Australian Corporations Law /Market Manipulation Case Study

David Brown has been charged with the offence below and seeks your advice on potential defenses that may be available to him in a court of law.

He has provided you with additional information below and has requested that you provide him with potential defenses for his conduct that are supported by laws or precedent cases in corporations law or general laws such as duress, emergency, self defense or equity (if these are available).

David would like if you can first outline defenses that are available to him under Australian law and also defenses that may be available in other jurisdictions such as the United Kingdom and United States of America.  There are no issues in relation to insider trading.

David’s Offence

David has been charged with conspiracy to commit the offence of market manipulation between March 2007 and December 2010, by taking part in transactions that had or would likely have the effect of creating or maintaining an artificial price of shares in Growcorp Limited (a company listed on the Australian Securities Exchange), contrary to section 11.5 of the Criminal Code (Cth) and sections 1041A and 1311(1) of the Corporations Act 2001 (Cth).

Additional information : Period 1 – May 2007

David was a licensed securities advisor and assisted Growcorp to gain admission to the Australian Securities Exchange (ASX) in 2006.  David became a director of the company from 2007 to 2009. David held 1 million shares in Growcorp and wanted to support the company. David derived $1 million of fees for his advisory services to the company and it was in his interests for the company to be successful.

Growcorp’s shares were offered to the public at 50c per share and its shares were valued by market analysts at 85c to $1.16 per share.  The price of Growcorp shares increased to 60c.
A few months after Growcorp was listed on the ASX, the price of Growcorp shares deteriorated to 30c when a former chairman was asked to resign after he leaked negative information about the company to brokers and investors.

David was to be appointed as a director and wanted to show confidence in the company. He wanted to restore the Growcorp share price to 50c, being the price at which shares were offered to the public and around half of the value of shares that was assessed by market analysts.

David told the directors of Growcorp that he wanted to buy 100,000 shares up to 50c to ‘get the price up’ and said he wanted to do this to make the company’s shares worth more, so the company could use its shares to buy other companies at a better value and to alleviate the need for one of the company’s directors to buy shares from the former chairman at 50c per share.

David sent emails to directors of Growcorp about this, obtained advice from brokers and lawyers that directors can buy shares in support of a company, then he bought shares on market. David also encouraged directors of Growcorp and other people to buy shares to increase the share price. David intended to increase the price of Growcorp shares and the effect of David’s share buying was to increase the price of Growcorp shares.

The Australian Securities and Investments Commission (ASIC) regulates the Australian share market and found emails on David’s computer about what he planned to do. ASIC has charged David with the offence (outlined above) in for his conduct in May 2007.

Additional information : Period 2 – July 2007

In 1 July 2007, the price of Growcorp shares was 50c. Someone then sold shares at 40c and the share price deteriorated to 40c.

David asked a director of Growcorp if he could buy shares at 50c to increase the share price.

ASIC has charged David with the offence (outlined above) in for his conduct in July 2007.

Additional information : Period 3 – June 2008 to June 2009

An investor (Mr Bad) approached Growcorp about issuing new shares to him and his associates at 60c per share so that they could acquire 20% of the company.

Shares were issued to Mr Bad and his associates. The Mr Bad encouraged David and directors of Growcorp to buy shares up to 70c and threatened that if they did not buy shares then Mr Bad and his associates would ‘dump’ shares on market to push down the share price.

Mr Bad wanted to take over Growcorp, be appointed as a director and acquire control of Growcorp at the lowest price possible. Mr Bad sent a number of emails to David and directors of Growcorp that he and his associates might sell down shares at low prices, predicted the share price would fall to 15c and threatened that if Growcorp did not agree to a takeover by his associates, then he would dump shares at 5c. In accordance with Mr Bad’s threats, he then dumped 20% of the company’s shares on market and sold shares down to 15c as he had threatened.

David contacted the company’s lawyer about Mr Bad’s conduct and spoke with the ASX to stop Mr Bad from dumping shares on market to push down the share price for a cheap takeover. Mr Bad then complained to the ASX that he was allowed to sell shares at any price and no one could stop him from doing this. Mr Bad then continued to sell shares at low prices.

David bought shares on market and encouraged other people to buy shares on market with the intention to restore or increase he share price to 50c. Whenever shares were sold at low prices, David bought shares and encouraged others to buy shares to restore the share price.

Additional information : Period 4 – January to June 2010

Mr Bad and his associates continued to dump shares on market in 2010 and threaten to take over the company at a low price.

Growcorp needed to raise money and wanted to arrange a buyer for Mr Bad’s shares to he would go away. Growcorp resolved to issue new shares to investors at 30c per share. Mr Bad then continued to dump shares on market to stop the placement of shares to other investors.

David and the directors of the company tried to buy shares up to 40c to restore the share price. Mr Bad contacted brokers and the ASX to stop people buying shares above the price at which he dumped shares on market. As a result, shares could not be purchased at more than 10% above the last sale price.

David then arranged for associates of the company to buy and sell shares between themselves so they could increase the share price. A friend of the company chairman gave the chairman access codes for his online broker account, then asked David if he could enter transactions to buy and sell shares in that account to increase the price. David did this a number of times but did not actually have authority from the owner of the account. There are no issues about using the account other than trades were entered for the purpose of artificially increasing the share price.