GLEESON CJ: This appeal, from a decision of Cohen J in the Equity Division, raises questions as to the meaning and effect of ss995 and 998 of the Corporations Law.

A number of the parties to the proceedings at first instance have taken no part in the appeal. The only participants in the appeal have been the appellant (Fame) and the Australian Securities Commission (ASC), which is the third respondent.

Cohen J held that two share transactions, both being sales of shares in Jeffries Industries Limited (Jeffries) on 28 April 1995, contravened ss995 and 998 of the Corporations Law, and made declarations accordingly. The appellant, Fame, challenges that finding and seeks to have the declarations set aside. ASC supports the finding and seeks to maintain the declarations. By notice of cross-appeal ASC contended that the findings and declarations did not go far enough, and that certain other sales by Fame of shares in Jeffries on the same day also contravened ss995 and 998. However, the cross-appeal has not been pursued, because ASC takes the view that the legal issues of concern to it are sufficiently covered by Fame's appeal.

Jeffries is a public company. Its shares are listed on the Stock Exchange. Fame has at all material times held shares in Jeffries. Mr J F O'Halloran, who principally controls the business of Fame, was formerly the Chairman of Directors of Jeffries. He had ceased to hold that position by April 1995.

In addition to a substantial parcel of ordinary shares in the capital of Jeffries, Fame, in 1995, held converting preference shares. The conversion date, on which those shares were to be converted to ordinary shares, was 4 February 1999, but the Articles of Association of Jeffries provided that conversion might be accelerated in certain circumstances. One such circumstance is presently relevant. If, prior to the completion date, Jeffries failed to pay a certain specified dividend on a particular date, then each holder of a converting preference share had a right to accelerate the conversion date in respect of all or some of the holder's preference shares. In that event, the number of ordinary shares to be allotted upon conversion was to be determined in accordance with a formula. It suffices for present purposes to say that one of the elements of that formula was the weighted average sale price of all fully paid ordinary shares in Jeffries sold on the stock exchange during the twenty trading days immediately prior to the conversion date. The lower the average sale price of ordinary shares during that period of twenty trading days, the greater would be the number of ordinary shares to be allotted to a preference shareholder upon conversion.

On Thursday 27 April 1995 Mr O'Halloran became aware that the directors of Jeffries intended to announce on the following day, Friday 28 April 1995, that there would be no dividend paid for the converting preference shares for the period ended Sunday 30 April 1995. That would trigger the accelerated conversion provisions.

The shares in Jeffries were thinly traded, and sales were infrequent. This rendered the market susceptible to manipulation. In March 1995 there was a placement of 1.45 million shares, and during that month there were sales on the stock exchange of about 755,000 ordinary shares at prices ranging from 25c to 35c each. From the beginning of April, 40,000 shares were sold on the stock exchange, at prices ranging from 35c to 50c. During the morning of 28 April there was a sale of 5,000 shares at 45c.

Mr O'Halloran contacted his stockbroker, Mr Powell, on 27 April and again on 28 April. There were some differences between the evidence of Mr O'Halloran and that of Mr Powell about those communications, but the differences were not regarded by Cohen J as material. They discussed the possible sale by Fame of a substantial number of shares in Jeffries. As they acknowledged, they both understood that, for reasons related to the possible conversion of preference shares, it was in the interests of Fame that the average sale price of ordinary shares, over the period up to and including 28 April, be minimised, thereby increasing Fame's entitlement on conversion of its preference shares.

There was evidence as to the method of operation of the Stock Exchange Automated Trading System (SEATS). Under that system brokers place on record offers to buy, and offers to sell, shares. When an offer to buy is matched with an offer to sell, a trade takes place. Brokers have computer access to the information which records offers and trades. As the evidence in the present case demonstrated, brokers sometimes make an offer to buy, or an offer to sell, at a price substantially different from the current market price, leaving such offer to stand in the hope that at some future time changes in market circumstances will result in its acceptance. If, at any given time, there are in existence a number of offers to buy shares in a company at various prices, then a seller who is willing to trade must accept the offers to buy in descending sequence until the shares available for sale have been exhausted, or there is no longer a willingness to sell at a price matching an outstanding offer.

According to Mr Powell, at about midday on 28 April he informed Mr O'Halloran of the details of the various offers to buy shares in Jeffries which were current at that time. These were as follows:

The dates listed above are the dates on which the offers to buy, or bids, were entered in the system.

According to the SEATS system, if Fame wished to sell shares in Jeffries it was required to accept those bids in the sequence listed above.

It was agreed between Mr Powell and Mr O'Halloran that they would have a further conversation later in the afternoon of 28 April. It was also agreed that if, by that time, there was no change in the market, Mr O'Halloran would instruct Mr Powell to sell 170,000 shares in Jeffries down to a price of 13c, and that the sales would be left until as late as possible, just before the close of the market. At 3.52pm on 28 April there was a further telephone conversation in which it was agreed between Mr O'Halloran and Mr Powell that Mr Powell would sell 170,000 shares down to 13c.

In the result, Fame accepted all the outstanding offers to buy Jeffries shares at prices of 35c, 30c, 28c, 26c, 25c and 14c. Fame also accepted offers to buy 74,000 shares at 13c, and there was, additionally, the sale of an odd lot parcel of 1,000 at 26c.

The offer to buy 20,000 shares at 14c had been placed by Cameron Securities. Mr Cameron gave evidence that, when he placed the bid, the market price was 35c. He said in his evidence:

"I didn't really think, in my wildest dreams, that anyone would sell them at 14, but if you're not there you don't get them. Sometimes it happens. In this case it happened."

The bid, or offer to buy 250,000 at 13c, had been placed by James Capel. There was no evidence from any member of that organisation.

There was no evidence or suggestion of any collusion between Fame and either Cameron Securities or James Capel.

The transactions which occurred on 28 April excited official interest, and an investigation was undertaken. Disputes arose between Jeffries and various persons as to the significance of those transactions in relation to the conversion of preference shares. For the purposes of this appeal it is unnecessary to go into the detail of those disputes, or their outcome. The sole question with which we are concerned is whether Cohen J was right to conclude that the sales of 20,000 Jeffries shares at 14c and 74,000 Jeffries shares at 13c involved contraventions of ss995 and 998 of the Corporations Law. ASC argued that all of the sales by Fame on 28 April 1995 contravened ss995 and 998 but, as was mentioned, regarded it as unnecessary to pursue its cross-appeal in support of that contention.

At first instance, Mr O'Halloran gave evidence in explanation of his conduct. He sought to persuade Cohen J that, in placing the selling orders on 28 April, he was acting under pressure of a need to obtain quick cash to satisfy certain financial commitments. His evidence was disbelieved. No attempt has been made to challenge Cohen J's findings of fact.

Cohen J found that Mr O'Halloran had funds available to enable him to pay any urgent debts, and there was no reason, arising out of any need for cash, for him to sell so many shares in Jeffries at such a low price. Cohen J said that the only conclusion that could be drawn was that Mr O'Halloran deliberately sold at least the last 94,000 shares on 28 April at a price well below the previous sale prices in order to create an artificially low figure for purposes of the conversion calculation to be made in respect of the preference shares.

All of the offers to sell made by Mr O'Halloran on behalf of Fame were made within about three minutes of the close of trading on 28 April 1995. That was an aspect of the transactions which had previously been arranged between Mr Powell and Mr O'Halloran. The apparent purpose was to foreclose the possibility that, in response to the placing of selling orders, additional buyers would come into the market offering to purchase shares in Jeffries at prices above the figures of 14c or 13c. That is exactly what happened on the next trading day, which was the Monday of the following week. On that day the market price of shares in Jeffries recovered to a figure well in excess of 14c.

Mr O'Halloran's objective was unusual. He was setting out to achieve a sale of a substantial number of Fame's shares in Jeffries, not at the highest possible price, but at the lowest possible price. This would be to the ultimate financial advantage of Fame, because a depressed market price for Jeffries shares would, by reason of the conversion formula, result in the potential acquisition of an increased number of ordinary shares upon conversion.

The question for this court to decide is whether, on the facts as found by Cohen J, there was a contravention of ss995 and/or 998 of the Corporations Law.

Senior counsel for the appellant submitted that there was nothing misleading about what occurred, and no form of market manipulation involved. There was, he acknowledged, conduct intended to take opportunistic advantage of the market situation which existed on 28 April, but that situation had not been created by the appellant or by any person acting in collusion with the appellant. All that the appellant did, acting in its own financial interests, was to accept the various offers to buy shares in Jeffries which had been placed in the market prior to 28 April and were still in place. The appellant went into the market immediately before the close of trading on 28 April, and simply mopped up all the current offers to buy at the current offer prices. The sales were all arm's-length transactions. The vendor met the market, and the fact that, for its own reasons, it suited the vendor to accept, for some of its shares, a lower price than might well have been obtained if it had acted differently, is immaterial.

It is convenient to deal first with s998, which relevantly provides:

"998(1) A person shall not create, or do anything that is intended or likely to create, ...... a false or misleading appearance with respect to the market for, or the price of, any securities."

This provision is the current Australian counterpart of s124 of the Securities Industry Act 1980 (Cth), s70 of the Securities Industry Act 1970 (NSW) and ss9(a)(i) and 10(b) of the Securities Exchange Act 1934 (US) and Rule 10b-5 made pursuant to s10(b). (For an examination of United States authorities on the corresponding legislation see Ashley Black, "Regulating Market Manipulations: Sections 997-999 of the Corporations Law" (1996) 70 ALJ 987).

In North v Marra Developments Ltd [1981] HCA 68; (1981) 148 CLR 42, a case concerning s70 of the Securities Industry Act 1970 (NSW) Mason J said, at 58-59:

"In terms the statutory prohibition is directed against activity which is designed to give the market for securities or the price for securities a false or misleading appearance. ...... 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 forced 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."

The concluding sentence is directly in point in this case.

Mason J went on to reject the suggestion that s70 struck only at fictitious or colourable transactions.

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, for example, Cargill Inc v Hardin [1971] USCA8 443; 452 F.2d 1154 (1971), Freeman v Laventhol & Horwath [1990] USCA6 1765; 915 F.2d 193 (1990)).

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.

As Mason J acknowledged in North, in individual cases there may be difficulty in determining whether the conduct of a buyer or a seller, unless fully disclosed, falsifies the assumptions upon which a market operates, and damages the integrity of the market. In the present case, however, Cohen J was right to conclude that both the purpose and the effect of Fame's conduct was to create an artificial market price for shares in Jeffries and that such conduct contravened s998.

"995(2) A person shall not, in or in connection with:

engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

(4) Nothing in the following provisions of this Part ......shall be taken as limiting by implication the generality of subsection (2)."

The parliamentary history of the legislation shows that this provisions was inspired by s52 of the Trade Practices Act 1974 (Cth). It was regarded as desirable that, although s52 may have applied to some cases of dealing in securities, there should be a similar provision having as its focus conduct in relation to securities. Much of the case law which has developed around s52 will apply also to s995.

There is a substantial degree of overlapping between s995 and the following provisions, and subs(4) prevents any reading down by implication from those provisions. The section was described in the Explanatory Memorandum to the Bill when it was introduced as "a general `catch all' provision".

The expression "in, or in connection with" means that the section is not restricted to conduct which amounts to, or is part of, a dealing in securities.

In the present case, Cameron Securities and James Capel were not misled or deceived, and they have no complaints to make about the conduct of Fame. The offers to sell shares to Cameron Securities and James Capel, or, more accurately, the acceptances of their offers to buy, and the resulting contracts of sale and purchase did not, in themselves, considered in isolation, involve misleading or deceptive conduct. They had, and were intended to have, the legal effect which all parties to the dealings wished to achieve.

However, the conduct of Fame in connection with the sales was, for the reasons given above in relation to s998, likely to mislead or deceive third parties who were interested in the market for shares in Jeffries, who were entitled to assume that market prices reflected the genuine interaction of forces of supply and demand, and who would not have expected that the seller on 28 April 1995 was seeking to sell to the lowest bidders and eliminate the possibility of a higher bidder emerging.

The finding of a contravention of s995 was also correct.

PRIESTLEY JA: The facts of this appeal are set out in the Chief Justice's reasons. On the facts it is my opinion the appeal should be upheld.

The appellant is a company whose actions were decided on and carried out by Mr O'Halloran. For simplicity, I will refer to him as the appellant.

By "market" for the purposes of this case I mean the place where shares in Jeffries Industries Limited (Jeffries) could be bought and sold together with the sum of publicly available information relevant to buyers and sellers of those shares.

The appellant did nothing in that market beyond selling shares in a way and for prices publicly on offer to any holder of those shares who wished to sell at those prices. His sales began after 3.52 pm on Friday 28 April 1995 and ended by 4 pm. At the close of trading the market price had fallen. On Monday 1 May 1995, the next day of market trading, the price rose. An observer of the events of the last eight minutes of trading on the Friday who understood the full publicly available facts relevant to Jeffries' shares would not have been deceived about the market price of those shares by what happened during those eight minutes.

What happened in the market happened because of the market's own mechanism. The appellant did nothing to that mechanism other than accept offers, made in accordance with market rules, to buy shares in Jeffries at set prices. The appellant had nothing to do with those offers being on foot. Anyone who knew how to find out what offers were on foot could get the information in a moment. Similarly, knowledge of the situation Jeffries had created, quite independently of the appellant, concerning its converting preference shares was publicly available. In doing what he did, the appellant was acting upon his own view of what would be to his advantage, on publicly available information, by selling shares in accordance with known market procedures, in circumstances which he had had no part in producing. This is the mainspring of ordinary market behaviour.

In acting for his own advantage the appellant's purpose was not to create a false or misleading appearance with respect to the market for, or the price of, Jeffries shares; nor in my opinion did he in fact do so. His purpose was to bring about a close of market price which would be to his advantage when Jeffries did the calculation required by its conversion formula. On the same facts he in my opinion engaged in no conduct which was misleading or deceptive, or likely to mislead or deceive any person aware of the publicly available facts. The absence of any misleading effect of his conduct seems to me to be demonstrated by what actually happened in the market. There were no sales at the close-of-market price of 28 April, other than the appellant's. The next market day, sales were at higher prices.

The unique combination of circumstances at the time the appellant sold his shares could not have been foreseen by Jeffries and brought about a situation to Jeffries' disadvantage. This was not due to anything done by the appellant. Jeffries had created the arrangement upon which the market procedures then worked. "He that diggeth a pit shall fall into it". Jeffries made the rules about its converting shares. The appellant took advantage of them, as anyone else who held 170,000 ordinary shares in Jeffries could have done if that holder, because of a simultaneous holding of converting preference shares, thought it advantageous to do so.

I do not see how the appellant, doing nothing more than sell shares in accordance with market procedures, without collusion, connivance, prearrangement or even communication with any other person than his agent fell within the words either of s 995 or s 998 of the Corporations Law.

The appellant himself appears to have thought he was doing something shady, or at least that others might think shady: he told a cover story for his need for the proceeds of the sale of the shares which Cohen J found was false, and "the wicked flee when no man pursueth".

However, whatever the appellant's motivation for his cover story, which to my mind is the only point in this case against him, what he did was in my opinion lawful and not in breach of either of the two sections relied on against him.

The difficulty in coming to any other conclusion is illustrated by the appellant's sales of shares for twenty eight cents, twenty six cents and twenty five cents. Cohen J held these sales not in breach of the sections. How could the conduct of a seller of shares, doing nothing more than accept lawful standing offers to buy, be not prohibited in accepting one offer at twenty five cents and the next moment prohibited in accepting another offer at thirteen cents?

In my opinion the appeal should be upheld with costs and the declarations made by Cohen J set aside.