After scoring twice and hitting the post a few times, the Financial Markets Authority (FMA) has claimed victory in the long-running legal war with Milford Asset Management portfolio manager, Mark Warminger.
In a statement following the release of the Auckland High Court last Friday, FMA chief, Rob Everett, said the regulator was “pleased with the outcome of the proceedings” despite winning on only two of the 10 counts against Warminger.
“Market manipulation threatens our core objective of promoting fair, efficient and transparent financial markets. For investors to participate confidently in our markets we need to target and respond to misconduct,” Everett said in the statement. “That is what this case was about.”
However, while the FMA won many of the points – with much hinging on decisions early in the legal preamble – Justice Venning ruled the regulator off-target in several instances.
Most notably, Venning’s legal decision released last Friday shows the regulator failed to make the direct link between Warminger’s trading behaviour and Milford’s performance fees.
For example, in one of the A2 Milk (ATM) trading patterns under scrutiny Venning ruled: “The suggestion that the trades were conducted to enhance the funds’ performance fees is not made out in this case.”
In relation to another foray by Warminger into the Wynyard Group, the ruling notes Milford performance fees would’ve increased by a theoretical $230.55 on the trades in question.
“In fact as the funds were performing one per cent behind benchmark as at 30 June there were no performance fees payable at all,” the ruling says. “The increase in price would have made a negligible 0.02 per cent difference to the fund performance. There was no logical reason or purpose for Mr Warminger to seek to manipulate the market.”
Nonetheless, Venning did emphasise Warminger’s winning personality as an important factor in the case.
“There is a common theme to the defence case on this and other transactions to the effect of ‘why would Mr Warminger engage in such behaviour and place his career at risk for either a very limited or even nil financial benefit to himself?’,” the ruling says.
“The FMA does not have to prove a motive. But Mr Warminger’s evidence, both in what he said and also how he answered questions as well as the evidence of Mr [Brian] Gaynor provides some insight. Mr Warminger is a goal driven individual. He is motivated by personal performance, the performance of the funds under his management and the targets he has to meet.
“… Mr Warminger has been very successful in a performance driven industry. He was the INFINZ fund manager of the year for three years preceding 2014. He was used to success and took pride in being on the winning side of a deal. His personality provides some explanation why he would engage in such activity.”
Indeed, the more qualitative features of the evidence were crucial in the FMA case. Venning noted the expert defence witness, Professor Michael Aitken , CEO of Capital Markets Co-operative Research Centre, highlighted “trading data [as] central to that issue”.
“The FMA on the other hand took the position that the surrounding context informed the purpose behind the trades,” Venning says in the decision. “I agree with that approach, which in my judgment is supported by the authorities referred to above.”
But the ruling does quantify the trading benefit to Warminger’s Milford portfolio in at least one of the counts that went the FMA way. According to the ruling, a flurry of his Fisher & Paykel (FPH) trades via a Macquarie-enabled Direct Market Access (DMA) on May 27, 2014, would’ve resulted in a loss after costs.
“By contrast, if his DMA activity led to the increased sale price of $4.35 it improved his crossing price by three cents resulting in a benefit of around $16,350,” the ruling says.
Venning also dismissed Warminger’s claim that he was “searching for volume” during a series of trades in ATM stock on July 9, 2014, that included a “ping pong” back-and-forth with Goldman Sachs.
“Warminger entered and traded 10 DMA buy orders for parcels of 500 or 200 ATM shares at $0.69, each order alternating with 10 sell orders placed by Goldman Sachs at $0.68 (the ping pong trades),” the ruling says.
Ultimately, Venning ruled the “purpose of his trading was to increase the offer, quote and price for ATM and to maintain the price at a higher level than would have been the case in the absence of his orders. It had that effect”.
The case also highlighted dangers associated with unsupervised DMA use. In the wake of the Warminger scandal in 2015, Milford instituted a central dealing desk to funnel all portfolio manager trades.
DMA compliance monitoring was also one of the nine areas targeted by the NZX last year in its ‘participation inspection programme’. According to the NZX inaugural ‘Oversight and engagement report’, co-incidentally released last week, “review reflected market developments and trends, as well as engagement that NZXR has had with Participants on compliance issues and matters which have been the subject of enforcement action”.
Joost van Amelsfort, NZX head of market supervision, said the focus on DMA as one of the target areas was not related to the Milford case.
Van Amesfort said the NZX has been monitoring the growing use of DMA for a number of years as well as developing “surveillance tools” to keep up with changing practices.
However, he said – prior to the release of the judgment – the NZX was “certainly interested” in the outcome of the Warminger case.
“But it won’t inform our guidance note [on DMA practice],” van Amelsfort said.
The ‘Oversight and engagement report’ says the NZX “is targeting” participant rule changes in the third quarter of this year covering:
- Additional surveillance tools;
- Changes to monitoring participant capital positions; and,
- The proposed introduction of voice recording to enhance NZX’s surveillance and monitoring capabilities
According to van Amelsfort, while voice recording “will happen”, the matter has been referred for further consultation.
Meanwhile, the FMA is poring over the finer details of the Warminger decision for clues.
“In terms of the broader consequences for conduct within our markets, we need to review and fully consider the judgement before making further comment,” Everett said.