Market Manipulation Case: Fame Decorator Agencies V Jeffries Industries

Discuss about the Date of Payment of Dividend.

Case introduction: In this case, James O’Halloran and his wife were acting as the directors and beneficiaries of Fame Decorator Agencies. The company had 217,430 ordinary shares and it also had 66,125 convertible preference shares in Jeffries Industries Ltd., which was a public company at the time and listed on the Australian Stock Exchange. Till December 1994, O'Halloran remained the director and chairman of the company. It was provided by the Articles of Association of Jeffries that in case the company failed to declare dividend regarding the convertible preference shares, they could be converted into ordinary shares on the basis of a formula. According to this formula, the lower the aggregate, weighted average sale price, the higher will be the number of ordinary shares that would be received by the preference shareholders in case of such conversion. The aggregate weighted sale price was going to be decided on the basis of the average price of ordinary shares that were sold on ASX during the 20 days trading period immediately before the date of the payment of dividend.

On 28 April, Jeffries Industries announced at nearly 2:44 PM to the ASX that it was not going to pay dividend preference shareholders and therefore they can convert their shares. On the same day at 3:30 PM, Mr O’Halloran contacted his stockbroker and placed an order for selling 170,000 ordinary shares held by Fame in Jeffries down to 13 cents per share. Therefore, 170,000 ordinary shares of Jeffries were sold by the stockbroker at prices from 35 cents to 13 cents. Before the sale, the last sale price of the ordinary shares of Jeffries was 45 cents.

In view of the ASIC, as a result of this trading, after conversion, Fame was going to receive 42 ordinary shares in return of each reference share. The other hand, if the trading would not have taken place, only 24 ordinary shares would have been received by Fame in return of the reference share. Assuming a value of 30 cents per ordinary share, the convertible preference shareholding of Fame would have become nearly $833,175 in place of the original $476,100.

In the present case, Fame Decorators Ltd was a holder of preference shares. The company organized a sale of 170,000 shares by its stockbroker in Jeffries industries during the last eight minutes left for trading in the market, striking all the offer orders that were listed above. Out of these, 74,000 have been sold and the 13 cent mark, where the last sale for the day had taken place. The offer for 13 cent had been made, speculatively by an unrelated third party. However, there were suspicions on part of Jeffries Industries regarding these transactions. The reason was that they can significantly impact the weighted average of the ordinary shares of the company for purchasing the conversion of preferred stock. Therefore, if the transactions that the place on 28th of April were ignored, each holder of preference stock would have received 25 ordinary shares on the basis of each preference share. If these were included, the conversion rate that would have been applied would be a 42 for one.

Sales Report

Under these circumstances, Jeffries Industries had discussions with the Australian Stock Exchange, and it was decided by the directors of the company that April 28 trading needs to be excluded. There was one more holder of preference shares, Fenwick, who had decided that the validity of this decision needs to be challenged.

The case was heard by Cohen J. at the first instance. He arrived at the conclusion that the market had been manipulated by Fame Decorators for the purpose of maximizing its return from the provision of conversion and in this way, the company had contravened deeper emissions that are similar to the proposed section 11 B, Securities Markets Act. It was stated by the Court that the available evidence was not sufficient to support the contention made by Fame regarding an immediate financial obligation behind certainly discounted selling of these shares. The court stated that Fame had recourse to finance from other sources. Under the circumstances, it was held by the court that the translations cannot be described as general supply and demand but instead, these translations were made by the seller was not looking for general demand.

The duties/responsibilities breached: However in this regard, an arbitrary distinction was made by Cohen J. The court stated that the sales down to $.25 cents were not treated as a breach due to reason that they were not so obviously a sacrificial price as compared to the sales at 14 and 13 cents. As a result of this distinction, it can be implied that the single sale of 170,000 shares could either be split into two purposes, one of which was a legitimate purpose and the other was manipulated or the sale had multiple effects, one of which was misleading, while the other was not.

Hence, an appeal was made against this decision. In the appeal, it was argued by Fame that the conduct of the company regarding the sale cannot be described as misleading or deceptive and there was no manipulation of the market involved in this transaction. However, it was acknowledged by Fame that the conduct of the company can be described as opportunistic taking advantage of the situation present in the market. However, it was argued by the company that the company was not responsible for the creation of such a situation or any person in collusion. However, the appeal was rejected by the majority. It was found by the court that the equivalent to s11B cannot be described as being confined to fictitious trading. However, a judgment in dissent was written by Priestly. He disagreed with the opinion of the majority according to which the arm's-length translations that have been executed according to the SEATS with method cannot be considered as tenant demand and supply. In the opinion of Priestly, JA, he felt uneasy regarding the imposition of liability for demand regulation of market, particularly when the market participants had all the relevant information available to them. Therefore, he expressed the opinion that an observer of events related with the last eight minutes of trading, who understood the facts that were publicly available and were relevant to the shares of Jeffries Industries, would not have been deceived regarding the market price of diesel shares due to the reason of what took place during the last eight minutes of trading.

Court Decision and Appeal

Hence in this case, the court was divided regarding the culpability of transaction. According to the majority of the court, the transaction has been described as manipulative due to the reason that the majority felt that the purpose of the transaction was to artificially host down the price of the shares in order to increase the entitlement of the appellant on conversion of preference shares. On the other hand, in the opinion of the minority, the transaction has merely taken place due to the mechanism of the market. The apparent and done nothing in order to influence the market mechanism except from accepting the offers. According to the rules of the market. In this way, this division in the opinion of the court also reveals the limits present in case of the requirements of specific intent due to the reason that it can be plausibly argued, as done by the minority judge in this case, that, while acting for his own advantage, the purpose of the appellant, cannot be described as creating a false or misleading opinions regarding the market. The purpose of the apparent was to bring a close of market price that would be advantageous to him, regarding the conversion of preference shares.

In this way, the issue that was mentioned by the minority argument can be dealt with by the interpretation of general intent to manipulate. Even if the minority view is accepted that the appellant did not have the purpose of creating false or misleading appearance of market because he had arguably done nothing more than selling shares according to the procedure of the market, still the transaction can be described as manipulative and the reason that clearly there was an intention present on part of the appellant lamentably regarding the convergent transaction. Therefore, it can be stated that the bad oblation law is not only confined to the deception of a purchaser or a seller of the securities but the law also covers any manipulative device that has been used in case of a securities transaction.

However, even if the above-mentioned reasoning may appear to be a little broad, but it can be justified on the basis of a number of grounds. First of all, it will be practically more effective to deal with market manipulation. It would also be consistent with the proposal that has been made by some commentators regarding a general anti-fraud provision; the implied intent approach can also widen the scope of anti-manipulation legislation. Therefore, it will result in improving the rate of enforcement as well as the rate of deterrence. It is particularly very significant, especially in view of the present poor record of enforcement that exists in Australia. In the same way, secondly, it appears that there is some judicial support also present for this approach. The reasoning mentioned above, that was applied by the majority in Fame, according to which, the conduct of the company regarding this sale. The probability to deceive or mislead the third parties who were entitled to depend on the market price in order to determine the conversion rate. Hence, it can be said that it was the impact of the transaction on the parties due to which the court was prompted to arise at the conclusion that the sale was manipulated. Similarly, if the experience from the US can be considered as a guide, the famous misappropriation theory present in the insider trading law was developed in the similar way in accordance with the general anti-fraud rule. The misappropriation theory provides that the fraud takes place on the source of information instead of market traders. Therefore it appears that even if the general intent approach may appear to be broad, but it is a viable option.

The relevance of the decision: Therefore, briefly speaking, although there are certain difficulties present, but the implied intent approach needs to be the way forward in order to improve the efficiency of the market manipulation regime. By adopting this approach, the test of manipulation will be broadened and therefore the regime will become more responsive towards new and emerging manipulative practices, but at the same time, it will also prevent over-deterrence, or in other words, to deter the participants in the market from entering socially desirable and legitimate transactions. Hence the general intent needs to be developed judicially by self implied intent approach, which may represent betterment as compared to the specific intent requirement that was present in the earlier provisions.

In this case, it appears that the defense has generally relied on the illusion that Jeffries Industries cannot be described as a trading or e financial Corporation. It was said that Jeffries Industries was a holding company. They did not have any other significant assets, apart from the shares in its subsidiaries. The company did not produce much income, apart from the dividends from its subsidiaries. The company did not have really separates the. The trading of the was done by its subsidiaries. The evidence produced by the Crown by the former managing director of Jeffries Industries advised that the company had exercised strict cash and management control on all the companies of the group, which pointed out towards the fact that it was a type of finance company, and it was operating as a trading company with the help of its subsidiaries.