": at [273]. However, the notice of appeal did not include any ground challenging that finding. The appellant's written submissions filed over two months in advance of the hearing of the appeal confirmed that Mr Schlaepfer did not appeal the malice finding. However, on the second day of the hearing, Mr Schlaepfer sought leave to amend his notice of appeal to add the following ground: "12A. The trial judge erred in failing to find that the publication of the matters complained of was actuated by the malice of the respondents in that they were published for a purpose foreign to any occasion of privilege, namely, the purpose of ensuring that the Appellant and his companies could no longer trade in the Australian market." 1. The respondents opposed the amendment. The Court refused leave to amend, reserving reasons. For my part, the reasons can be stated very briefly. The application was simply made too late. Contrary to a submission put in support of the application, it was clear that the amendment would prejudice the respondents (noting that one is an individual), at least to the extent that they had prepared the case without addressing the issue of Mr Yanco's purpose in publishing the matters complained of. The respondents accepted that Mr Schlaepfer had repeatedly contended that purpose was relevant to the issue whether there was an occasion of qualified privilege, but ASIC and Mr Yanco did not accept that premise and accordingly did not address purpose in their submissions or preparation. To grant the amendment at the time it was sought would have been inimical to the overriding purpose stated in s 56 of the Civil Procedure Act 2005 (NSW) of facilitating the just, quick and cheap resolution of the real issues in the proceedings. Grounds 13 and 14: truth defence 1. Section 25 of the Defamation Act provides: 25 Defence of justification It is a defence to the publication of defamatory matter if the defendant proves that the defamatory imputations carried by the matter of which the plaintiff complains are substantially true. 1. ASIC and Mr Yanco pleaded the defence of truth to each of the imputations and true innuendoes specified by Mr Schlaepfer. Grounds 13 and 14 challenge the primary judge's findings to the extent that the defence succeeded. As already indicated, while it is not necessary to determine those grounds, I propose to state how I would have determined them had it been necessary to do so. 2. Grounds 13 and 14 were as follows: "(13) His Honour erred in finding (at [246], [251]) that companies controlled by the Appellant, Select Vantage Incorporated and Merlito Securities Company Limited, engaged in manipulation of the stock market by 'layering' and/or by placing orders that were never intended to trade. (14) His Honour erred: a in accepting the Respondents' circumstantial case without considering the evidence that the order activity was consistent with the rational pursuit of legitimate trading strategies; b in making findings of contravention (at [246], [251]) in the absence of any finding (or even allegation) that any particular order or orders constituted a 'transaction' or 'act or omission' that contravened s 1041A or s 1041B of the Corporations Act 2001 (Cth); c in relying on the analysis of ASIC's employee, Mr He, of order activity in relation to the stock OIL ([201], [202]), order activity in relation to the stocks GCN and ATO ([197], [198], [200]) and evidence as to 'clustering' of orders ([193], [194]), each of which was disavowed by Senior Counsel for the Respondents at the trial as not forming part of the truth case and/or was outside the particulars of truth; d in relying on Professor Putnins' '10 metrics' which were novel, untested, unvalidated and (contrary to his Honour's observation at [205]) not based on characteristics which had been seen in past cases where manipulation had been established; e in finding (at [232]) that there was coordinated layering activity among Select Vantage traders based on Professor Putnins' flawed 'correlation' analysis; f in relying on Professor Putnins' opinion, which: (i) was based on a statistical analysis of whole day order data, aggregated across all traders, and which did not identify any particular order or orders that were not intended to trade; and (ii) included order data prior to traders obtaining a long position, when the Respondents' case was that no manipulation occurred before the traders acquired a long position; g in relying (at [205]) on 6 of the metrics (Nos 1, 2, 3, 4, 6 and 7) as compelling when Professor Putnins had based his opinion on all 10 and agreed that 3 of the 6 (Nos 1, 2 and 3) were consistent with legitimate, lawful trading; h in relying (at [240]) on metric 3 as probative because other metrics were present and in relying (at [243]) on metric 7 by reference to unsupported speculation as to what could have been features of the order book on the particular stock/days." 1. The justification defence sought to establish that Select Vantage traders were manipulating the market. In order to understand the evidence in support of the defence, it is necessary to recall the model of trading used by Select Vantage. It had a large number of traders, organised into pods, who were confined to day trading. They began the day with nothing and were not permitted to carry stock over at the end of the day. In short, ASIC's contention was that, at the commencement of trading, Select Vantage traders acting in concert would establish a substantial long position in a thinly traded stock. They would then place bids for large numbers of shares at prices sufficiently below the highest competing bids to render it unlikely that their bids would be filled, but sufficiently close to the trading price to create a false impression of increased demand. The effect (so it was contended) was to place upwards pressure on the share price. Over the course of the day the traders would maintain a large volume of these non-genuine bids, cancelling and resubmitting or amending them to ensure they had a low priority on the order book and thus were unlikely ever to execute, and would unwind their position with the benefit of the rising prices. 2. ASIC sought to prove that case by reference to Select Vantage's trading on 21 identified trading days in seven identified stocks (on two of the days, two of the stocks were traded on the same day; the primary judge thus analysed the relevant period as constituting 23 "stock/days"). The primary judge essentially accepted ASIC's case. His Honour found that Select Vantage had engaged in manipulation of the market by layering on each of the 23 stock/days in each of the seven stocks: at [246]. To understand the precise allegations made by ASIC's defence, and the criticisms made of that finding on appeal, it is helpful to begin with the pleadings. The pleaded defence 1. For convenience, the imputations and true innuendoes pleaded by Mr Schlaepfer at pars 12 and 16 of the statement of claim (condensed in the manner adopted by the primary judge) are reproduced here: "12 Particulars of Imputations ... (a) [Mr Schlaepfer] was engaging in criminal conduct by layering the stock market. (b) In the alternative to (a), [Mr Schlaepfer] was engaging in unlawful market manipulation. (c) [Mr Schlaepfer] had conducted his business in such a way as to warrant the Head of Market Supervision at ASIC contacting the head of compliance at a large brokering house and warning him of the risks of doing business with both his companies Merlito Securities and Select Vantage. (d) [Mr Schlaepfer] had so mis-conducted his financial business as to deserve having had two brokers terminate relationships with his company Merlito Securities. … 16 Particulars of Imputations ... (a) [Mr Schlaepfer's] companies, (i) Merlito Securities and (ii) Select Vantage, engages in stock market manipulation. (b) [Mr Schlaepfer's] companies, (i) Merlito Securities and (ii) Select Vantage, engaged in market manipulation to such a serious extent that two brokers terminated their relationships with [each of them]. (c) [Mr Schlaepfer] is such a dishonest trader that he deserves to be compared to the disgraced Peter Beck. (d) [Mr Schlaepfer] had authorised such serious manipulation of markets as to warrant the Head of Market Supervision at ASIC contacting the head of compliance of a large broking house and warning him of the risks of doing business with his companies (i) Merlito Securities and (ii) Select Vantage." 1. It may be seen that only innuendoes (a) and (b) were directly concerned with the conduct of Merlito and Select Vantage. The other imputations and innuendoes were concerned with the conduct of Mr Schlaepfer personally. As already noted, the primary judge rejected imputation (c) and there is no challenge to that finding. 2. As already indicated, ASIC sought to justify every imputation and innuendo. The particulars of justification ran to some 200 paragraphs in "Schedule A" to the defence. The case was nonetheless put only at a general level. It was not sought to prove the individual trading of any particular trader or pod. ASIC contended that "Merlito as agent for SVI" (Select Vantage) had engaged "in conduct commonly known as 'layering'" on the ASX and Chi-X equity markets on "any one or more" of 23 "occasions". Each occasion involved one of seven named securities being traded by Merlito over the course of a particular day. For instance, Merlito was said to have engaged in layering: "on any one or more of the days in the period 1 to 5 September 2014 (inclusive) in respect of shares in Goconnect Limited (ASX ticker code GCN) (GCN Shares)." 1. As explained at the outset of this judgment, layering is a recognised form of stock market manipulation. It is the term used by Mr Yanco and in one of the imputations specified by Mr Schlaepfer. However, the claim that Select Vantage was layering does not recur in the particulars of justification. 2. ASIC relied on substantially identical particulars in respect of the trading activity in each stock. For each it was said that on each of the relevant days "Merlito submitted on behalf of SVI" into the ASX and Chi-X markets various orders, being either bids or asks, amendments to bids or asks to increase their volume, or cancellations, collectively referred to as (for instance) the "Merlito GCN Order Activity". The order activity was set out for each stock/day in the following form: Orders submitted by Merlito for GCN Shares in the Markets on 2 September 2014 No. of new Bids and Volume Increase Bids No. of new Asks and Volume Increase Asks No. of Cancelled Bids No. of Cancelled Asks 151 92 122 63 1. The particulars also set out the "ROM" (Rest of the Market) activity in the same form, as follows: ROM orders for GCN Shares in the Markets on 2 September 2014 No. of new Bids and Volume Increase Bids No. of new Asks and Volume Increase Asks No. of Cancelled Bids No. of Cancelled Asks 243 106 102 25 1. ASIC maintained that on "each or any" of the relevant days for each stock, Merlito's trading activity, undertaken on Select Vantage's instructions, had the following characteristics: Merlito placed a significant number of Bids for GCN Shares during the pre-open and/or soon after the opening of the Markets, thereby establishing its position in the Bid schedule for GCN Shares; the number of Merlito Bids for GCN Shares (Merlito GCN Bids) was materially greater than the number of Merlito Asks for GCN Shares (Merlito GCN Asks); Merlito cancelled and re-entered Merlito GCN Bids throughout the day such as to give the appearance of activity in and demand for GCN Shares; Merlito GCN Bids represented a significant proportion of the Bids for GCN Shares in the Markets; the Merlito GCN Bids that were current at any given time generally included Bids placed at a large number of different price steps, and/or several Bids placed at the same price step; the Merlito GCN Bids included a significant number of Bids placed at a price or prices sufficiently below the best (lowest) Ask price to make it unlikely, as at the time they were placed or amended, that they would trade; and a large percentage of the Merlito GCN Bids were cancelled without trading, being a materially higher percentage than the percentage of Bids for GCN Shares placed by the Rest of the Market that were cancelled without trading. 1. By reference to those characteristics, it was contended that the "Merlito GCN Order Activity... constituted a series of transactions" having or likely to have the effect of creating or maintaining an artificial price for trading in GCN Shares, or a "series of acts" likely to have the effect of creating or causing the creation of a false or misleading appearance of active trading in, or with respect to the market or price for, GCN Shares. 2. It was said to follow that on each stock/day there had been contraventions of ss 1041A and 1041B of the Corporations Act and that those contraventions amounted to criminal offences by virtue of ss 1308A and 1311(1) of the Corporations Act. 3. Sections 1041A and 1041B relevantly provide: 1041A Market manipulation A person must not take part in, or carry out (whether directly or indirectly and whether in this jurisdiction or elsewhere): (a) a transaction that has or is likely to have; or (b) 2 or more transactions that have or are likely to have; the effect of: (c) creating an artificial price for trading in financial products on a financial market operated in this jurisdiction; or (d) maintaining at a level that is artificial (whether or not it was previously artificial) a price for trading in financial products on a financial market operated in this jurisdiction. 1041B False trading and market rigging--creating a false or misleading appearance of active trading etc. (1) A person must not do, or omit to do, an act (whether in this jurisdiction or elsewhere) if that act or omission has or is likely to have the effect of creating, or causing the creation of, a false or misleading appearance: (a) of active trading in financial products on a financial market operated in this jurisdiction; or (b) with respect to the market for, or the price for trading in, financial products on a financial market operated in this jurisdiction. 1. The case to establish the alleged contraventions and offences was put in several ways. First, it was asserted that Mr Schlaepfer took part in, or alternatively carried out indirectly, the Merlito GCN Order Activity, contravening ss 1041A and 1041B. 2. Secondly, it was asserted that he did so with the intention that a substantial number of Merlito's bids would be cancelled without trading but that their placement would create an appearance of increased demand, causing the trading price to increase and enabling Select Vantage to sell GCN Shares at an artificially high price, thereby committing the offences of contravening s 1041A and s 1041B. 3. Thirdly, it was asserted that Merlito and/or Select Vantage had contravened ss 1041A and 1041B; that the relevant conduct (the Merlito GCN Order Activity) had been "procured" by Mr Schlaepfer with that same intention; and that he had thereby committed the offences of contravening ss 1041A and 1041B "by proxy", by virtue of s 11.3 of the Criminal Code (Cth). 4. Finally, it was asserted that Merlito and/or Select Vantage conducted and/or instructed the conduct of the Merlito GCN Order Activity with that intention, committing the offences of contravening ss 1041A and 1041B; that Mr Schlaepfer aided, abetted, counselled or procured the commission of those offences; and that he had thereby committed the same offences by virtue of s 11.2 of the Criminal Code. 5. In those circumstances, it was said (without more) that each of the imputations and innuendoes was substantially true. The findings of the primary judge and the case put to his Honour 1. Although it is Mr Schlaepfer who takes issue with the primary judge's findings, ASIC was the party that largely failed on the issue of justification. The primary judge noted at [255] that, in order to establish the substantial truth of each of the imputations, and of innuendoes (c) and (d), it was necessary for ASIC to prove that Mr Schlaepfer was "knowingly concerned" in the alleged market manipulation. His Honour found that the system Mr Schlaepfer provided for Select Vantage's traders was "objectively calculated to encourage market misconduct" but was not prepared to infer that Mr Schlaepfer was knowingly concerned in the unlawful activities of his traders: at [256]-[258]. Further, as to the imputations that included an element that two brokers terminated their relationships with the companies, his Honour found that Macquarie terminated its services to Select Vantage "for layering" but was not satisfied that Morgan Stanley had done the same: at [89] and [260]. Accordingly, those imputations were not proved to be substantially true. 2. The primary judge simply found, on the balance of probabilities, "that Select Vantage engaged in manipulation of the market by layering on each of the 23 stock/days in question": at [246]. His Honour considered that, for most purposes, Select Vantage and Merlito could be referred to "interchangeably": at [22], and it would appear that the finding at [246] was intended to apply to both companies. Thus the only meaning found to be substantially true was innuendo (a) (his Honour referred to innuendoes (a) and (b) but it was common ground that he must have intended to refer to (a)(i) and (a)(ii)): at [259], [260]. For convenience, that innuendo is repeated here: "[Mr Schlaepfer's] companies, (i) Merlito Securities and (ii) Select Vantage, engaged in stock market manipulation." 1. Despite the length of Schedule A, the particulars did not address the physical elements of any particular offence against ss 1041A and 1041B. For each stock there was simply an allegation that the activity in question, being "conducted in the manner and having the characteristics described" (including characteristics suggesting that some orders were not intended to execute), constituted "a series of transactions" that had or were likely to have the effect of creating an artificial price or a false or misleading appearance of active trading. 2. That invoked the language of ss 1041A and 1041B, contraventions of which were said to follow. Those provisions turn respectively on the concepts of an "artificial price" and a "false or misleading appearance...of active trading". Those concepts are to be understood in contradistinction to the forces of "genuine supply and demand" created by "buyers whose purpose is to acquire at the lowest available price and sellers whose purpose is to sell at the highest realisable price": Director for Public Prosecutions (Cth) v JM (2013) 250 CLR 135; [2013] HCA 30 at [71]. If a bid or ask, however optimistic or speculative, was placed with a genuine desire that it be executed, any movements in price produced by that bid or ask would reflect the forces of genuine supply and demand and would therefore not produce or maintain an "artificial" price. Similarly, on the same premise, any appearance of active trading in or with respect to the market for or price of a financial product would not be "false or misleading". 3. Accordingly, whether seeking to prove a contravention for the purpose of civil penalty proceedings or to prove a criminal act, in the way in which the case was put by ASIC, the relevant "act" had to be not just the placing of significant numbers of bids but the placing of bids the relevant trader did not intend would be filled. As explained by the High Court in JM at [76], that is not to posit the existence of a separate fault element of the offence but is simply "one way of demonstrating that the impugned transaction was at least likely to have the effect of setting or maintaining an artificial price". 4. ASIC's approach, consistent with its particulars of justification, was to lead evidence of certain characteristics of Select Vantage's trading activity on the relevant stock/days from which the primary judge was invited to infer that some of that trading activity involved orders not intended to be executed, largely in the form of bids not intended to be filled. ASIC did not identify any particular order or short sequences of orders alleged to be manipulative. Rather, the defence consciously presumed that it would be sufficient if the primary judge was satisfied that some of the trading activity on the nominated stock/days was manipulative; that was the question ASIC asked of its expert witness. It will be necessary to return to this point, which is emphasised by Mr Schlaepfer, below. The evidence of market manipulation and its treatment by the primary judge 1. ASIC relied primarily on the expert evidence of Professor Putnins, a Professor of Finance at the University of Technology, Sydney. His approach involved the identification of ten statistical characteristics which he regarded as indicative of the presence of layering. He described them as characteristics which "form the empirical 'fingerprint' that layering leaves behind in the data". With one exception, he analysed Merlito's order activity data for each whole stock/day to establish the presence of those characteristics. The exception concerns characteristic 10, which analysed orders on the books in the last half hour of the day but which might have been placed at an earlier point in time. As the primary judge explained, Professor Putnins' opinion was that "the inference of an intent not to trade" could be drawn from the presence of those characteristics "both as a matter of logic and because in his experience" they had been present in past cases of layering: at [205]. 2. Professor Putnins did not maintain that any one of the ten characteristics taken alone was indicative of layering or other market manipulation. His evidence was that while "some legitimate trading strategies can display some of the characteristics, many of the characteristics/indicia of layering are unlikely to be observed in legitimate trading strategies", and that the consistent presence of all ten on each of the relevant stock/days made it "likely" that Select Vantage traders were layering on each stock/day. The primary judge found that six of the measures were "compelling and ample to support the inference" of manipulative trading on each stock/day, one was "not significant", and the "remaining three, while having merit," did not need to be considered in detail given the strength of the first six: at [205]. 3. The primary judge's reasoning proceeded as follows. First, at [204]-[224], his Honour described each of the statistical measures, summarised Professor Putnins' evidence as to why they are indicative of layering and, with the exception of the fifth characteristic (inventory reversal), accepted that evidence. His Honour then stated [225]-[226] that he could "see no rational explanation" for the statistical measures "other than a deliberate [and coordinated] attempt to create a misleading impression of market interest". His Honour set out Professor Putnins' summary of what he took to be Select Vantage's layering strategy at [226]: "The data are consistent with Select Vantage using layering in the following way: (i) establish a long position [ie holding a positive balance of the shares] early in the day by buying the stock during or soon after the opening auction; (ii) place small sell orders at or near the best ask quotes to try and sell the long position for a profit; (iii) submit many buy orders (the layering orders that are not intended to execute) on the bid side of the market at prices below the best bid (such that the orders have little chance of executing) to create the appearance of active buying interest in the stock and obtain more favourable executions for the sell orders; and (iv) maintain the layering orders on the bid side, entering new orders and cancelling orders as market conditions change, until such time as the long position is completely sold and inventory is back at zero, which is typically the end of the day." 1. The primary judge then explained at [227]-[230] a further statistical test performed by Professor Putnins to detect coordinated trading, which involved testing for a correlation between the trading activities of randomly assigned groups of Select Vantage traders, and rejected the criticisms made of that exercise by Mr Schlaepfer's expert, Dr Carr. Finally, at [231] and [232], his Honour accepted Professor Putnins' opinion that Select Vantage's trading activity was "likely to increase the price at which the relevant stock will trade" and accordingly likely to produce an artificial price. 2. Having largely accepted Professor Putnins' evidence, the primary judge went on to address the evidence of Mr Schlaepfer's expert, Dr Carr. At [234]-[237] his Honour rejected Dr Carr's "reservation... about the capacity of circumstantial evidence to prove manipulative intention" and criticised "his adoption of very prescriptive criteria for layering". His Honour did not "give significant weight to the nonconformity of Select Vantage's trading with these strict criteria, having regard to the strong combination of other indicative characteristics identified by Professor Putnins". His Honour then considered and rejected a number of Dr Carr's criticisms of the power of Professor Putnins' statistical measures before concluding, at [246]: "The expert reports comprised 250 pages of closely reasoned technical and statistical information. There were two initial reports, one on each side, followed by a subsequent exchange of responsive reports. Then, in addition, each expert made quite extensive further response in oral evidence and each was cross-examined rigorously. I have considered the entirety of Dr Carr's reports and his oral evidence. I found Professor Putnins' analysis clearly the more persuasive and I have dealt in these reasons with only the main points of controversy that lead me to that assessment. On the balance of probabilities, I am satisfied that Select Vantage engaged in manipulation of the market by layering on each of the 23 stock/days in question." 1. The primary judge briefly went on to consider evidence of Select Vantage's internal monitoring system, primarily the evidence given by Mr Kruyne, an employee of a Canadian subsidiary of Mr Schlaepfer's group of companies. That evidence did not feature significantly in his Honour's reasoning and was not given particular emphasis in the appeal. The arguments made on appeal 1. Mr Schlaepfer contends that the order activity analysed by Professor Putnins was consistent with the rational pursuit of legitimate trading strategies. The principal argument on appeal was that Professor Putnins and the primary judge failed to consider the constraints under which Select Vantage's traders traded, which, it was submitted, provided an innocent explanation for many of the characteristics of their trading activity taken by Professor Putnins to be indicative of layering (I note that Mr Schlaepfer used the term "metrics" to describe the characteristics relied upon by Professor Putnins and I have adopted that term). 2. The constraints under which Select Vantage's traders traded were, first, that traders were required to close out their positions at the end of every day and, secondly, that with the exception of one stock/day, and then only to a limited extent, they were unable to "short" any of the stocks identified as subject to manipulation. That "short" constraint applied to each individual trader, not (save as a corollary) to Select Vantage's overall position. Putting aside the characteristics said to be generated by the "short" constraint, Mr Schlaepfer submitted that the remaining characteristics are either consistent with legitimate trading, an artefact of aggregating the trading activity data of traders not acting collusively, or simply equivocal. 3. As already noted, Mr Schlaepfer also contended that ASIC's defence was flawed because it did not impugn any particular order or series of orders as constituting a "transaction" or "act or omission" that contravened the Corporations Act. That was said to be significant for two reasons. The first is evidentiary: it was submitted that the invitation to infer layering behaviour from whole-day statistical analyses is critically flawed; it is novel; it was not the approach taken in previous cases in which layering was found (which focused on particular sequences of orders), and it is not possible to infer from those metrics alone that any particular trades involved a manipulative intention. Secondly, it was submitted that the prohibitions in ss 1041A and 1041B are directed to individual acts, omissions or transactions; that Mr Schlaepfer was entitled to the particularity of an indictment in relation to the truth defence; and that it is not enough to be able to say that it is more likely than not that some unspecified acts or transactions in a whole day's trading activity were manipulative. 4. Mr Schlaepfer complains that the primary judge did not engage with his detailed submissions (running to some 86 pages) on those issues. 5. Mr Schlaepfer also makes a number of more technical points. The first is that the primary judge relied on only six of Professor Putnins' ten metrics (1, 2, 3, 4, 6 and 7), and that in the absence of a notice of contention ASIC "can't now try to rely on something that the trial judge didn't rely on". Save as to the fifth characteristic, which was not probative, it appears that the premise of that submission is not correct. The primary judge said at [224]: "I found Professor Putnins' eighth characteristic, regarding Select Vantage's use of the unlit market, of some additional weight. However, I do not find it necessary to rely upon that element and will refrain from discussing it. To do so would require a description at length of the operation of the unlit market. Professor Putnins' ninth and tenth characteristics both concerned Select Vantage placing or maintaining resting bids at times when it is clear that the traders' intentions must have been to sell stock in order to revert their balance to zero. I find that the Professor's analysis establishes these two additional characteristics and I attach significant weight to them. It is not necessary to set out the numerical results because those that I have considered above are well sufficient to support the inference that Select Vantage was engaged in manipulative layering on the days in question..." (emphasis added) Those remarks indicate that the primary judge did attach at least some weight to metrics 8 to 10 but did not consider it necessary to explain his reasoning in respect of them because he regarded the other metrics as being "well sufficient" to support his conclusion. 1. Secondly, Mr Schlaepfer submitted that, to justify the conclusion that Select Vantage "was engaging" in market manipulation (the past imperfect tense), it would be necessary to demonstrate that manipulation took place "as a practice, or systematically, or at least frequently enough to justify that description", and perhaps also that it was carried out by more than one trader. Finally, it was noted that there is some uncertainty as to whether an unfilled order can be a "transaction" within s 1041A, although in view of the availability of s 1041B that question was not suggested to be determinative. Was Select Vantage engaged in market manipulation? 1. It is helpful in the present context to consider the nature of conduct that has been recognised as "layering". Past cases of proven layering have followed a fairly particular pattern, described in the UK Financial Services Authority's Decision Notice suspending Swift Trade as follows: "... the manipulative trading activity involved the placing of a series of short-lived and large orders to buy or sell shares on the order book close to the touch price throughout the Relevant Period... The vast majority of these large orders were cancelled within seconds of being placed without being executed, following the execution of a smaller trade on the opposite side of the order book which took advantage of and profited from the artificial movement in price which had been caused by the placing of the large orders. The large orders were subsequently re-entered on the opposite side of the order book." 1. Significant features of that form of layering are that it was rapid and cyclical. It was rapid in that the non-genuine orders were rapidly deleted after their price effect had been exploited, typically within seconds of the non-genuine orders being placed. It was cyclical in that layering of one side of the market alternated with layering of the other. Dr Carr gave evidence, by reference to past cases, that "layering" as commonly understood involved at least the characteristic of being rapid, though it was not always cyclical. The primary judge described his criteria for layering as "very prescriptive" and did not accept that they were appropriate for analysing the "unidirectional" activity of Select Vantage's traders: at [237]. 2. In the appeal, ASIC submitted that the more pertinent question is whether the trading activity was manipulative. The submission may be accepted, so far as it goes. Only one of the eight imputations and innuendoes concerned "layering" as opposed to market manipulation more generally, and although the particulars of justification refer to layering, their focus is on market manipulation as defined and proscribed by ss 1041A and 1041B. In that context the common understanding of "layering" was not relevant, save as to the truth of an imputation which the primary judge found not to be substantially true for other reasons. 3. But the submission does not go very far. ASIC's case that Select Vantage's trading activity entailed a form of market manipulation was based on the inference it invites the Court to draw from the resemblance of the activity of Select Vantage's traders to a recognised form of market manipulation, namely, layering as it is commonly understood. Professor Putnins' own metrics, which were drawn from past cases of layering in addition to his own expertise, presumed as much. The force of Dr Carr's point is that it is much easier to infer a manipulative intention where a repeated pattern of orders involving rapid entry, execution and cancellation, and with an effect on prices, can be identified. 4. Mr Schlaepfer emphasised that past cases of proven layering have focused on particular sequences of orders, or patterns thereof, rather than on the statistical characteristics of whole-day trading data. Dr Carr searched the entire set of order activity data relied on by Professor Putnins for sequences which met his own criteria for potential layering behaviour, and determined that none came from a single trader, or even from traders in the same location. It was not suggested that his analysis was in error. Indeed, the primary judge appears to have accepted Mr Schlaepfer's evidence that Select Vantage's own compliance software would likely have flagged potentially manipulative trades on a standard layering pattern: at [78]. 5. However, assuming for the sake of argument that Select Vantage traders were engaged in market manipulation of the form alleged, that form of market manipulation did not conduce to the identification of particular orders, or sequences of orders, which were not genuine. That ASIC did not do so cannot as a matter of logic prohibit the drawing of an inference that a substantial number of orders – and therefore a substantial but unspecified number of transactions or acts, in the language of ss 1041A and 1041B – were manipulative. It is simply a consideration which complicates the decision whether to draw that inference on the evidence. 6. That does not deal with the related but logically distinct submission that there could be no finding of a contravention of ss 1041A or 1041B in the absence of a particular manipulative "transaction" or "act". As submitted by Mr Schlaepfer, it is accepted that a plea of justification must state the charge with the precision of an indictment. The authorities relied upon by Mr Schlaepfer to support that contention included my decision in Brooks v Fairfax Media Publications Pty Ltd (No 2) [2015] NSWSC 1331 at [9]-[12]. I remain of the view I expressed at [12] in that case: "That expression ('with the same precision as in an indictment') is one which is capable of being misunderstood. It is a requirement of specificity rather than one going to the amount of information to be provided. As I observed during argument, the amount of detail in an indictment is often spare but the specificity provided should be such as to put an accused person on notice of the Crown case as to each element of the offence with which he or she is charged." 1. A difficulty with ASIC's case was that it did not fasten on any particular act in contravention of the legislation. It presented, in effect, a floating case which contended that at some point, in some trades on particular days, some traders in some pods somewhere must be taken to have engaged in manipulative trading. The significance of that is considered below. 2. ASIC submitted, first, that it never purported to establish liability for a contravention of s 1041A or s 1041B, but rather merely that Select Vantage and Merlito had engaged in market manipulation. Secondly, ASIC submitted that ss 1041A and 1041B do not require the identification of transactions or acts in the sense contended for by Mr Schlaepfer, although it was conceded that identification might be relevant to a question of penalty (obviously irrelevant to these proceedings). Thirdly, ASIC submitted that, to the extent this objection is a "pleading point", it is too late for Mr Schlaepfer to make it. He was aware for months of the way in which they particularised their defence, which was consistent with the way they framed their expert evidence, and did not take any procedural objection. 3. The first submission is partly wrong: ASIC did set out to establish contraventions of those provisions. It also maintained that Select Vantage's trading activity on the relevant stock/days included a substantial number of unspecified orders that were manipulative. That more general allegation remains dependent on the understanding of market manipulation established by ss 1041A and 1041B. If made good, it would follow that some orders must have been placed in contravention of those provisions, though it would not be possible to say how many, or to identify the particular orders or series of orders involved. A finding in those general terms would not establish the truth of all of the imputations and true innuendoes pleaded. It is, however, the only finding that the primary judge made, and therefore all that this Court is asked by Mr Schlaepfer to review. Precisely what must be proven before a court may find contraventions of ss 1041A and 1041B need not be decided. 4. ASIC's third submission concerning the "pleading point" is right, as far as it goes. While objection was taken below to ASIC's failure to identify any particular orders, it was taken based on ASIC's inability to establish contraventions of ss 1041A and 1041B and on the evidentiary difficulties for ASIC's case, said to involve "indirect inferences based on very inexact evidence". Mr Schlaepfer did not suggest that he required ASIC to particularise its claim that some of the trading activity on each of the relevant stock/days was manipulative. 5. The strict requirement of particularity in pleading justification discussed in Brooks and the cases cited therein is primarily a matter of fairness, designed "to enable the plaintiff to know and to prepare himself to deal with" the material facts of the case he or she is to meet: Wootton v Sievier [1913] 3 KB 499 at 504 (Kennedy CJ). Mr Schlaepfer was on notice of the way in which ASIC put its case and the evidence it proposed to lead. He did not take an objection to the pleadings for want of particularisation. Instead, he relied on ASIC's inability to identify any manipulative orders or sequences of orders as a weakness in the evidence supporting the case he prepared to meet. 6. The critical question is whether, in the absence of proof of any particular manipulative transaction, the case based on Professor Putnins' 10 metrics established market manipulation. Coordination 1. The structure of the Select Vantage business was relevantly as follows. Select Vantage traders were independent of one another in the sense that their positions were independent and that they were instructed not to coordinate. The primary judge noted that each individual trader belonged to a pod, a group of traders who traded from the same physical location and were overseen by the same manager: at [21]. Managers were responsible for hiring, training, and giving basic instructions, aided by instructional videos prepared by Select Vantage: at [69]. 2. For each month, each manager received 83% of the net revenue of the traders of their pod to distribute among those traders as they chose: at [73]. That is, traders within pods were, subject to the discretion of their manager, rewarded collectively rather than individually, which may have provided an incentive for coordination. But between pods there was no such incentive. There was a suggestion that some unspecified number of managers managed multiple pods. Otherwise, some form of profit-sharing might well be necessary for traders in separate pods to have an incentive to coordinate their activities. 3. The trading activity said to include manipulative orders was the activity of hundreds of traders across many different pods – for one stock/day, by way of example, 301 traders across 60 different pods. Absent coordination, and an associated form of profit-sharing, there would be no reason for traders who had yet to purchase stock to place non-genuine bids to increase the trading price. Any such increase would be likely to affect the price at which genuine bids and asks could be expected to execute, and either prevent those traders from trading or have ultimately no effect on their profits (because the increase in prices would affect both sides of the spread). 4. There was no evidence as to whether the impugned trading activity was exclusively or largely that of traders who had already assumed a long position. But evidence of coordination would make the absence of such evidence of little or no consequence, by explaining why traders without a long position might engage in manipulative activity. 5. There was no evidence of communications between traders or managers suggesting coordination. Nor was any evidence led from traders or managers to rebut an inference of coordination, but unless specific orders were identified as manipulative, evidence from traders or managers as to their trading behaviour would have been of limited use. No inference adverse to the appellant can be drawn from his failure to lead such evidence. 6. Rather, the evidence on coordination was essentially (1) the evidence led by Mr Schlaepfer and his companies that traders were required to agree not to coordinate, or even discuss their trading intentions, and of internal compliance systems; and (2) the statistical tests for coordination performed by Professor Putnins. The former does not go very far: as the primary judge observed, coordination between traders was possible notwithstanding that it was formally discouraged: at [225]. 7. As to the statistical tests for coordination performed by Professor Putnins, there was a dispute between the experts. Professor Putnins statistically tested for coordination (or, as he put it, for independence) by randomly dividing all of Select Vantage's traders into two groups, each containing half of the traders. The testing was based on probability theory which holds that two events are "independent" if the occurrence of one does not affect the probability of another. Professor Putnins said it follows that "the correlation between two independent events should be zero". He reasoned that, if Select Vantage traders were coordinated at a firm level, "there should be some correlation in their actions, implying a tendency for the traders to take similar actions at around the same time" whereas if there was no coordination (that is, if the traders were acting independently), "there should be no significant correlation in their actions". 8. In order to test for independence between the two groups, for each hour of each stock/day, Professor Putnins measured the numbers of entered, cancelled and executed bids and asks. For each group, he "estimated" the correlation between the trading activities of the two groups, first in absolute terms (for instance, the total number of executed buy orders). He concluded that there were statistically significant correlations between the two groups indicating a lack of independence between Select Vantage traders. He then repeated the analysis after "normalising" each of the activity measures as a percentage of the total market activity (for instance, the number of executed buy orders divided by the number of such orders for the entire market). On that measure, the correlation was highest for the entry and cancellation of bids, which he took to indicate coordination on the bid side of the market "between some or all of Select Vantage's traders". Finally, to ensure "the robustness of the results", he estimated "regressions" of the activity of one group of Select Vantage traders on the other, double-clustering standard errors for each stock and each day (which he described as "a statistical procedure that accounts for dependencies between observations and their effects on the statistical tests"). Those results supported his conclusion of an absence of independence in the activity of Select Vantage traders particularly in their bidding activity. 9. Dr Carr's evidence in response was an argument to absurdity. He performed the same three correlation analyses, but for the rest of the market rather than for Select Vantage traders, and produced similar results. The suggestion was that, as the rest of the firms in the market were presumably not coordinating their trading, Professor Putnins' analysis must have been unsound. 10. In his oral evidence, Professor Putnins rejected that criticism. He explained that a normalised analysis of the whole market (including Select Vantage) would necessarily produce a perfect (negative) correlation (because the normalised measures of activity of two halves of the market would always sum to 1). He further explained that the whole market analysis excluding Select Vantage, "only one relatively small part of the market", would similarly mechanically tend towards identifying a (negative) correlation. When he repeated the correlation analysis for pairs of other firms within the market, the false positive rate (the rate at which spurious correlations were identified) was low. In his view, the problem identified by Dr Carr was simply that his method was not valid when repeated at a market or most-of-market level. The primary judge accepted that response: [230]. 11. There are difficulties with that conclusion. The first is that Dr Carr found positive correlations in the rest of the market analysis. As he expected, Professor Putnins stated that he found a negative correlation when he attempted to perform a similar analysis. The second and more substantial difficulty is that Select Vantage accounted for a very large proportion of the orders placed for the relevant stock/days: slightly over a third on the ASX and more than half on the Chi-X. Any problem with the rest of market analysis attributable to the fraction of the market involved should logically also affect the Select Vantage analysis. 12. I am persuaded by Dr Carr's criticisms of the probative value of Professor Putnins' coordination test. Select Vantage traders were subject to identical constraints and likely received similar information at similar times. Select Vantage did not provide extensive training, but the number of reasonably viable trading strategies on which they might independently converge was likely fairly low. (They might, moreover, share trading strategies in general terms without coordinating their trading.) Professor Putnins' own evidence accepted that correlation in measures of activity might well reflect factors other than agreements to coordinate their trading. He added that Select Vantage's internal mechanisms for "netting out" what are known as "wash trades" – trades between two Select Vantage traders – would tend to conceal the presence of conflicting intentions or strategies on an individual level. 13. In those circumstances I am not persuaded that mere correlation provided a basis for inferring coordination. The regression analysis was subject to a similar problem, because clustering errors by stock and by day would not account for (innocent) correlations referable to the factors discussed. 14. Finally, ASIC points to the unlikelihood of hundreds of independent traders converging on the same thinly traded stocks on the same days. What might motivate such strategic behaviour, and therefore explain its adoption by a large number of traders, is explained below. Again, for sole traders with limited training and resources, the set of viable strategies was probably small. That is, of course, also a reason to think coordinated manipulation might prove attractive; there is force in the primary judge's conclusion that Select Vantage's trading model was in that sense "objectively calculated" to encourage traders to engage in coordinated manipulation: at [256]-[257]. 15. In my assessment, however, the independent evidence of coordination is equivocal. If the trading activity data demonstrates that market manipulation likely took place, for the reasons given above – the number of different traders whose activity the data captures, and the absence of an incentive for traders who were not already long to push up prices – that manipulation was likely coordinated. But that trading data must be analysed without the benefit of a pre-existing assumption that coordination was likely rather than merely possible. A legitimate trading strategy? 1. Before turning to Professor Putnins' metrics of layering, it is necessary briefly to explain the competing innocent explanation offered for the presence of those metrics in Select Vantage's trading data. The suggestion is not that all Select Vantage traders adopted the same strategy (Mr Schlaepfer's case is that they were independent) but that reasons could be given for why they might decide to pursue similar legitimate strategies that would generate the patterns of activity seized on by ASIC. 2. After ASIC had communicated its concerns arising from Dr He's analysis of Select Vantage's trading in OIL stock over several days from 17 November 2014, Mr Kruyne (as already noted, an employee of a Canadian subsidiary of Mr Schlaepfer's group of companies) undertook his own analysis of the impugned trading in the hope of allaying the concerns ASIC had raised. He set out the results of that analysis, together with an explanation of features of Select Trading's method of trading, in an email which was sent to Macquarie on 26 November 2014. The following account is drawn primarily from that explanation. 3. Mr Kruyne contended that Select Vantage's increased activity in OIL stock was "directly related to publicly available news or increases in volume & volatility". He said that news was important to Select Vantages traders (who, as already noted, were day traders) because it would "draw other market participants to the stock and allow [Select Vantage] traders to provide liquidity and try to capture the spread" (in place of making long-term directional bets). In this context, the "spread" refers to the difference between the limit (that is, listed) price of the highest bid and the lowest ask resting on the order book. If there were market participants willing to "cross" the spread by meeting the terms of an outstanding limit order, traders would be able to "capture" the spread by buying and selling equivalent quantities of a stock over the course of the day. In placing resting limit orders for other traders to fill, they also served as liquidity providers. Mr Kruyne said "Given the intraday nature of the trading done by [Select Vantage] traders, the focus of these individuals is always on market microstructure, and intraday metrics (volume, volatility, bid/ask size) rather than fundamentals such as market cap or earnings". 4. Traders following such a strategy (seeking to provide liquidity to more aggressive traders) would look for stocks with relatively high trading activity. Two useful indicators of activity would be recent changes (at or around market open or the previous day's close) in trading volume or pricing volatility. Select Vantage traders focused their attention on non-indexed and low-priced stocks, to avoid competing with high-frequency trading firms and to take advantage of the fact that Australian equity markets' fees are calculated in terms of basis points rather than per share. 5. A trader following this strategy would obviously seek to provide liquidity on both sides of the spread. But Select Vantage required its traders to close out their positions at the end of each day, so they were unable to enter orders on the ask side unless they had either already purchased stock on that day or were able to borrow stock to assume a short position. As already noted, there was generally not a pool of shares from which traders could borrow. 6. It was therefore necessary for Select Vantage traders to place bids, and have those bids wholly or partially filled, before they could place asks and attempt to "capture the spread". Typically, they would place orders at or before opening, to secure execution priority, and leave their orders on the books in the hopes of an aggressive fill (bearing in mind that these stocks were identified as having higher than usual trading volume or pricing volatility). It followed that they would necessarily place a higher number of bids than asks, and that their orders would usually remain on the book, until executed or cancelled, for an extended duration. 7. ASIC responded to that explanation by submitting that there would be no reason for traders adopting a liquidity provision strategy to place bids significantly below the touch price. Their goal was (ex hypothesi) to trade, which they could not do until they acquired stock; there was therefore no reason to enter and leave open large bids with a very low chance of being filled, which would be counted towards their internally imposed limits of three orders on each side of the market, and the amount of capital with which each trader could trade. 8. As to the order limit, which applied per stock, it is not implausible that inexperienced day traders might prefer to place low-probability but possibly high-reward bets over attempting to buy in at the price of the best prevailing bid at any given time. The gist of this explanation was put to Professor Putnins. The suggestion was that traders might leave non-aggressive bids in place over the course of the day, so that they would enjoy queue priority if the market price fell. That assumed, possibly on the basis of the historical price of the stock, that if the market price fell it was likely subsequently to rebound, allowing a more profitable sale. Otherwise there would be no reason not to place an order at or close to the touch price and exploit the existing spread. 9. Professor Putnins rejected that assumption as the basis of a legitimate strategy, because it "would imply that the market is not even weak form efficient, which I think [is] inconsistent with a large, large body of empirical literature". That response made two untested assumptions, first as to the efficiency of capital markets for thinly traded, non-indexed low-cap stocks and secondly as to the rationality of Select Vantage's traders. 10. Separately, Dr Carr speculated in his reply report that the trading activity "appears consistent with a mix of arbitrage and liquidity provision strategies", the former being a reference to arbitrage taking advantage of price differentials between the ASX and Chi-X. He did not expand upon that cryptic observation in his oral evidence. Dr Carr's position was ultimately that it was "virtually impossible" to account for the various different strategies and information flows which might explain the trading data. That does not explain the degree of correlation, which suggests that the diversity of strategies was not as great as Dr Carr was evidently prepared to assume. Professor Putnins' metrics 1. Turning to Professor Putnins' ten metrics of layering, they were: 1. Unbalanced quoting: the resting limit orders at any given point in time were highly imbalanced by dollar volume, so that the difference between the value of resting bids and resting asks was a very large proportion of the sum. For Select Vantage, this proportion was greater than 50% on each stock/day – on average it was 85% – and much higher than that of other market participants, who averaged 18%. Professor Putnins considered that this imbalance was used to create a false impression of buying or selling interest in order to influence market prices. 2. High quoting activity: Select Vantage was responsible for a very high proportion of the volume of resting limit orders on the bid side of the market – between 10.5% and 28.5% over the relevant stock/days, averaging 20.3% – but very little on the ask side, on average 1.7%. 3. Abnormal cancellations: Select Vantage's cancel-to-trade ratio, the ratio of orders cancelled to orders executed, exceeded that of other market participants by a clear margin on each stock/day. On average its ratio was 3.4, whereas the ratio was 0.8 for the rest of the market. 4. Low execution probability: Select Vantage was much more aggressive on the ask side than the bid side. On average, its bids were placed at a much greater distance from the touch price than its asks; and the average execution rate of its bids below the highest resting bid was 3.99%, much lower than the 11.89% rate for other traders' bids below the highest resting bid and the 13.33% rate for its own asks above the lowest resting ask. 5. Inventory reversals: Select Vantage did not hold positions overnight. Professor Putnins treated this as consistent with but not greatly probative of layering. In fact it was required by Select Vantage of their traders, and for that reason was given no weight by the primary judge. 6. Trades oppose quotes: Select Vantage executed an average of 48% of its trades on the side of the market that was not the side with the larger volume of resting orders, whereas "many legitimate trading strategies", including traditional liquidity provision, would score close to 0%. 7. Cancels oppose trades: a high percentage – from 40% to 72%, depending on the stock/day – of Select Vantage's cancellations were of orders on the opposite side of the order book to the most recent trade, whereas, again, traditional liquidity provision would score close to 0%. 8. Dark opposes lit: averaged over all relevant stock/days, [2] Select Vantage's order imbalance in the dark market, where limit orders were not displayed (but might still be executed against), was in the opposite direction to its imbalance in the lit market 43% of the time. The obvious inference is that Select Vantage tended to have an ask-side skew in the dark market, where its orders could not readily create a false impression of demand, slightly under half the time. 9. Quoting opposes inventory reversion: the trading of a liquidity provider would generally exhibit inventory reversion in the sense that their order imbalance would mirror their inventory position – that is, they would tend to quote more on the ask side when their inventory was positive, and vice versa – although not necessarily at all times, as Professor Putnins conceded. Depending on the stock/day, Select Vantage's quoting activity was inconsistent with inventory reversion between 51% and 100% (and on average 93%) of the time. 10. Quoting opposes trading intention: as Select Vantage traders were required to be flat at the end of the day, their trading intention towards the end of the day must have been to wind down their accumulated inventory. But in the last half hour of the continuous trading phase of each stock/day [3] a buy-side resting order imbalance was observed at all times, save for one stock/day on which it was present 67% of the time. 1. Many of the differences between Select Vantage and the market average for these characteristics were statistically significant. That assists only in rejecting a hypothesis that is in any event plainly untenable, namely that Select Vantage's traders in aggregate behaved like the average market participant. The effect of aggregating trading activity data 1. Mr Schlaepfer submits that metrics 6 and 8 may be an artefact of aggregating the trading data of traders acting legitimately and independently. Supposing that traders were acting independently, there would be no reason to expect that trades would not regularly (and randomly) oppose quotes, or the dark market imbalance oppose the lit market imbalance. That was Professor Putnins' own evidence in his first report. 2. However, it was also Professor Putnins' evidence that for many of the metrics, aggregating the trading activity data would have the opposite effect. If other traders were not layering (and their individual data therefore did not display characteristics of layering), aggregation would dilute rather than exaggerate most of the characteristics of layering in the firm-level data. 3. In his first report, Professor Putnins' evidence was that "the two effects act in opposite directions" and it was difficult to say what the overall effect of aggregation would be on the likelihood of correctly observing the characteristics of layering (that is, observing the characteristics of layering when layering behaviour is present to some extent, and not otherwise). And he conceded that one effect of aggregation was that "some characteristics will be more useful than others in identifying layering". 4. In his oral evidence, Professor Putnins' qualified that opinion, suggesting instead that aggregating the data of "a large number, or even some number of independent traders" would generally result in fewer indicia of layering. That evidence may be accepted in the general terms in which it was expressed, although its force is limited in a case such as the present where it is already clear that many traders were trading in a similar fashion (as discussed above) and the question is whether that behaviour indicates sinister collusion or admits of an innocent explanation. The proper approach to the metrics 1. ASIC emphasised the point, made repeatedly by Professor Putnins in his evidence, that the metrics cannot be analysed, rationalised and explained away individually. What is necessary, so it was submitted, is to conduct a "probabilistic exercise" having regard to the joint likelihood of observing the presence of all of the metrics in Select Vantage's trading activity data on the hypothesis that there was no manipulative activity. 2. It may be accepted that the Court must consider all of the evidence taken together. However, it would not be permissible to treat the improbabilities of observing each characteristic in legitimate trading activity as straightforwardly compounding. As I will explain, the probabilities are not independent. 3. For example, taking metrics 1 and 2 (unbalanced quoting and high quoting activity), if other market participants quoted in a roughly balanced fashion, as the evidence suggests they did, then a company trading on Select Vantage's model, with a pronounced bid-side imbalance at most points in time, would necessarily have higher quoting activity on the side the subject of the imbalance. Given metrics 1 and 5 (unbalanced quoting and inventory reversals), the side the subject of the imbalance would have lower execution probability (metric 4). The high cancellation rate and low execution probability (metrics 3 and 4) are obviously related because higher cancellation rates reduce the likelihood of execution and orders less likely to execute are more likely to be cancelled. Metric 6 (trades oppose quotes) follows from metrics 1 and 5 (unbalanced quoting and inventory reversals) where, as here, the enduring quoting imbalance was on only one side of the market. 4. Given imbalanced quoting on the bid side, a high cancellation to trade ratio, and inventory reversals (metrics 1, 3 and 5), cancellations opposing trades (that is, cancellations being of orders on the opposite side of the order book to the most recent trade: metric 7) is not itself surprising. This is not a case in which particular cancellations following shortly after trades are identified as suspect – indeed, the evidence was that the number cancellations surrounding a fill was relatively low: primary judgment at [243]. And if resting bids had a low execution probability relative to asks (metric 4), there would be no reason for cancellations not to oppose trades, or for quoting activity by volume to be consistent with inventory reversion (metric 9). The same point might be made, albeit with less force closer to the day's close, about metric 10 (quoting opposes trading intention). 5. Professor Putnins' metrics emphasise how different Select Vantage's trading patterns were from the average of all market participants, although it is difficult to know how much significance to attribute to the mere fact of that difference. For some metrics, "many" legitimate strategies would result in scores close or equal to zero, but how many was not explained. Metrics 8 and 10 raise further questions about the genuineness of at least some of the low-priced, high-volume bids in the lit market. Ultimately, however, the extent to which the ten metrics do more than show that Select Vantage traders placed and maintained over the course of the day large numbers of low-priced bids that were cancelled or left on the books rather than executed is much slighter than was acknowledged by the primary judge. Insufficient evidence for a finding of manipulation 1. Dr Carr addressed Professor Putnins' opinion in detail in his "rebuttal" report. In summary, he was of the view that Professor Putnins' conclusion ("that it was likely that Select Vantage engaged in a form of market manipulation known as layering") was not reliable because his measures did not identify particular orders and trades that contained the basic elements of layering as commonly understood by regulators and market participants. Dr Carr did not consider that the opinion that traders had created and maintained artificial prices could be sustained in the absence of any identification of particular orders that created artificial prices and a benchmark "but for" price for the relevant stock or at least some statistical certainty of deviation from the "but for" price. 2. While Dr Carr analysed the 10 metrics in detail in that report, it is not necessary here to address every point. It is enough to highlight some key points. 3. Professor Putnins demonstrated that Select Vantage's order to trade ratios were high (between 3.1 and 10.8 on the relevant stock/days) and indeed considerably higher than those of the rest of the market (on average around 250% higher than the average for other market participants). Dr Carr expressed the opinion that the levels of cancellations by Merlito traders observed in ASIC's defence dataset were within the reasonable range of cancellations observed in equity trading in the US and Australian equity markets. Professor Putnins explained that Dr Carr's opinion on that issue did not have adequate regard to differences in market structures between Australia and the US. 4. But Dr Carr also gave persuasive evidence that, on most stock/days, other market participants had higher rates of cancellation than Select Vantage, and cancelled orders more quickly after entry. Elsewhere, Dr Carr explained that the time sensitivity of order placement was a significant factor in that analysis; he said Professor Putnins took no account of that. The primary judge dismissed Dr Carr's evidence because Professor Putnins' other indicia of layering were present in Select Vantage's trading activity data, which diminished the likelihood that there was an innocent explanation for Select Vantage's cancellation rates (as opposed to those of the other market participants, whose high cancellation rates "may have some other explanation"): at [240]. 5. With respect, that reasoning is flawed. The question was not, what is the likelihood that there is an innocent explanation for Select Vantage's higher cancellation rates, conditional on the presence of the other metrics? Obviously, the likelihood of an innocent explanation for any one metric was lower given the presence of the others. The question was whether the likelihood Select Vantage was engaged in manipulation was informed by the presence of high cancellation rates, conditional on the presence of the other metrics. The significance of Dr Carr's evidence was that, while Select Vantage's cancellation rates were high, they were not outliers on the relevant stock/days. Professor Putnins' analysis of metric 3 asserted that "layering orders are not intended to execute so they will typically end in a cancellation, and may also need to be cancelled and resubmitted as market conditions change". Dr Carr noted that this analysis acknowledged the need to cancel and resubmit orders as market conditions change but that nowhere did Professor Putnins conduct any analysis of the changing market conditions or identify a proper benchmark as to what was an "abnormal" cancellation rate as opposed to a normal rate. Dr Carr's analysis indicates that the degree to which the third metric (abnormal cancellations) is independently informative is low (if non-zero). 6. Metric 4 (low execution probability) is based on Professor Putnins' claim that "layering orders are placed in the market in such a way that they deliberately have low execution probability: either at price steps behind (away from) the best quotes, or at the back of a long queue of orders at a given price step". Dr Carr's opinion was that the use of the term "deliberately" in that assertion had no economic basis. While the evidence was that the execution probability of Select Vantage's traders' bids was low relative to the rest of the market, it was not shown that the execution probability was low relative to the quoted prices. It remains possible that the low execution probability was largely or wholly attributable to the distance of Select Vantage bids below the best quoted bid. Dr Carr noted that traders place limit orders away from the touchline "intending and hoping that their orders get executed because market prices fluctuate". In other words, the placement of limit orders at a point away from the touchline does not in itself indicate an intention that the order not execute. Select Vantage's high cancellation rates are not informative on the point, because those cancellation rates might in turn be the result of Select Vantage's bids being systematically lower than the rest of the market (and hence more likely to be cancelled rather than executed). Separately, Dr Carr noted that orders having a low execution probability were less likely to have a price effect on the market (and so not obviously part of a "deliberate" layering strategy). 7. Professor Putnins' analysis does show that Select Vantage's bids were much less aggressive (that is, much further from the trading price) than their asks, but that is not suspicious in itself. Leaving high-volume, high-priced asks on the order book, on the assumption that a reversion to the historical trading price band would be likely should the order be filled, was not an available option in view of the inability to short. It is far from obvious that Select Vantage traders could be expected to adopt a symmetrical volume and pricing strategy in view of the asymmetrical constraints under which they operated. 8. The divergence between dark and lit market behaviour is at least superficially suspicious. Dr Carr's evidence in reply was that, by his calculations, Select Vantage's cancellation rate was higher in the dark than lit market for both bids and asks, and accordingly that it was not clear that the dark market was, by Professor Putnins' standards, more reflective of traders' true intentions. Professor Putnins gave oral evidence that Select Vantage's cancellation rates in the dark market were not meaningfully different from those of the rest of the market on the relevant stock/days. The mere fact that Select Vantage's cancellation rates were higher in the dark than lit market was "nothing surprising. It's a different market". There were technical reasons for there being higher cancellation rates in the dark market. On his evidence it was like comparing the Australian and Canadian (or American) equity markets. 9. Accepting that to be so, at that point it is difficult to see how the quoting imbalance in the dark market could be significantly informative about the true trading intentions of Select Vantage traders in the lit market. It would be entirely consistent with Professor Putnins' evidence that traders using the dark market differed systematically in their trading strategies or sophistication from those placing orders only in the lit market. As was already observed, he conceded that the eighth characteristic could have been generated by aggregation of the trading data of traders acting legitimately and independently, and that it might therefore be less useful than the other metrics in identifying manipulative behaviour. 10. The tenth characteristic is the most difficult to explain innocently. Dr Carr noted in reply that orders placed during the last half hour were consistent with inventory reversion and suggested that the statistic was an artefact of the inclusion of orders placed earlier and left on the books during the last half hour. That only underlines the question why those orders were left on the books, rather than cancelled, when their execution would not have been desirable. It suggests as one possible answer that the orders were not then intended to execute because they were never intended to execute. 11. In oral evidence Dr Carr made two points about this characteristic. The first was that during the last half hour of continuous trading, cancelling bids left on the books would not be traders' primary concern, and would be necessary only if there were a real risk of the bids executing. Presumably in all the circumstances that risk was low. His second point was that traders would have another option to close out a long position in the closing auction, and that it was not unheard of for traders to have "actual strategies based on what happens at the closing auction". What those strategies might be, and whether it was likely that any number of Select Vantage traders were pursuing them, was not explained. 12. Stepping back to consider the suggested layering strategy in general terms, there remain questions about both its appeal and its efficacy. The profit-sharing arrangements required to give an incentive for cooperation between traders or pods who were not yet long would be complex and possibly difficult to implement. In the absence of such arrangements there was no reason for a trader to engage in layering behaviour until he or she, or at least his or her pod, had a long position. 13. For the strategy as described by Professor Putnins to be sensible, it was necessary for Select Vantage to amass a very considerable long position at the beginning of the day and to elevate prices considerably while it was unwound. Once the initial position was unwound, unless and until the manipulative bids were cancelled or amended, or supervening and presumably unpredicted events pushed prices back down, any further trades would simply be trades around the spread (but centred on a higher trading price). At that point there would be no reason, other than to escape detection for layering, consistently to maintain a high volume of non-genuine bids over the course of the day. Given the prescriptiveness of the layering detection software monitoring traders' behaviour, it would still have been possible to cancel bids after the initial position had been unwound and to repeat the same strategy over a shorter time horizon. 14. There was evidence neither of the size of the initial long position Select Vantage traders would accumulate nor of whether it was acquired after, before or simultaneously with the allegedly manipulative conduct commencing. Nor was there any evidence of whether that position was in fact slowly wound down over the course of the day, or whether there was continual churn as traders sold and then rebought shares in order to continue to profit from the spread. That Select Vantage was always or almost always long, a fact referable to the short constraint, does not distinguish between those two possibilities. If it was the latter, the suggested layering strategy was at best implausibly unambitious. 15. Further, there was no evidence that the suggested strategy was successfully executed, in the sense that on all or some of the stock/days Select Vantage managed first to acquire a large long position and then to unwind it over the course of the day at elevated (or elevated and rising) prices. As noted earlier in this judgment, there was a reference in the email concerning ASIC's preliminary analysis to a "positive correlation between the change in [Select Vantage's] contribution to the order book imbalance and the mid-point price of the relevant securities", but that evidence was not admitted for the purpose of proving the truth defence (a point made in the grounds of appeal). 16. Dr Carr's report included some evidence that he had been unable to discern any price effects on a relatively short timescale. That evidence was persuasively criticised by Professor Putnins on the grounds that it was extremely difficult to isolate any causal link, given the number of factors which might plausibly have an effect on market pricing. Nevertheless, some evidence that Select Vantage's trading patterns had price effects, or even just that there were price increases from which Select Vantage benefited over the course of the relevant stock/days, would have been of assistance. I appreciate that the market manipulation provisions do not require proof of actual price effects; it would be sufficient that there were acts or transactions likely to have that effect. But it would be easier to conclude that there was a reason for traders to engage in a manipulative strategy if there was evidence suggesting that it had been (and hence could be) successfully executed. 17. That Select Vantage's trading patterns did not reflect other cases of layering is not, as has been observed, decisive. Professor Putnins gave evidence that layering strategies might differ between countries and markets: in less liquid equity markets, there is less depth at the best quoted bid price, so that the execution probabilities of bids at that price may be relatively high (and undesirably so for a trader engaged in layering). Lower liquidity also makes it easier to induce price movements. For those reasons, layering through lower priced bids left on the books for an extended period, rather than through bids at or close to the best quoted bid cancelled shortly after entry, might be more feasible in thinly traded stocks on Australian equity markets. There was also the speculative possibility that Select Vantage traders had adopted a novel form of layering after regulatory action led to the imposition of stricter internal monitoring, making standard forms of layering less viable. 18. Accepting those possibilities, this Court is left with suspicious trading patterns that were only partially explained; one metric (the tenth) which demands and did not receive any satisfactory potential explanation, from Dr Carr or otherwise, and Professor Putnins' opinion that in his view Select Vantage traders were likely engaged in a form of layering. ASIC did not even attempt to demonstrate that Select Vantage's trading patterns actually reflected the whole-day manipulative strategy it maintained Select Vantage traders were pursuing, even though such evidence should have been available. Manipulation in the form alleged has never previously been observed. There are at least some questions about how rewarding such a strategy would be. The level of coordination required would be considerable, but there was no independent evidence of any such coordination. 19. In those circumstances, approaching the evidence in the general way in which it was approached by the primary judge and by the parties, the finding that Select Vantage was likely engaged in manipulative trading contrary to ss 1041A and/or 1041B on each of the relevant stock/days cannot stand. Although that finding was not in terms a finding of a contravention of the statutory prohibitions, and no question of civil penalty arose in the proceedings, the allegations are extremely serious. Having regard to their gravity and the indirect and ultimately somewhat speculative evidence offered for them, in my view it is not possible affirmatively to conclude that Select Vantage or Merlito were engaged in market manipulation. While I have not addressed every subpart of grounds 13 and 14 individually, had it been necessary to determine those grounds, I would have upheld Mr Schlaepfer's challenge to the primary judge's conclusion concerning the truth defence. Conclusion 1. In any event, as I would uphold the primary judge's conclusion concerning the defence of qualified privilege at common law, the order I propose (subject to what follows) is that the appeal be dismissed. 2. As to costs, unless either party wishes to be heard, the order I propose is that Mr Schlaepfer pay one third of ASIC's costs of the appeal and of the proceedings at first instance. Although Mr Schlaepfer has been unsuccessful in the outcome of the appeal, he has been successful on most issues including the defence of truth, which occupied a substantial portion of the proceedings. That success has achieved what was said to be an important outcome of the appeal, namely, the vindication of Mr Schlaepfer's reputation. Although ASIC has succeeded in establishing the defence of qualified privilege at common law, that is a defence of confession and avoidance. To put the matter another way, Mr Schlaepfer has established in the appeal that he was defamed, but defensibly so. For those reasons, while costs ordinarily follow the event, I do not think he should be liable for the whole of ASIC's costs. 3. Accordingly, the orders I propose are: 1. that the primary judge's order as to costs be vacated; 2. that the appeal otherwise be dismissed; 3. that Mr Schlaepfer pay one third of the costs of the proceedings below and of the appeal. ********** Endnotes 1. On two stock-days (GCN 4/9/2014 and ADO 1819/2014) the measure cannot be computed because SV's accumulated inventory had been reversed to zero by 3 :30pm. However, on both of these stock-days the characteristic was nevertheless present because earlier results (characteristic #9) show that on those stock-days SV was quoting opposite to inventory reversion 100 per cent of the time, indicating that in the course of reversing the accumulated inventory to zero, SV was quoting in a direction that was opposite to their likely trading intention. 2. The dark market data was unavailable on one stock/day. 3. There were two stock/days for which the measure could not be computed, because inventory was already zeroed by 3:30 pm. Amendments 01 July 2021 - Corrected typographical error on coversheet DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 July 2021