Australia: market manipulation and the meaning of 'artificial price'

The High Court - the highest court in Australia's judicial system - gave judgment yesterday in Director of Public Prosecutions (Cth) v JM [2013] HCA 30 (on appeal from [2012] VSCA 21). This is an important and very interesting decision concerning section 1041A of the Corporations Act 2001. Section 1041A prohibits the carrying out, or taking part in, a transaction that has or is likely to create an artificial price for trading in financial products on a financial market operated in Australia.

The court unanimously held that section 1041A covered transactions the sole or dominant purpose of which was to set or maintain the price at a particular level. In doing so it rejected the view that 'artificial price' should be construed more narrowly to refer to market prices resulting from practices such as cornering and squeezing (as considered in the American decision Cargill Inc v Hardin [1971] USCA8 443). The court stated (at paras. [71] and [72]):

The forces of "genuine supply and demand" are those forces which are created in a market by buyers whose purpose is to acquire at the lowest available price and sellers whose purpose is to sell at the highest realisable price. The references in s 1041A to a transaction which has, or is likely to have, the effect of creating an "artificial price", or maintaining the price at a level which is "artificial", should be construed as including a transaction where the on-market buyer or seller of listed shares undertook it for the sole or dominant purpose of setting or maintaining the price at a particular level. It is, however, important to emphasise that whether there are other kinds of transaction which have the effect of creating or maintaining an artificial price in a market for listed shares is not, and, given the terms of the case stated, should not be, decided.

The price that results from a transaction in which one party has the sole or dominant purpose of setting or maintaining the price at a particular level is not a price which reflects the forces of genuine supply and demand in an open, informed and efficient market. It is, within the meaning of s 1041A, an "artificial price". The offer to supply or acquire of the kind described is made at a price which is determined by the offeror's purpose of setting or maintaining the price. It is not determined by the offeror's purpose, if buying, to minimise, or, if selling, to maximise, the price paid, and it is not determined by the competition between other buyers whose purpose is to minimise the price and other sellers whose purpose is to maximise the price. If the offer results in a transaction, that is a transaction which can be characterised as at least likely to have the effect of creating or maintaining an artificial price for trading in the shares."

A summary of the decision is available here (pdf). Background materials - including the parties' written submissions - are available here.