CORPORATE LAW CASE

FAME DECORATOR AGENCIES PTY LTD V JEFFRIES INDUSTRIES LTD ( 1998)

Introduction

The report is prepared in the case of Fame decorator agencies, herein referred to as Fame henceforth versus Jeffries Industries and others. The case was heard in 1998 and later determined. The case was appealed by Fame who held shares both ordinary and preference shares in Jeffries. Jeffries was a publicly traded company whose stocks were listed. In the determination of the case, Fame was allowed to convert into ordinary shares the preference shares held using a predetermined formula as follows: use an average of the lower selling price of the ordinary shares for 20 days before the actual conversion took place to increase the ordinary shares for allotment during conversion. However, before the conversion took place, Fame sold some ordinary shares on the last day of the 20 days slotted (Jade Case Trace, 1999).

Retrospectively, the share price of Jeffries suffered a substantial setback and lowered tremendously by approximately 71% from the mid-day prices. What happened may be explained in the following terms: the sales were implemented in the last three minutes to the closure of business on the last day. This was meant to entice new buyers who would then buy the shares at higher prices than the 14c the shares were trading at. This would mean that Fame would then be compensated at a higher price and the market price of the shares would be well above the trading price of 14c (Emma, 2009). The allegation was that Fame had an intention and had conspired to manipulate the market to his favor.

The share price had in fact risen because the core assumption in the market is based on the law of demand. Buyers and sellers were depicted as being active participants in the trade which was a deception capable of giving a false picture about the securities of Jeffries which resulted to a price fall of 71% of the share prices (Roman, Stephen & McQueen, 2002). The action was alleged to have breached two acts namely act 995 and act 53 which state the following: “A person shall not engage in a conduct that is misleading or deceptive or is likely to mislead or deceive” and “A person shall not do anything that is liable to create, a misleading appearance with respect to the market for, or the price of, any securities” (Roman, Stephen & McQueen, 2002).

Duties and responsibilities breached and the reasons for violating

The violation of duties and responsibilities was in the manipulation of the market so that it would favor him. It was argued that Fame, deliberately orchestrated to arbitrarily dump the shares to the firm just as the case had been in the Nomura Securities. In this case, curiosity was well deserved when 20, 000 of shares were bought at 14c which he later resold as follows; 10,000 were resold at 30c while 8,000 were sold at 40c (Singapore laws, 2011). While this might not be immediately questionable, it is worthwhile to note that the shares were only sold after two to three trading days. This was in contravention of Act 998 which states, “A person shall not create, or do anything that is intended or likely to create, a false or misleading appearance concerning the market for, or the price of, any securities.” The main issue here was the question on the price of the offers and the acceptance. The picture created was to depict a tender that had been made and ultimately received and accepted and thus there was no issue (Singapore laws, 2009).

Critical analysis of the whole matter would then suppose that the market was manipulated and that the buyers and sellers were deceived. From the different sides, the buyers might have been misled, and consequently, the market manipulated or from the Jeffries’ point of view, the case was that of a willing buyer and a willing seller, and at such a situation, every party in the transaction wants what is best for him. Therefore, the buyer intends to sell the products at the highest price attainable while it is the intention of the seller to acquire the same products at the lowest price possible (Jade Case Trace, 1999).

In the defense, the case law provided a heap of cases such as the audacious case of stark ASIC v Nomura International plc commonly referred to as the Nomura case, where an agreement was reached to sell shares worth $600 million just before the market closes so that they would benefit from the future contracts based on the prices of the securities (Jade Case Trace, 1999). The practice has been extensively explained in section 1041B and also featured prominently on the Parliamentary Committee of ASM (Australian Securities Market) and the policies it has adopted (Roman, Stephen & McQueen, 2002).

The two scenarios can be termed as follows: Scenario one is where the investors themselves would agree to exchange the shares among themselves which would then increase the sales turnover and the stock prices by creating the impression that the interests in the shares rose and then later get rid of their shares at a profit. Scenario two would involve churning a situation, places bids, and sells orders momentarily or when the prices have risen slightly. The two scenarios would lure unsuspecting investors into the purchasing of otherwise uninteresting shares, and thus the culprits of the acts would gain from the illegal acts (Singapore laws, 2011).

These laws are openly unfair to other actors in the market. The market efficiency is impeding by the human-made actions which control the supply and the demand of the financial market. The information by which the performance of a market is dependent is volatile and keeps changing monthly, weekly, daily and hourly as investors struggle to account for the distortions and in making their investment decisions. This is, however, difficult in the scenarios where the investors are out to manipulate and distort the occurrence of the market (Singapore laws, 2011).

Fame, in this case, the appellant was a company which had made a decision and actions on being carried out by its manager Mr. O’Halloran. It was held that they did nothing wrong regarding the market besides the sale of shares to the public on offer to any holder who would have wanted to keep them at the going prices (Michael, 2009). The sales are believed to have lasted for 8 minutes from 3.52 pm on Friday 28th April in 1995 to 4 pm. The market closed at 4 pm, and the share price had fallen. As expected, the prices on the next trading day, which was Monday, rose and thus a keen observer of the publicly traded securities would have understood the relevant facts essential to the Jeffries shares. He would not be easily deceived by the stock prices since it was easy to deceive what had happened in the eight minutes (Jade Case Trace, 1999).

The happenings of the market could have correctly occurred as a result of the forces of the market. These should be understood as the forces of demand and supply which affect and control a market mechanism. Fame did not do anything wrong to the market forces or to the market mechanism besides offering his shares on sale and accepting the offers which were made by adhering to the market regulations and standards. What is even more questionable is that the shares were bought at the set prices by Jeffries (Paul, 2013). Fame had thus no effect to the offers being made to him, and he acted just like any other reasonable seller. Every logical buyer of the shares and in need of the shares could have easily accessed the information about the shares in the publicly traded company. The same information being peddled by Jeffries was independent of the appellate especially in the conversion of the preference shares being publicly traded. In his actions, Fame was doing what was best for his business in his view and what would benefit him using the publicly traded information and shortcuts in the procedures given the circumstances which had presented themselves to him. He played no part in their manufacture and thus would not be held accountable for actions done without his knowledge (Jade Case Trace, 1999).

In doing what would benefit him in his quest for the business, the appellants’ objective was not at all misleading or deceiving in respect to the overall market of the shares or the price of the shares of Jeffries. The main aim of Fame was to raise the share price close to the marketing share price which would be of benefit to him in the future contract especially about the conversion formula (Eugene, 2011). Similarly, his conduct would not be said to be deceptive or misleading the market or any person because the information about the shares of the company was public and available for scrutiny by any member of the public (Jade Case Trace, 1999). The fact that there were no misleading effects was plainly evident and demonstrable in the market as there were no sales of shares on the closing minutes of Friday other than Fame. The shares traded at slightly higher prices on the next market day which was Monday.

In the case of Fame, the sale of shares was all the appellant did and was done in agreement with the laid structures and the market policies, absent of collusion or conniving or following insider information. The absence of prearrangement or communication with the company’s agents squarely falls within the Act 998 and Act 995 (Ann, 2013).

Critical analysis of the decision

The basic understanding of a securities market is that it should function with the forces of demand and supply of securities especially for the publicly traded shares such as those in the ASE. The buyers will be concerned with the buying of securities at the lowest price possible while on the other hand; the sellers aim to sell their securities at the highest possible prices. Any other actors who would distort the prices of the securities would be considered as an interference of the natural phenomenon of the free market. High Court of Australia (2012) determined that the Fame transactions against Jeffries were orchestrated thus they followed a design and an intentional appeal which was far-reaching and was supposed to create a false appearance and by large mislead. The decision of the court of appeal held that Fames conduct had intentionally purposed to mastermind the prices artificially regarding the shares of Jeffries (Vicky, 2005). Contrastingly, the different limbs of Act 998 or ACA of 2001 have not been agreed upon, and they both require the mens rea for them to be incorporated (Singapore laws, 2011). The appellate court determined that the defendant intentionally created a misleading and a false appearance. His actions had a purpose of increasing the set market prices so that he would benefit at the expense of the other investors who were not privy to have been following the progress of the shares.

The second limb of liability 998(1) for the intention to create an appearance which is false can be determined if the primary purpose of such an act was to artificially create an unnatural market to alter the prices of the shares to their favor. The tribunal and the court of appeal in Australian courts took different limbs where the decision was overturned from the two. The limb in the overturning case held that the second limb 998(1) should be concerned where the actions of the allegations to the contravener if the primary purposes are primarily beneficial and do not reflect the market forces of demand and supply (High Court of Australia, 2012).

Conclusion

In the prior ruling, the court held that a party, in this case, a business-oriented party, could not have committed a mistake by acting in such a way that increased their profits. They, however, disregarded the second limb that such a benefit would result to a misrepresentation and false appearance by the fraudulent party. The second ruling also had its limitation; it failed to recognize the fact that as business people, parties will endeavor to maximize their profits.

In order to ensure that the parties that are innocent are not caught unfairly within the court’s prohibition, a defense can be provided which is based upon the provisions of the insolvent trading. The defense will ensure that the person transacting in any business that are not regarded to breach the forbidden rules can have a safe harbor. The same defense should be put in association to provision civil contraventions.

The proportionally weak penalty connecting to a criminal contravention of subsection 1041B is of interest. The maximum penalty must correspond to the one valid under the civil penalty provisions and can be similar to that relevant to insider trading conviction. As a matter of agency, the issues need to be addressed to ensure effective law enforcement. If the maters will not be petitioned, the people will continue to undermine the policy objective of section 1041B. Nevertheless, it is recommendable to resolve the deficiencies in section 1041 as suggested in the case.

References

Arson, Emma (2009). False Trading and Market Rigging in Australia. Online accessed 20th May, 2017, from http://www.clta.edu.au/professional/papers/conference2009/ArmsonCLTA09.pdf

Clark, Eugene (2011). The legal tortoise and the high frequency trading hare: The challenge for regulators. Australian Journal of Corporate Law, 274.

Constable, Paul (2013). Combating Stock Market Manipulation in Australia: Trading Scandals and the Lessons to be learnt. International Trade and Business Law Review, 325.

Comino, Vicky (2005). High Court relegates strategic regulation and pyramidal enforcement to insignificance. Australian Journal of Corporate Law, 48.

Duffy, Michael (2009). Insider trading: Addressing the continuing problems of proof, Australian Journal of Corporate Law, 149.

High Court of Australia (2012). Written submissions – High Court of Australia. (Online). Accessed 20th May 2017, from http://www.hcourt.gov.au/assets/cases/m73-2012/DPP-JM_App.pdf

Jade Case Trace (1999). (Online). Accessed 20th May 2017, from https://jade.io/article/231787

Mazzeo, J., Druesne, B., Raffeld, P. C., Checketts, K. T. & Muhlstein, A. (1991). The Princeton, NJ.

O’Connell, Ann (2013). Protecting the Integrity of Securities Markets-What is an ‘Artificial Price’?: DPP (Cth) v JM (online). Accessed on 20th May 2017, from, https://blogs.unimelb.edu.au/opinionsonhigh/2013/08/01/o-connell-jm/

Tomasic Roman, Bottomley, Stephen & Rob, McQueen (2002). Corporations laws in Australia. Sydney: The Federation Press.

The Singapore laws (2011). Tan Chong Koay and another v Monetary Authority of Singapore. Online, accessed on 20th May 2017, from, http://www.singaporelaw.sg/sglaw/laws-of-singapore/case-law/free-law/court-of-appeal-judgments/14632-tan-chong-koay-and-another-v-monetary-authority-of-singapore-2011-sgca-36

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