Stock Market For Setting And Maintaining Market Price

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Stock Market For Setting And Maintaining Market Price

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Stock Market For Setting And Maintaining Market Price

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Question:
Discuss about the Stock Market for Setting and Maintaining Market Price.

Answer:
Introduction:

The issue before the High Court of Australia in this case was related with the purchase of shares on stock market for setting and maintaining market price and was concerned with the Securities Industry Act. There are several reasons due to which the case assumes significance and one reason was that this case started as a simple debt claim, where a stockbroker’s firm brought a claim for unpaid fees but the claim was held by the court as being illegal on account of the breach of section 70, Securities Industry Act. It is worth mentioning at this point that this case was concerned with the offense under section 70, Securities Industry Act, that was not identical to section 1041 of the present iteration of Corporations Act, 2001 (Cth). Similarly, in this section was not identical to the offense that was discussed in Cargill Inc. v Hardin, still all three of them were related with the prohibition against market manipulation as their basis.
Rule: Without repeating the exact terms of section 70, Securities Industry Act, it is sufficient to say that the offense that has been created by this section was created with a view to prevent the creation of a false or misleading appearance being created regarding trading or prices on the stock market. This section has been expressed in terms that are related with the result of conduct. It also needs to be mentioned that specific acts have not been prescribed in this section. Therefore, the provision has been expressed in terms according to which, doing anything has been prohibited, that may result in the creation of false or misleading appearance of active trading in context of securities or doing anything that may result in false and misleading appearance regarding market or share prices.
Application: In this case, there was a firm of stockbrokers named North and on the other hand, there was a property developer company, called Marra. In this case, the board of directors of Marra were concerned that the company was vulnerable to takeover. As a result, they consented North for getting strategic advice regarding the ways in which such a situation can be prevented. According to the advice given by North to Marra, it was to reconstruct its share capital and was also advised to take over or merge with some other company named Scottish Australia Holdings Ltd. It was also advised by North that Marra should allocate bonus shares and in this way, the value of ordinary shares of the company will come to $4.40 per share. In this regard, it was held by the trial judge that North and Marra, with the help of the transactions taking place on the Sydney Stock exchange, have set up a market for the shares of the company at $16.50 so that these may be used for the takeover of Scottish Australia Holdings Ltd. While the real price of the shares of Marra was $4.40 per share, it was considered that $16.50 as the price of the shares was significantly higher. However later on, it was stated by the Court of Appeal that the purpose of Marra was not to buy the shares of the company and the lowest price at which these were reasonably available and instead, the company purchased shares with the view that the price of the shares of the company would appear to be 16.50 in the market and this was done by Marra in context of its takeover bid of Scottish.
The High Court of Australia agreed with these arguments. It stated that the purpose of section 70 was to protect the market from activities due to which there may be artificial or managed manipulation. The court stated that the section tried to make sure that the market prices were reflective of the genuine supply and demand forces. Buyers or sellers who have undertaken transactions only one mainly with the view to set up or maintain the market cannot be considered as genuine forces of demand and supply. Such a transaction would not have been entered into by the parties if it was not the object of the buyer or seller to set up the price. Such a situation appears to be suggesting the comments made by the Court of Appeals in Cargill Inc. v Hardin when the court stated that floating of false rumors that have an effect on future prices, is among the most common manipulative devices.
The types of market manipulation that came under the purview of Securities Industry Act included market rigging, false trading, effecting and affecting market prices and false trading. In order to establish that the offense has been committed, it is not necessary that the accused should have been profited by it because it is mainly irrelevant whether any profit was made by the accused or not.
The court explained this concept in Cargill Inc v Hardin when it was stated that the economic harm caused could be just as great, regardless of the fact that there has been profit or loss. This proposition assumes significance in view of the fact that no profit was achieved by accused from the manipulation can only be considered by the sentencing and not by considering the commission of the offense.
Conclusion:
The court arrived at the conclusion that false or misleading appearance is that in the absence of any information that market support is afoot, the market appears to be genuine or real, there’ve been no signs of malnutrition or market support. Under these circumstances, the court stated that it was sufficient to amount of breach of the section if the activities have been calculated with a view to create false or misleading appearance and it is not required that such an appearance should have been in fact created by it.

Reference
North v Marra Developments Ltd (1981) HCA 68

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