Australian Securities & Investments Commission v Soust [2010] FCA 68 (15 February 2010)

Last Updated: 15 February 2010

FEDERAL COURT OF AUSTRALIA

Australian Securities & Investments Commission v Soust [2010] FCA 68

Citation:		Australian Securities & Investments Commission v Soust [2010] FCA 68
Parties:		AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION v MARTIN SOUST
File number:		VID 1087 of 2008
Judge:		GOLDBERG J
Date of judgment:		15 February 2010
Catchwords:		CORPORATIONS – purchase of shares on Stock Exchange – whether transaction created an artificial price for trading in financial products on a financial market – whether transaction created a false or misleading appearance with respect to the market for or price for trading in financial products on a financial market – directors’ duties – good faith and proper purpose – personal advantage – causing detriment to a corporation.
Legislation:		Corporations Act 2001 (Cth): 181(1), 182(1), 206C(1), 1041A, 1041B, 1317E, 1317G Evidence Act 1995 (Cth): s 140 Securities Industry Act 1970 (Vic): ss 70, 71 Securities Industry Act 1975 (Vic): s 109 Financial Services Reform Act 2001 (Cth) Securities Industry Act 1980 (Cth): ss 123, 124 Futures Industry Act 1986 (Cth): ss 130, 131 Futures Industry Bill 1986 Corporations Act 1989 (Cth): ss 1259(1),1260 Financial Services Reform Bill 2001 Corporations Legislation Amendment Act 1990 (Cth) Acts Interpretation Act 1901 (Cth): s 13(3)
Cases cited:		Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298, applied Briginshaw v Briginshaw (1938) 60 CLR 336, applied Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504, cited Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Australian Competition and Consumer Commission (2007) 162 FCR 466, cited North v Marra Developments Ltd (1981) 148 CLR 42, followed Fame Decorator Agencies Pty Ltd v Jeffries Industries Ltd (1998) 28 ACSR 58, followed Donald v Australian Securities and Investments Commission (2000) 104 FCR 126, followed
Date of hearing:	13 October 2009
Place:	Melbourne
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	112
Counsel for the Plaintiff:	C Caleo S.C. and J P Moore
Solicitor for the Plaintiff:	Australian Securities and Investments Commission
Counsel for the Defendant:	H R Carmichael
Solicitor for the Defendant:	Oakley Thompson & Co

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 1087 of 2008

BETWEEN:	AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Plaintiff
AND:	MARTIN SOUST Defendant

JUDGE:	GOLDBERG J
DATE OF ORDER:	15 FEBRUARY 2010
WHERE MADE:	MELBOURNE

THE COURT DECLARES THAT:

1. Pursuant to s 1317E of the Corporations Act 2001 (Cth) (“the Act”) on 31 December 2007 Martin Soust, the defendant, contravened s 1041A of the Act by taking part in, and carrying out, a transaction that had the effect of creating an artificial price for trading in shares in Select Vaccines Limited by placing an order with Bell Potter Securities to purchase $2,550 worth of shares in Select Vaccines Limited at market price on the Australian Stock Exchange Limited.
   
2. Pursuant to s 1317E of the Act on 31 December 2007 the defendant contravened s 1041B(1)(b) of the Act by doing an act which had the effect of creating a false and misleading appearance with respect to the market and the price for trading in shares in Select Vaccines Limited on the Australian Stock Exchange Limited by placing an order with Bell Potter Securities to purchase $2,550 worth of shares in Select Vaccines Limited at market price on the Australian Stock Exchange Limited.
   
3. Pursuant to s 1317E of the Act on 31 December 2007 the defendant contravened s 181(1) of the Act in that he failed to exercise his power, and discharge his duty, as a director of Select Vaccines Limited in good faith in the best interests of Select Vaccines Limited or for a proper purpose, by:
   

(a) placing an order with Bell Potter Securities to purchase $2,550 worth of shares in Select Vaccines Limited at market price on the Australian Stock Exchange Limited;

(b) thereby contravening Select Vaccines Limited’s Share Trading Policy;

(c) failing to inform the other directors of Select Vaccines Limited of his involvement in that purchase;

(d) deliberately concealing his involvement in that purchase from the other directors of Select Vaccines Limited.

4. Pursuant to s 1317E of the Act on 31 December 2007 the defendant contravened s 182(1) of the Act in that he improperly used his position as a director of Select Vaccines Limited to gain an advantage for himself and Martin Soust & Co Pty Ltd and to cause detriment to Select Vaccines Limited by:
   

(a) placing an order with Bell Potter Securities to purchase $2,550 worth of shares in Select Vaccines Limited at market price on the Australian Stock Exchange Limited;

(b) thereby contravening Select Vaccines Limited’s Share Trading Policy;

(c) failing to inform the other directors of Select Vaccines Limited of his involvement in that purchase;

(d) deliberately concealing his involvement in that purchase from the other directors of Select Vaccines Limited.

THE COURT ORDERS THAT:

5. The further hearing of the proceeding be adjourned to a date to be fixed to enable the parties to make submissions as to whether any, and if so what, orders should be made pursuant to s 1317G of the Act that the defendant pay a pecuniary penalty in respect of his contraventions of ss 1041A, 1041B, 181(1) and 182(1) of the Act and whether any, and if so what, orders should be made pursuant to s 206C(1) of the Act that the defendant be disqualified from managing corporations for a period that the Court considers appropriate.
   

6. The costs of the proceeding be reserved for further consideration.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 1087 of 2008

BETWEEN:	AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Plaintiff
AND:	MARTIN SOUST Defendant

JUDGE:	GOLDBERG J
DATE:	15 FEBRUARY 2010
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

INTRODUCTION

1. In this proceeding the plaintiff, Australian Securities and Investments Commission, (“ASIC”) seeks the following relief:

(a) a declaration that the defendant has contravened ss 1041A, 1041B, 181(1) and 182(1) of the Corporations Act 2001 (Cth) (“the Act”);

(b) an order under s 1317G of the Act that a pecuniary penalty be paid by the defendant in an amount that the Court considers appropriate in respect of each such contravention;

(c) an order under s 206C(1) of the Act that the defendant be disqualified from managing corporations for a period that the Court considers appropriate.

2. The proceeding was set down for trial on Monday 12 October 2009 with an estimated duration of five days. Early in the morning of Friday 9 October 2009 the defendant’s solicitors sent an open letter to ASIC in the following terms:

“We advise that at the trial of this matter listed to commence on Monday 12 October 2009 the position to be taken by the defendant Dr Soust, is that:

(1) he does not require the attendance in person of any ASIC witness;

(2) he will make no objection to ASIC through its counsel tendering ASIC witness Affidavit evidence filed and served in the proceeding as evidence in the proceeding;

(3) he will call no evidence and will tender no evidence in contradiction of the facts pleaded in the Statement of Claim; and

(4) he will adduce no evidence in support of his pleaded defence.”

3. Later that morning the proceeding was called on for mention in the Court. Counsel for the defendant said that the defendant’s defence would stand on the pleading alone, unsupported by evidence and that there would be no positive case put in response to ASIC’s case. Counsel for the defendant read to the Court the letter sent earlier that morning by the defendant’s solicitors to ASIC. Counsel for the defendant reiterated that the defendant would not adduce any evidence, or seek to lead any contradictory evidence such as could sustain the positive allegations pleaded in the defendant’s defence.
4. At the trial of the proceeding on 13 October 2009 ASIC tendered the affidavits and documents upon which it relied without objection. There was no cross-examination of any witness called by ASIC, the defendant led no evidence and in final submissions counsel for the defendant did not make any submissions as to the factual allegations and submissions submitted by ASIC and confined himself to making submissions on the construction and interpretation of relevant provisions of the Act.
5. Although the defendant did not cross-examine any of the witnesses called on behalf of ASIC, nor did he tender any evidence whether in contradiction of ASIC’s evidence or otherwise, I am still required to be satisfied that the matters alleged by ASIC have been established in accordance with the appropriate standard of proof. As this is a civil proceeding the relevant standard of proof to be applied and adopted is the balance of probabilities: s 140 of the Evidence Act 1995 (Cth). Consistently with previous authority, having regard to the nature of the causes of action alleged against the defendant and the gravity of the matters alleged I have adopted and applied the degree of persuasion explained by Dixon J in Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362. See also Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504 at pars [146]-[148]; Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Australian Competition and Consumer Commission (2007) 162 FCR 466 at [30]-[38].
6. The matters of fact and evidence to which I refer hereafter in these reasons were not contested by the defendant and they constitute my findings of fact in relation to ASIC’s case. ASIC submitted that I should draw certain inferences from these facts and, in substance, those inferences were not challenged or contradicted by the defendant.

BACKGROUND

7. From 1 April 2003 until 31 August 2008, Dr Martin Soust (“the defendant”) was the Managing Director and Chief Executive Officer of Select Vaccines Limited (“Select Vaccines”), a biotechnology corporation. He was also a member of the company’s Board of Directors. At all relevant times Mr Robin Beaumont was Chairman of the Board of Directors of Select Vaccines, the other directors being Mr George Weber, Dr Ian Cooke, Mr Shane Allan and the defendant. The principal activity of Select Vaccines at all material times was the development and commercialisation of products (including vaccines addressing unmet medical needs in the field of infectious diseases). Its fully paid ordinary shares were listed on the Australian Securities Exchange Limited (“ASX”). At all relevant times the trading of shares in Select Vaccines was low volume, highly illiquid and thin.
8. The defendant was also a director of Martin Soust & Co Pty Ltd (“Martin Soust & Co”), a company which acted as the trustee of a trust known as the Soust Trust, the beneficiaries of which included the defendant’s wife and children.
9. On 24 April 2007, Select Vaccines, Martin Soust & Co and the defendant entered into an Executive Service Agreement. The terms of this agreement provided, inter alia, that Martin Soust & Co was to provide consulting services to Select Vaccines, namely that the defendant would provide his services as Managing Director of Select Vaccines. In return, Select Vaccines was to pay Martin Soust & Co a service fee of $245,000 per annum (excluding GST) with an annual increase of not less than CPI. Martin Soust & Co agreed to employ or engage the defendant to deliver the consulting services and was to ensure that the defendant promoted the best interests and opportunities of Select Vaccines and its business, used reasonable endeavours to be continuously informed of all matters relating to the business of Select Vaccines, made all information acquired during the course of fulfilling the preceding obligation available to Select Vaccines, and provided prompt and full information to the Select Vaccines’ Board regarding the conduct of the business of the Company.
10. Under the terms of the Executive Service Agreement, Martin Soust & Co was entitled to receive short-term performance bonuses, subject to the achievement of some or all of the agreed performance measures to be set and reviewed on a yearly basis. Relevantly, a short-term annual cash bonus of up to 30% of the service fee was payable to Martin Soust & Co by Select Vaccines for the achievement of specific goals identified by Select Vaccines. For the calendar year 2007 the short-term bonus was structured as follows:

“(i) A bonus will be paid if the change in the Company share price (adjusted for any consolidations or splits) outperforms the change in the Intersuisse Biotech Index by up to ten percentage points. For example, if the index rises 10% over the calendar year, and the Company share price rises by 15.6%, the bonus will be 5.6% of the Service Fee; similarly if the index declines 10% over the year and the Company share price declines by 4.4%, the bonus will be 5.6% of the Service Fee.
...
(v) A maximum bonus of 5% of the Service Fee may be paid to the Consultant ...”

11. A crucial determining factor whether or not the short-term bonus was payable was Select Vaccines’ share price at the close of trading on 31 December 2007.
12. The Intersuisse Biotechnology Stock Market Index was produced, maintained and circulated by Intersuisse Limited and was calculated and published quarterly. Select Vaccines was represented on Intersuisse Limited’s mailing list by the defendant and Mr David Anderson, Select Vaccines’ chief scientific officer. The short-term bonus referred to in the Executive Service Agreement was determined by reference to the Select Vaccines’ share price at the close of trading on 31 December 2007 measured against the Intersuisse Biotech Index for the twelve month period ending on that date.

SELECT VACCINES’ SHARE TRADING POLICY

13. In December 2005, Select Vaccines’ Board of Directors approved and implemented a Share Trading Policy for the company. The terms of the Share Trading Policy relevantly provided that:

(a) the policy governed the trading in securities of Select Vaccines on the ASX;

(b) the policy applied to all directors and employees of Select Vaccines and their associates (including spouses, children, family trusts and family companies – termed “designated officers”);

(c) designated officers likely to be in possession of unpublished price sensitive information were permitted to trade only during designated “trading periods”;

(d) the designated trading periods were:

● The six weeks following the release by Select Vaccines of its half-yearly results to the ASX;

● The six weeks following the release by Select Vaccines of its annual results to the ASX; and

● The six weeks following Select Vaccines’ Annual General Meeting.

(e) trading outside of the trading periods was permitted only in exceptional circumstances with the approval of the Chairman upon the relevant designated officer satisfying the Chairman that:

● the designated officer did not possess unpublished price sensitive information about Select Vaccines; and

● a failure to trade in the securities would result in exceptional circumstances including financial hardship.

14. The financial year of Select Vaccines ran from 1 January to 31 December. Select Vaccines released its results for the half year ended 30 June 2007 to the ASX on 1 August 2007 so that directors and their associates were able to trade for six weeks from 1 August 2007 to 12 September 2007. Except for that period, under the Share Trading Policy, directors and their associates were not permitted to trade in the shares of Select Vaccines during the period 1 July 2007 to 31 January 2008. The Share Trading Policy also stated that directors must, prior to trading in the securities of Select Vaccines (whether buying or selling) notify the Chairman of their intention to trade and confirm that they are not in possession of any unpublished price sensitive information. The policy also stated that directors must also notify the Company Secretary of any trade in Select Vaccines shares within two days of such trade occurring so that the Company Secretary could comply with ASX Listing Rule 3.19A.
15. The policy prohibited directors purchasing shares in Select Vaccines on 31 December 2007. Mr Beaumont, the Chairman was not notified by any director of their intention to trade in shares in Select Vaccines on 31 December 2007.

THE DEFENDANT’S SHARE TRADING

16. Throughout 2007 Martin Soust & Co had a Commsec trading account with the Commonwealth Bank of Australia which enabled the defendant to view “market depth” information which disclosed the number of shares offered for sale, and the number of bids made for the purchase of shares at particular prices. The defendant had opened a trading account in the name Martin Soust & Co with Bell Potter Securities (“Bell Potter”), a full service private client stockbroking and financial advisory firm.
17. Although trading on the ASX normally closes on weekdays at 4.00 pm (Melbourne time) it was a published fact that trading closed on 31 December 2007 at 2.10 pm (Melbourne time).
18. At about 1:45 pm on 31 December 2007, the defendant telephoned Bell Potter and spoke with Ms Santina Midolo, a dealer’s assistant who supported Mr Perry Rosenzweig – a Bell Potter client advisor. Ms Midolo was aware that the defendant was one of Mr Rosenzweig’s clients. The defendant said he wanted to place an order on account 335602 and that he was placing the order on behalf of his mother, Mrs Bohumira Soust. The defendant instructed Ms Midolo to purchase $2,550 worth of Select Vaccines shares at market price using the account of his mother. Mr Rosenzweig told Ms Midolo it was alright to take the order from the defendant on his mother’s account. Ms Midolo then placed the order to purchase $2,550 worth of Select Vaccines shares using Mrs Soust’s account at market price.
19. The bid was entered into the market at or around 1.56 pm and immediately three trades were transacted to fill the bid:

● the purchase of 50,000 Select Vaccines shares at 2.4 cents per share;
● the purchase of 18,166 Select Vaccines shares at 2.5 cents per share; and
● the purchase of 35,834 Select Vaccines shares at 2.5 cents per share,

making the average purchase price 2.45 cents per share. The total amount payable (including brokerage and GST) was $2,660. The defendant’s trade was the only trade in Select Vaccines shares on 31 December 2007.

20. The settlement amount for the purchase of the shares, $2,660 was paid by Martin Soust & Co to Bell Potter on 3 January 2008.

EFFECT OF THE SHARE TRADE

21. The defendant’s trade had the following consequences:

(a) the price of Select Vaccines shares increased from 2 cents per share immediately before the trade to 2.5 cents per share immediately after the trade, representing an increase of 25%;

(b) the Select Vaccines share price over the 2007 calendar year increased by 19.05% – from 2.1 cents per share at the close of trading on 29 December 2006 (the last day of trading for 2006) to 2.5 cents per share at the close of trading on 31 December 2007; and

(c) the short-term performance bonus under the Executive Service Agreement referred to in par [10] above was payable, because:

● there had been a decrease of 1.49% in the Intersuisse Biotech Index for the period 31 December 2006 to 31 December 2007;

● there had been an increase in the price of Select Vaccines shares over the same period of 19.05%; and

● the price of Select Vaccines shares had therefore outperformed the Intersuisse Biotech Index by 20.54%.

22. But for the defendant’s trade:

(a) the price of Select Vaccines shares would have remained at 2 cents per share as at the close of trading on 31 December 2007;

(b) the share price of Select Vaccines over the 2007 calendar year would have decreased by 4.76% – from 2.1 cents per share at the close of trading on 29 December 2006 (the last day of trading for 2006) to 2 cents per share at the close of trading on 31 December 2007; and

(c) the short-term performance bonus under the Executive Service Agreement referred to in par [10] above would not have been payable, because:

● there had been a decrease of 1.49% in the Intersuisse Biotech Index for the period 31 December 2006 to 31 December 2007;

● there would have been a decrease of 4.76% in the price of Select Vaccines shares over the same period; and

● the price of Select Vaccines shares would have underperformed the Intersuisse Biotech Index by 3.27%.

PAYMENT OF THE SHORT-TERM PERFORMANCE BONUS

23. The Remuneration and Nomination Committee (“the Committee”) of Select Vaccines met on 12 February 2008. Members of the Committee were Mr Allan, Mr Beaumont, Mr Webber and Dr Cooke. The purpose of the meeting was to review the five short-term bonus objectives under the defendant’s Executive Service Agreement and determine whether they were payable. The Committee agreed that no short-term bonuses were payable in respect of objectives (a)(ii) to (a)(iv) in the schedule to the agreement, that a bonus of $10,000 should be paid in respect of objective (a)(v) and that they could not make a decision in respect of objective (a)(i) as they did not have the share prices of Select Vaccines at 31 December 2006 and 31 December 2007 nor had Mr Beaumont asked the defendant for the Intersuisse Biotech Index.
24. Further meetings of the Committee were held on 6 March 2008 and 19 March 2008. Prior to the 6 March meeting, the defendant provided Mr Beaumont with the Intersuisse Biotech Index. Mr Beaumont, after undertaking the appropriate calculations, determined that the defendant was entitled to a bonus of $24,500 under objective (a)(i) of the Executive Service Agreement given that Select Vaccines share price had outperformed the Intersuisse Biotech Index. Mr Beaumont told the Committee that the defendant had provided him with the Intersuisse Biotech Index and that according to his calculations the defendant was entitled to a bonus of $24,500 payable under objective (a)(i) of the Executive Service Agreement.
25. On 19 March 2008, the Committee met and resolved to pay both a $24,500 and $10,000 bonus to Martin Soust & Co on the basis that the company was entitled to performance bonuses under objectives a(i) and a(v) of the Executive Service Agreement. Although they were not members of the Committee, the defendant and Mr Richard Wadley (Select Vaccines’ Company Secretary and Chief Financial Officer) were present at this meeting.
26. If the share price of Select Vaccines had closed at 2 cents on 31 December 2007 (as it had on 29 December 2006), there would have been a decrease in the share price of Select Vaccines of 4.76% between 31 December 2006 (2.1 cents) and 31 December 2007 (2 cents), compared with a decrease of 1.49% in the Intersuisse Biotech Index over the same period, an under performance of the share price of Select Vaccines over the Intersuisse Biotech Index of 3.27%.
27. Following the final meeting of the Committee, a Board Meeting was held that same day. The defendant attended the meeting and the Board of Directors approved the payment of the bonuses to Martin Soust & Co. At no time during or prior to the Committee meetings or Board Meeting did the defendant disclose to the Committee or the Board that he knew about, or was involved in, the share trade in his mother’s name on 31 December 2007 which resulted in the Select Vaccines share price rising from 2 cents to 2.5 cents. Messrs Allan, Beaumont and Weber said that had they known of the defendant’s involvement in the purchase on 31 December 2007, they would not have approved the $24,500 bonus payment pursuant to objective a(i). Mr Beaumont said that the defendant never notified him in his capacity as Chairman of his intention to trade in shares of Select Vaccines on 31 December 2007 in accordance with the Select Vaccines’ Share Trading Policy in par [13] above.
28. Dr Cooke said that had he been aware of the defendant’s involvement in the share trade, he would have made further enquiries into the matter before making a decision as to whether to approve the payment of the objective a(i) short-term bonus to the defendant.
29. On 4 April 2008 Select Vaccines paid Martin Soust & Co a cheque for $64,075. The account of Martin Soust & Co was credited by Select Vaccines with $64,075 on 8 April 2008, which amount included the $24,500 bonus payment.
30. On 2 May 2008, Mr Wadley was contacted by Darren Collins, a Companies Officer at the ASX. Mr Collins told Mr Wadley that there had been a purchase of Select Vaccines shares on 31 December 2007 in the name of Mrs Soust and he asked why the transaction had not been reported to the ASX as a related party transaction under ASX Listing Rule 3.19A.2. This was the first time Mr Wadley had heard of this transaction so he telephoned the defendant. The defendant told Mr Wadley that it was his mother who had carried out the share purchase on 31 December 2007 and that his mother bought shares from time to time. The defendant did not tell Mr Wadley that he was involved in the purchase of the shares. Mr Wadley sent an email to Mr Collins advising him that the transaction in question was not a related party transaction.

ASIC INVESTIGATION INTO THE DEFENDANT

31. On Wednesday 4 June 2008 two ASIC investigators Mathew Gillie and Phillip Armstrong conducted a voluntary interview with the defendant in relation to the purchase of the 104,000 Select Vaccines shares in Mrs Soust’s name on 31 December 2007. From Monday 16 June 2008 until Friday 20 June 2008, Mr Armstrong made multiple telephone calls to Mrs Soust’s residence and did not receive an answer. On Monday 23 June 2008, Mr Armstrong called again and left a message for Mrs Soust, asking her to call back in relation to an investigation ASIC had commenced. Mr Armstrong left his name and contact details.
32. After receiving no response from Mrs Soust, Mr Armstrong sent Mrs Soust a letter on Thursday 26 June 2008 requesting that she contact ASIC in relation to the ASIC investigation into the purchase of the 104,000 Select Vaccines shares in her name on 31 December 2007.
33. On Saturday 28 June 2008 a document entitled “Q&A” was created on the defendant’s laptop computer. The document was not discovered by ASIC until September 2009.

THE DEFENDANT’S TERMINATION AND THE “Q&A” DOCUMENT

34. A regular Board meeting was held on 25 August 2008. During an adjournment of it, Dr Cooke and Mr Beaumont met with the defendant. At the meeting, it was put to the defendant that he was involved in the purchase of shares in Select Vaccines on 31 December 2007 in the name of Mrs Soust and this had the effect that Martin Soust & Co had received the performance bonus of $24,500.
35. The defendant responded by saying that he had received legal advice that he should not discuss the issue with the Board of Directors of Select Vaccines as ASIC could come and talk to the Board about what he might say. He said that “it is all perfectly innocent” but that he would not say any more due to legal advice.
36. The Board then terminated the defendant’s services effective from 31 August 2008. It was agreed between the Board and the defendant on 28 August 2008, after the defendant had received his own legal advice that:

(a) The defendant would resign, effective immediately, and a media release would be issued;

(b) The Board would not make any negative comment in the media release;

(c) The Board would not seek repayment of the performance bonus of $24,500; and

(d) The Board would not pay any of the termination payments specified in cl 11.4 of the Executive Service Agreement.

37. On 28 August 2008, a Deed of Settlement was executed between the defendant, Martin Soust & Co and Select Vaccines, which set out the terms of the settlement between the parties.
38. At the meeting on 25 August 2008, the defendant had in his possession an Apple Macbook laptop computer (“the laptop”) which had been provided to him by Select Vaccines in his capacity as Chief Executive Officer. At the conclusion of the meeting, Mr Beaumont asked the defendant to leave the laptop in his custody, and said that it would be possible for the defendant to arrange to copy personal files from the laptop at a later date.
39. For a time shortly after 28 August 2008, Mr Beaumont routinely perused the files stored on the laptop and categorised them as he thought relevant. During this process, Mr Beaumont came across a document stored on the laptop entitled “Q&A.doc.” (“the Q&A document”). The Q&A document opened with the following extract:

“The basic theme is that:

1. It was your decision to buy the shares (about $2,500 worth of shares)
   
2. It simply turned out to be that they were bought at the end of the year (that is when you collected the money as a result of the gifts for Christmas)
   
3. Martin had nothing to do with this decision – he simply contacted your stockbroker when you asked him to
   
4. Your reason to buy the shares was that you had a bit of money and you thought you should buy some more shares (in other words, you had no information that led you to buy these shares)
   
5. It was a simple purchase of shares in Select Vaccines, the company that your son works with.”
   
40. Over the next three pages the Q&A document then adhered to a question and answer format as follows:

Q: Did you choose to purchase shares in Select Vaccines or was it your son’s choosing to do so?

A: It was my choice to do so.

Q: Why did you choose to buy shares in Select Vaccines?

A: Because I had saved a bit of money and I got some money as gifts for Christmas. I didn’t want to spend the money and as my son works with the company I think it is a good thing to do.

Q: Do you own any other shares?

A: Yes, a bit.

Q: Have you bought Select Vaccines shares before?

A: Yes, a small amount.

Q: How many do you own?

A: I don’t really know. I’d have to look in my files.

Q: Does Martin always ring your broker to buy or sell shares for you?

A: Yes, when I want to sell shares or if I want to buy shares I ask Martin to ring my stockbroker, Bell Potter is the stockbroking firm.

Q: Why does Martin talk to your stockbroker?

A: It has always been like that since my husband died. I don’t know exactly what to say and I am afraid I might not get my order right.

Q: Does Martin have any involvement in your decisions about shares?

A: No.

Q: Did you speak about the company’s activities before you bought the shares in Select Vaccines?

A: No. My son never speaks with me about what the company is doing. I know they are trying to make some vaccines.

Q: Did you speak to Martin about buying shares in Select Vaccines before the day they were purchased (31 December 2007)?

A: Yes, I said to him that I had some money and I wanted to buy some Select Vaccines shares. This was around Christmas last year and I remember I asked him about it again after Christmas when Martin visited me at home one evening.

Q: Why were the shares purchased on 31 December.

A: I remember Martin visiting. I think it was new year’s eve – It was a hot day and Martin came to visit me to make sure everything was OK. I didn’t want to spend the money I had collected so I said to him to buy the shares otherwise I would spend the money and he said he would do it as soon as he got home.

Q: Why didn’t he buy the shares the previous time?

A: The previous time he visited was in the evening.

Q: So the decision to buy those shares was yours?

A: Yes.

Q: And what were your instructions to Martin?

A: I had saved and collected about $2,500 and I asked him to buy that much.

Q: How were the shares paid for?

A: I received an invoice in the mail and Martin paid it. I gave him the cash I had saved. I don’t think I can pay the stockbroker for shares with cash.

Q: If you sell any shares where does the money go?

A: I get a cheque from Bell Potter and it goes into my bank account.

Q: Have you sold any Select Vaccines shares?

A: I think I have sold some. It was several years ago.

Other possible questions.
Q: Do you own shares in different holdings?

A: I have had to get some shares transferred from my husband’s estate and I have had to change some details.

Q: Some of your holdings had an address at The Grange in East Malvern. How did that come about?

A: I am not sure but it is clearly the wrong address for me.”

41. At the time Mr Beaumont discovered the Q&A document (during September 2008) he spoke to another director, Mr Allan, about it and they agreed that because of privacy and legal privilege concerns, they would not volunteer information about it to ASIC but would provide information on the laptop if requested to do so. The laptop was provided to ASIC on 12 September 2009 and was subsequently forensically examined by Mr Blare Sutton of Ernst and Young on 14 September 2009. An ASIC officer asked Mr Sutton to create a forensic image of the laptop’s hard disk, which he did. On 1 October 2009 the ASIC officer instructed Mr Sutton to locate a document titled “Q&A.doc” and to advise:

(i) when the document was created?

(ii) who was the author?

(iii) when the document was modified (including when it was last modified)?

(iv) when the document was printed?

(v) when the document was accessed?

(vi) could the document have been printed after the meta-data stated it was “last printed”?; and

(vii) could the document have been accessed at times other than when it is noted as being accessed?

42. Mr Sutton examined the file “Q&A. doc” and said:

(i) The document represented in the file “Q&A.doc” was first created at approximately 6:23 pm on Saturday 28 June 2008;

(ii) The file “Q&A.doc” was first saved onto the hard disk at 6:38:47 pm on Saturday 28 June 2008;

(iii) The author of the file “Q&A.doc” was recorded by Microsoft Word as being “Select Vaccines Limited Martin Soust”;

(iv) The last time the file “Q&A.doc” was modified was at 6:17 pm on Sunday 29 June 2008, and represented the sixth revision of the document as recorded by Microsoft Word, with a total editing time of 57 minutes;

(v) The file “Q&A.doc” was last printed by Microsoft Word at approximately 6:17 pm on Sunday 29 June 2008; and

(vi) The file “Q&A.doc” was last accessed at 8:38:27 pm on 13 October 2008.

ASIC’S ALLEGATIONS AND THE DEFENCE

43. ASIC alleged that the defendant instructed Bell Potter to purchase the Select Vaccines shares with the intention of increasing the Select Vaccines share price on the ASX in order to secure for Martin Soust & Co the payment of the short-term performance bonus referred to in par [10] above. ASIC contended that such an intention was to be inferred from the fact that it was the defendant who instructed Bell Potter in the last hour of the last day of trading for the 2007 calendar year to purchase the shares in question, that he failed to disclose to Select Vaccines that he was involved in the purchase of the shares when the question of payment of the short-term performance bonus was under consideration and given that Martin Soust & Co paid $2,660 to Bell Potter on 3 January 2008 in settlement of the share purchase, rather than the payment being received from the defendant’s mother.
44. In its Originating Process filed 24 December 2008, ASIC’s application was made under ss 206C, 1317E and 1317G of the Act seeking declarations and/or orders that the defendant:

(a) contravened his director’s duties in ss 181(1) and 182(1) of the Act by failing to inform his fellow directors of his involvement in the share purchase and his response to the ASX query concerning the related party transaction;

(b) engaged in market manipulation in contravention of ss 1041A and 1041B of the Act insofar as his share purchase was carried out with the intention of increasing the Select Vaccines share price;

(c) pay a pecuniary penalty under s 1317G of the Act in respect of each contravention; and

(d) be disqualified from managing corporations for a period considered appropriate by the Court pursuant to s 206C(1) of the Act.

45. In his defence, in respect of which he led no evidence, the defendant denied that when making the share purchase he was acting in his capacity as a director of Select Vaccines. He was, it was pleaded, acting in a personal capacity. The defendant maintained that the purchase of $2,500 worth of Select Vaccines shares at market price was made on behalf of his mother and further denied that he attended upon the deliberations and decision-making of the Remuneration Committee on 19 March 2008. In relation to Mr Wadley’s enquiry concerning the share purchase constituting a related party transaction, the defendant pleaded that the situation was adequately clarified given that in the conversation with Mr Wadley the defendant said words to the effect that “It’s not Boo my wife, it’s Bohumira my mother” and “I don’t have an interest in the shares” and “Mum makes her own decisions”.
46. ASIC alleged in paragraph 14 of its Statement of Claim that at about 1.45 pm on 31 December 2007 the defendant placed a telephone call to Bell Potter and provided instructions to Bell Potter to purchase $2,550 of Select Vaccines shares using the Bell Potter account of his mother, Mrs Bohumira Soust.
47. In his amended Defence the defendant admitted that in his private and individual capacity, but not in his capacity as a director of Select Vaccines at approximately 1.45 pm on 31 December 2007 he telephoned Bell Potter and placed an order on behalf of his mother, Mrs Bohumira Soust, to buy $2,550 of Select Vaccines’ shares at market price, such order to be made on the account of his mother held at Bell Potter in her name. The defendant otherwise denied the allegations in paragraph 14.
48. ASIC submitted that I should draw an inference that:

(a) the instruction given to Bell Potter and the trade which was thereby undertaken was the defendant’s own trade and not a trade on behalf of his mother;

(b) the defendant intended to increase the price of Select Vaccines shares on the ASX and thereby secure for Martin Soust & Co, the short-term performance bonus referred to in par [10] above.

49. ASIC submitted that I should rely upon the principle in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 in drawing the inferences as it was peculiarly within the ability of the defendant to give evidence, had he wished to do so, as to the person on whose instructions he carried out the trade. I accept that submission.
50. There was evidence that the transaction was conducted on an account in the defendant’s mother’s name but there was no evidence that the instructions that the defendant gave to Bell Potter were instructions on behalf of his mother.
51. There are a number of factors which satisfy me that I should draw the inference that the transaction undertaken on 31 December 2007 was a transaction which the defendant placed, and sought to have implemented, on his own behalf and not on behalf of his mother. I draw attention, in particular, to the following matters:

(a) the order was placed by the defendant personally;

(b) there was no evidence that the defendant was instructed by anyone else to place the order on behalf of any such person;

(c) when Mr Wadley telephoned the defendant on 2 May 2008 the defendant told him that it was his mother Mrs Soust who carried out the purchase of the shares. In that conversation the defendant did not tell Mr Wadley that he was involved in the purchase of the shares in the name of Mrs Soust;

(d) the conduct of the defendant in creating the Q&A document found on his laptop computer and the contents of that document;

(e) the settlement amount for the purchase of the shares was paid by Martin Soust & Co.

I accept the submission of ASIC that the inference is compelling that the defendant was acting on his own behalf when he instructed Bell Potter to purchase Select Vaccines shares on 31 December 2007.

52. There was no evidence that the defendant was instructed by anyone else to place an order on behalf of any other person for the purchase by them of shares in Select Vaccines. Although Mr Wadley says that on 2 May 2008 the defendant told him that it was his mother who carried out the purchase of the shares on 31 December 2007 the defendant did not lead any evidence to that effect. Further, in the same conversation with Mr Wadley, Mr Wadley says that the defendant did not tell him during that conversation that he was involved in the purchase of the shares on 31 December 2007 in the name of his mother.
53. The weight of the evidence led by ASIC points to the conclusion, which I accept, that what the defendant said to Mr Wadley on 2 May 2008 was a deliberate and conscious falsehood.
54. I am also satisfied that the defendant went to significant lengths to conceal his identity as the true purchaser of the shares. Notwithstanding several discussions with various members of Select Vaccines’ Remuneration Committee and board members, the defendant did not inform them that he had any involvement in the transaction on 31 December 2007. Indeed, he told Mr Wadley to the contrary.
55. I am also satisfied that the defendant brought the Q&A document into existence for the specific purpose of concealing his identity as the buyer of the shares from ASIC.
56. I am also satisfied that I should draw the inference that the defendant intended to increase the price of Select Vaccines shares on the ASX by placing the order on 31 December 2007 having regard to the following matters:

(a) the defendant’s conduct whereby he tried to conceal his identity as the real purchaser of the shares;

(b) the instructions for the purchase were given to Bell Potter in the last half hour of the last day of trading for the year 2007, namely 25 minutes before the close of trading for the year;

(c) the defendant was familiar with “market depth” information and was able to access the market depth of Select Vaccines shares on 31 December 2007 through the CommSec account he had established for himself;

(d) the defendant’s conduct in creating the Q&A document and the contents of that document.

57. It is significant to note that the instructions were given to Bell Potter by the defendant at such a time that the purchase was undertaken in the closing minutes of the last trading day for 2007, thereby ensuring that the market price of the shares was not reduced below the market price at which the shares had been purchased for him. He had given instructions to purchase the shares at market price. The defendant did not give instructions to put a bid price on the market for the purpose of seeing whether a seller would proffer what is called on the market an “ask” price.
58. In short, the transaction which the defendant intended to carry out, which was in fact carried out in the closing minutes of the last trading day of 2007 on the ASX, was one which, in relation to thinly traded stock such as Select Vaccines stock, would not allow any time for any other person to conduct further trades on the ASX which might interfere with, or change, the market price of those shares. The defendant had particular information available to him in relation to the bid, ask and market price of Select Vaccines shares on the ASX because his family company held an online trading account with CommSec and that account enabled him to have up to date and live information available in relation to any company securities on the ASX including details of “market depth” that is to say what bids and asks were in the market at any particular time. That information enables a person to determine what bid would need to be entered into the market in order to transact immediately any particular trade.
59. In short, the defendant knew what bid to enter into the market in order to ensure that a transaction was effected at a particular price.
60. In my opinion, the Q&A document is compelling evidence of the defendant’s intention to mask or obscure the fact that he was involved in the trade, that he was the true purchaser of the shares and that the purpose of the trade was to bring about an increase in the market price of Select Vaccines shares at the end of trading for the calendar year 2007.
61. The defendant created the Q&A document within 24-48 hours of the time when his mother would have received and read the letter from ASIC asking her to contact ASIC in relation to the purchase of the shares in Select Vaccines on 31 December 2007. I am satisfied that the defendant prepared the document as an aide mémoire or script for his mother to use when she was questioned by ASIC officers. The opening words of the document “the basic theme is that:” make this clear. The purpose of the aide mémoire or script was to ensure that ASIC did not discover that the defendant was connected with the purchase of the shares and that he had purchased the shares on his own behalf. This is made clear by the words that it was “your decision to buy the shares”. The person “you” whose decision is referred to is the mother of the person creating the document. This is made clear by the paragraph numbered 5 on the first page of the document which refers to Select Vaccines as “the company that your son works with”. There is also a reference in the answer to the second question “as my son works with the company”.
62. The document came into existence a short time after it would have become apparent to the defendant that ASIC wished to interview his mother about the transaction and she needed to be “worded up” about it. In substance the defendant was seeking to coach his mother as to how she should deal with questions which ASIC officers were obviously proposing to ask her. The emphasis in the document is on the fact that what was to be said was that it was his mother’s decision to buy the shares.
63. I am satisfied that at the time the defendant spoke to Bell Potter at 1.45 pm on 31 December 2007 he was giving instructions on his own behalf and not on behalf of anyone else, in particular his mother, to purchase the Select Vaccines shares on market. There was no evidence to the contrary and the inference to that effect is overwhelming.
64. I am also satisfied that at the time the defendant gave the instruction to Bell Potter he intended:

(a) to increase the last sale price for the year of Select Vaccines shares on the ASX;

(b) by doing so, to obtain the short-term performance bonus referred to in par [10] above for his family company, Martin Soust & Co.

THE RELEVANT LEGISLATION

65. ASIC submitted that the defendant, by causing the purchase of the shares to be carried out, acted with the sole, alternatively, the primary purpose of increasing the price of Select Vaccines shares and thereby contravened the provisions of ss 1041A(c) and 1041B(1)(b) of the Act. Section 1041A is in the following terms:

“1041A Market manipulation
A person must not take part in, or carry out (whether directly or indirectly and whether in this jurisdiction or elsewhere):

(a) a transaction that has or is likely to have; or

(b) 2 or more transactions that have or are likely to have;

the effect of:

(c) creating an artificial price for trading in financial products on a financial market operated in this jurisdiction; or

(d) maintaining at a level that is artificial (whether or not it was previously artificial) a price for trading in financial products on a financial market operated in this jurisdiction.”

66. Section 1041B is in the following terms:

“1041B False trading and market rigging—creating a false or misleading appearance of active trading etc.

(1) A person must not do, or omit to do, an act (whether in this jurisdiction or elsewhere) if that act or omission has or is likely to have the effect of creating, or causing the creation of, a false or misleading appearance:

(a) of active trading in financial products on a financial market operated in this jurisdiction; or

(b) with respect to the market for, or the price for trading in, financial products on a financial market operated in this jurisdiction.

(2) For the purposes of subsection (1), a person is taken to have created a false or misleading appearance of active trading in particular financial products on a financial market if the person:

(a) enters into, or carries out, either directly or indirectly, any transaction of acquisition or disposal of any of those financial products that does not involve any change in the beneficial ownership of the products; or

(b) makes an offer (the regulated offer) to acquire or to dispose of any of those financial products in the following circumstances:

(i) the offer is to acquire or to dispose of at a specified price; and
(ii) the person has made or proposes to make, or knows that an associate of the person has made or proposes to make:
(A) if the regulated offer is an offer to acquire—an offer to dispose of; or
(B) if the regulated offer is an offer to dispose of—an offer to acquire;
the same number, or substantially the same number, of those financial products at a price that is substantially the same as the price referred to in subparagraph (i).

...”

67. The defendant submitted that the allegations of fact made by ASIC, which he did not challenge, nevertheless did not result in a contravention of s 1041A or s 1041B(1). He made the following submissions:

(a) The sections impugned the creation of an artificial price for trading in financial products in the financial market;

(b) The placement on the market of a single bid to buy shares at market price and the consummation of that bid by a wholly independent seller at the seller’s asking price is the antithesis of market manipulation and not within the terms of either section;

(c) The trade did not falsify assumptions upon which the seller operated;

(d) If there is a seller in the market who has posted an asking price of 2.5 cents per share, it does not make a transaction at that price artificial if there is a buyer prepared to buy at that price, albeit a buyer acting in breach of his duty to a company;

(e) Even if the defendant had the intention of effecting a trade to increase the share price to a level that attracted for him the bonus under the Executive Service Agreement, which might be evidence sufficient to find a breach of duty, it did not result in a contravention of s 1041B;

(f) It was not a breach of s 1041A for a person to have an intention to effect an increase in price so as to procure a collateral advantage. That collateral purpose has nothing to do with whether the trade was or was not genuine.

(g) The defendant’s intention as alleged by ASIC to increase the price of Select Vaccines shares was not a proscribed intention.

68. ASIC submitted that an artificial price will be created where there is an absence of genuine buyers or genuine sellers and where the buyer or the seller of shares undertakes the trade for the sole or primary purpose of setting or maintaining the market price. In such circumstances genuine supply and demand is absent and an artificial price is created. ASIC submitted that the focus on the absence of genuine supply and demand was consistent with the Dictionary definition of “artificial”. The ordinary meaning of “artificial” was “constructed, contrived; not natural (though real)”.
69. There has been no judicial consideration of ss 1041A and 1041B although the predecessors of those sections have received some judicial consideration. The concept of an “artificial price” did not appear in early securities legislation.
70. The genesis of ss 1041A and 1041B is to be found in earlier State securities legislation. Sections 70 and 71 of the Securities Industry Act 1970 (Vic) provided:

“70. A person shall not create or caused to be created or do anything which is calculated to create, a false or misleading appearance of active trading in any securities on any stock market in the State, or a false or misleading appearance with respect to the market for, or the price of, any such securities.”

71.(1) A person shall not effect, take part in, be concerned in or carry out, either directly or indirectly, any transactions in any class of securities which have the effect of raising or lowering the price of securities of that class for the purpose of inducing the purchase or sale of securities of that class by others.

(2) ...
(3) ...”

71. Section 70 of the Securities Industry Act 1970 (NSW) was in identical terms to s 70 of the Victorian Act and s 71 was, in substance, in the same terms as the Victorian Act.
72. The Securities Industry Act 1975 (Vic) repealed the 1970 Act and s 109 dealt with false trading and markets and markets rigging. It provided:

“109(1) A person shall not create, or cause to be created, or do anything that is calculated to create, a false or misleading appearance of active trading in any securities on a stock market in the State, or a false or misleading appearance with respect to the market for, or the price of, any such securities.

(2) A person shall not, by means of purchases or sales of any securities that do not involve a change in the beneficial ownership of those securities, or by any fictitious transactions or devices inflate, depress or cause fluctuations in the market price of any securities.

(3) ...
...”

73. Section 123 of the Securities Industry Act 1980 (Cth) provided:

(1) A person shall not, whether within or outside the Territory, effect, take part in, be concerned in or carry out, either directly or indirectly, 2 or more transactions in securities of a body corporate, being transactions that have, or are likely to have, the effect of raising the price of securities of the body corporate on a stock market in the Territory, with intent to induce other persons to purchase or subscribe for securities of the body corporate or of a related body corporate.

(2) A person shall not, whether within or outside the Territory, effect, take part in, be concerned in or carry out, either directly or indirectly, 2 or more transactions in securities of a body corporate, being transactions that have, or are likely to have, the effect of lowering the price of securities of the body corporate on a stock market in the Territory, with intent to induce other persons to sell securities of the body corporate or of a related body corporate.

(3) ...

(4) ...”

Section 124 of that Act provided:

(1) A person shall not, whether within or outside the Territory, create, or cause to be created, or do anything that is calculated to create, a false or misleading appearance of active trading in any securities on a stock market in the Territory or a false or misleading appearance with respect to the market for, or the price of, any such securities.

(2) A person shall not, by means of purchases or sales of any securities that do not involve a change in the beneficial ownership of those securities, or by any fictitious transactions or devices, maintain, inflate, depress, or cause fluctuations in, the market price of any securities.

(3) ...
...”

74. The concept or expression “an artificial price” emerged first in s 130 of the Futures Industry Act 1986 (Cth) which provided:

“A person shall not, whether within or outside the Territory, take part in, be concerned in or carry out, whether directly or indirectly-

(a) a transaction (whether or not the transaction is a dealing in a futures contract) that has, is intended to have or is likely to have; or

(b) 2 or more transactions (whether or not any of the transactions is a dealing in a futures contract) that have, are intended to have or are likely to have, the effect of-

(c) creating an artificial price for dealing in futures contracts on a futures market within the Territory; or

(d) maintaining at a level that is artificial (whether or not that level was previously artificial) a price for dealing in futures contracts on a futures market within the Territory.”

Section 131 of that Act provided:

“(1) A person shall not, whether within or outside the Territory, create, or cause to be created, or do anything that is calculated to create, a false or misleading appearance of active dealing in futures contracts on a futures market within the Territory or a false or misleading appearance with respect to the market for, or the price of dealing in, futures contracts on a futures market within the Territory.

(2) A person shall not, by any fictitious or artificial transactions or devices, maintain, inflate, depress or cause fluctuations in, the price for dealing in futures contracts on a futures market within the Territory.

(3) For the purpose of determining whether a transaction is fictitious or artificial within the meaning of sub-section (2), the fact that the transaction is, or was at any time, intended by the parties who entered into the transaction to have effect according to its terms shall not be conclusive.”

75. The Explanatory Memorandum for the Futures Industry Bill 1986 provided the following explanation for cls 130 and 131 which became ss 130 and 131:

“Cl. 130 : Futures market manipulation
284. Cl.130 prohibits a person from effecting or taking part in one or more transactions (whether involving futures contracts or not) that have or are intended to have or are likely to have the effect of creating an artificial price, or maintaining at an artificial level the price, for dealing in futures contracts on a futures market within the Territory.

285. The two main forms of manipulation are “squeezing” and “cornering” which involve attempts to manipulate futures prices by manipulating supply and demand for the physical commodities that are deliverable under futures contracts so that available supply is exceeded and artificial prices are created.

Cl. 131 : False trading and market rigging
286. False trading and market rigging will be prohibited. A person will be prohibited from creating a false or misleading appearance of active trading, or creating a false or misleading appearance with respect to the market for futures contracts (s-cl.131(1)).

287. A person will also be prohibited from maintaining, inflating, depressing or causing fluctuations in the price for dealing in futures contracts on any futures market in the Territory by any fictitious or artificial transactions or devices (s-cl.131(2)).

288. For the purpose of determining whether a transaction is fictitious or artificial within the meaning of s-cl. 131(2), the fact that the transaction is, or was at any time, intended by the parties who entered into it to have effect according to its terms will not be conclusive (s-cl. 131(3)) – cf North v Marra Developments Ltd [1981] HCA 68; (1981) 56 ALJR 106 at 112 per Mason J.)”

That reference in North is found in [1981] HCA 68; (1981) 148 CLR 42 at 58-59.

76. Chapter 8 of the Corporations Act 1989 (Cth) related to the Futures Industry. Section 1259(1) provided:

“Where a person takes part in, is concerned in, or carries out, whether directly or indirectly:

(a) a transaction (whether a dealing in a futures contract or not) that is, is intended to have, or is likely to have; or

(b) 2 or more transactions (whether any of them is a dealing in a futures contract or not) that have, are intended to have, or are likely to have;

the effect of:

(c) creating an artificial price for dealings in futures contracts on a futures market within Australia; or

(d) maintaining at a level that is artificial (whether or not it was previously artificial) a price for dealings in futures contracts on a futures market within Australia;

each of the succeeding subsections has effect without prejudice to the effect of any of the others.”

77. The 1989 Corporations Act ultimately became the basis for the Corporations Law which the states adopted as their Corporations Acts so as to provide a uniform Corporations Law throughout Australia. The Corporations Legislation Amendment Act 1990 (Cth) implemented that purpose. Amongst the amendments to the Corporations Act 1989 (Cth) to enable the Corporations Law to be applied as a law of each State and Territory, ss 1259 and 1260 were repealed and there was substituted:

“1259. A person must not, in this jurisdiction or elsewhere, take part in, be concerned in, or carry out, whether directly or indirectly:

(a) a transaction (whether a dealing in a futures contract or not) that has, is intended to have, or is likely to have; or

(b) 2 or more transactions (whether any of them is a dealing in a futures contract or not) that have, are intended to have, or are likely to have:

the effect of:

(c) creating an artificial price for dealings in futures contracts on a futures market in this jurisdiction; or

(d) maintaining at a level that is artificial (whether or not it was previously artificial) a price for dealings in futures contracts on a futures market in this jurisdiction.

1260. (1) A person must not, in this jurisdiction or elsewhere, create, cause to be created, or do anything that is calculated to create, a false or misleading appearance:

(a) of active dealing in futures contracts on a futures market in this jurisdiction; or

(b) with respect to the market for, or the price for dealings in, futures contracts on a futures market in this jurisdiction.

(2) A person must not, in this jurisdiction or elsewhere, by any fictitious or artificial transactions or devices, maintain, inflate, depress, or cause fluctuations in, the price for dealings in futures contracts on a futures market in this jurisdiction.

(3) In determining whether a transaction is fictitious or artificial for the purposes of subsection (2), the fact that the transaction is, or was at any time, intended by the parties who entered into it to have effect according to its terms is not conclusive.”

78. Sections 997 and 998 of the Corporations Law which came into operation on 1 January 1991 and was adopted by the States and Territories as their Corporations Act, provided relevantly:

“Stock market manipulation
997(1) A person shall not enter into or carry out, either directly or indirectly, 2 or more transactions in securities of a corporation, being transactions that have, or are likely to have, the effect of increasing the price of securities of the corporation on a stock market, with intention to induce other persons to buy or subscribe for securities of the corporation or of a related body corporate.
...
(4) A person shall not enter into, or carry out, either directly or indirectly, 2 or more transactions in securities of a corporation, being transactions that have, or are likely to have, the effect of reducing the price of securities of the corporation on a stock market, with intent to induce other persons to sell securities of the corporation or of a related body corporate.
...

False trading and market rigging transactions
998(1) A person shall not create, or do anything that is intended or likely to create, a false or misleading appearance of active trading in any eligible securities on a stock market or a false or misleading appearance with respect to the market for, or the price of, any eligible securities.
...
(3) A person shall not, by means of purchase or sales of any securities that do not involve a change in the beneficial ownership of those securities or by any fictitious transactions or devices, maintain, increase, reduce, or cause fluctuations in, the market price of any securities.”

79. Sections 1041A and 1041B were introduced into the Corporations Act 2001 (Cth) by the Financial Services Reform Bill 2001 which was enacted as the Financial Services Reform Act 2001 (Cth). The Revised Explanatory Memorandum for that Bill explained that the proposed s 1041A would replace ss 997 and 1259 of the Corporations Act, that it was based on s 1259 but it would apply to all financial products traded on a financial market and that, as was currently provided in s 1259, it would apply to a transaction or two or more transactions with the effect of creating or maintaining an “artificial price”.
80. Section 1041A was derived from s 997 of the Corporations Law but unlike s 997, the proscription in s 1041A does not contain any “intention” or “intent” on the part of the relevant person as a necessary integer or element of the offence. That was a deliberate legislative change. The commentary on the draft provisions of the Financial Services Reform Bill 2000 issued by Treasury in February 2000 set out in par 11.10

“Section 997 currently contains an ‘intention’ element. Civil contravention of the new provisions will not require that element of intention to be established.”

81. ASIC submitted that although ss 1041A and 1041B do not require proof of any particular intent, the existence of an intention such as to increase the price of the shares being purchased, was sufficient to satisfy the requirement of an “artificial price” for the purposes of s 1041A(c) and a “false or misleading appearance ... with respect to ... the price” in s 1041B(1)(b).
82. It is important to note that ASIC submitted that what occurred on 31 December 2007 was a genuine transaction which nevertheless contravened the legislation because of the purpose actuating the trade by the purchaser. ASIC submitted that an “artificial price” is a price which is created when a transaction is undertaken for the sole or primary purpose of setting the market price. ASIC eschewed the proposition that what occurred was a fictitious transaction. It submitted that the price was “artificial”, that is, a price that was constructed or contrived, because the transaction itself which created the price was undertaken for the sole or primary purpose of setting the price rather than the sole or primary purpose being that of a genuine purchaser to have those shares at that price. ASIC submitted that the transaction was proscribed because it was not a transaction that resulted from the interplay of the forces of genuine supply and demand because on one side the sole or primary purpose was to set the price, not to acquire the shares.
    
83. ASIC relied upon the reasoning of Mason J in North v Marra Developments Ltd (1981) 148 CLR 42 at 58-59:

“In terms the statutory prohibition [s 70 of the Securities Industry Act 1970 (NSW)] is directed against activity which is designed to give the market for securities or the price of securities a false or misleading appearance. In this setting, ‘calculated’ means ‘designed’ or ‘intended’ rather than ‘adapted’ or ‘suited’. It is not altogether easy to translate the generality of this language into a specific prohibition against injurious activity, whilst at the same time leaving people free to engage in legitimate commercial activity which will have an effect on the market and on the price of securities. Purchases or sales are often made for indirect or collateral motives, in circumstances where the transactions will, to the knowledge of the participants, have an effect on the market for, or the price of, shares. Plainly enough it is not the object of the section to outlaw all such transactions.

It seems to me that the object of the section is to protect the market for securities against activities which will result in artificial or managed manipulation. The section seeks to ensure that the market reflects the forces of genuine supply and demand. By ‘genuine supply and demand’ I exclude buyers and sellers whose transactions are undertaken for the sole or primary purpose of setting or maintaining the market price. It is in the interests of the community that the market for securities should be real and genuine, free from manipulation. The section is a legislative measure designed to ensure such a market and it should be interpreted accordingly.

I agree with Hope and Samuels JJ.A. in rejecting the suggestion that the section strikes only at fictitious or colourable transactions. Transactions which are real and genuine but only in the sense that they are intended to operate according to their terms, like fictitious or colourable transactions, are capable of creating quite a false or misleading impression as to the market or the price. This is because they would not have been entered into but for the object on the part of the buyer or of the seller of setting and maintaining the price, yet in the absence of revelation of their true character they are seen as transactions reflecting genuine supply and demand and having as such an impact on the market.”

84. These observations were adopted and followed by the majority of the New South Wales Court of Appeal in Fame Decorator Agencies Pty Ltd v Jeffries Industries Ltd (1998) 28 ACSR 58. Gleeson CJ (with whom Powell JJA agreed), cited the passage in North v Marra Developments Ltd (supra) to which I have referred in par [83] above and at 62 continued:

“This approach accords with United States authority on similar legislation, where a price reflecting basic forces of supply and demand working in an open, efficient and well-informed market, is contrasted with an artificial price resulting from manipulative conduct: see eg, Cargill Inc v Hardin; Freeman v Laventhol & Horwath.

Section 998 aims to preserve the integrity of the share market. Markets, in reflecting the interaction of forces of supply and demand, may suffer from a variety of imperfections, including mismatches of information, without such imperfections destroying their integrity. However, the conduct of a seller of thinly traded shares, calculated to effect sales at the lowest, rather than the highest, obtainable price, and timed so as to deflect the possibility of some purchasers bidding up the price, had both the purpose and effect of creating, temporarily, an artificial market and price.

There is a difference between the market and the individual buyers who had current bids immediately before the close of trading on 28 April 1995. The effect of Fame’s conduct upon the market for shares in Jeffries, and the market price, was not merely incidental. The central object of such conduct was to influence the market price.”

(Citations omitted)

85. ASIC submitted that the present case was a mirror image of what Gleeson CJ had referred to. Rather than a seller who was going to enter the market and ask or transact a sale at the lowest price, there was a buyer willing to pay a price well above the other bids that had been entered in the market at that time which was the bid that was entered to deflect the possibility of selling or transacting a trade which may affect the market price.
86. ASIC also relied upon the observations of Heerey J in Donald v Australian Securities and Investments Commission (2000) 104 FCR 126 where his Honour in considering s 998(1) of the Corporations Act said at 134:

“This was plainly an artificial or managed manipulation of the price. In his own words, the applicant wanted to give the Burswood shares ‘a bit of a nudge upwards’ so that the price appeared higher than it would if the market had operated in accordance with the normal expectations of participants, with buyers buying for the lowest price obtainable and sellers selling for the highest.”

87. The defendant submitted that the observations of Mason J in North v Marra Developments (supra) were not determinative of the issues in the present case because the facts were quite fundamentally different and that the distinctions between the facts in that case and the present were important. It is true that the facts in North v Marra Developments Ltd (supra) were quite different but the observations of Mason J (with whom the other members of the Court agreed) provide substantial support for the submissions of ASIC as to the proper interpretation and construction of ss 1041A and 1041B(1)(b).
88. I note that the defendant’s submissions are supported by the reasoning of Priestley JA in Fame Decorator Agencies Pty Ltd v Jeffries Industries Ltd (supra). However, Priestley JA was in dissent in that case, Gleeson CJ and Powell JA comprised the majority of the Court.
89. The fundamental issue to address is what is meant by an “artificial price”. The expression “artificial price” is defined in the Shorter Oxford English Dictionary as “constructed, contrived”, “not natural though real” and “not real”. The expression “natural” is defined as “in the usual or ordinary course of things” or “in the usual course of nature”.
90. Having regard to the context in which the expressions “artificial price” and “false or misleading appearance” appear, I consider that the expression “artificial price” in s 1041A connotes a price created not for the purpose of implementing or consummating a transaction between genuine parties wishing to buy and sell securities, but rather for a purpose unrelated to achieving the outcome of the interplay of genuine market forces of supply and demand. I consider that the reasoning of Mason J in North v Marra Developments Ltd (supra) (par [83] above) in relation to the creation of a false or misleading appearance of active trading and the creation of a false or misleading appearance with respect to the market for, or the price of, securities is equally applicable to the creation of an artificial price for trading in securities. That is to say, the reasoning applies to ss 1041A and 1041B(1)(b).
91. It is fundamental to the working of the free market forces of securities exchanges such as the ASX that buyers are concerned to buy securities at the lowest possible price and sellers are concerned to achieve the highest possible price. Any different approach to the price for which securities are traded is a distortion of the interplay of the open market forces of supply and demand.
92. A consideration of the scope of s 1041A is complicated by the fact that the section has a heading “Market Manipulation”. Section 13(3) of the Acts Interpretation Act 1901 (Cth) provides that headings to sections do not form part of the Act. It is therefore necessary to be careful in equating the act of creating an artificial price for shares or securities with manipulation of the market.
93. A guide as to the legislative intention enshrined in the expression “artificial price” is found in the Explanatory Memorandum for the Futures Industry Bill 1986 (par [75] above). It is apparent from par 288 of that Memorandum (par [75] above) that the draftsman and the Parliament had in mind the observations of Mason J in North v Marra Developments Ltd (supra) at 58-59 (par [83] above). Although Mason J was analysing s 70 of the Securities Industry Act 1970 (NSW) which proscribed the creation of “a false or misleading appearance of” trading in shares, I consider that his observations are equally applicable to the interpretation of “artificial price” in s 1041A. Mason J focussed on the intention or purpose of the conduct of a relevant buyer or seller in market. His Honour was concerned to ensure that market prices reflected the operation of the genuine forces of supply and demand.
94. The defendant’s submissions proceed on the basic assumption that so long as there was a seller in the market with a posted or “ask” price who was independent of, and not connected or associated in any way with, a person such as the defendant who was wanting to buy at that price to achieve his purpose of increasing the price of Select Vaccines shares on the market there was no creation of an “artificial” price for those shares, nor was there the creation of a false or misleading appearance with respect to the price for trading in them.
95. This assumption is misplaced. It places emphasis only on the existence of a genuine seller and fails to take into account that there also needs to be, as Mason J observed in North v Marra Developments Ltd (supra), a genuine buyer whose purpose in buying the shares is to achieve a genuine purchase at the lowest possible price and thereby reflect the forces of genuine supply and demand. The defendant was not such a genuine buyer. His purpose in buying the shares was rather to set the market price. Mason J excluded such a buyer from the equation of the interplay of the forces of genuine supply and demand.
96. The defendant did not wish to acquire or own shares in Select Vaccines on 31 December 2007. Further, there was no evidence that his mother wished to do so. Indeed, the defendant knew, because of Select Vaccines’ Share Trading Policy, he was prohibited because of his role as a director in Select Vaccines from acquiring shares in Select Vaccines on 31 December 2007. What he wanted to do was to have the share price in Select Vaccines increase at the close of the trading for the 2007 year. He was not intending or proposing to buy shares in Select Vaccines at the lowest price which he could on the market. He could only achieve his object, that is to qualify for the bonus, by ensuring that the price for trading in Select Vaccines shares increased.
97. Because of the defendant’s familiarity with “market depth” information about Select Vaccines shares, he knew that by placing the order to purchase the Select Vaccines shares at market price he would thereby be able to move the share price up to 2.4 cents per share and then 2.5 cents per share by placing an order to purchase $2,550 worth of shares, having regard to the number of shares offered for sale at those prices.
98. I am therefore satisfied that at the time the defendant spoke to Bell Potter at 1.45 pm on 31 December 2007 and gave instructions to purchase the Select Vaccines shares on market he took part in, and carried out, a transaction that had the effect of creating an artificial price for trading in Select Vaccines shares on the ASX. This resulted in a contravention of s 1041A(c) of the Act.
99. I am further satisfied that by giving this instruction to Bell Potter the defendant committed an act which had the effect of creating a false and misleading appearance with respect to the market for and the price for trading in Select Vaccines shares on the ASX. This resulted in a contravention of s 1041B(1)(b) of the Act.
100. I therefore propose to make a declaration of such contraventions in accordance with s 1317E of the Act.
101. I am further satisfied that by undertaking that course of conduct on 31 December 2007 the defendant contravened ss 181(1) and 182(1) of the Act.
102. ASIC submitted that the transaction undertaken by the defendant on 31 December 2007 resulted in a contravention by the defendant of his obligations under ss 181 and 182 of the Act. Section 181 provides:

“(1) A director or other officer of a corporation must exercise their powers and discharge their duties:

(a) in good faith in the best interests of the corporation; and

(b) for a proper purpose.

(2) ...”

103. Section 182 of the Act provides:

“(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation.

(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.”

104. Not only did the defendant, a director of Select Vaccines, consciously and deliberately contravene the Select Vaccines’ Share Trading Policy, he deliberately and consciously lied to the other members of the Board of Directors about what he had done on 31 December 2007 and embarked on a deliberate course of conduct to conceal what he did. The severity of his conduct and the egregious nature of his conduct was exacerbated by the preparation of the Q&A document around 26 June 2008.
105. The share trade which the defendant initiated and implemented on 31 December 2007, which I have found was carried out on his own behalf and not on behalf of anyone else, was a clear breach of Select Vaccines’ Share Trading Policy. The end result of his conduct was that Select Vaccines suffered a financial loss. Had the share trade not been undertaken and completed, Martin Soust & Co would not have received the bonus which was available to it under the Executive Service Agreement in the event of an increase relevantly in the share price. Further, the defendant concealed from the other directors of Select Vaccines the true situation in relation to the share trade. If he had been honest with his fellow directors, they would not have approved or resolved to grant the bonus.
106. As I have found earlier, the defendant lied to Mr Wadley when he told him after the inquiry from the ASX that it was his mother who had purchased the shares. He consciously and deliberately concealed from Select Vaccines and its directors that he was the true purchaser of the shares. When the matter of the bonus was discussed at the meetings of the Remuneration Committee and the Board he continued to conceal the true position. What is more, he signed the cheque that effected the payment of the bonus. I have no doubt that the defendant’s course of conduct on and after 31 December 2007 in relation to the share trade on that day was such that in contravention of s 181(1) of the Act the defendant did not exercise his power and discharge his duty as a director of Select Vaccines in good faith, in the best interests of Select Vaccines or for a proper purpose. Indeed, he did so for an improper purpose. Further, by initiating and implementing the share trade on 31 December 2007 and ultimately signing the cheque that effected payment of the bonus, the defendant made improper use of his position as a director of Select Vaccines and its Chief Executive Officer to gain an advantage for himself or at least for Martin Soust & Co and to cause detriment to Select Vaccines.
107. The defendant contravened ss 181(1) and 182(1) of the Act not only by placing the order to purchase $2,550 worth of shares in Select Vaccines at market on the ASX, but also by contravening Select Vaccines’ Share Trading Policy and failing to inform his fellow directors of his involvement in the purchase and deliberately concealing that involvement from them.
108. Sections 1041A and 1041B are “civil penalty provisions” which are defined in s 1317E(1) of the Act. So are ss 181(1) and 182(1) of the Act. I am therefore required by s 1317E to make a declaration as to the contravention of those sections. Section 1317G of the Act empowers the Court to order the defendant to pay the Commonwealth a pecuniary penalty of up to $200,000 if a declaration of contravention has been made under s 1317E in the circumstances there referred to.
109. A contravention of ss 181(1) and 182(1) of the Act is by virtue of s 1317D also a corporation/scheme civil penalty provision whereas a contravention of ss 1041A and 1041B are contraventions only of a financial services civil penalty provision.
110. The pecuniary penalties which the Court is empowered to order in respect of these contraventions are found in s 1317G(1) in relation to corporation/scheme civil penalty provisions and s 1317G(1A) in respect of financial services civil penalty provisions.
111. The power to disqualify a person from managing a corporation pursuant to s 206C of the Act is enlivened where the Court has made a declaration under s 1317E of the Act that the person has contravened a corporation/scheme civil penalty provision.
112. I propose therefore to make the declarations sought by ASIC and otherwise adjourn the proceeding to enable the parties to make further submissions as to whether any, and if so what, orders should be made under s 1317G of the Act that pecuniary penalties be paid by the defendant and whether any, and if so what, order should be made under s 206C(1) of the Act disqualifying the defendant from managing corporations for such period as the Court considers appropriate.
     

I certify that the preceding one hundred and twelve (112) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg.

Associate:

Dated: 15 February 2010