Schlaepfer v ASIC

The Australian stock market and the MIR

1. The impugned statements are alleged to have been made by Mr Yanco to senior executives of major stockbrokers in Sydney. The activities of the stockbrokers were governed by Market Integrity Rules ("MIR"). These rules were made by ASIC pursuant to s 798G of the Corporations Act 2001 (Cth) for the purpose of regulating and supervising the stock market. In 2014 there were in force separate MIR for the Australian Stock Exchange ("ASX") and for a competitor exchange known as Chi-X, respectively. These rules have since been repealed and replaced. In the MIR stockbrokers were referred to as "Market Participants", electronic order books operated by the ASX and Chi-X were referred to as "Trading Platforms" and orders, cancellations of orders and amendments placed on Trading Platforms were referred to as "Trading Messages".
2. The MIR recognised that Market Participants each operated their own systems of transmitting Trading Messages to the Trading Platforms. Each Participant was required under the MIR to have at least one representative, known as a "DTR", who was authorised to submit Trading Messages. "Authorised Persons" under the MIR included clients of Market Participants who were permitted by the Participant to submit Trading Messages to its system, through which the Messages would go to the Platforms without the intervention of any employee or representative of the Participant. This has been referred to in the evidence as Direct Market Access ("DMA") and in the Rules it was identified as Automated Order Processing ("AOP"). A definition appears in cl 1.4.3 of the Rules as follows: "Automated Order Processing" means the process by which orders are registered in a Market Participant's system and, if accepted for submission into a Trading Platform by the Market Participant, submitted as corresponding Trading Messages without being keyed or rekeyed by a DTR.
3. Clause 5.6.1 of the rules required that if a Market Participant should use its system of electronic trading for AOP, it had to have appropriate automated filters in place and it had to ensure that use of its system would not interfere with the efficiency and integrity of the market. Clauses 5.6.2 and 5.6.3 imposed additional requirements to ensure that, where a Participant provided DMA/AOP to clients, the activities of clients would not interfere with the efficiency or integrity of the market, that Trading Messages capable of having that effect could be cancelled and that access to the Participant's system, and hence to the Trading Platforms, could be suspended or limited in relation to any client whose conduct might threaten the good order of the market.
4. Clause 5.6.12 provided as follows: 5.6.12 Limitations on Automated Order Processing (1) This Rule applies where ASIC reasonably considers that: (a) A Market Participant is not complying with the Automated Order Processing Requirements; or (b) it is otherwise appropriate to direct a Market Participant to take the actions referred to in subrule (2). (2) A Market Participant must, if directed to do so by ASIC: (a) cease conducting Automated Order Processing until ASIC is satisfied that the Market Participant complies with the Automated Order Processing Requirements; or (b) immediately suspend, limit or prohibit the conduct of Automated Order Processing in respect of: (i) one or more Authorised Persons or clients; (ii) Automated Client Order Processing; (iii) Automated Order Processing; or (iv) one or more Cash Market Products, as required by the direction. Maximum penalty: $1,000,000

The parties

1. Mr Schlaepfer has at all relevant times, including in 2014, been the president and Chief Executive Officer ("CEO") of Select Vantage, as well as being a director of the company and its secretary. He is the sole beneficiary of a trust that owns all of the issued shares in Select Vantage. Select Vantage was incorporated in Anguilla on 12 September 2011. Since 2017 it has been domiciled in the Cayman Islands. In 2014 the company conducted a business of day trading on stock markets around the world. In Australia it traded on the ASX and on Chi-X.
2. Mr Schlaepfer was the sole shareholder of another entity, Merlito Securities Company ("Merlito"). Merlito is registered in Hungary. From August 2012 to August 2014 it had an agreement with a licensed stockbroker in Australia, Morgan Stanley, under which the latter provided direct access to the Australian stock markets. Through Merlito's arrangements with Morgan Stanley, orders could be placed and trades could be made by Select Vantage personnel. From 20 August 2014 Merlito's DMA arrangement with Morgan Stanley came to an end and it commenced a similar arrangement with Macquarie Securities Australia Pty Ltd ("Macquarie"), another broker to the Australian stock market.
3. In 2014 Mr Yanco was the Senior Executive Leader, Market Supervision within ASIC. Under that title he was the senior executive of ASIC in charge of and responsible for market supervision. Supervision included oversight of the compliance by Market Participants with the MIR. Mr Yanco was based in Sydney and reported directly to Commissioners of ASIC. A team of ASIC officers under him carried out surveillance of the stock market, including identifying and investigating evidence of manipulation.

The oral statements

1. It is common ground that on 21 November 2014 Mr Yanco spoke by phone to market compliance executives at each of UBS, Bank of America Merrill Lynch ("BA Merrill Lynch"), Credit Suisse and Deutsche Bank and that on 24 and 28 November 2014, respectively, he spoke in person to executives of Citi and BA Merrill Lynch. All of those entities were licensed stockbrokers in Australia. Like Macquarie they provided direct market access to approved clients. The plaintiffs allege that during the five conversations on 21 and 24 November 2014 Mr Yanco said words the substance of which is set out in Annexure A to the statement of claim (see [13] below) and that in the sixth conversation, face-to-face on 28 November 2014, he said the same words together with an additional point that is set out in Annexure B (see [144] below). The words attributed to Mr Yanco in these two Annexures are the foundation of the plaintiffs' causes of action, said to have conveyed both the defamatory imputations relied upon by Mr Schlaepfer and the false representations relied upon by Select Vantage.
2. The first issue in the proceedings is whether the plaintiffs have proved on the balance of probabilities that the words spoken were as alleged in the two Annexures. The plaintiffs sought to prove this by tendering an email sent by Mr Andrew Couper of Credit Suisse to several of his fellow employees on 21 November 2014 at about 4:08pm. The plaintiffs submit that this is a business record of the words actually spoken, admissible as proof of the truth of its contents as to what was said. The defendants dispute the admissibility of the email and in any event deny that it purports to record the substance of the words spoken. The plaintiffs did not call evidence from any of the persons to whom the words in issue are alleged to have been communicated. Mr Yanco gave evidence of what he said on each of the six occasions, in terms materially different from those alleged by the plaintiffs.

Identification of Mr Schlaepfer

1. The plaintiffs allege that the words spoken by Mr Yanco on all six occasions included the following: 1. ASIC has concerns that a particular entity is layering the market. 2. ASIC is aware that the Entity has been closed down at two brokers because of their behaviour. As explained more fully below, "layering" is understood by brokers and other stock market participants to refer to a particular technique and pattern of trading by which a misleading impression is created in the market, having the likely effect of stock price manipulation.
2. The plaintiffs allege that those to whom Mr Yanco spoke republished his words to other employees of their organisations, that this was the natural and probable consequence of the original publication and that it was in any event impliedly authorised by Mr Yanco. With respect to each of the six matters complained of it is pleaded that: "The republication is relied upon only as to damages". Mr Schlaepfer is not referred to by name in the words alleged to have been spoken. The plaintiffs contend that those who heard the words and those to whom the words were republished would have identified Mr Schlaepfer as the person of whom defamatory imputations were conveyed. Identification of Mr Schlaepfer is disputed by the defendants.
3. On the issue of identification the plaintiffs rely in part upon a circular issued by ASIC on 25 November 2014 to brokers and other participants in the Australian stock market. The circular was entitled Market Supervision Update and is referred to as "MSU No 53". The plaintiffs argue that parts of this document provided context that would have caused persons to whom the impugned words were published or republished to identify Mr Schlaepfer. This gives rise to a subsidiary issue as to whether the plaintiffs are estopped from relying upon MSU No 53 in this way. The defendants assert that in December 2014 a dispute about the circular was resolved on terms, inter alia, that the plaintiffs released ASIC from any claims arising from its publication. The defendants contend that in reliance upon this release they issued an agreed clarification on 17 December 2014, namely, MSU No 54.

Imputations and true innuendoes

1. The imputations defamatory of Mr Schlaepfer that are alleged to have been conveyed by Mr Yanco's words are particularised in par 12 of the statement of claim as follows: (a) [Mr Schlaepfer] was engaging in criminal conduct by layering the stock market. (b) In the alternative to (a), [Mr Schlaepfer] was engaging in unlawful market manipulation. (c) [Mr Schlaepfer] had conducted his business in such a way as to warrant the Head of Market Supervision at ASIC contacting the head of compliance at a large brokering house and warning him of the risks of doing business with both his companies Merlito Securities and Select Vantage. (d) [Mr Schlaepfer] had so mis-conducted his financial business as to deserve having had two brokers terminate relationships with his company Merlito Securities.
2. The parties are at issue as to whether any of these imputations were conveyed by the words spoken. After consideration of whether Mr Yanco's words were in substance as the plaintiffs have alleged and whether they would reasonably have led the listener to believe that Mr Schlaepfer was the person referred to, it will be necessary to determine whether any of the above meanings were conveyed.
3. In par 18 of the statement of claim Mr Schlaepfer alleges six extrinsic facts, one or more of which is alleged to have been known to one or more of the persons to whom Mr Yanco's words were published or republished. Mr Schlaepfer relies upon these extrinsic facts, first, to support the imputations set out at [15] above as true innuendoes if they are not found to arise from the natural and ordinary meaning of the spoken words. Secondly, the extrinsic facts are relied upon to support additional imputations as true innuendoes. These may be condensed as follows: (a) [Mr Schlaepfer's] companies, (i) Merlito Securities and (ii) Select Vantage, engaged in stock market manipulation. (b) [Mr Schlaepfer's] companies, (i) Merlito Securities and (ii) Select Vantage, engaged in stock market manipulation to such a serious extent that two brokers terminated their relationships with [each of them]. (c) [Mr Schlaepfer] is such a dishonest trader that he deserves to be compared to the disgraced Peter Beck. (d) [Mr Schlaepfer] had authorised such serious manipulation of markets as to warrant the Head of Market Supervision at ASIC contacting the head of compliance of a large broking house and warning him of the risks of doing business with his companies (i) Merlito Securities and (ii) Select Vantage.
4. The case concerning true innuendoes gives rise to issues as to: 1. whether any person with whom Mr Yanco spoke on any of the six relevant occasions knew of the extrinsic facts or any of them and 2. if so, whether the words spoken conveyed any of the imputations referred to at [15] and/or [17] above when heard by a person who had knowledge of those facts.

Justification

1. The defendants have pleaded the defence of justification pursuant to s 25 of the Defamation Act 2005 (NSW). If it should be found that any of the imputations set out at [15] and [17] above were conveyed with respect to Mr Schlaepfer the defendants contend that those imputations were substantially true. The most substantial issue of truth concerns whether Mr Schlaepfer personally engaged in layering on the Australian stock market or caused Select Vantage to do so.
2. The business model of Select Vantage involved trading activity of 1,800 individual traders located at various places around the world, each of whom was authorised to use the company's capital to trade on stock markets to which Select Vantage had direct market access through brokers. The company set the parameters of trading. A significant limitation was that only day trading was permitted; that is, each trader could buy and sell shares but had to close out his or her position on each exchange at the end of each trading day. No stock was permitted to be held overnight.
3. The traders were engaged in groups called "pods", each of which had a particular physical location. There was a manager for each pod. A large number of the traders were located in China. Because of the minor difference between that country's time zone and Australian Eastern Standard Time, Select Vantage's Chinese traders were active on the ASX and Chi-X. They were authorised by Select Vantage to trade through Merlito's direct access relationship with Macquarie. The plaintiffs contend that the individual traders were free to place bids and asks and to buy and sell stock according to their individual strategies and decisions.
4. The facts and circumstances upon which the defendants rely to establish the substantial truth of the imputations, to the extent they may be found to have been conveyed with respect to Mr Schlaepfer, are particularised in Schedule A to the defence. This spells out in great detail the conduct of Select Vantage's traders with respect to seven named stocks on dates in the period August to November 2014. There are 21 days of trading, in one or more of seven identified stocks. On two of the days, two of the relevant stocks were traded. These may be considered as 23 "stock/days". In relation to each stock/day the defendants have alleged that one or more offences against s 1041A or s 1041B of the Corporations Act 2001 (Cth) was committed by Merlito and/or by Select Vantage, counselled and procured by Mr Schlaepfer. Select Vantage's capital was used but Merlito had the DMA services agreement with Macquarie. For most purposes Select Vantage and Merlito may be referred to interchangeably.
5. Whether the activities of Select Vantage's traders on the 23 stock/days involved market manipulation by layering is a question that occupied a great proportion of the hearing time and attracted a very large volume of documentary and expert evidence. Some of the evidence concerning the market activities of Select Vantage's traders will have to be considered not only with respect to the defence of truth but also in connection with the common law and statutory defences of qualified privilege.

Common law and statutory qualified privilege

1. The defendants rely upon ASIC's duties and powers, under the Australian Securities and Investments Commission Act 2001 (Cth) ("the ASIC Act") and under the Corporations Act, to supervise the stock market exchanges and Market Participants. The defendants contend that ASIC has at all material times had an interest, arising from its statutory obligations, to promote a fair, orderly and transparent stock market. They contend that the licensed brokers with whom Mr Yanco spoke in late November 2014 had the same interest, arising from their licence obligations and duties imposed by the MIR.
2. From these considerations the defendants contend that when Mr Yanco conducted the impugned conversations with brokers in November 2014 he was under a duty to speak to them about his concerns with respect to Select Vantage's trading and that the conversations were in furtherance of a common interest between the regulator and the licensed brokers, namely, an interest in the promotion of a fair, orderly and transparent stock market. It is further argued that the communications were necessary for the convenience or welfare of society. These considerations are said to attract common law qualified privilege.
3. It is common ground that a discussion took place between Mr John Price, a Commissioner of ASIC, Mr Tom Veidners, an ASIC market surveillance officer, and Mr Paul Packham, Macquarie's Regional Head of Compliance, on 20 November 2014. Mr Price expressed ASIC's concern about signs of market manipulation by traders using Merlito's DMA account with Macquarie and reminded Mr Packham of Macquarie's obligations not to permit its clients' direct access to the market to be used in a manipulative way. The next day Macquarie notified Merlito that its DMA services agreement was terminated. Mr Schlaepfer contends that Mr Yanco's phone calls and face-to-face conversations with compliance personnel of other major brokers at the time of and shortly after this termination event had the effect of warning off those brokers from entering into relationships with Merlito, Select Vantage or Mr Schlaepfer. Mr Schlaepfer contends that ASIC had at the time no more than a suspicion of market misconduct and that this was insufficient to give rise to a duty to communicate with brokers in the terms alleged.
4. For the purposes of the statutory defence under s 30 of the Defamation Act, the defendants allege that Mr Yanco believed on reasonable grounds that each of the compliance executives at the various broking houses to whom he spoke on 20, 21 and 28 November 2014 had an interest or apparent interest to receive information on the subject of possible market manipulation. It is contended that Mr Yanco spoke to each of them in the course of conveying information on that subject and that his conduct was reasonable. Those are the prerequisites for the defence stipulated in s 30(2).
5. Mr Schlaepfer's response to the statutory defence includes the allegation of malice. A further issue is whether, on the assumption that the various brokers had at least an apparent interest in receiving information about possible market manipulation, Mr Yanco acted reasonably in speaking directly to them and conveying the information he did. Mr Schlaepfer contends that a more reasonable course would have been to issue notices to Select Vantage, Merlito and/or Macquarie for compulsory production of documents and provision of information and to enquire further into the market observations that had raised ASIC's concerns.

Damages for defamation

1. The parties are in dispute as to whether the evidence led by Mr Schlaepfer to prove hurt to his feelings is sufficient to support general damages in this category. With respect to damage to reputation, although the defendants accept that there is a presumption of at least some such damage they submit that the award would be very small because, as a Canadian-based businessman, Mr Schlaepfer has not proved that he enjoyed any reputation in Australia prior to the matters complained of. The defendants submit that in assessing damages the Court is only concerned with loss of reputation in Australia, not in Canada.
2. Mr Schlaepfer claims aggravated damages, the award of which would depend upon it being found that Mr Yanco's statements to the stockbrokers were improper and/or unjustifiable and/or lacking in bona fides: Triggell v Pheeney (1951) 82 CLR 497; [1951] HCA 23; Waterhouse v Broadcasting Station 2GB Pty Ltd (1985) 1 NSWLR 58 at 74-75. The defendants deny that any of these criteria are satisfied, relying upon what they allege was a statutory duty of Mr Yanco to communicate with the stockbrokers (as referred to under issue 5 above concerning common law and statutory qualified privilege).

Elements of the tort

1. The elements of the tort of injurious falsehood are as stated by Gummow J in Palmer-Bruyn and Parker Pty Ltd v Parsons (2001) 208 CLR 388; [2001] HCA 69 in the following passage: [52] The elements of the action for injurious falsehood usually are expressed in terms which derive from Bowen LJ's judgment in Ratcliffe v Evans [1892] 2 QB 524 at 527-528, to which further reference will be made. Thus, generally, it is said that an action for injurious falsehood has four elements [further citation omitted]: (1) a false statement of or concerning the plaintiff's goods or business; (2) publication of that statement by the defendant to a third person; (3) malice on the part of the defendant; and (4) proof by the plaintiff of actual damage (which may include a general loss of business) suffered as a result of the statement.
2. In proof of elements (1) and (2) Select Vantage relies upon the oral statements alleged to have been made by Mr Yanco to brokers on 21, 24 and 28 November 2014. Therefore the resolution of Issue 1 in Mr Schlaepfer's defamation claim, concerning what was actually said, bears upon the cause of action for injurious falsehood as well.

Representations concerning the plaintiffs

1. The following representations of and concerning Select Vantage and Mr Schlaepfer are alleged to have been conveyed by the words spoken by Mr Yanco on the six occasions in November 2014, taken together with the extrinsic facts pleaded at par 18 of the statement of claim (and reproduced at [179] below): (a) [Select Vantage] was engaging in market manipulation by layering the market. (b) [Select Vantage] had been terminated by two brokers for layering the market. (c) [Select Vantage] was a related entity of Peter Beck, the disgraced former principal of Swift Trade Inc, who had been barred in the USA for market manipulation, and whose company, Swift Trade Inc, was levied an £8 million fine for market manipulation. (d) [Mr Schlaepfer], principal of [Select Vantage and of Merlito], was engaging in market manipulation by layering the market. The defendants dispute that any of these representations were conveyed.

Alleged falsehood of the representations

1. Select Vantage bears the onus of proving that the alleged representations, or at least some of them, were false for the purposes of element (1) of the tort of injurious falsehood. The defendants deny that the representations referred to above, if made, were false. The evidence upon which the Court is to determine whether representations (a) and (d) were false is the same as that upon which the defendants' justification defence to Mr Schlaepfer's defamation claim is to be decided under Issue 4 only the onus is reversed. The plaintiffs allege that it was false to represent that Select Vantage's trading on the 23 stock/days constituted market manipulation in contravention of s 1041A of the Corporations Act or the creation of a false appearance of active trading contrary to s 1041B. With respect to representation (b) the plaintiffs contend that this referred to the cessation of its DMA agreements with Morgan Stanley (in August 2014) and Macquarie (on 21 November 2014). The plaintiffs say it was false to assert that Morgan Stanley terminated Merlito's DMA "for layering" the market. The plaintiffs also contend that representation (c) was untrue in that Select Vantage was not in any way related to Peter Beck or his entities.

Malice

1. With respect to element (3) of the tort of injurious falsehood, the plaintiffs must prove that Mr Yanco used each of the six occasions of speaking to executives of broking houses in November 2014 for an indirect purpose, or in pursuit of an indirect motive, to cause injury to Select Vantage's business: AMI Australia Holdings Pty Ltd v Fairfax Media Publications Pty Ltd [2010] NSWSC 1395 at [31]-[36]. Again this is in contest because the defendants say that Mr Yanco communicated with the stockbrokers in performance of his statutory duties, as considered under Issue 5 above (concerning common law and statutory qualified privilege).

Actual damage

1. In closing written submissions Select Vantage has expressly refrained from contending "that any quantifiable loss arises for calculation by the Court". However, it submits that the Court "can infer the existence of some loss" as a result of it being unable to secure broking services that were essential to continued trading. Select Vantage says brokers would not deal with it after the alleged injurious falsehoods were published. It relies upon its financial statements for calendar 2014 showing total worldwide trading revenue and direct costs. These figures are said to prove that on a worldwide basis the company's gross margin was 4.53% on revenue. The direct costs are not dissected between Australia and the 25 to 30 other countries in which Select Vantage traded and from which it derived the gross revenue. Select Vantage gave evidence of its trading revenue from Australia for the year to 21 November 2014, when Macquarie terminated its direct market access. It submits that the 4.53% may be applied to the Australian revenue and that the Court may infer that, at least up to termination, some gross margin was derived from the company's Australian activities.
2. Select Vantage further submits that the company would have continued to derive gross margin from trading on the Australian stock market in the years following November 2014 and that this gross margin, admittedly unquantified, has been lost as a result of the injurious falsehoods published by the defendants. All of this is disputed by the defendants, who contend that actual damage has not been proved and hence that an essential element of the tort is not made out.

Mr Schlaepfer's early involvement with Swift Trade

1. Mr Schlaepfer was born and educated in Canada and is now in his early 30s. He graduated with a Bachelor of Commerce degree from the University of Toronto in 2003. He attained the degree of Master of Business Administration from Concord University in 2009 and completed the requirements to become a Chartered Finance Analyst in 2010.
2. In about 2003 Mr Schlaepfer was engaged as an independent contractor to an entity named Barka Co Ltd ("Barka"), to undertake share trading using the capital of Swift Trade Inc ("Swift Trade"). In that capacity Mr Schlaepfer traded on share markets in North America and Europe under constraints set by Swift Trade, including that only day trading was permitted and that the value of open orders on the market at any given time had to be below a specified ceiling. Remuneration was a percentage of trading profits, calculated monthly.
3. During 2005-2007 Mr Schlaepfer and two partners conducted their own firm under the name Tri-Star Trading. This entity managed a number of other subcontractors to Barka, all of whom engaged in the same kind of share trading activity using the capital of Swift Trade. Tri-Star Trading received from Barka a percentage of the profits made collectively by all traders under Tri-Star Trading's management and distributed that percentage amongst the individuals.
4. From 2007 Mr Schlaepfer ceased his involvement in Tri-Star Trading and worked as a trader in Swift Trade's head office. At the request of one of the owners of the company he also undertook software development. In about 2009 or 2010 Mr Beck, an owner and principal of Swift Trade, paid "a fine, or settlement" to the Ontario Securities Commission for his failure to disclose, when questioned, that his father was the ultimate beneficial owner of his companies.
5. In 2010 Mr Schlaepfer, in the capacity of consultant, entered into an agreement with Mr Beck to advise on policies and procedures to address risks in Swift Trade's business. The risks under consideration were those of losing capital through trading and of infringing stock exchange rules. At Mr Schlaepfer's suggestion Mr Beck enlisted the assistance of Mr Hugo Kruyne, whom Mr Schlaepfer had known since 2004 and whom he regarded as very astute with respect to software systems for identifying and controlling risks, both with respect to capital loss and regulatory non-compliance. Mr Schlaepfer found that Swift Trade had no system for monitoring activities of its traders that might infringe market rules. He and Mr Kruyne examined hundreds of communications received from regulators around the world querying patterns of trading that appeared to involve manipulation by the technique known as "layering", as explained at [48] below.
6. Mr Schlaepfer and Mr Kruyne set up filters in Swift Trade's computerised order-placing system, designed to generate alerts if any of the patterns that had attracted regulators' enquiries should be repeated. Neither Mr Schlaepfer nor Mr Kruyne nor any of the traders that they had managed were the subject of any proceedings by regulators in connection with Swift Trade or its US licensed dealer, an entity named Biremis Corp.

Regulatory action against Swift Trade in the UK

1. From 2007 to 2011 Swift Trade was investigated by the Financial Services Authority (the "FSA") for alleged manipulation, by layering, on the London Stock Exchange ("LSE"). At that time the FSA was the statutory body with responsibility for regulating the financial services industry in the United Kingdom. The trading conduct investigated had occurred during calendar year 2007. On 6 May 2011 the FSA issued a final notice, accompanied by reasons, pursuant to which Swift Trade was fined £8 million for market abuse. The FSA found that throughout 2007 Swift Trade had systematically and deliberately engaged in manipulative trading by layering.
2. At par 2.2 of its reasons the FSA provided a definition of the offending activity, which is quoted at [48] below. The definition is to be understood against the background that on the LSE, as on the ASX, an order book for each stock is displayed on a screen available to traders and brokers. On one side are the bids; that is, offers to buy a given quantity of the stock at a nominated price. The identity of the trader placing the bid is not shown. At a particular time there may be, for example,

• a bid for 10,000 of the stock at 34¢;
• a bid for 5,000 at 33¢;
• a later-placed bid for 7,000 at 33¢ - and so on.

1. On the other side of the book the asks (offers to sell) are similarly displayed. There might be

• 15,000 of the stock at an ask of 36¢;
• 2,000 at 37¢;
• 5,000 at 38¢ - and so on.

1. Bids and asks of the above nature are referred to generically as "limit orders", being offers to transact at a price which is specified or "limited". It is open to a trader at any time to execute a trade by placing a "market order", crossing the spread between the highest bid price and the lowest ask price to meet the terms of one of the limit orders resting on the order book. In the above example this might be done by a buyer executing a trade at the most favourable (lowest) ask price thereby purchasing all or some of the 15,000 shares on offer at 36¢. In completing this transaction the buyer would exceed the price of the highest bid amongst the resting limit orders on the book, being the bid for 10,000 at 34¢.
2. Paragraph 2.2 of the FSA's reasons of 6 May 2011 is as follows: Layering involves entering relatively large orders on one side of the LSE order book … , which has the effect of moving the share price as the market adjusts to the fact that there has been an apparent shift in the balance of supply and demand. This is then followed by a trade on the opposite side of the order book which takes advantage of, and profits from, the share price movement. This is in turn followed by a rapid deletion of the large orders which had been entered in order to cause the movement in price, and by a repetition of this behaviour in reverse on the other side of the order book. Swift Trade placed the large orders in order to give a false and misleading impression of supply and demand. The large orders were not intended to be traded. They were carefully placed close enough to the touch price (i.e. the best bid and offer prevailing in the market at the time) to give a false and misleading impression of supply and demand, but far enough away to minimise the risk that they would be executed. They were deleted in seconds in order to further minimise the risk that they would be traded. The trading activity caused many individual share prices to be positioned at an artificial level, from which Swift Trade profited directly.
3. In the example given at [45] and [46], this pattern would involve Swift Trade having placed the ask of 36¢ for 15,000 of the stock and also placing numerous relatively large bid orders at, for example, 33¢ and 32¢. These bid orders would be far enough away from the ask price to be unlikely to be executed but would create the impression to other traders that there was an accumulating demand in excess of supply. That impression would induce another trader to purchase the stock offered by Swift Trade at 36¢. The selling price would thereby have been pushed up artificially to the advantage of Swift Trade. Swift Trade would then remove all the layered orders it had placed on the bid side, which it had never intended to execute.
4. In further illustration of the FSA's definition, in this example Swift Trade would have sold at the inflated price of 36¢ and would now reverse the process so as to position itself to buy at, say, 35¢. It would place a bid for a quantity of the stock at 35¢ and proceed to layer up relatively large volume asks on the opposite side of the order book at, say, 36¢ and 37¢. The volume of stock being offered for sale on the ask side would create the impression amongst other traders that supply exceeded demand and would cause a seller to cross the spread and execute a sale to Swift Trade on its bid at 35¢. Having bought at this favourably and artificially low price Swift Trade would then cancel the numerous asks that it had placed. As with the layered bids in the first phase of the manipulation, Swift Trade would never have intended to execute trades on its layered asks in the second phase.
5. It will be apparent from the above description that in carrying out this strategy the trader necessarily must place a number of resting limit orders on one side of the book, none of which results in a trade. When a single trade has taken place at the artificially induced price all of the layered limit orders on the opposite side of the book are removed. A tally at the end of the day will show that the trader has placed a very large number of orders, most of which have come to nothing, for only a handful of executed trades. This is referred to as the Order to Trade Ratio. It is a metric that in conjunction with other indicia may be regarded by surveillance and compliance professionals as evidence that layering has taken place.
6. The following further extracts from the FSA's reasons are relevant to the issues in the present case: 2.4 The FSA regards this as a particularly serious case of market abuse for the following reasons: (1) the manipulative trading was deliberate, was intended to create a false or misleading impression and an artificial share price and was undertaken to achieve a profit; (2) the manipulative trading was widespread and systematic. It was repeated on many occasions and in many different shares on the LSE over [calendar 2007]; (3) the manipulative trading was undertaken by many individual traders, sometimes acting in concert with each other, and was widespread across many trading locations worldwide. Swift Trade disseminated this trading strategy to individual traders and trading locations; (4) Swift Trade profited substantially from the trading to the detriment of other market participants; (5) although Swift Trade became aware in March 2007 that the LSE had raised concerns regarding the trading activity, not only did Swift Trade continue its manipulative trading, it also actively sought to evade restrictions on the trading. It refined the trading pattern which made it less easy to detect, it purported to impose effective controls on the trading when this was not the case, and it took steps to avoid regulatory scrutiny by changing its Direct Market Access ("DMA") provider; (6) while the price movements which Swift Trade caused were short term, they still operated to the detriment of other market participants at the time of trading. Further, the trading activity had significant market impact for a prolonged period in a variety of FTSE 100 and FTSE 250 stocks because it was widespread, systematic and repeated. The volume of the manipulative trading was large enough to misrepresent the overall liquidity on the order book for the shares in question and to deter genuine liquidity providers from trading when they perceived that manipulative trading was being undertaken; (7) the manipulative trading disrupted and distorted the price formation process; and (8) conduct of this kind, if unchecked, could undermine market confidence.
7. The FSA's reasons continued as follows: 2.7 The trading activity involved placing individually or cumulatively large orders to buy or sell shares on the order book, the majority of which orders were subsequently cancelled without being executed. Relatively small orders were placed on the opposite side of the order book. The large orders gave the impression of substantive demand for, or supply of, the shares and had the effect of moving the share price such that the smaller orders entered on the other side of the order book became more attractive and were executed, at which point Swift Trade's large orders were rapidly cancelled. Swift Trade profited from the small price movements which followed such orders by buying after triggering a fall and selling after triggering a rise in the share price. 2.8 The large orders were not intended to be traded and were very unlikely to be traded because of the combination of their size, their distance from the touch price and their short duration given their rapid cancellation. They created a false impression of supply of or demand for, or price of, the shares in question as there was no intention to trade at the prices and in the quantity stated. The purpose of the large orders was to trigger share price movements from which Swift Trade could profit. 2.9 Individual price movements were small. However, the trading activity created a distinct movement of the price first one way and then the other. This movement was created by Swift Trade which was then in a position to gain an advantage over other market participants by trading in response to the price movement it had caused. By repeating the pattern many times a day and in a large number of shares across a range of market sectors, the small benefit from each individual price movement was magnified. … … 4.11 [In 2007] Swift Trade operated a network of over 50 customers based in over 150 trading locations worldwide, which in turn engaged over 3,000 traders as independent contractors. These traders engaged in day trading and were not permitted to hold positions overnight. During the Relevant Period, none of the trading locations which engaged in the manipulative trading were in the United Kingdom. 4.12 The manipulative trading activity was ostensibly conducted independently of Swift Trade by traders retained by its customers, with Swift Trade providing the trading platform and required connectivity to the LSE. However, Swift Trade directed and controlled the manipulative trading activity in the following ways: (1) Swift Trade actively disseminated the trading strategy to individual traders and trading locations; …
8. The reference at 4.11 to "customers" is to entities that engaged individual traders as independent contractors. Under contractual arrangements between the customers and Swift Trade, the individual traders were permitted to use Swift Trade's capital, its computerised systems for electronic placement of trades and its relationships with brokers who provided direct market access.
9. At paragraphs 4.17-4.26 the FSA summarised its interaction with Swift Trade during 2007. It had expressed concerns regarding manipulative trading to the company's DMA provider in March 2007. Swift Trade responded by contending that the activity was legitimate and that "traders were merely reacting quickly and independently to changing market conditions". The company purported to impose controls on its traders and represented to the DMA provider and to the LSE that it had done so. The FSA found that no effective controls had been imposed despite Swift Trade having the necessary technical capabilities and resources.
10. In June 2007 Swift Trade's DMA provider imposed its own controls, including a minimum time during which orders were to be left on the order book, a restriction upon the number of open orders per trader per stock and a limit on the size of individual orders. This resulted in the manipulative trading evolving, with a small number of very large orders being placed instead of a large number of smaller orders. The changed trading pattern was more difficult to detect however the DMA provider's measures hampered the traders' manipulative activities significantly. The provider suspended Swift Trade on 31 May 2007 and 20 June 2007 and "switched off" Swift Trade's access to the LSE in September 2007.
11. Swift Trade then commenced to use another DMA provider, from October 2007. It continued manipulative trading with the new provider, not informing it of the restrictions and controls that the previous provider had imposed or of the concerns that had been raised by the LSE. Modifications were made to the manner of trading, making the manipulation more difficult to detect. The second DMA provider withdrew Swift Trade's access to the LSE on 4 January 2008, at the request of the Exchange. The FSA drew the following conclusions: 4.24 Swift Trade was able to suspend or terminate access by individual traders or trading locations to the LSE and other exchanges. Despite the continuing and escalating concerns expressed, Swift Trade failed to take any effective action to stop the manipulative trading, which was not limited to isolated offices or individual traders. Rather, Swift Trade and Peter Beck instructed traders to trade in a way designed to avoid detection by regulators. The manipulative trading was undertaken by many individual traders, sometimes acting in concert with each other, and was widespread across many trading locations worldwide. … 5.33 The FSA finds that Swift Trade did direct the manipulative trading activity. The FSA rejects the assertion that Swift Trade did not have any involvement in the trading activity except as an electronic order router. Instead the FSA considers that the only credible explanation for the utilisation by a wide range of Swift Trade customers across a wide range of geographical locations and time zones of the same, highly unusual, trading strategy was that Swift Trade was directing and controlling the trading activity. Furthermore the FSA finds that there is clear evidence not only that Swift Trade was aware that 'layering' was occurring but also that it had disseminated this trading strategy having identified this as an effective way of manipulating the market. 5.34 … The FSA considers that despite the outward appearance of independence between Swift Trade and its customers … the true position was that Swift Trade was involved in the direction and control of these entities. Swift Trade was able to exert influence, through contracts with customers, which demonstrate that it had not relinquished control of the trading of these customers. The control which Swift Trade had as a result of contracts with its various customers was augmented by the close links between Swift Trade and personnel employed by its customers. The FSA considers that Swift Trade had a significant incentive to maintain control over the trading activity of its customers as it took a substantial portion of the trading profits of these customers. The FSA finds that these connections between Swift Trade and its customers give rise to the compelling inference that the unusual layering activity seen in this case was disseminated and utilised at Swift Trade's direction. 5.35 Furthermore the FSA considers that the opaque business model adopted by Swift Trade and its attempts to evade regulatory scrutiny or control demonstrate that Swift Trade was knowingly and deliberately engaging in market abuse. ... These efforts to evade any effective restraint being put upon the layering activity were accompanied by a business structure that was designed to shield Swift Trade from robust scrutiny and to thus ensure that the trading could continue. 5.36 The FSA finds that the evidence, set out in the paragraphs above, of Swift Trade's involvement in facilitating, disseminating and directing the abusive trading strategy is further bolstered by certain internal communications at Swift Trade and an account given by a former employee when interviewed by the [Ontario Securities Commission]. Various internal communications at Swift Trade provide clear evidence that the management of Swift Trade were not only aware that layering was occurring but that they were urging traders to continue making profits whilst endeavouring to evade drawing any regulatory attention to their activities. This evidence is complemented by comments in interview made by a former employee of Swift Trade in which he describes the efforts that the management of the firm made to disseminate the trading strategy.

Regulatory action against Swift Trade in the USA

1. Mr Schlaepfer continued his consultancy to Swift Trade until 2011. By that time the company had approximately 5,000 traders, organised in about 250 pods, all of them day trading on stock exchanges around the world with Swift Trade's capital. Following FSA's action in 2011, Mr Beck, Swift Trade and related entities were the subject of formal allegations by the Ontario Securities Commission in 2012. The Commission alleged widespread failures of record-keeping, failure to supervise traders and numerous other defaults, amounting to a "culture of non-compliance". The complaints were settled by an agreement of 20 June 2012 under which, inter alia, Swift Trade and Biremis Corp were prohibited for six years from trading in securities in Ontario and Mr Beck was prohibited for two years from being a director of any securities trading entity.
2. Mr Beck and Biremis Corp also faced regulatory action in the United States, for lack of supervision of their traders that had resulted in layering and market manipulation. They were expelled by the Financial Industry Regulatory Authority of the United States ("FINRA") on 31 July 2012. In December 2012 Mr Beck, Mr Kim (a co-owner of the businesses) and Biremis Corp agreed to a lifetime ban from registration in the securities industry in the United States.

Transfer of Swift Trade's business to Select Vantage

1. In mid-2011 Mr Schlaepfer was of the view that Mr Beck could not continue to conduct the business of Swift Trade following the FSA's decision. Mr Beck apparently accepted this. The two of them agreed terms on which Mr Schlaepfer would take over the business. The following transactions were entered into: 1. Subject to a selection process described at [61] below, traders and managers who had been contracted to Swift Trade or to an intermediate entity, were engaged by Elite Vantage Placement Ltd ("Elite Vantage"). This company was under Mr Schlaepfer's control and direction. Traders within Canada were engaged as independent contractors to Elite Vantage and traders elsewhere in the world entered into employment with that company. On 1 January 2013 Elite Vantage entered into a Trader Services Agreement with Select Vantage, pursuant to which Elite Vantage agreed to engage traders and make them available to trade Select Vantage's capital on stock markets worldwide. 2. The traders were required to sign agreements that they would comply with the trading rules and regulations of the exchanges on which they operated (see [62]-[65] below) and "some compliance training" was given by a company in the Select Vantage group. 3. On 1 January 2013 Select Vantage entered into a Services Agreement with Omira Corporation SA ("Omira") pursuant to which Omira was required to operate a website called "DayTradetheWorld". Marketing information was provided on the website to anyone interested in becoming a trader of Select Vantage's capital. Omira was also required to host training sessions for managers of traders, provide service support for managers and trainers and impose risk controls to protect Select Vantage's capital. Omira's issued capital is owned by the same trust - of which Mr Schlaepfer is the sole beneficiary - that owns all of the shares in Select Vantage. 4. From 2013, computer servers in New Jersey, Hong Kong and London were used by Select Vantage to interface with providers of direct market access for the placement of orders on stock markets. I infer that either the use of these servers was taken over from Swift Trade or that Select Vantage made independent arrangements for the use of the servers commencing in 2013. 5. Red Flowers Technologies Inc ("Red Flowers") and Orbixa Technologies Inc ("Orbixa"), companies of which Mr Beck was the principal, owned or had rights to a program for placing stock market orders through the abovementioned servers. The program was called ProsperPro or, in one version, PPro8. On 1 January 2013 Red Flowers entered into a Technology License Agreement with Select Vantage pursuant to which a license to use the above software was granted for an initial term of 20 years. The Agreement defined Net Trading Revenue as gross revenue less brokers' fees and regulatory charges. A monthly royalty was payable to Red Flowers at the rate of 5% of Net Trading Revenue derived from US markets and 10% of revenue from all other markets. A second Technology License Agreement was entered into on the same date and in the same terms between Orbixa as licensor and two of Mr Schlaepfer's Canadian companies. 6. Red Flowers also owned a program for back-office record-keeping to account for stock exchange transactions (called, in 2001, Back Office Portal and later renamed Metro) and a proprietary software tool to manage and avert wash trading amongst the traders (called Rosemary). As Mr Schlaepfer explained: [A]ll trades [by Swift Trade's traders] are going to the market with the same beneficial owner. So as two traders inadvertently trade with each other, they've effectively traded stock on the stock market where there was no change in beneficial owner. Mr Schlaepfer said this would amount to wash trading, which is prohibited. It was necessary to have software which would raise alerts if it should occur. Select Vantage entered into a license agreement with Red Flowers in order to use the Rosemary software for this purpose. It had the capability automatically to cancel or reduce the size of an order to prevent it resulting in a wash trade. 1. Mr Schlaepfer acquired Merlito from one of the co-owners of Swift Trade. This company had a broker's licence in the United States. 2. Neither Mr Beck nor any other person who had an ownership interest in Swift Trade obtained an interest in Select Vantage or in Merlito. Apart from the agreements for licensing software from Mr Beck's companies, the only residual business relationship between Mr Beck and Mr Schlaepfer and the Select Vantage group of companies is that the latter hold leases of some office space in a building owned by a Beck company.

Compliance obligations of Select Vantage's traders

1. During the process of Select Vantage taking over the business of Swift Trade, commencing in 2011, Mr Schlaepfer identified traders (including managers of locations or pods) whose actions had been the subject of regulatory inquiries and warnings directed to Swift Trade. Those traders were not taken on by Mr Schlaepfer's new entity, Elite Vantage. He gave evidence that he also caused "even more conservative checks on manipulative behaviour" to be incorporated into Select Vantage's monitoring systems. Traders who infringed these "even more conservative checks" were "just fired" and, consequently, were not offered contracts with Elite Vantage. Mr Schlaepfer gave no details of the additional "checks on manipulative behaviour" or of their efficacy in identifying traders who had a propensity to infringe market rules. The selection process resulted in about 1800, or 40%, of Swift Trade's traders moving across to the Select Vantage group.
2. Canadian traders who were engaged to trade using Select Vantage's capital were required to enter into an Independent Contractor Agreement with Elite Vantage. In Section 6 of this Agreement the responsibilities of the trader were stipulated, including: (d) complying with: (i) all policies and procedures established by Elite Vantage from time to time, including the Compliance Agreement, as may be amended from time to time; and (ii) all instructions of the Manager that are not inconsistent with (i); and (e) complying with all applicable Laws and marketplace rules and the applicable terms of this Agreement and ensuring that any and all persons under the Independent Contractor's supervision at the Trader Location, if applicable, comply at all times with all applicable Laws and marketplace rules and with the terms of this Agreement.
3. The Compliance Agreement referred to in par (d)(i) of Section 6 of the Independent Contractor Agreement was a separate document. It included the following: You have trading access to various marketplaces around the world through one or more of Select Vantage [and related entities] (the "Select Group"). As a condition of such access, you must comply with all applicable marketplace trading rules, and all applicable regulations issued by the authorities that regulate such marketplaces. The Select Group will use their best efforts to make available to you links to the applicable trading rules and regulations. However, it is ultimately your responsibility to know these rules and regulations before you trade. In particular, you agree that you SHALL NOT: 1. Intentionally engage in wash trading. A "wash trade" is a trade in which there is no change in the beneficial ownership of the securities. Under no circumstances should you try to execute against your own posted orders or against the orders of another trader trading through Select Group. 2. Intentionally engage in team trading. "Team trading" involves two or more traders co-ordinating their trading activities, so that they actually trade as a team while giving the appearance of trading as separate individuals. In many countries, team trading can be considered fraudulent trading. To be safe, you should not discuss your specific trading intentions with other traders. 3. Intentionally manipulate the opening price or closing price. This includes sending either large orders or multiple small orders around the time of market open/market close, which are intended to improperly impact the opening/closing price.
4. Traders outside Canada were employed by Elite Vantage under an Employment Agreement, which included the following terms: I.1 The Employee shall, on behalf of Elite Vantage and/or its affiliate(s), place orders to buy and sell securities … and execute trades from out of the Office Location subject to (i) the terms and conditions hereof, (ii) all applicable Laws (including securities regulations and marketplace rules) … I.2 "Laws" means any and all applicable laws, including … policies, guidelines and … any and all applicable self regulatory organisation or securities regulatory authority requirements … II.1 The Employee shall only utilise the order execution system permissioned to him from time to time by Elite Vantage and the [location manager], which shall be accessible only at the Office Location. … II.2 The Employee acknowledges that Elite Vantage and its affiliate(s) are subject to securities regulations and marketplace rules governing trading on the markets which the Employee will access. The Employee acknowledges and agrees that failure to comply with any securities regulatory requirements communicated to him from time to time, or that he reasonably ought to have been aware of, may result in sanctions ranging up to immediate termination.
5. Mr Schlaepfer said that throughout 2013 and 2014 all managers of locations were bound by a schedule of Manager Duties to Ensure Trader Compliance. That document required that the managers should ensure their traders did not communicate their specific trading intentions to others. Managers were directed to forbid traders from using cell phones or other devices that would enable them to communicate with other traders. The managers were also required to enforce the rule that traders must be in the office location when active and to ensure that no trader's unique identification number was used by any other person.

Transaction constraints on Select Vantage's traders

1. Mr Schlaepfer gave evidence that the limitations imposed by Select Vantage and Elite Vantage on traders in its system were as follows: 1. day trading only; 2. compliance with "applicable rules and regulations", as per the Compliance Agreement (see [63] above); 3. no trading in prohibited stocks, a list of which was issued and updated by Select Vantage (or a related entity) from time to time; 4. a limit on the total value of orders that a trader could have open at any time, variable from $10,000 up to $20 million for a highly experienced trader in the US market; 5. a limit on trading losses for a single day, variable between traders; 6. each trader was only permitted to place and to have open at any time two resting orders per side of the order book on a particular stock (or "symbol") on any exchange, "unless [the trader] had more experience and the strategy [warranted] it", in which case if the trader could explain a strategy and justify exceeding the limit of two open orders per side, exemption would be granted.
2. Mr Kruyne said with respect to the limitations in (6) that, in Australia during August to November 2014 that permissible number of resting orders became five per side per stock per exchange. Some of the above limitations were enforced by automated functions of Select Vantage's ProsperPro software. For example with respect to limitation (4), an attempt by the trader to place an order that would take the total of his or her open orders over the trader's applicable limit would simply be blocked. The order would not go through. Similarly with respect to limitation (5), once a trader had incurred losses for the day up to his or her limit, any attempt to place further orders would be automatically rejected. Likewise with respect to limitation (6), an attempt to place an additional limit order on either side of the order book for a particular stock on an exchange would fail and an error notification would be displayed on the trader's screen.

Training, methodology and remuneration of Select Vantage's traders

1. Mr Schlaepfer said that managers of locations had responsibility for hiring traders, providing basic training on the use of the software through which trades were carried out, giving basic instruction on how the markets worked and providing access to Select Vantage's market simulator as the final stage of preparation. He said that traders were given: some small learning lessons on the mechanics of how a market works, what a rebate was, some basics on tactical analysis, some basics on understanding the correlation between a stock and the futures market, but very rudimentary, basic courses … [T]hen they would look at those lessons and … first they would practice on our simulated environment and then they would move on … to the actual markets.
2. Commencing in 2012 or 2013 Select Vantage prepared instructional videos for managers and traders explaining how day trading could be successfully carried out within the regulated framework of stock markets. These videos concerned individual topics and were referred to as "modules". They were prepared in English and "a large subset" were also in Mandarin, Spanish and Russian. These modules were distributed to the pods for the use of managers in instructing traders.
3. Mr Schlaepfer described the techniques "ordinarily used by traders to take advantage of the gap or the spread between bids and asks in the market", in these terms: [S]pread capture involves bidding and offering on either side of the book, or bidding or offering on one side of the book until you're filled and then trying to get out on the other side of the spread to capture that spread.
4. He used the term "spread capture" interchangeably with "market making" to describe the above process. He said that this was discussed with prospective traders "as a basic high level thing [that] could be done". I infer that such discussion was part of the basic instruction provided by the managers. Despite the seemingly technical terminology, Mr Schlaepfer agreed that the trading procedure he had described came down to buying stock at a price, waiting until it could be sold at a slightly higher price and then selling.
5. He said that it was important in day trading to have the ability to "go short", that is, to sell a particular stock without having previously acquired a quantity of it with which the sell transaction could be completed. This could be done where the broker had an inventory of the stock that the trader could borrow in order to be able to enter into a sell transaction, with a view to purchasing replacement stock at a later point in the day's trading at a lower price and returning this to the broker's inventory. Mr Schlaepfer defined the term "locate" or "short-locate" as meaning an indication from the broker that inventory of the particular stock was available and could be borrowed, thus enabling the trader to "go short".
6. The arrangement for remuneration was that each manager was paid, monthly, 83% of net revenue generated by the activities of all traders in the location or pod. Distribution of this share of the revenue amongst the traders was in the discretion of the manager.
7. Mr Schlaepfer himself does not trade on the stock market with Select Vantage's capital and he did not in 2012-2014. He also does not (and did not) communicate directly with traders about their trading decisions, apart from dealing with managers in relation to alerts raised by the Ginger monitoring system, described below.

Select Vantage in-house screening of traders' activities

1. When Select Vantage commenced to operate the business it implemented software under the name "Ginger", which Mr Schlaepfer described as a surveillance tool. This had the capacity to read the "receipts of transactions" that were carried out by traders and to screen them with filters designed to reflect "rules and regulations around the world". Mr Schlaepfer explained the "receipts of transactions" as being the whole dataset of trading messages sent electronically to brokers to effect transactions and messages from brokers by way of acknowledgement. The Ginger software would generate alerts if the application of the filters identified transactions that met the program's criteria for infringement of relevant trading rules. The alerts would then be followed up "by human investigation". Mr Kruyne's evidence referred to later in these reasons shows that the Ginger criterial for alerts were too narrow to identify a significant range of non-compliant trading.
2. In 2014 Select Vantage had about 1,800 traders around the world. They placed approximately 400,000 orders per day, that is, bids, asks and cancellations. The data for all of these was run through the Ginger software continuously. If alerts were generated the software enabled the trader and his or her location to be identified immediately. A surveillance team within Select Vantage was assigned to review the alerts and if examination of the trading data appeared to warrant further enquiry the traders concerned would be contacted for an explanation.
3. Each trader location was issued with an item of computer hardware called a cube. Select Vantage applied a policy that every trader must be in the office of the location to which he or she was attached when trading. This was achieved by requiring that any computer used by a trader to access Select Vantage's system for placing stock market orders would have to be connected to the cube in the trader's location. Mr Schlaepfer gave evidence that this effectively ensured that traders were in their respective location offices when trading because they would not be able to transmit and receive data swiftly enough for day trading purposes if they attempted to connect to the cube wirelessly from outside the office.
4. Mr Schlaepfer agreed that a number of traders in the one pod, all working close to each other in a single office, could cooperate between themselves to place a substantial number of resting limit orders for a stock listed on a particular exchange, in order to carry out a layering strategy. This would subvert the individual trader limit of two or five orders per side per symbol at any one time. Mr Schlaepfer said that the Ginger in-house surveillance software looked for "exactly that" and was configured to raise an alert if this collaborative trading was identified.

Select Vantage's infringement on the Tokyo exchange in 2012

1. Select Vantage was trading on the Tokyo stock exchange in 2012. In that year the Japanese regulatory authority, the "SESC", identified that Select Vantage traders were trading between the two pods in an attempt to manipulate the market. Twenty traders were involved, all located in China. Select Vantage was fined the equivalent of $500. It terminated the services of all of the traders. Select Vantage's broker, Morgan Stanley, suspended the company's access to the Tokyo market for six months while it carried out a full review of its own compliance systems to verify their capacity to identify trading behaviour of the kind that had attracted the regulator's attention. According to Mr Schlaepfer this review involved applying the broker's vetting system to every trade that Select Vantage had carried out using the broker's access to all markets.

Select Vantage's trading on the Australian market through Morgan Stanley

1. On 18 February 2014 the Japanese SESC recommended a penalty against Select Vantage for manipulating the price of shares in two listed companies "by placing large orders and cancelling them before they could be executed". The authority alleged that there was similar manipulative trading in a total of 88 other stocks. All of this was alleged to have occurred in April 2012.
2. On 4 August 2012 Merlito entered into an agreement with Morgan Stanley for direct market access to the ASX and Chi-X. About half of Select Vantage's traders were domiciled in China and because of the closeness of the two countries' time zones many of them traded on the Australian market.
3. On 10 October 2013 Morgan Stanley received from ASIC a direction under s 912C(1) of the Corporations Act to provide a written statement concerning trading in the shares of Eden Energy Ltd ("EDE") on 7 October 2013. ASIC required Morgan Stanley to provide the full names and contact details of the account-holders (and underlying beneficiaries) for whom orders had been placed and trades carried out in the stock under direct market access through Morgan Stanley. The dealings had been effected by Select Vantage traders through Merlito. ASIC enquired whether Morgan Stanley had concerns about the dealings: with specific regard to the multiple orders at the same price levels and consequently multiple price levels on the order book throughout [7 October 2013], especially given volumes on the buy side were large in comparison to the sell side whilst the volumes sold were greater than that acquired.
4. On 27 October 2013 Mr Kruyne prepared on behalf of Select Vantage a detailed written analysis of the trading in question, in which he argued that the transactions were consistent with legitimate day trading strategy. He referred to Select Vantage's surveillance system, which he said had a focus on, inter alia, layering. Morgan Stanley attached Mr Kruyne's analysis to its response to ASIC dated 1 November 2013. Morgan Stanley said it operated its own "real-time risk management tool" for monitoring trade flow by its clients. This had not generated any alerts that, on examination, were of concern. Morgan Stanley advised that the trades in question had been placed by 91 individual traders spread across 19 locations and that it had assurance from Merlito that "no trader can see what the other traders are trading". The broker said Merlito's real-time trade surveillance did not generate any alerts with respect to the trading in EDE. It referred to the post-trade surveillance and analysis in Mr Kruyne's email, from which it said Merlito and Select Vantage had satisfied themselves of the appropriateness of the dealings.
5. On 6 November 2013 a Final Enquiry File note was prepared by the Market Surveillance Team within ASIC, recording the following conclusions: Surveillance notes that the orders which [Select Vantage] place appeared genuine at this time, as they do not appear to be layering or spoofing. These orders sit in the market and wait to be picked up by the increase in liquidity and/or volatility of certain securities on certain days. They are only deleted toward the end of the day as [Select Vantage] attempt to entirely close their positions. There is insufficient evidence of the reference stacking one side of the schedule while attempting to trade on the other side. Based on the above, no more action is recommended.

Select Vantage's infringement on the Tokyo exchange in February 2014

1. Mr Schlaepfer told this Court that the Japanese SESC also took action in 2014 for conduct that he described as traders purposely influencing an auction conducted on the Tokyo exchange at a lunchtime break in trading. This appears to have been an entirely separate episode from that referred to in the previous paragraph. Mr Schlaepfer said that Mr Kruyne on behalf of Select Vantage had brought the relevant features of the trading in 2014 to the attention of Morgan Stanley before the SESC had queried it. Morgan Stanley saw no irregularity in what was occurring and said "it was okay to continue the behaviour as is". The Japanese authority saw the matter differently and in 2017 a fine of US$180,000 was imposed. Mr Schlaepfer said that this is under appeal.

Termination of Select Vantage's relationship with Morgan Stanley

1. Up to 2014 Morgan Stanley was Select Vantage's broker on more than 20 stock exchanges around the world. The parties' relationship was governed by a global prime brokerage and execution agreement that was terminable at will. Mr Schlaepfer gave evidence that in early 2014 Morgan Stanley became concerned about adverse publicity "regarding the use of a product that Morgan Stanley had built" named Speedway. Neither the nature of the product nor the basis of Morgan Stanley's concern was explored in Mr Schlaepfer's evidence. He said, however, that Select Vantage and a number of other clients of Morgan Stanley were using this product. Mr Schlaepfer said that because of Morgan Stanley's concern about the product and publicity around it, the managing director in charge of worldwide trading informed him in early 2014 that Morgan Stanley proposed to close the accounts of Select Vantage and 40 or 50 other clients. Select Vantage was by far the largest of these.
2. Mr Schlaepfer said that the transfer of Select Vantage's business to another broker could not be effected instantaneously because the number of markets on which the company traded worldwide made it difficult to find a replacement. Morgan Stanley's electronic trading systems were uniform around the world and this simplified their interface with Select Vantage's systems. To replace Morgan Stanley, Select Vantage entered into broking and DMA agreements with different brokers in different regions. This required time because Select Vantage's systems had to be adapted to the systems of a variety of brokers. Mr Schlaepfer said that in recognition of these difficulties, Morgan Stanley allowed Select Vantage until the end of 2014 to complete the transition.
3. Up to the termination of Select Vantage's relationship with Morgan Stanley on 20 August 2014, Mr Schlaepfer said there had never been any enquiry to his company concerning the appropriateness of its traders' conduct on the Australian markets, apart from the EDE issue referred to at [82]-[84] above. He said that no suggestion was made by Morgan Stanley that Select Vantage had acted unlawfully or inappropriately in its trading. He said that the long lead time allowed by Morgan Stanley for transfer of Select Vantage's business substantiates this.
4. However, evidence considered later in these reasons shows that in early June 2014 and early July 2014 the International Bankers Association of Japan published reports of the Japan SESC's findings that Select Vantage had engaged in manipulative trading with respect to 90 stocks on the Tokyo Exchange. The termination of the broking relationship with Morgan Stanley followed soon after. In cross-examination Mr Schlaepfer denied any connection. The evidence does not enable me to decide on the balance of probabilities whether Morgan Stanley withdrew its broking services by reason of the SESC's adverse decision and/or upon its own negative assessment of Select Vantage's compliance with stock market regulation. I am satisfied that, in circumstances recounted below, Mr Veidners and Mr Yanco came to believe that Morgan Stanley had made its decision on the basis of regulatory concerns.

Select Vantage's trading on the Australian market through Macquarie

1. In mid-2014 Mr Schlaepfer was introduced to Mr Stuart McWilliam, Head of Equities Execution at Macquarie, and commenced discussions about that firm providing and DMA for Select Vantage's trading activities, through Merlito, on the Australian market. He said that he informed Macquarie of the circumstances in which Select Vantage's relationship with Morgan Stanley was being terminated, as he described them (see [86] above) Macquarie Securities could not handle Select Vantage's business worldwide.
2. On 22 July 2014 Mr Schlaepfer informed Macquarie by email of the regulatory action that had been taken by the Japan SESC in February 2014. Macquarie treated this as immaterial. Negotiations and due diligence were completed by mid-August 2014, at which time Merlito entered into an agreement with Macquarie for the provision of broking services and DMA. Select Vantage's traders would effect their trades on the Australian markets through Merlito which would in turn obtain direct access via Macquarie as a licensed Market Participant. On 19 August 2014, prior to commencement of trading under these arrangements, Mr Kruyne gave a presentation to Macquarie's senior compliance personnel. He explained the pre-trade and post-trade controls configured into Select Vantage's electronic trading software. These were said to be designed to detect potentially manipulative activity. On 22 August 2014 Merlito/Select Vantage commenced trading on the ASX and Chi-X utilising the DMA services of Macquarie.
3. On 17 September 2014 Macquarie initiated a meeting with ASIC surveillance personnel Mr Tom Veidners and Mr Darryl Harvey to discuss Merlito. The subjects covered included the Japanese regulatory action, the earlier disciplinary action against Swift Trade, Mr Schlaepfer's purchase of the business from Mr Peter Beck and conduct of it through Select Vantage and the controls incorporated in Merlito's software that had been demonstrated by Mr Kruyne to Macquarie. On behalf of ASIC Mr Veidners raised a concern "that it appeared that there [had been] multiple bids and offers at the same price points" and Mr Harvey questioned whether Select Vantage's traders could be "acting in concert".
4. On 13 October 2014 there was circulated amongst Macquarie's Australian compliance personnel a report dated 6 June 2014 from the International Bankers Association of Japan and an amended version of the report dated 9 July 2014. These are the reports referred to at [89] above. On about their respective dates of issue they had been distributed globally within Macquarie by its personnel based in Japan. The reports stated findings of the Japan SESC regulatory authority concerning a recent instance of layering carried out by Select Vantage's traders. The regulatory authority had concluded that "a group of skilled professionals colluded" to manipulate the market using the layering technique. Although this communication was addressed to Macquarie personnel globally it is not clear on the evidence whether it was considered by Macquarie executives in Australia prior to the Australian entity concluding its agreement with Merlito and Select Vantage for DMA services.
5. Together with the International Bankers Association reports, there was also distributed within Macquarie on 13 October 2014 an internal report of that date concerning trading by Merlito/Select Vantage on Chi-X in Australia over the preceding seven weeks. This referred to alerts that had been triggered by electronic surveillance with respect to Select Vantage's trading. The report stated that since the commencement of trading on 22 August 2014: The Chi-XAU volume of alerts has risen exponentially: <7 per day to c. 1100 per day now. The increase is solely attributable to this client and the type of alert is exclusively layering. The Macquarie internal report also summarised the past association between Mr Schlaepfer and Mr Beck, the history of regulatory action against Swift Trade and the history of Japanese regulatory action against Select Vantage.
6. On 15 October 2014 Mr McWilliam of Macquarie emailed Ms French (the firm's Head of Compliance) regarding surveillance issues with respect to Merlito/Select Vantage. He expressed the view that the system for generating the alerts referred to in the memorandum of 13 October 2014 was crude and only "simplistically looks at number of orders on the same side of the order book for a single client". He said there had not been a single trading pattern that could be proved to be manipulative and that the system was "incorrectly flagging alerts".
7. On 23 October 2014 at a meeting of Macquarie Securities personnel in Sydney there was disagreement about whether Merlito/Select Vantage appeared to be manipulating the market and whether Macquarie's relationship with this client should be terminated. The decision of the senior personnel present at the meeting was that there was no justification for "turning the client off". That expression is used throughout the evidence to mean denying the client continued direct access, through Macquarie, to place orders and effect trades on the exchanges.
8. By 30 October 2014 Mr Matthew White, a senior manager in compliance at Macquarie, had drafted a Suspicious Activity Report with respect to Merlito/Select Vantage, for submission to ASIC. The draft stated that Select Vantage had advised Macquarie: that it may have between 750 and 900 traders active in the Australian market on a given day and that each trader runs their own trading strategy and operates independent to other traders.
9. The basis of Macquarie's suspicions regarding Select Vantage's trading activity was expressed in the following terms in this draft report: [Macquarie's] suspicions regarding the Client's trading are based on the following frequently exhibited trading pattern: Merlito sends large numbers of limit orders to the BID schedule of Chi-X at the priority BID price and other price levels in the BID schedule in multiple securities. In some instances this results in up to 70 limit orders resting in the combined BID schedule of ASX/ Chi-X for one security; and Whilst there are large numbers of resting orders in the bid schedule, Merlito often also has a small number of orders in the ASK schedule for the relevant securities. The net effect of these transactions is to create an imbalance in the order book giving rise to the possible appearance of excess buy-side demand for the [affected] securities, which in turn may create a floor in the price of those securities. In particular, the commercial purpose for the significant numbers of orders entered at prices which we consider to be materially away from the best BID is not obvious. This trading pattern may have the effect of inducing aggressive BID orders from other Market Participants and enable the Clients to profitably exit passively acquired long positions on market or through [Macquarie's] internal matching engine. There are also a number of instances where the Clients send significant numbers of limit BIDs in the same security at the best BID within fractions of a second. This trading pattern raises some uncertainty as to the independence of the underlying traders and/or their strategies. Most of the securities that the Clients trade each day exhibit the same trading pattern of BIDs being entered at multiple price points in order books of Chi-X and ASX. We note that this trading behaviour appears similar to the trading activity which was the subject of regulatory sanctions in Japan earlier this year.
10. One of the stocks referred to in this draft report as having potentially been impacted by this pattern of trading was the symbol MBN on 24 October 2014. On 30 October 2014 Mr White sent the draft to Ms French and to Mr Paul Packham.

ASIC's surveillance of Select Vantage's trading through Macquarie

1. During August and September 2014 ASIC monitored Select Vantage's trading through Macquarie and on a number of days of trading in particular stocks ASIC's surveillance personnel identified features of Merlito's trading that were considered abnormal and attracted closer examination by Mr William He. Mr He had worked for the ASX as a market structure analyst from February 2009 to March 2012. He joined ASIC in March 2012 as a policy analyst and continued in that position to June 2014. He occupied the position of Senior Analyst in the Market Surveillance Team from July 2014 to August 2018.
2. During August and September 2014 Mr He observed that on the limit order book of a number of stocks there were many resting orders, typically on the bid side, all placed by Merlito utilising direct market access via Macquarie. The identifier "6ZW" showed that those orders came through Merlito's account with Macquarie but whilst that was visible to ASIC it was not visible to the market. Mr He noted that these resting bid-side orders often caused a disproportionate contribution to order book imbalance. He had never seen trading like this before, including during his years at ASX, and he regarded it as highly abnormal.
3. On 17 September 2014 Mr He analysed the trading of Merlito/Select Vantage over the preceding week and calculated an Order to Trade Ratio of 4.598. He did not consider this particularly high in the context of possible layering conduct, however he took into account that the calculation had been made across the aggregate of all of Merlito's trading, including legitimate trading and suspected manipulative trading. In a report by Mr He dated 30 September 2014 this ratio was considered significant but not conclusive in relation to the trading of Merlito/Select Vantage in two particular stocks on 5 and 18 September 2014.
4. During October 2014 Mr He examined the market replay. This utilised a real-time recording of all orders placed and trades carried out. The recording was able to be replayed to facilitate analysis of the trading behaviour of participants. On 30 October 2014 Mr He reported that he had "found that the behaviour [of Select Vantage] extended to days around those dates [ie 5 and 18 September 2014]". Mr He ran his analysis over the surrounding weeks, as well. He found that Merlito, utilising direct market access via Macquarie with the identifier 6ZW, was "posting, cancelling and re-entering by far the most orders on the bid side of the book" in relation to the two stocks on the two relevant days.
5. Mr He considered that the stocks in which this pattern of trading was exhibited were "relatively obscure and illiquid". He considered whether there might be numerous independent traders conducting transactions using the capital of Select Vantage through Merlito's direct access via Macquarie. He considered it highly improbable that a significant number of such independent traders would have acted without coordination to place the resting bid orders observed, given the category of the stocks and the clustering in time of the resting bids, all of which remained un-traded and either lapsed at the end of the day or were cancelled.
6. On 31 October 2014 ASIC issued to Ms French at Macquarie a request for information pursuant to s 912E of the Corporations Act 2001. The request was for an "audit trail showing details of order entries, amendments, executions and cancellations" in the two stocks referred to above, for 5 and 18 September 2014, and also for a third stock for 8 October 2014. On 6 November 2014 the data requested was supplied in electronic form.
7. On 3 November 2014 Ms French sent an internal email to Mr McWilliam commenting upon Mr White's draft Suspicious Activity Report (see [97]-[99] above). Ms French expressed the view that Select Vantage's trading in MBN on 24 October 2014 had not created an imbalance in the order book and that the price of the stock had been driven up by the activity of retail buyers.
8. On 3 November 2014 ASIC issued to Macquarie two notices concerning its agreements and relationship with Merlito and seeking information concerning order activity and trades by Merlito in certain stocks during September and October. One of these notices invoked s 33 of the Australian Securities and Investments Commission Act 2001 (Cth), seeking the provision of documents. The other notice was under s 912C(1) of the Corporations Act and required provision of a written statement. These notices were responded to on 19 November 2014 but the responses are not significant to this narrative.
9. On 5 November 2014 Ms French sent an email to Mr Ritchie (Head of Cash Equities at Macquarie) and Mr McKeown (another Macquarie executive in Equities), providing a timeline of regulatory notices and discussions concerning Select Vantage since the commencement of the relationship. She sent a copy of this to Mr White under cover of an email of the same date, stating that "the business are starting to look at this client more holistically from a cost of business [point of view] and whether it's worth it". Mr White responded with a request for an update as to what had been done with the draft Suspicious Activity Report of 30 October 2014. Ms French replied that a staff member would "bump the notice through". On 7 November 2014 Ms French sent a critique of the Suspicious Activity Report to Mr Packham (Macquarie's Head of Compliance) and Mr McWilliam. This queried the Report's conclusions and implicitly indicated that it had not been sent on to ASIC by that date. The evidence does not establish to my satisfaction that the Report was ever sent to ASIC.
10. On 17 November 2014 ASIC surveillance personnel brought to Mr He's attention the trading and ordering activity of Select Vantage on that date in a stock with the symbol OIL. Mr He interpreted this data as reaffirming his view that Merlito was layering the market. On 18 November 2014 Mr He prepared an Initial File Note concerning suspected layering of the market by Merlito/Select Vantage in relation to "numerous securities" during "numerous trading days in September and October 2014". The significance of this Note in ASIC's procedures was that it initiated a formal enquiry into whether regulatory enforcement action should be taken. The Note was an internal document, not communicated to Macquarie or to Merlito/Select Vantage. It was initially sent to Mr Harvey and Mr Veidners both of whom were superior to Mr He in ASIC's Market Supervision area.
11. In this note Mr He reported that he had examined the order entry, amendment, execution and cancellation data that had been provided by Macquarie concerning Merlito/Select Vantage trading in three stocks over certain date ranges in September and October. The data had been supplied in response to ASIC's notice under s 912E issued on 31 October 2014. The Note states that: the ultimate order placers trading for Select Vantage are [a] large number [of] distinct individuals of Chinese origin. However, the intraday timing, direction and size of their order submissions demonstrate pronounced patterns of clustering intraday. Mr He explained what he means by "cluttering": see [192] below.
12. Mr He's Note referred to the regulatory action that had been taken against Swift Trade in the United Kingdom "for market abuse, specifically layering". The Note referred to Mr Schlaepfer's former prominent role as a trader in the Swift Trade business and to his status as a principal of Merlito and Select Vantage. The Note further stated: The modus operandi of Swift Trade is extremely similar to that of Merlito and Select Vantage, although the organisational structure and trading behaviours [have] evolved somewhat.
13. The Note concluded with the following recommendation: Surveillance recommends commencing a market manipulation enquiry into the order submission and trading practices of [Macquarie] and its client Merlito Securities Ltd.
14. On 18 November 2014 Mr Veidners replied in an email that included the following: Given what we are seeing in stocks such as OIL in the last few days, Merlito are dominating the market with scores of orders at each price step - at one stage today they had 70 to 80+ orders on the buy side with fewer than 6 orders on the sell side. We will need to consider how to stop/disrupt this conduct as a priority, whilst at the same time pursuing Enforcement referral and investigation.
15. Later on the same day Mr Veidners wrote to Mr He on the same subject, stating that ASIC needed to consider: Disruption or ceasing Merlito's activity via Macquarie asap. The ongoing level of layering is seriously threatening market integrity. Progressing [Market Integrity Rules] action against Macquarie. Given they have been aware of the potential manipulative activity, yet have not sought to amend or otherwise control Merlito's activity is concerning. With this in mind, could you please convene a meeting later this week with this group to discuss the above and any other relevant issues not covered above.
16. On about 19 or 20 November 2014 Mr He had a conversation with Mr Greg Yanco concerning his analysis and suspicion of Merlito's apparent layering activity. On 19 November 2014 Mr He prepared a draft briefing document on the issue and provided it to Mr Veidners. In this document Mr He expressed the view that Merlito "appeared to be layering the order books of numerous securities … for extended periods of time". He named six stocks as examples of where this had occurred. Mr He listed in this document the features of trading by Merlito that he considered indicative of layering, including the points noted in his Initial File Note referred to at [110]-[111] above.
17. In Mr He's briefing document he stated that initial results "suggest a positive correlation between the change in Merlito's contribution to order book imbalance and the mid-point price of relevant securities". He outlined the regulatory history of Swift Trade and Peter Beck and referred to their past association with Mr Schlaepfer. An "Order Book Snapshot" of OIL at 12:15pm on 19 November 2014 was attached, illustrating numerous resting orders placed by Merlito on the bid side and a small number of asks also placed by it.
18. On 19 November 2014 Mr Veidners forwarded Mr He's briefing document to Mr John Price, an ASIC Commissioner. He said in his covering email: We are currently analysing the large volume of trading data to determine if we can establish a manipulation case, however, we are very concerned that the level of layering may be creating a false and misleading appearance of active trading. It should also be noted that Morgan Stanley ceased providing trading access for Merlito in August of this year and Merlito then moved to Macquarie. I have left a message with Paul Packham [Macquarie's Regional Head of Compliance] asking him to call me to arrange a teleconference with both of us so that we can outline our concerns and suggest they may wish to review their provision of trading access for Merlito.
19. On 20 November 2014, at the request of Mr Veidners, Mr He forwarded to Mr Yanco a copy of the United Kingdom FSA's decision on layering by Swift Trade that resulted in the £8m fine imposed on that company, together with a copy of the Japanese SESC's decision of 18 February 2014 concerning Select Vantage manipulating the price of 90 stocks on the Tokyo exchange by layering.
20. Throughout September and October 2014 Mr Yanco had spoken frequently to Mr He and Mr Veidners and he had followed the development of their concerns that Select Vantage was layering bids on certain stocks on the ASX and Chi-X. Through October 2014 and up to 21 November 2014 Mr Yanco was aware of the notices that had been issued by ASIC to Macquarie seeking information regarding Select Vantage's trading. Mr Yanco reviewed the information forwarded to him by Mr He, from publicly available sources, concerning the history of Swift Trade, Mr Beck and Mr Schlaepfer. He inferred that the Japanese regulatory action against Select Vantage had caused Morgan Stanley to terminate its relationship with that client.
21. In oral evidence Mr Yanco said he came to the view during October and November 2014 that Select Vantage and Merlito were engaging in unlawful market manipulation and that Mr Schlaepfer was the controlling influence behind these entities and was himself engaged in such manipulation. He was pressed in cross-examination with the proposition that he had formed this view on the basis of the history of market misconduct by Swift Trade and Mr Beck, taking into account Mr Schlaepfer's former association with those parties. Mr Yanco rejected that. He gave these answers: A. I think the antecedents give us some clues as to what sort of - what we might be told or what might've come over in terms of behaviours that weren't […] really acceptable. But what's really important is the first part, which is the analysis of trading. Q. But the bit of the answer that you gave before that last sentence, would suggest, would it not, that the historical link between Beck and Mr Schlaepfer's business certainly left you with a suspicion that it was tarred with the same brush, do you agree with that? A. To a certain extent, but the important thing for a regulator is the actual behaviours of the entity whose activities we're monitoring at the particular time. … Q. As you assessed it, what did you think was the predominant aspect of the results of looking about all points about this matter? A. It's the analysis of trading because what we're considering at this particular point in time is whether the trading that we're seeing through Macquarie is something that Macquarie should be dealing with and not allowing to happen in the market.
22. I accept that evidence. It is common sense that the interest of a stock market regulator would be piqued by a history of proven market misconduct by a company and an individual with whom Mr Schlaepfer was formerly connected. But the significant matter would be the characteristics of trading by Mr Schlaepfer's own company at the current time on the market for which Mr Yanco was responsible.
23. Mr Yanco also said that in forming a view about what action should be taken by ASIC he was not concerned to enquire closely into the robustness of controls or filters that Merlito or Select Vantage might have had in place to ensure that transactions effected by its traders were compliant with Market Integrity Rules. In his view, ASIC's "reach in terms of supervision and Market Integrity Rule obligations [… was] to Macquarie". He regarded the role and the obligations of Market Participants like Macquarie as those of a "gatekeeper". He considered that the regulator's interest should be in "the gatekeeper's controls being the immediate interface between the trader and the market". Hence, if "what reaches the market" in terms of orders and trades appears to be manipulative and disruptive, then it is the licensed intermediary that is held responsible and whose filters, controls and systems become a matter of concern to ASIC. In my view that is a sound and proper approach having regard to the terms of the Market Integrity Rules and the statutory regime of licensing of market intermediaries.
24. Mr Yanco summarised his perception of the position as at 20 November 2014 in the following passage of his evidentiary statement. The references to "participants" are to brokers such as Macquarie that provided DMA and AOP for clients: At this time, ASIC was pursuing a deliberate strategy of seeking to effect positive behavioural change amongst market participants in order to stop market misconduct and disorderly markets. Part of this strategy was for ASIC to try to influence participants to change their own behaviour, rather than having to wait for ASIC's enforcement mechanisms to be deployed. This strategy included regulating the market by using all the tools available to us, including by having direct conversations with market participants. We wanted to stop disorderly conduct in the first instance, and then analyse it and determine if the Enforcement team needed to take action subsequently.
25. For these reasons Mr Yanco considered ASIC would be justified in directing Macquarie, pursuant to cl 5.6.12 of the MIR, to cease its provision of DMA services to Select Vantage. He supported Mr Veidners' suggestion of a phone conference with Mr Packham in order to give Macquarie the opportunity to take its own action before being directed. He considered that conversations between ASIC personnel and Macquarie up to that point and ASIC's notices requiring information had "not had much effect on Merlito's trading behaviours".

ASIC's approach to Macquarie re termination of services to Select Vantage

1. Mr Veidners' proposed teleconference with Mr Packham took place on 20 November 2014 for a little over 15 minutes from 3:15pm. Mr Price was also on the line at Mr Veidners' end. I accept that the substance of the conversation was as recorded by Mr Veidners in an email to Mr He sent later the same day. Material extracts from that email are as follows: TV opened discussion and explained the key reasons behind ASIC's concerns, which are primarily around layering in numerous stocks which may give rise to the false and misleading appearance of active trading (market manipulation). TV outlined the background to Merlito and regulatory fines imposed by both UK and Japan for the same activity we are now seeing in Australia via Macquarie. TV explained Merlito were also cut by another Participant for regulatory issues ([Mr Packham] said these were offshore based reasons not Australian market activity). TV explained an example - OIL at approximately 12:19 yesterday - mentioned that there were nearly 100 bids at every price step on the bid and only 10 orders on the sell side. TV said we are currently analysing trading and if we see evidence of [Market Integrity Rules] or Corps Act breaches we will be pursuing those. TV said Macquarie should carefully consider the above and whether it should continue to provide trading access for Merlito. [Mr Price] explained the obligations on Macquarie to respond accordingly to ensure that they comply with their obligations. [Mr Price] explained the seriousness of our concerns […] [Mr Packham] said Macquarie were closely watching trading and in a discussion with Global Head of equities on Tuesday this week, said they would "cut them (Merlito) in a heartbeat" should their licenses be under any threat at all. TV said the trading was ongoing & suggested their Compliance team consider amending trading activity or access to prevent layering. TV counselled [Macquarie] to be particularly cautious about the type of trading they continue to allow given our ongoing market manipulation enquiries.
2. On 21 November 2014 Mr Veidners followed up on this meeting with an email to Mr Packham in the following terms: […] We are progressing with our trading analysis and initial observations suggest Merlito's trading is having an influence on the mid-point price in the direction of layered bids. If our further analysis reveals evidence of market manipulation, we would use our compulsory powers under ASIC Market Integrity Rule 5.6.12 to direct Macquarie to cease providing Automated Order Processing (AOP) access for Merlito. Following the direction being made we propose to issue a media release announcing the outcome, in line with our usual practice. This is an issue which poses a threat to market integrity in Australia and ASIC expects Macquarie to take immediate steps to ensure that its trading on Australian markets does not threaten or compromise market integrity.
3. During the late morning of 21 November 2014 Mr Packham advised Mr Veidners by phone that following a meeting with senior management in the Equities Group the previous evening, Macquarie had decided to terminate the provision of broking services to Merlito from the close of business that day.

Notification to Select Vantage of termination by Macquarie

1. On 21 November 2014, without forewarning, Mr McWilliam on behalf of Macquarie Securities notified Mr Kruyne that Merlito/Select Vantage's account for trading on Australian markets was terminated immediately. Upon Mr Schlaepfer being informed of this he made enquiries with Mr McWilliam and Mr Ritchie. Mr Schlaepfer was at first told only that ASIC had made a phone call and that as a result Macquarie had been forced to cease providing services. Sometime later Mr Schlaepfer was informed that ASIC had expressed concern regarding Select Vantage's trading in OIL. No dates of trading were specified.
2. Mr Schlaepfer said that he and Mr Kruyne then conducted a "broad range analysis over a series of days" of Select Vantage's trading in OIL. This was done quickly, within two days of receiving the information that OIL was of concern to ASIC. Mr Schlaepfer said that from their analysis he and Mr Kruyne were "confident there was no manipulation". The analysis was provided to Macquarie on 26 November 2014, with a request that it be sent on to ASIC. That was done on some date before 23 December 2014 but Mr Schlaepfer said ASIC never took up with Select Vantage any issue it may have had concerning OIL.

Statements to brokers on Friday 21 November 2014

1. Mr Yanco explained his state of mind on 21 November 2014, upon learning that Macquarie had terminated its services to Select Vantage that day, as follows: [I was] concerned that Merlito may shortly approach another market participant to seek to continue trading. I was aware that Merlito had moved from Morgan Stanley to Macquarie very quickly. I was therefore concerned that Merlito would move on to another broker. […] I was of the view that there had been a failure in the way that Macquarie had reacted to the trading so I wanted to ensure that the next broker to deal with Merlito would do a better job. I decided to inform other market participants by both telling participants generally by way of Market Supervision Update [an ASIC publication] and by contacting immediately the brokers that we considered most likely to be approached by Merlito […] In order to flag with them the type of conduct ASIC was concerned about and emphasise that they should have a heightened sense of due diligence and appropriate filters in place if approached by [a] new entity seeking to be on-boarded.
2. Mr Yanco gave evidence that he phoned Mr Ian Chambers of Morgan Stanley at 2:50pm on 21 November 2014 for the purpose of identifying which other stockbrokers might be likely to take on Merlito/Select Vantage, following Macquarie's termination of their relationship. He told Mr Chambers that he understood Morgan Stanley had "previously turned them off" and enquired who he thought would be competitors for the provision of broking services. Mr Chambers named UBS, Citi, BA Merrill Lynch, Deutsche Bank, Credit Suisse and Goldman Sachs.
3. Mr Yanco said that he spoke by phone to Mr Steve Boxall, the co-head of equities at UBS, at 2:55pm. He gave this evidence: I said to Mr Boxall that I was calling because there was a client that'd been turned off by a broker, that had previously been turned off by another broker. We were concerned about that client's activities, particularly layering. The client would be coming through DMA, direct market access, they'd be a pretty good client. We couldn't - I couldn't tell you who that client is. But I can tell you that the activities that we're concerned about are similar to the activities that you can read about in the FCA decision on Swift Trade and the Japanese SESC decision on Select Vantage.
4. Mr Yanco said that before making the call to Mr Boxall he wrote out what he wanted to say by hand in the form of dot points. He intended to make six phone calls, one to each of the brokers that had been nominated by Mr Chambers. Mr Yanco was treating those brokers as possible candidates for taking on Merlito/Select Vantage as a client. He said that in such a situation it was his practice to handwrite bullet points of the message he wished to convey and then to adhere to those points. He had developed this practice in the course of his communications with media representatives.
5. Mr Yanco said that on the afternoon of 21 November 2014 he had the following further conversations, each in the same terms as his 2.55pm conversation with Mr Boxall:

• 3:23pm, Mr Anatoly Kirievsky, Head of Compliance for Australia at BA Merrill Lynch;
• 3:32pm, Mr Andrew Couper of the Compliance Australia department of Credit Suisse;
• 4:14pm, Mr Lee Newton, director of Markets Compliance at Deutsche Bank.

1. At 3:53pm on 21 November 2014 Mr Yanco reported by email to the Commissioners of ASIC and to Messrs Veidners and He that he had informed several brokers: that a client of another broker had been turned off for layering behaviour that ASIC was concerned about - suspected manipulation. I also noted it was similar to trading by Swift Trade and Select Vantage that other regulators were concerned about.
2. At 4:02pm on 21 November 2014 Mr Yanco sent an email to Mr Ryan Holsheimer, Head of Global Markets at BA Merrill Lynch, following up a message he had left at 3:22pm for Mr Holsheimer to call him back. This was now unnecessary as Mr Yanco had spoken to Mr Kirievsky of the same firm in the meantime. Mr Yanco wrote: No need to return my call. I spoke to [Mr Kirievsky] to let [BA Merrill Lynch] know that a client of another broker had been turned off for layering behaviour that ASIC was concerned about - suspected manipulation. I also noted it was similar to trading by Swift Trade and Select Vantage that other regulators were concerned about.
3. At 4:02pm on the afternoon of 21 November 2014 Mr Couper of Credit Suisse sent an email direct to two of his colleagues, Ms Economou and Mr Healy, concerning Mr Yanco's phone call. With an immaterial addition the email was also sent to other colleagues, and copied to Ms Economou and Mr Healy, at 4:08pm Sydney time. The six points in this email have been taken up in Annexure A to the statement of claim as Mr Schlaepfer's allegation of what Mr Yanco said to each of the brokers. The message was as follows (numbers added for ease of reference): Just took a call from Greg Yanco - NOTE - this does not involve any actions by [Credit Suisse]. [1] ASIC have concerns about a particular Entity who is layering the market. [2] ASIC is aware that the Entity has been closed down at two brokers because of their behaviour. [3] ASIC is aware this entity would be quite a payer to brokers (fees). [4] This would be DMA. [5] ASIC was NOT able to advise the name of the Entity but were able to advise that they are related to Swift Trade, Select Vantage and Merlito. Peter Beck (or Bec) is associated with Swift Trade. [6] ASIC wanted us to be aware of their concerns. Can you please check if we have any clients with associations with the above entities and be aware of new clients and apply [heightened] diligence.
4. One of the recipients of Mr Couper's email apparently did a search within Credit Suisse's client database and responded at 4:40pm that he could not "find any clients resembling those names". Mr Couper replied at 4:42pm: [Mr Healy] is doing a little googling. ASIC couldn't tell us the client, must be [a] confidentiality issue or investigations have begun. We need to be aware of new electronic clients - heighten vigilance.
5. At 3:58pm on 21 November 2014 Mr Kirievsky of BA Merrill Lynch sent an email in these terms to colleagues within his organisation: Greg Yanco called just now. There is a client in the market that is likely to be switched off by their current broker today and might be looking for a new broker quite urgently. ASIC is providing heads-up to the industry on the basis that regulators (including ASIC) have concerns with the type of trading this client undertakes. In particular, they are concerned that the layering of bids and asks is designed in a way to move the midpoint in a favourable (to them) direction. This was just a courtesy heads-up from ASIC. Please let us know of any new potential clients emerge in the next few days that are looking to trade to us.

Statement to Citi on Monday 24 November 2014

1. On Monday 24 November 2014 Mr Yanco met with four executives of Citi, one of whom was Ms Messina Mouhtaris, Head of Markets Compliance. Mr Yanco had been unable to contact her by phone the preceding Friday and had left a message. The meeting on 24 November 2014 concerned other matters but at the end of it Mr Yanco referred to the subject concerning which he had attempted to contact Ms Mouhtaris at the end of the previous week. He gave these answers: A. I recall it was a very short conversation at the end of the meeting, where I just went through those same messages that I'd given to the - Steve Boxall, Mr Couper and the others. Q. Can you be any more specific about what you said on that occasion, did you have your note with you? A. I, I don't think I had the note with me. At that time, I was very clear about what our messages were as we've been preparing another document to disseminate to the market.

Market Surveillance Update No 53 issued 25 November 2014

1. On 25 November ASIC issued MSU No 53, which was circulated by email that day to Market Participants. It contained the following passages, extracted below so far as relevant to the present case. Each of the two bullet points typed in bold and underlined was a hyperlink, to the report on Japan's SESC decision of February 2014 (see [80]) and to the United Kingdom FSA decision (see [44]-[57]), respectively. Australian market participants terminate client for suspected market manipulation An overseas securities firm providing intermediary services to proprietary traders had its market access terminated by two market participants within a three month period. ASIC's preliminary analysis of order submission and trading patterns in question revealed: large numbers of orders from a single entity resting on the order book of relevant securities, many at the same price step disproportionately large number of orders being entered, amended, cancelled and re-entered by that entity a positive correlation between the change in the entity's contribution to order book imbalance and the mid-point price of relevant securities, and clustering of order submission patterns, which may be indicative of co-ordination between ultimate order placers behind the entity. Overseas regulatory responses to suspected market manipulation In February 2014, Japan's Securities and Exchange Surveillance Commission recommended a fine of 60,000 yen for alleged market manipulation through layering by Select Vantage Inc. Read about Securities and Exchanqe Surveillance Commission recommendation In 2011, the Financial Services Authority in the UK issued a fine of £8 million to Swift Trade Inc, (Swift) for similar instances of market manipulation through layering. A former trader at Swift is the founder and owner of Merlito Securities Company Limited (the intermediary securities firm for Select Vantage Inc) and President of True North Vantage (a subsidiary of Select Vantage Inc). Read about Financial Services Authority fine Market participants are reminded of their obligations to comply with Part 5.7 of the ASIC Market Integrity Rules (ASX Market) 2010 on Manipulative Trading and Part 5.11 of the ASIC Market Integrity Rules (ASX Market) 2010 on Suspicious Activity Reporting.

Statement to BA Merrill Lynch on Friday 28 November 2014

1. On 28 November 2014 Mr Yanco met with Mr Holsheimer of BA Merrill Lynch. They discussed matters other than the subject of these proceedings but Mr Yanco said ASIC's concern about a party layering the market was referred to, as follows: I told Mr Holsheimer again, I think I'd already emailed him, that we were concerned about a client and that our concern was about the layering activity that the - you know, we were seeing activity that was similar to what we'd seen in the - what you can see in the FCA Select Vantage - sorry Swift Trade report, and the Japan SESC report on Select Vantage, that they'd be coming - they'd be a very good payer, and [through] DMA.

Findings as to the terms of the conversations

1. The plaintiffs submit that the Court should find that the words spoken to each of the broker representatives in the four phone calls on 21 November 2014 and in the face-to-face conversation on 24 November 2014 were in substance as set out in points [1]-[6] of Mr Couper's email of 4:02pm on 21 November (see [137]). The plaintiffs submit that in the further conversation with Mr Holsheimer on 28 November 2014, after MSU No 53 had been issued, Mr Yanco also said words the effect: [7] The client I am talking about is the same one referred to in Update 53 of 25 November 2014 as having issues with regulators.
2. With respect to points [1]-[6] the differences between Mr Yanco's recollection (see [132] above) and Mr Couper's email are slight. First, with respect to [2], Mr Yanco's evidence is that he said the client concerned had been "turned off" by one broker and then by a second broker but he gave no evidence of having said that this was "because of their behaviour". The difference is of little consequence because even without the additional words Mr Yanco's statement that ASIC was "concerned about the client's activities, particularly layering" in combination with the statement that it had been "turned off" by two brokers conveyed the meaning that the turning off had occurred because of the trading behaviour.
3. Further, Mr Yanco's emails to the Commissioners at 3:53pm ([133]) and to Mr Holsheimer of BA Merrill Lynch at 4:02pm ([134]) stated that he had told brokers of a client having "been turned off for layering behaviour". I am satisfied that this causal connection was made in Mr Yanco's conversations with brokers on 21 November 2014 and subsequent dates.
4. Secondly, with respect to point [6] in Mr Couper's email Mr Yanco recalls that his reference to "the FCA decision on Swift Trade and the Japanese SESC decision on Select Vantage" was introduced by the statement that activities about which ASIC was concerned were similar to those outlined in the two decisions; whereas Mr Couper records in his email that ASIC "was able to advise that [the entity he is referring to was] related to Swift Trade, Select Vantage and Merlito". In cross-examination Mr Yanco adhered to his recollection of this part of the conversation. He said Mr Couper's version "doesn't make sense to me".
5. I find it improbable that Mr Yanco would have said that the relevant client was "related to" Select Vantage and Merlito. On any view of the conversation, including Mr Couper's points [1]-[4], Mr Yanco was trying to avoid identifying the relevant client. Further, the form of words written by Mr Couper would have been contrary to Mr Yanco's knowledge. The client in question was Merlito, with Select Vantage trading through it. It would not have been correct to say that the client was "related to" those entities (or to Swift Trade). Mr Yanco's version of this part of the conversation is, again, supported by his emails at 3:53pm and 4:02 pm on 21 November, to the Commissioners and to Mr Holsheimer respectively.
6. Mr Yanco did not recall having said, to any of the brokers with whom he spoke, that "Peter Beck (or Bec) is associated with Swift Trade" (see point [5] in Mr Couper's email). I am not satisfied on the balance of probabilities that words to that effect were spoken. Mr Couper may have had his own memory of an association between the name Swift Trade and either Beck or Bec. The sentence quoted may not have been a notation of anything said to him by Mr Yanco.
7. No affirmative evidence was adduced from Mr Couper that this email was a record of the words actually spoken or of words having substantially the same meaning as those spoken. On the face of the document taken alone it might be no more than a record of Mr Couper's inferences and understanding drawn from his conversation with Mr Yanco, perhaps with the aid of knowledge from another source. It is only because Mr Yanco gave evidence of having spoken to Mr Couper in much the same terms as he had earlier spoken to Mr Boxall that the Court is able to compare his evidence with what is in the email and infer that the latter is, at least in large part, a record of what was said. The finding that the email is a business record of the conversation thus depends upon Mr Yanco's evidence about what was said. The reliability of the email does not rise above the reliability of Mr Yanco's own account.
8. Without oral evidence from Mr Couper to support his email as an accurate record of the words spoken and to permit testing of him concerning the differences between his document and Mr Yanco's recollection, I find that the oral evidence of Mr Yanco, coupled with his own contemporaneous emails to the ASIC Commissioners and to Mr Holsheimer, is the only sure foundation for resolving differences.
9. With respect to point [7], alleged to have been said by Mr Yanco in his conversation with Mr Holsheimer on 28 November 2014, Mr Yanco had no recollection of saying this but did not deny it. As earlier mentioned, Mr Holsheimer did not give evidence. In an email of 4 December 2014 Mr Holsheimer said that on this occasion Mr Yanco had "hinted strongly that the client was the same one they reference [sic] had issues with other regulators in" MSU No 53. That characterisation of what Mr Yanco said provides no evidence of the words spoken. There is insufficient evidence upon which the Court could find that words to the effect of point [7] were spoken on 28 November 2014.
10. I find that the words spoken by Mr Yanco on each of the six occasions were to the following effect: [i] ASIC is concerned about the activities of a client, particularly layering. [ii] ASIC is aware that the client has been turned off by a broker for layering behaviour and had previously been turned off by another broker. [iii] It would be a pretty good client. [iv] This client would be a direct market access client. [v] ASIC cannot say who the client is but can say that the activities ASIC is concerned about are similar to those that can be read about in the FCA decision on Swift Trade and the Japanese SESC decision on Select Vantage. [vi] ASIC wants you to be aware of our concerns.

Issue 2: Identification of Mr Schlaepfer

1. To succeed in his defamation action Mr Schlaepfer must prove that at least one person who heard the oral statements complained of, expressed in the terms as found at [153], identified Mr Schlaepfer as the "client" referred to. In Prince v Malouf [2014] NSWCA 12 the Court said (some citations omitted): [102] It is an essential element of a claim in defamation that the plaintiff prove that the published statements were made "of and concerning" him or her: Steele v Mirror Newspapers Ltd (1974) 2 NSWLR 348 at 371 per Samuels JA. The test of whether words that do not specifically name the plaintiff refer to him or her is whether the words are "such as reasonably in the circumstances would lead persons acquainted with the plaintiff to believe that he was the person referred to": Steele at 371, applying David Syme & Co v Canavan [1918] HCA 50; (1918) 25 CLR 234 at 238 per Isaacs J: see also Universal Communication Network Inc t/as New Tang Dynasty v Chinese Media Group (Aust) Pty Ltd [2008] NSWCA 1 at [43] per McColl JA (Mason P and Young CJ in Eq agreeing). [103] Where identification is in issue, it is common but not essential that witnesses are called who say that they made the requisite link between the defamatory material and the plaintiff: Vlasic v Federal Capital Press of Aust Pty Ltd (1976) 9 ACTR 1 at 10 per Blackburn J; Channel Seven Sydney Pty Ltd v Parras [2002] NSWCA 202 at [52] per Mason P (Handley JA and Ipp AJA agreeing).
2. On my finding as to the words spoken by Mr Yanco, they did not name Mr Schlaepfer, or even any particular corporation or organisation, as the "client". Although I do not place particular weight upon this, the use of the word "it" in point [iv] would tend against an inference being drawn by an ordinary sensible listener that the words referred to an individual as opposed to a company. In written submissions the defendant submitted that the use of the word "entity" would strongly exclude, for any ordinary sensible listener, the possibility that an individual was referred to. I discount that submission because in Mr Yanco's version of the conversations, which I have accepted, the term used was "client" rather than "entity". "Entity" was used throughout Mr Couper's email but for reasons given above I treat that evidence as subordinate to and dependent upon Mr Yanco's oral evidence of what he said.
3. Mr Schlaepfer did not call any witness who heard the words spoken by Mr Yanco and who, having knowledge of certain circumstances, understood those words to refer to Mr Schlaepfer. However in written submissions Mr Schlaepfer relied upon an email sent by Mr Hani Shalabi of Credit Suisse at 5:23pm on 21 November 2014 in reply to Mr Couper's email of a little over one hour earlier. Mr Shalabi said: I know this outfit well. They used to trade with [Credit Suisse] in their previous incarnation called Orbixa/Biremis. But we eventually dropped them due to regulatory concerns. Daniel bought the day trading platform from Peter Beck and resurrected it as Select Vantage/Merlito. It was always thought that Peter was the problem and that Dan would clean it up.
4. The plaintiff submits that this is some evidence "to establish identification and to pass the threshold". That submission could only have any force if I accepted that Mr Yanco's conversation was as set out in Mr Couper's email, to which Mr Shalabi was responding. But I have found that the conversation was not in those terms and in particular that it did not include his point [5]. There is no evidence of whether Mr Shalabi would have claimed to identify Mr Schlaepfer as the "client" spoken of by Mr Yanco if he had understood that the conversation was as I have found it, in particular including point [v].
5. Mr Schlaepfer submits that the cause of action may be sustained if identification occurs later than the time of original publication. He submits that this is particularly so if the recipient of the information is in effect invited to discover the identity of the person of whom the impugned matter is published, although it is not necessary to show that there was an invitation of that nature. Those propositions are supported by Fairfax Media Publications Pty Ltd v Pedavoli [2015] NSWCA 237 at [78] (Simpson JA, McColl JA agreeing) and [145]-[159] (Sackville JA, McColl JA agreeing).
6. I do not accept that Mr Yanco's statements to the brokers on any of the six occasions invited them to make their own enquiries to ascertain what "client" he was referring to. I take into account Simpson JA's observation that "such an invitation is, in any event, implicit in almost any defamatory publication that does not name its subject" (at [79] of Fairfax Media Publications Pty Ltd v Pedavoli). However Mr Yanco's oral communications were made to a limited audience for a narrow and specific purpose, relevant to his professional relationship with each of the listeners. The conversations were inherently and essentially warnings to the brokers that they may be approached by the "client" who had been "turned off" by two previous brokers.
7. Mr Yanco's information invited the listeners to be vigilant for an approach by a substantial client seeking DMA services that fitted the circumstances described. The communications prompted no enquiry as to the identity of the client because that would become clear enough if a substantial party, recently turned off by other brokers and seeking DMA services, should make an approach. If there was no approach the identity of the client was of no significance to the listeners.
8. Having regard to the evidence concerning the manner and extent of circulation of ASIC's Market Supervision Updates, I am satisfied on the balance of probabilities that on or shortly after 25 November 2014 MSU No 53 came to the attention of each of the brokers with whom Mr Yanco spoke. Within the principles accepted in Fairfax Media Publications Pty Ltd v Pedavoli that was sufficiently proximate to Mr Yanco's conversations on 21 and 24 November 2014 for the contents of MSU No 53 to be taken into account in determining whether Mr Schlaepfer was identified. As the publication preceded Mr Yanco's meeting with Mr Holsheimer on Friday 28 November, it can be also taken into account on the issue of identification with respect to that conversation.
9. The question is whether it would have been reasonable for the brokers, having knowledge of the content of MSU No 53, to have concluded that the "client" to whom Mr Yanco referred in his oral communications was Mr Schlaepfer. I conclude that it would not. The main heading of the article in MSU No 53 refers to a "client" that had been terminated by participants "for suspected market manipulation". Thereafter all references to the "client" are in terms that make clear that it was a business organisation rather than an individual. Emphasis has been added in the following quotations. In the first line the client is referred to as "an overseas securities firm" that had "its market access terminated". The "trading patterns in question" that were said to have been identified by ASIC's preliminary analysis are listed in four bullet points. All of these refer to market activity by an "entity". The last bullet point refers to "ultimate order placers behind the entity".
10. Under the heading "Overseas regulatory responses to suspected market manipulation", the first instance referred to is the Japanese SESC response to alleged market misconduct "by Select Vantage Inc". It makes no reference to an individual and provides no reasonable basis upon which any of the brokers could have concluded that the "firm" or "entity" referred to earlier in the Update, or the "client" referred to by Mr Yanco in his conversations with the brokers was an individual.
11. The second instance of "Overseas regulatory responses to suspected market manipulation" refers to an individual, namely, "a former trader at Swift [Trade]". The Update goes on to state that the "former trader" is the "founder and owner of Merlito Securities Company Limited (the intermediary securities firm for Select Vantage Inc) and President of True North Vantage (a subsidiary of Select Vantage Inc)". On no view does this convey, on a reasonable understanding, that the "former trader", being also the "founder and owner" of Merlito and "President" of a subsidiary of Select Vantage, is the "firm" or "entity" earlier referred to.
12. I do not accept that any of the brokers who heard Mr Yanco's words and read MSU No 53 could reasonably have concluded that the "client" of whom he spoke, or the "client", "firm" or "entity" referred to in the MSU, was Merlito Securities Company Limited or Select Vantage Inc. But if they did so conclude and if they knew from some other source that Mr Schlaepfer was the "former trader at Swift [Trade]" and the "founder and owner" of Merlito, that would still not lead to a reasonable conclusion or understanding that the "client" to whom Mr Yanco had referred was Mr Schlaepfer. No listener in the position of any of these brokers could reasonably have conflated an incorporated entity with an individual concerned it.
13. The defendants submit that in any event Mr Schlaepfer is precluded from relying upon MSU No 53 in relation to this issue of identification in the defamation action, because on 12 December 2014 he agreed in writing: to release ASIC from any claims arising out of … the publication of the Market Supervision Update 53.
14. It was a term of this settlement that ASIC would publish in its next Market Supervision Update a clarification to the effect that ASIC had "not taken any action against Select Vantage, or any of its officers or employees, under the Market Integrity Rules", noting "Select Vantage's assertions that it has not been terminated by any Australian market participant for wrongdoing, that it is not affiliated with Swift, and that it has implemented rigorous internal controls in order to prevent market manipulation or other market abuses". In performance of that term, a statement to the above effect was duly published in MSU No 54 on 17 December 2014.
15. The defendants submit that they acted under the settlement agreement upon "an assumption as to their legal relationship" with Mr Schlaepfer. I readily accept that the statement that appeared in MSU No 54 was published by ASIC upon the understanding that the settlement agreement with Mr Schlaepfer was binding. The defendants further submit that "in accordance with conventional estoppel principles [Mr] Schlaepfer is now estopped from relying on Update 53 for the purposes of establishing the cause of action here". On the view that I take of MSU No 53 it is not necessary to resolve this contention. It turns upon the application of estoppel principles to facts that are either uncontroversial or have been determined in these reasons. If this judgment should be the subject of appeal and if the defendants should raise their estoppel argument under a notice of contention, it may be determined conveniently by the Court of Appeal upon the facts stated here. In those circumstances I will not extend these reasons with consideration of the asserted estoppel.

Principles

1. Whether Mr Yanco's conversations with the brokers conveyed the alleged defamatory imputations is a matter to be determined by applying the test of how the ordinary reasonable listener would have understood the words spoken. For this purpose the characteristics of the ordinary reasonable listener have been expressed in Amalgamated Television Services Pty Ltd v Marsden (1998) 43 NSWLR 158; [1998] NSWSC 4 as including that: The ordinary reasonable [listener] is a person of fair average intelligence, who is neither perverse, nor morbid or suspicious of mind, nor avid for scandal. That person does not live in an ivory tower but can and does read between the lines in light of that person's general knowledge and experience of worldly affairs (citations omitted).
2. In Amalgamated Television Services Pty Ltd v Marsden Hunt J referred to the importance of the "mode or manner of publication … in determining what imputation is capable of being conveyed". With respect to transient publications such as radio or television broadcasts his Honour observed that the listener does not have the opportunity to go back over what has been published, in contrast with the ability to reread a newspaper article or book. Hence, a first impression may be particularly important. This is equally so with respect to matter published by way of oral conversation, whether over the phone or person to person. I will take all of those considerations into account in determining whether the pleaded imputations were conveyed.

Imputations (a) or (b): criminal layering or unlawful manipulation

1. For ease of reference the first two imputations are repeated, as follows: (a) [Mr Schlaepfer] was engaging in criminal conduct by layering the stock market. (b) In the alternative to (a), [Mr Schlaepfer] was engaging in unlawful market manipulation.
2. The defendant correctly points out that there is a significant difference between these alternatives. Criminal conduct by layering, exposing Mr Schlaepfer to prosecution, conviction and criminal punishment, is materially different from unlawful market manipulation that might result in regulatory sanction and perhaps civil penalty proceedings. A reasonable broker in the position of any of those to whom Mr Yanco spoke would not have understood that he was conveying either of the affirmative imputations pleaded in (a) or (b).
3. The words spoken, as I have found them, did not convey that ASIC had concluded and was positively asserting that layering or manipulative conduct, in breach of criminal or civil penalty provisions or Market Integrity Rules, had actually occurred. Elements [i], [v] and [vi] of the conversation expressly limited ASIC's assessment to the level of "concerns"; that is, a possibility not yet concluded. Element [ii] conveyed that a broker had decided, to a sufficient level of probability for its prudential and commercial purposes, that "layering behaviour" had been exhibited. This clearly fell short of ASIC adopting the broker's conclusion.
4. Brokers in this highly regulated environment, receiving an oral message such as this from ASIC's Head of Market Supervision, would be well attuned to the difference between, on the one hand, ASIC being concerned about a client's trading behaviour and its broker turning it off and, on the other hand, ASIC making an affirmative assertion that such market misconduct had taken place. Further, the brokers would have been well aware of ASIC's powers to direct a broker to cease providing DMA to a client, to commence civil penalty proceedings and/or to set in train the criminal process. The very nature of this call, being merely a warning to the brokers to evaluate the client with care if it should approach and seek DMA services, was inconsistent with ASIC having reached a concluded view or making positive assertions of criminal or otherwise unlawful conduct. It would have been apparent to these brokers that if ASIC had moved beyond "concerns" to assertions it would have been acting upon them directly.

Imputations (c) & (d): misconduct of business by Mr Schlaepfer

1. Again for ease of reference, the third and fourth imputations are repeated: (c) [Mr Schlaepfer] had conducted his business in such a way as to warrant the Head of Market Supervision at ASIC contacting the head of compliance at a large brokering house and warning him of the risks of doing business with both his companies Merlito Securities and Select Vantage. (d) [Mr Schlaepfer] had so mis-conducted his financial business as to deserve having had two brokers terminate relationships with his company Merlito Securities.
2. The spoken words would not have conveyed to a reasonable person in the position of the brokers an imputation that the business of the "client" referred to had in fact been misconducted. Imputation (c) is a significant distortion of the meaning actually conveyed by the words. Mr Yanco conveyed no more than that ASIC considered that its "concerns" warranted the urging of caution by the broker if the client should approach. The expression of the regulator's concerns and the implicit indication that these were sufficient to require a communication of this nature is entirely different from a positive assertion of misconduct of business. Further, even if the words could be taken as conveying an affirmative allegation that the business had been misconducted they certainly did not convey that this had been at the hands of any nominated individual, in particular Mr Schlaepfer.
3. With respect to imputation (d), nothing said by Mr Yanco could reasonably have been taken as a conclusion or assertion by him or by ASIC that the client "deserved" having had its DMA services terminated by the two brokers. The words conveyed that layering behaviour was the reason the brokers had assigned and, at most, that it was their conclusion. Misconduct of business deserving of such termination was not asserted as a fact. Mr Schlaepfer submits that "the overwhelming inference is that [termination by the other brokers] was warranted". I reject that submission. I find no basis upon which a reasonable listener could read into Mr Yanco's words an assertion that the brokers had made a correct judgment. In conjunction with ASIC's "concerns" Mr Yanco's words rose no higher than a statement of the view that the other brokers had had formed.
4. I find that none of the imputations alleged by Mr Schlaepfer were conveyed by Mr Yanco's conversations with brokers.

True innuendoes

1. The extrinsic facts relied upon by Mr Schlaepfer to support his case of true innuendo are pleaded in par 18 of the statement of claim as follows: (a) "Layering" the market is a form of market manipulation whereby large numbers of orders are created, often at various price points, to create a false impression of demand or supply. These orders are then cancelled, or amended, as they move closer to trading. (b) Market manipulation is a criminal offence. (c) ASIC is responsible for investigating and prosecuting market manipulation including layering. (d) "DMA" stands for "Direct Market Access"; whereby investors use a broker's electronic trading system to access the order book of the stock exchange directly. (e) At and before the publication of the defamatory matter, two brokers, Morgan Stanley and Macquarie Securities, had ended their arrangements whereby [Mr Schlaepfer's] businesses had direct access to the Australian market and no other Australian brokers had replaced them. (f) Peter Beck was the principal of Swift Trade Inc. In 2011, Swift was fined £8 million for market manipulation by the Financial Services Authority in the UK. In July 2012, the Financial Industry Regulatory Authority barred Mr Beck and in December 2012, the Securities and Exchange Commission in the United States similarly barred Mr Beck and fine[d] him and his business partner, Charles Kim, $500,000 principally for failure to supervise. All of these sanctions were published throughout the finance industry by the respective regulators on their websites and press releases issued linking to these publications.
2. All of these matters have been established as facts by evidence in the proceedings. I infer that each of the brokers to whom Mr Yanco spoke knew the facts in pars (a)-(d) inclusive at the time of the conversations. It has not been shown that they knew the facts in par (e) except to the extent that Mr Yanco told them that two (unnamed) brokers had ceased providing DMA services to an unidentified client. There is no evidence that any of the brokers knew the matters pleaded in par (f).
3. To the extent it has been proved that the brokers had knowledge of these extrinsic facts, such knowledge, would not alter the ordinary and natural meaning of the words spoken by Mr Yanco so as to cause those words to convey any of the imputations pleaded in par 12 of the statement of claim. Knowledge of those facts would not affect or displace the reasoning upon which I have concluded that the imputations were not conveyed.
4. Similarly, knowledge of these facts to the extent it has been proved would not have caused any of the brokers to understand Mr Yanco's spoken words as conveying the true innuendoes pleaded in par 16 of the statement of claim. The alleged innuendoes (a)-(d) are set out at [17] above. With respect to innuendoes (a) and (b) (that Merlito and Select Vantage engaged in market manipulation), the known extrinsic facts would make no difference to the analysis I have already made; namely, that Mr Yanco did not make any positive assertion of stock market manipulation by any entity. He only identified ASIC's inconclusive concerns about an entity's trading and noted that the entity's previous brokers had formed a view about layering behaviour and had acted upon it.
5. With respect to innuendo (c) (that Mr Schlaepfer is dishonest and comparable to Peter Beck), I do not consider that Mr Yanco's words coupled with knowledge of the extrinsic facts, to the extent there was such knowledge, conveyed any imputation against Mr Schlaepfer personally. Certainly no imputation of dishonesty or of comparability with Mr Beck's proven market misconduct was conveyed. With respect to innuendo (d) (that Mr Schlaepfer had authorised manipulation of markets by his companies), this is substantially the same as imputation (c) pleaded under par 12 of the statement of claim and I have rejected it for the reasons given at [176] above.
6. Mr Schlaepfer has submitted that MSU No 53 may be considered in support of his pleaded innuendoes. It is not clear to me that the principles stated in Fairfax Media Publications Pty Ltd v Pedavoli extend to using matter published on an occasion other than the oral communications as a basis for finding a true innuendo. There is a distinction between using MSU No 53 for that purpose and using it as a basis for determining whether Mr Schlaepfer was identified in the conversations. But even if MSU No 53 may be so used, I do not consider that it would make any difference to my conclusion that none of the imputations or true innuendoes were conveyed. In particular with respect to the additional information in MSU No 53 concerning Mr Beck and Swift Trade, this does not support Mr Schlaepfer's innuendo (c), that he is "such a dishonest trader that he deserved to be compared to the disgraced Peter Beck". I find this innuendo far-fetched. Nothing that Mr Yanco said nor anything published in MSU No 53 invites the alleged comparison.

Two aspects of the defendants' case on truth

1. The defendants bear the onus of proving the truth of the imputations and innuendoes, for the purpose of the defence of justification as outlined at [19]-[23]. Despite the considerable amount of evidence and the detailed submissions devoted to this issue, I will state my findings and my reasons on the subject as briefly as possible. I deal with the subject only for completeness because, as I have found that Mr Schlaepfer was not identified in the spoken words and that the alleged imputations and innuendoes were not conveyed, the defamation action must fail irrespective of the truth or otherwise of the defamatory meanings alleged.
2. The defendants' case on truth was directed firstly to proving that Select Vantage through the acts of its numerous traders based in various pods or locations in China engaged in trading that was likely to (a) create or maintain a price for certain stocks on certain days that did not reflect the forces of genuine supply and demand, contrary to s 1041A of the Corporations Act and (b) create a false and misleading appearance of active trading in those stocks on those days or a misleading appearance of the market for those stocks, contrary to s 1041B of the Corporations Act.
3. Section 1041A and, for present purposes, the relevant part of s 1041B, are as follows: 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. 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.
4. Contravention of either of these provisions is a criminal offence and may also or alternatively attract a civil penalty. Mr He's evidence is relied upon by the defendants to prove breach of both sections in relation to some of the stocks that have been particularised in the defence, on some of the relevant days of trading. In order to make out the defence of truth it is not necessary for the defendants to prove every instance of contravention that they have particularised. Any instance would make the imputations and innuendoes true.
5. In addition to Mr He's evidence the defendants rely upon the expert reports of Professor Putnins. He has identified statistical characteristics of the impugned trading, for all 23 of the stock/days identified by the defendants. He says that these characteristics support an inference that Select Vantage's traders placed many orders that were not bona fide, in the sense that they were never intended to trade. In Professor Putnins' opinion the inference from these statistical indicators is that the orders were placed for the purpose of creating a false appearance on the market having the likely effect of influencing the price other than by genuine supply and demand.
6. The second aspect of the defendants' case on justification is its contention that Mr Schlaepfer counselled and procured the traders to place the non-bona fide orders and that he aided and abetted them or was otherwise knowingly concerned in their manipulative activity in contravention of ss 1041A and 1041B of the Corporations Act. This aspect is essential to the defendants' position because the defamatory meanings of which they seek to prove truth concern criminal or otherwise unlawful conduct of Mr Schlaepfer himself, not merely of Merlito/Select Vantage. The defendants seek to prove Mr Schlaepfer's accessorial liability by inference from his position as the principal of Select Vantage and from business records that are said to reveal his awareness of widespread and frequent breach of Select Vantage's restrictions on its traders' activities. The defendants have advanced a case that Mr Schlaepfer must have known his company's internal controls were being flouted and were ineffectual.

Mr He's evidence

1. Mr He's layering report of 30 October 2014 addressed ten of the stock/days that are particularised in Schedule A of the defence, namely, GCN on 1 to 5 September 2014 (inclusive) and ADO on 15 to 19 September 2014 (inclusive). He found that in both of these periods Select Vantage traders "stacked" the order books of both stocks. In cross-examination he said: By stacking of the order book I meant that you would regularly observe in excess of 100-200 orders by the same client ID, 6ZW, concurrently resting on the essential limit order book …
2. Mr He said he found that at the time these concurrent resting orders had been entered they were sufficiently far away from the price at which the relevant stock was trading that the orders were themselves unlikely to trade and, indeed, a large proportion of them did not trade. Mr He described the placement of these orders as "self correlation" meaning that numerous orders from Select Vantage's supposedly independent traders were "clustered" in a resting position, off the likely execution price, in the same stock on the same day. He explained his term "clustering" as follows: [W]hat I meant by clustering is when an order is entered, it is shortly followed by another order of a similar nature in quick succession.
3. I find that these characteristics of the trading in GCN and ADO in the two five-day periods strongly support the inference that Select Vantage's traders acted in concert in placing the orders. Mr He said: [Y]ou have to look at how the order is entered, at one point […] in time it is entered and at that point in time, how far away is it from the best price. The likelihood that it […] will execute, the clustering of the order entry patterns by a large number of submissions, the self-correlation of that pattern, […] the proportion of those orders that never execute […] [If] you have a large proportion of those orders as a point of submission, that's so far away from the order book that it has a very small chance of execution and it repeats every day and these are supposed to be day traders, not day order submitters. […] [C]onsidering all of these things, at the time […] when I observed how it was being stacked, it is very difficult for me to come up with a rational explanation for how that might come about.
4. I understand this evidence in the sense that Mr He could not conceive of any "rational explanation" for the characteristics of order placement that he identified consistent with bona fide trading. In my view, not only do these characteristics show concerted and cooperative order placement activity by Select Vantage's traders, they also support an inescapable inference that their purpose was to create a false impression of demand for the stock and thereby to influence other purchasers to pay higher prices.
5. Mr He's layering report of 30 October 2014 was accompanied by spreadsheets of data for all orders and trades in each of the two stocks for the period in question. With respect to GCN in the week 1 to 5 September 2014, Select Vantage's traders placed a total of 396 orders of which only 73 executed and 323 were untouched. This figure of 323 represented 60.7% of all orders placed by all traders in the market that remained untouched over the period. Apart from Select Vantage, the trader who placed the next largest number of orders that remained untouched placed only 33. A total of approximately 78 other traders made up the remaining 39.3% of the orders that had been placed and remained untouched, each of them with small numbers. Select Vantage's traders literally swarmed on this stock with orders that never looked like trading, in Mr He's assessment, and never did.
6. Mr He pointed out the extreme improbability that these orders, that remained in a resting condition and untouched, had been placed by various of Select Vantage's traders acting independently. He said: The innocent [explanation] is the highly unlikely scenario that hundreds of people in various parts of China are interested in submitting large amount of orders [in a] highly […] approximate period of time in obscure small cap Australian stocks repeated over many days and many are just resting and not trading. That is the innocent explanation, if they're all independent.
7. I find that hypothesis improbable in the extreme. Once it is rejected the inference of concerted action, for the purposes of creating a false impression of trading and influencing the price of the stock, stands. Mr He's schedules of order data in respect of ADO for 15 to 19 September 2014 show a similar picture. Select Vantage placed 1182 orders of which 958 remained untouched. There were over 100 other traders, independent of Select Vantage, who placed orders for the stock during the period. Select Vantage's 958 untouched orders constituted 63.95% of all untouched orders. The trader with the next largest number placed only 210 orders that remained untouched and the next after that placed 53. Each of the remaining participants on this stock placed 20 or less of such orders.
8. The evidence establishes that if an order is amended after it has been placed, for example by reducing or increasing the number of shares for which the bid is made at the nominated price, then the order loses its priority and therefore has less chance of execution than other orders at the same price. Mr He's order data schedules for GCN and ADO for the two periods in question showed that Select Vantage's traders amended their orders with significant frequency. 64% of the orders placed for GCN and 69% of those placed for ADO were amended. This characteristic is of limited probative value but the frequent amendment of orders is consistent with the traders not genuinely seeking execution and, in fact, making execution less likely by amendment and consequent loss of priority.
9. Mr He said that by watching the active placement orders on the market replay he had obtained information additional to what could be gathered from looking at the order and trade counts in schedules such as those compiled for GCN and ADO. He said that whenever a Select Vantage trader placed a resting limit order on the buy side, it was very common that this would be followed quickly by a sequence of resting limit orders on the buy side, placed by other Select Vantage traders. This contributed to his view that the activity of these traders was highly "correlated" and that it did not exhibit the randomness that one would expect if the traders were acting independently with genuine buying or selling intent.
10. Mr He's evidence with respect to these two stocks alone satisfies me on the balance of probabilities that Select Vantage engaged in conduct in breach of ss 1041A and 1041B prior to 21 November 2014.
11. In addition to the statistical counts of untouched orders, amended orders, trades and so on, the evidence tendered by the defendants includes the illustrative "snapshot" of the order book for the stock symbol OIL at about 12:19pm on 19 November 2014. This has been referred to earlier in these reasons. It shows many resting bids placed by a number of Select Vantage traders, at various prices, all below the level at which a trade could be expected to occur. These numerous bids create the superficial impression of significant demand for the stock. On the ask side of the book there is a much smaller number of limit orders placed by Select Vantage traders, so that their combined activity creates a significant order book imbalance.
12. As each Select Vantage trader was only permitted to have five resting limit orders on either side of the book in any stock and any one time, these orders have necessarily been placed by multiple traders. On Mr He's evidence, the low capitalisation and obscurity of OIL makes it unlikely in the extreme that these bids were all made on the one day pursuant to the genuine investment decisions of these supposedly independent traders. Of course, to see direct evidence of layering activity taking place one would have to view subsequent movements on the order book. The static position illustrated in the OIL snapshot is only the commencement of the manipulation sequence. However, the example illustrates how order imbalance was created.
13. Mr Schlaepfer's counsel disputed in the course of the hearing that the trading impugned in the defendants' case is properly characterised as layering because it is unidirectional; that is, on all 23 stock days Select Vantage's traders are alleged to have layered the bid side and then effected a sale to a third party at a favourable ask price. It is not alleged that the traders then reversed the process and layered or stacked the ask side of the book with a view to moving the price downwards and effecting a bid at a favourable level. I am satisfied that the unidirectional activity is properly characterised as layering, according to common usage of the term in this field. The plaintiffs' expert, Dr Emre Carr accepted this. In any event, unidirectional layering is undoubtedly manipulative.

Professor Putnins' evidence

1. ASIC tendered a report by Professor Putnins dated 10 December 2018 in which he identified 10 statistical measures of stock market activity that in his opinion are indicative of manipulative order placement. Professor Putnins is a Professor of Finance at the University of Technology Sydney and holds research positions in the fields of business data and analysis. He has held academic appointments at Columbia University in New York and at the Stockholm School of Economics. Professor Putnins holds a Doctorate of Philosophy conferred for research in market microstructure with a focus on market manipulation. His research into the effects of trading on price and liquidity makes him well-qualified to express the opinions contained in his reports.
2. Professor Putnins examined the market data for Select Vantage's trading on each of the 23 stock/days relied upon by the defendants. He found that this trading exhibited all 10 of the characteristics that he regards as indicative of layering. He is of the opinion that the inference of an intent not to trade the layered orders follows from the presence of these characteristics both as a matter of logic and because in his experience these characteristics have been seen in past cases where layering has been established. Of the 10 measures explained and applied by Professor Putnins I found six to be compelling and ample to support the inference that non-bona fide, manipulative trading was undertaken on the relevant stock/days. I found one characteristic not significant. The remaining three, while having merit, need not be considered in detail because of the strength of the defendant's position without them.
3. All of Professor Putnins' analyses were of Select Vantage's activity on the combined order books of the ASX and Chi-X in what is referred to as the "lit market", that is, the order book openly displayed to participants on the stock market. There was reference in the evidence also to the "unlit" or "dark" market, on which orders are not visible to participants. I do not find it necessary to consider the evidence concerning that aspect of the relevant markets.
4. The first measure identified by Professor Putnins is a marked imbalance in Select Vantage's ordering as between the buy and sell sides. For each stock/day he calculated separately the total dollar volume of Select Vantage's buy orders and its sell orders. The dollar volume of each order is derived by multiplying the number of shares by the price at which the order is placed. Professor Putnins found that for each stock/day the total dollar volume of Select Vantage's buy orders significantly exceeded the total dollar volume of its sell orders. He worked out the proportion of this excess, the difference between the dollar volume of buys and sells, relative to the combined total of all orders (buy and sell) for the day, expressed as a percentage. The average across all the stock/days was 85%. Professor Putnins carried out the same exercise for all other traders in each of these stock/days and found that their corresponding proportion was 18.1%.
5. Professor Putnins expressed the following conclusion about this highly unbalanced pattern of Select Vantage's ordering (or "quoting"): The resting (unexecuted) limited orders of a layering strategy a given point in time are likely to be highly unbalanced (more buy volume than sell volume or vice versa). The imbalance is used to create a false impression of buying or selling interest in order to influence other participants and market prices. […] On all of the stock-days, [Select Vantage's] average displayed order imbalance is above 50%, reaching levels as high as 98% on some stock-days, and having an average of 85% across all of the stock-days. These levels indicate a strong tendency for [Select Vantage] to have highly unbalanced displayed orders resting in the limit order book.
6. This was further explained in Professor Putnins' oral evidence as follows: Select Vantage has roughly 12 times more quoting activity on the buy side than the sell side, yet they buy and sell equal volumes on a typical day. In other words, putting the quoting activity in perspective relative to the amount of trading activity, there's 12 times more, in other words there's abnormal quoting activity on the buy side of the market.
7. Professor Putnins' second measure is a high level of ordering or quoting activity. He measured the total dollar volume of Select Vantage's displayed resting orders on the bid side and, separately, the total dollar volume of its displayed resting orders on the ask side. He similarly measured the total dollar volume of resting orders of all traders, including Select Vantage, on each side of the book. These latter totals are referred to as the "total displayed depth" on each side of the book. Professor Putnins then calculated, for each side, the proportion of the total displayed depth represented by Select Vantage's resting orders, expressed as a percentage. This showed that on average across all of the stock/days Select Vantage's share of the resting bid orders was 20.3% whereas its share of the resting asks was only 1.7%.
8. Professor Putnins made the following observations about this second metric: Placing a large proportion of the resting orders on one side of the market (buying or selling) is not a typical characteristic of a legitimate short-term speculative trading strategy. Short-term speculators that have a prediction about future price movements usually want to trade in the direction of the predicted price movement with minimum signalling of their trading intention to other market participants. […] The limit orders of a layering strategy are likely to represent a substantial proportion of the depth … on one side of the market (buying or selling) as the layering strategy is attempting to mislead the market. Using a large volume increases the probability that the layering orders have a substantial effect on the appearance of supply or demand and therefore the desired effect of influencing the price or trading decisions of other market participants. […] On average [… Select Vantage's] quoting on the bid side represents about one fifth (20.3%) of all quoting activity (dollar depth) on the bid side. This share ranges from 10.5% to 28.5% indicating a fairly high quoting activity on the bid side of the market … . In contrast [Select Vantage's] share of the quoting activity (dollar depth) on the ask side is a mere 1.7% on average - less than one tenth of its quoting on the bidside. [Select Vantage's] quoting on the ask side puts the bid side quoting level into perspective. [… On] a typical stock-day [Select Vantage] buys and sells an equal volume of shares. Therefore, the high volume of bidding does not reflect a tendency to buy more shares than the amount sold. [… There is] 12 times more quoting activity on the bid side than the ask side, even though the volumes bought and sold are approximately (or exactly) equal. This comparison suggests that [Select Vantage's] quoting activity is excessive (by a factor of 12 times) relative to the volume that it buys.
9. Professor Putnins' third measure is an abnormally high rate of cancellation of orders. He worked out the ratio of Select Vantage's order cancellations to the number of its trades, in each stock on each of the relevant days. He found that this varied between 10:1 and 1.9:1 (expressed in his report simply as ratios of "10" and "1.9"). The average was 3.4. Professor Putnins made the same calculation for all other traders combined and derived an average of 0.8.
10. Professor Putnins' opinions about this metric are as follows: Layering strategies involve abnormally high order cancellation rates (a high ratio of cancellations to trades). This is because the layering orders are not intended to execute so they will typically end in a cancellation, and may also need to be cancelled and resubmitted as market conditions change (such as when the market moves towards the layering orders) to maintain a low execution probability. […] [T]he characteristic of abnormally high cancellation rates is a feature of [Select Vantage's] trading. On all of the stock-days, [Select Vantage's] cancel-to-trade ratio exceeds that of other market participants by a clear margin. [It] is between 251% higher and 1081% higher than that of other market participants depending on the stock-day. [… On] the average stock-day, [Select Vantage's] cancel-to-trade ratio is about 450% higher than that of other market participants. This is a substantial difference in cancellation rates, consistent with the presence of layering orders in the Relevant Order Activity.
11. I am satisfied that Professor Putnins' methodology is effective to ensure that the high cancellation rates do not merely reflect legitimate influences on the market, such as news specific to the stock. He gave this oral evidence: I deliberately construct the [metric so] that it controls various market wide effects that could be specific to a given security or specific to a given day. [… For] example, if different levels of volatility of different securities lead to different cancellation rates, different markets have different cancellation rates, whether there's news flow or not news flow on a particular day can affect the cancellation rate and so forth. So the way to control all of those various factors that can affect the natural, the normal cancellation rates is to conduct the analysis within a given stock within a given day, and within that given stock and within that given day you hold constant things like the particular stock, the characteristics of the stock, the news flows and so forth, and so the relevant comparison holding those factors constant becomes between Select Vantage cancellation rates and the cancellation rates of the rest of the market […].
12. Professor Putnins' fourth characteristic is a low probability of execution. To measure the probability of Select Vantage's orders being accepted so as to result in an executed trade, the Professor calculated the distance of each of its bids away from the best price on the order book. The distance was allocated one unit where the order was one price step away from the best order; that is, away from the highest price on the bid side or from the lowest price on the ask side. The distance was allocated two units for any order that was two price steps away from the best, and so on. Professor Putnins averaged these distances for all of Select Vantage's buy orders and, separately, for its sell orders. The average across all stock/days for the bids was a distance of 1.8 and for the asks a distance of 0.2.
13. The following are Professor Putnins' conclusions on this measure: Placing orders in the market that deliberately have low execution probability is not a feature of a typical legitimate short-term speculative trading strategy. Short-term speculators that have a prediction about future price movements will generally want to execute trades to try and profit from their predictions and therefore are likely to place orders such that they have a reasonably high probability of resulting in trades. One cannot profit from orders that do not execute, unless those orders are used to obtain favourable execution prices for other orders and are therefore not intended to execute (eg layering orders). […] Layering orders are placed in the market in such a way that they deliberately have low execution probability: either at price steps behind (away from) the best quotes, or at the back of a long queue of orders [with earlier time priority] at a given price step. If low execution probability is achieved by placing orders away from the best quotes, we should see lower price aggressiveness (orders further from the best quotes) on the side that contains layering orders (the side with more quoted volume). […] Given the results for [the second characteristic] indicate excessive bidding activity by [Select Vantage], consistent with layering the bid side of the market but not the ask side, if some of the bid orders are used for layering, we would expect to see lower execution priority [scil probability] for [Select Vantage's] buy orders than its sell orders. The results [for the fourth characteristic] show that the tendency described above is indeed a feature of [Select Vantage's] quoting activity. [Select Vantage's] buy orders tend to be placed further behind the best quotes than their sell orders, giving [Select Vantage's] buy orders lower execution priority [scil probability] than their sell orders. The results indicate that Select Vantage places its buy orders in the market in such a way that they are likely to have lower execution priority/probability than their sell orders.
14. Professor Putnins found that Select Vantage's placement of its buy orders further away from the best quotes than its sell orders correlated with significantly lower execution rates actually achieved for its buy orders, relative both to the average execution rates for all limit orders, buy and sell, of all traders (36.61%) and to the average execution rates for Select Vantage's sell orders (13.33%). In Professor Putnins' opinion: This evidence further supports the notion that most of the buy orders placed by [Select Vantage] behind the prevailing best bid are not intended to execute.
15. Professor Putnins accepted that the further a bid is away from the best price and the lower its execution probability, the less influence it is likely to have on moving the price. However, he considers that bids first placed relatively close to the best price would be influential. Select Vantage traders' high rates of cancellation and amendment of bids led to a large volume moving to positions of low execution probability.
16. Professor Putnins' fifth characteristic is that of buying volume during a trading day being approximately equal to selling volume. I do not put any weight on that characteristic in the present case because, although it is present, it is attributable to Select Vantage having adopted a business model of not permitting its traders to hold any stock overnight and requiring them to close out all positions at the end of each day's trade. There could be sound commercial reasons for limiting activity to day trading in this manner and I do not regard this feature as supporting an inference of market manipulation.
17. Professor Putnins' sixth characteristic is that of trades commonly being executed on the opposite side of the order book to the side on which there is an imbalance of resting orders. He made a count of how many trades were executed by Select Vantage on the sell side at a time when the dollar volume of its resting bids outweighed the dollar volume of its resting asks. Similarly, he counted how many trades were executed on the buy side when the balance of resting orders was the other way. He also counted the number of trades that were executed on the same side as the imbalance of resting limit orders. Professor Putnins then calculated what percentage of the total number of trades was represented by those that were executed on the opposite side to the imbalance. The range was found to be between 25% and 56% with an average of 48%.
18. Professor Putnins expressed these opinions: Executing trades on the opposite side of the market to the traders' resting order imbalance […] is unlikely in a typical legitimate short-term speculative trading strategy. At a given point in time, a speculator with a prediction about the future price movement will typically want to buy or sell, but not be bidding to buy and then actually selling, or vice versa, offering to sell but actually buying the stock. […] Market participants engaging in layering will often have trades executed on the opposite side of the market to their resting order imbalance […]. Put differently, layering often involves trading in a direction that is opposite to what trader's order imbalance would signal as their intended direction of trade because their order imbalance is not a true reflection of their intentions. To put [the average of 48% as measured for Select Vantage] into perspective, note that many legitimate trading strategies will have a score of 0% on this characteristic […].
19. The seventh characteristic is that of cancelling orders on one side of the market after executing an order on the opposite side. Professor Putnins counted both the number of bid orders cancelled after an ask had executed and the number of sell orders cancelled after a bid had executed. He also counted the numbers of orders that were cancelled on the same side as that on which a trade had been effected. Professor Putnins then worked out what percentage of all orders cancelled following trades was represented by those that cancelled on the side opposite the transaction. The percentage ranged from 40% to 70% and averaged 52%.
20. Professor Putnins gave these opinions about this seventh characteristic: Manipulators engaging in layering will often cancel orders on one side of the market after they execute an order on the opposite side of the market […]. This occurs because layering orders are not intended to execute and once they have served their purpose of pushing the market towards the price of any bona fide orders resulting in executions, the layering orders can be cancelled. […] [This] is unlikely in a legitimate short-term speculative trading strategy unless the cancelled orders were not intended to execute but were instead intended to get the favourable execution price for the trade (layering). In particular if the speculative strategy is an intraday one […] in which the intention is to reverse inventory towards zero by the end of the day, then after having bought the desired quantity a speculator would typically want to sell that position for a profit, or after having sold the desired quantity a speculator would want to repurchase that position for a profit. Such trading would result in the opposite characteristic: placing sell orders after buying (not cancelling sell orders) and placing buy orders after selling (not cancelling buy orders). […] To put [Select Vantage's] numbers into perspective, note that many legitimate trading strategies will have a score of 0% on this characteristic […]. Therefore, cancelling orders following trades on the opposite side of the market, a characteristic of layering, is consistently present in [Select Vantage's] activity on all stock-days and accounts for a considerable fraction of [Select Vantage's] order cancellations on individual stock-days as well as overall.
21. I found Professor Putnins' eighth characteristic, regarding Select Vantage's use of the unlit market, of some additional weight. However, I do not find it necessary to rely upon that element and will refrain from discussing it. To do so would require a description at length of the operation of the unlit market. Professor Putnins' ninth and tenth characteristics both concerned Select Vantage placing or maintaining resting bids at times when it is clear that the traders' intentions must have been to sell stock in order to revert their balance to zero. I find that the Professor's analysis establishes these two additional characteristics and I attach significant weight to them. It is not necessary to set out the numerical results of these two additional characteristics because those that I have considered above are well sufficient to support the inference that Select Vantage was engaged in manipulative layering on the days in question. I accept Professor Putnins' opinions that a number of the characteristics are inconsistent with legitimate speculative trading and that they strongly indicate an absence of bona fide intention to execute the large volume of bid-side orders that were placed.
22. Professor Putnins' analysis of the data has not been shown to be inaccurate. I can see no rational explanation for the metrics he has brought to light other than a deliberate attempt to create a misleading impression of market interest in the relevant stocks and to influence the price at which they would trade, that attempt having been orchestrated amongst Select Vantage's traders. It was of course possible for the traders to act in concert, given the physical circumstances under which they operated and notwithstanding that the terms of their employment required each individual to act independently.
23. In his second report dated 29 January 2019 Professor Putnins summarised Select Vantage's layering technique as follows: The data are consistent with Select Vantage using layering in the following way: (i) establish a long position [ie holding a positive balance of the shares] early in the day by buying the stock during or soon after the opening auction; (ii) place small sell orders at or near the best ask quotes to try and sell the long position for a profit; (iii) submit many buy orders (the layering orders that are not intended to execute) on the bid side of the market at prices below the best bid (such that the orders have little chance of executing to create the appearance of active buying interest in the stock and obtain more favourable executions for the sell orders; and (iv) maintain the layering orders on the bid side, entering new orders and cancelling orders as market conditions change, until such time as the long position is completely sold and inventory is back at zero, which is typically the end of the day.
24. The data provided to Professor Putnins included unique identifying codes for the individual Select Vantage traders. Each order placed through Merlito's account with Macquarie included the trader identification code. Using this information Professor Putnins was able to divide the Select Vantage traders into two randomly selected groups and then to compare the order counts for each of the two groups, on each stock/day, in the following categories: buy orders; sell orders; cancelled buy orders; cancelled sell orders; executed buys; executed sells.
25. Professor Putnins found a correlation of greater than 0.5 between the two groups in all of these measures. This result is to be understood on the basis that +1 or -1 would be perfect correlation and zero would be no correlation. If all of the traders were acting independently the correlation between the two randomly selected groups should be zero. In oral evidence in chief the Professor described having repeated the exercise but this time with Select Vantage's traders divided into two groups alpha-numerically, by reference to the trader codes. He said the results were substantially the same.
26. Professor Putnins further tested the independence of the two groups of Select Vantage traders by normalising the results. That is, for each category of order he divided the count for Group 1 by the total order count for all market participants and he repeated this for Group 2. The resulting figures provided a measure of the activity of Select Vantage's traders relative to the whole market. Again Professor Putnins found positive correlation between the groups, varying between 0.21 and 0.89 across the several categories of ordering activity. Very significantly, for buy orders the correlation was 0.72 and for cancelled buy orders the correlation was 0.89. These numbers indicate a strong coordination of Select Vantage's traders with respect to bidding activity. This supports the inference of orchestration in layering the bid side of the order book in these stocks on the relevant days.
27. In his oral evidence in chief Professor Putnins expanded upon the rigour of these statistical exercises, to a level of detail that it is not necessary to repeat here. I accept that his method is sound. I also accept, for the reasons Professor Putnins gave, that Dr Carr's statistical examination of the entire market on the relevant stock days, divided into two groups, is not meaningful or useful and does not detract from Professor Putnins' statistical proof that Select Vantage's traders did not act independently with respect to the impugned stock/days.
28. Professor Putnins' opinion that layering the bid side of the order book is likely to increase the price at which the relevant stock will trade is reasoned by him in the following passages of his first report: A number of studies find that when there is more depth on the bid (buy) side of the market, buyers respond by increasing the aggressiveness of their orders: placing buy orders at higher prices and/or using market orders to execute their trades immediately rather than being patient and using limit orders. […] There are two main reasons why the level of depth in the limit order book affects order placement decisions. First, greater depth on a given side of the market decreases the execution probability and/or increases the waiting time for limit orders placed on that side of the market because they would have to sit at the end of the longer queue. A longer waiting time to get [to] the front of the queue increases the probability that the market moves away from the limit order and it remains unexecuted. […] In response, traders are likely to either place limit orders at more aggressive prices (lower sell prices or higher buy prices) to undercut the resting orders in the limit order book and "jump the queue". They will simply use a market order instead of a limit order, paying a premium to avoid the queue altogether and get a guaranteed execution. The second reason that depth affects order placement and trading decisions is the information that it signals. […] Given that some orders are from informed traders, order arrivals provide signals about future price movements: future prices on average are likely to be higher when there is a lot of buying and vice versa when there is a lot of selling. Therefore, the market reacts to order flow: traders tend to revise upward their beliefs about the value of a stock when they see a lot of buying interest and vice versa. […] Empirical studies show that imbalance in the limit order depth (the extent to which the volume of resting buy orders exceeds the volume of resting sell orders) is a predictor of future price movements.
29. This reasoning accords with what one would expect as a matter of common sense given the mechanisms of the market. I find it compelling and I accept that it is supported by academic and empirical studies. I accept Professor Putnins' opinion that the data he analysed indicates coordinated layering activity by Select Vantage's traders that was likely to result in setting and maintaining artificial prices in the stocks concerned.

Mr Carr's evidence

1. Mr Schlaepfer relied upon a report of Dr Carr dated 10 December 2018. Dr Carr's background includes employment as a Senior Financial Economist with the United States Securities and Exchange Commission. He has served on the faculties of several North American Universities, teaching a variety of accounting, valuation and finance-related subjects. Dr Carr has undertaken research on securities and banking regulation and his research has been published in peer-reviewed academic journals. He is appropriately qualified to comment on phenomena of market manipulation.
2. In Dr Carr's opinion layering involves: both a specific pattern of orders and trades that can be observed in the ex-post trading data and the intentions and state of mind of the trader who placed the orders at the time [they were placed]. A computer program or market surveillance system is, in my opinion, not capable of determining those intentions.
3. In a later passage of his first report Dr Carr said: [Patterns of trading] would not be considered layering as long as it was not the intention of the trader to cancel the orders at the time the trader placed them. In other words, if the trader was not intending to cancel the order at the time the order was placed, the price effect of the order, if any, would not be artificial. The combination of (i) the specific pattern of trades and (ii) the intention to cancel the orders at the time the orders were placed is what defines the conduct of layering. In my opinion, there is no way of objectively telling apart displayed […] orders that may be placed with the intention to be cancelled from any other cancelled orders in the market. […] In my opinion the determination of which orders were intended to be cancelled at the time orders were placed is a subjective enquiry that is based on indirect evidence. Economic analysis is useful in this enquiry, but not the only means of enquiry. In a footnote to this passage Dr Carr refers to a case in which intent with respect to orders was established primarily from evidence embedded in the computer programs used by the trader to place the orders.
4. The above-quoted passages reflect a reservation that I do not share about the capacity of circumstantial evidence to prove manipulative intention. Certainly the intent to cancel orders at the time they are placed may be proved by evidence of explicit instruction to traders, as was the case in the United Kingdom FSA's finding that Mr Beck had disseminated to Swift Trade's traders the technique of layering. But an entirely circumstantial case may be a very strong case. Many prosecutions for offences of defrauding and the like have succeeded on purely circumstantial evidence of intent or of lack of bona fides. Sufficiently compelling circumstances may support an inference of fraudulent or manipulative intent, beyond reasonable doubt.
5. The weight of Dr Carr's report is adversely affected by his reservations about circumstantial proof and also by his adoption of very prescriptive criteria for layering. These criteria, that he states have been adopted by regulators of United States equities and futures markets, are drawn from cases where rapid cyclical layering has taken place. The criteria include that an imbalance in ordering activity will only be treated as indicative of layering if it exceeds a ratio of 3 to 1 and that cancellations of orders on the layered side of the book should take place within seconds, or at least no more than a minute, after an executed trade on the opposite side. I do not accept that these tight criteria are appropriate to the unidirectional activity of Select Vantage, summarised by Professor Putnins in the terms quoted at [226]. I do not give significant weight to the nonconformity of Select Vantage's trading with these strict criteria, having regard to the strong combination of other indicative characteristics identified by Professor Putnins.
6. With respect to Professor Putnins' first characteristic, unbalanced order placement to the bid side, Dr Carr has examined the data by reference to the ratio of 3:1 that he takes to be the United States regulators' benchmark. I find Professor Putnins' approach of calculating the imbalance by reference to dollar volume and by mathematical comparison with the total of Select Vantage's orders on both sides of the book a much more meaningful measure. Dr Carr found very few days on which even a 2:1 imbalance, calculated on a raw count of orders, occurred in conjunction with cancellations on the opposite side within one minute of an executed trade. I do not find the scarcity of stock/days meeting these demanding criteria to be probative.
7. As regards Professor Putnins' second characteristic, Select Vantage's high level of order placing, Dr Carr observed that where a participant buys and sells the same number of stock to leave zero inventory, this may be done quite legitimately without the trader necessarily having placed equal numbers of orders on the buy and sell sides in order to achieve the outcome. No doubt that is so but where the disproportion is by a factor of 12:1 (see [209] and [211] above), I accept Professor Putnins' view that this is consistent with layering and, in combination with other features, indicative of that type of manipulation.
8. With respect to Professor Putnins' third characteristic - the abnormally high ratio of order cancellations to trades - Dr Carr opines that high cancellation rates "by themselves would not demonstrate that they had an intention to cancel their orders when they placed them". This may be accepted. But the high cancellation to trade ratio is relied upon by Professor Putnins and by the defendants in conjunction with many other factors. Dr Carr has identified numerous stock/days on which participants other than Select Vantage have the highest rate of cancellation. This is not probative of whether or not Select Vantage engaged in layering. If the trading of those other participants also exhibited the additional characteristics seen in Select Vantage's activity, then it may be that they also were engaged in manipulation. Otherwise, their high cancellation rates may have some other explanation. But the presence of this characteristic in the trading of other participants cannot detract from its significance in Select Vantage's activity, given all the other telling metrics.
9. Also in relation to this third characteristic, Dr Carr has questioned whether the data for the 23 stock/days "may not be an unbiased sample that enables me to form an opinion as to whether [Select Vantage] had generally higher cancellation rates than the rest of the Australian equity market trading". With due respect I find this consideration beside the point. Select Vantage's order cancellation rate across all stocks in which it traded and on all days is of no relevance. Nor would there be any utility in making a comparison of such a measure of Select Vantage's overall activity with the prevailing average across the rest of the market.
10. With respect to Professor Putnins' fourth characteristic, the placement of bids away from the best price in a manner that would reduce the probability of execution, Dr Carr expressed the view that "the rest of the market was approximately as close to the best bid and ask as [Select Vantage] traders, but with a larger variation". He did not discern a "systematic difference between the behaviours of [Select Vantage] traders relative to others" in this respect. Again this comparison with other traders is immaterial. The importance of the low execution probability of Select Vantage's orders lies in its conjunction with its high cancellation rates, the placement of the orders with low execution probability on the opposite side of the book from that on which trades actually take place and the several other features identified by Professor Putnins.
11. Relevantly to Professor Putnins' seventh characteristic, orders being cancelled on one side of the market after execution of an order on the opposite side, Dr Carr observed that participants other than Select Vantage were "quicker … in cancelling their orders on most of the days". Also he calculated that on six of the 23 stock/days there were no cancellations "surrounding a filled order on the opposite side" and on another four days there were fewer than three orders cancelled after an order had been filled on the opposite side. There could well have been features of the order book on these particular stock/days that made it unnecessary for Select Vantage's traders to cancel their layered orders after executing a trade; for example if those orders were still sufficiently off the best price to provide reasonable assurance that they would not themselves be executed. I do not consider that the absence of individual characteristics on particular days is capable of displacing the inference that arises from the overall coincidence of imbalances and other features that Professor Putnins has identified.
12. Dr Carr observes that the defendants have not pleaded: what price levels were artificial, or what point during those days prices were artificial, nor [do the defendants] point to any specific causal link between those allegedly artificial prices and [Select Vantage's] cancellations […]
13. In order to prove the truth of the proposition that Select Vantage engaged in market manipulation contrary to s 1041A or s 1041B it is not necessary that the defendants should show that an artificial price was actually achieved or what the artificial price was, in any of the relevant stocks. Breaches of these provisions are constituted by conduct likely to have had the proscribed effects.
14. The expert reports comprised 250 pages of closely reasoned technical and statistical information. There were two initial reports, one on each side, followed by a subsequent exchange of responsive reports. Then, in addition, each expert made quite extensive further response in oral evidence and each was cross-examined rigorously. I have considered the entirety of Dr Carr's reports and his oral evidence. I found Professor Putnins' analysis clearly the more persuasive and I have dealt in these reasons with only the main points of controversy that lead me to that assessment. On the balance of probabilities I am satisfied that Select Vantage engaged in manipulation of the market by layering on each of the 23 stock/days in question.

Mr Kruyne's evidence

1. From January 2013 Mr Kruyne was employed by True North Vantage, a Canadian subsidiary in Mr Schlaepfer's group. He was employed in a role that included surveillance of Select Vantage's trading. He had previously worked for Orbixa Management Services, which had implemented compliance software controls for Peter Beck's entities in their last years of trading. Orbixa had developed surveillance and compliance software and had provided it to Select Vantage after the takeover of Swift Trade's business. Mr Kruyne described his duties at True North Vantage as including the following: A. I managed the trade surveillance team as well as having some responsibility for the trade support team and continued to interact with Orbixa Management Services and their role as our software provider to ensure that any refinements to the software or new requirements would be met. Q. Would you briefly describe please what were the duties of the trade surveillance team? A. So the trade surveillance team was really there to review all trade activity executed by Select Vantage traders on the various markets that we had access to and monitor four potentially suspicious patterns of trade activity.
2. Mr Kruyne referred to Morgan Stanley's suspension of Select Vantage's access to all markets, globally, for several months in the first half of 2012 as a result of layering on the Japanese market involving collaboration between traders in separate pods or locations. He said that he and others working under him carried out an investigation and did not receive satisfactory explanations from about 20 traders, whose services were terminated. Thereafter Morgan Stanley reinstated provision of broking services for European markets from 21 May 2012. Up until August 2012 it required Select Vantage to submit daily reports to demonstrate that its trading was compliant. From August 2012 Morgan Stanley was satisfied with the propriety of Select Vantage's resumed trading and it ceased to require these ongoing reports. At the same time Morgan Stanley reinstated broking services for the Japanese market.
3. Mr Kruyne said that Select Vantage's trade surveillance team had remained fairly constant at five analysts during 2013 and 2014. Throughout those years, the filters in Select Vantage's software known as Ginger were set to raise an alert if, following execution of a trade, there was a cancellation of orders on the opposite side of the book within 10 seconds. That criterion remained the trigger for identification of layering throughout 2014. In cross-examination it was clarified that an opposite-side cancellation within 10 seconds would not engage the alert if the cancelled order had been resting on the book for a significant period of time. For other types of manipulation another filter was in place. This identified any placements and cancellations of orders in quick succession. The surveillance team also carried out analysis to try to identify collaboration in the placement of orders between traders in different locations around the world.
4. Mr Kruyne said that in 2014 Select Vantage's filters on the entry of orders restricted its traders to 3 orders per side per exchange per stock. Combining the ASX and Chi-X, a trader could have six bids and six asks resting at any time on a particular stock. Attempts by traders to place orders in excess of this limit would be blocked before the orders could reach the broker's electronic placement system. Some traders were granted exemption from this limit and could place a higher number of orders. However Macquarie itself set an upper limit of five orders per side per exchange per stock.
5. The filters and triggers for alerts that Mr Kruyne described do not cause me to doubt the otherwise strong evidence that Select Vantage's traders engaged collaboratively in layering the market for the 23 stock/days in question. I am comfortably satisfied that the traders could and did place numerous orders that were never intended to trade and that were likely to mislead the market and create artificial prices without infringing any individual's limit on numbers of resting orders or the 10-second-cancellation criterion.
6. In his evidence in chief Mr Kruyne proffered explanations for certain queries that had been received from Macquarie and certain alerts that had been thrown up by Select Vantage's software. By those explanations he attempted to rebut the suggestion of manipulative trading on the occasions in question. In cross-examination it was put to Mr Kruyne that the level of instruction given by the company to traders about market compliance was inadequate and, in particular, not sufficiently specific with regard to the types of market strategies that would be regarded as manipulative and that should not be undertaken. None of Mr Kruyne's evidence on these topics dissuades me from my conclusions that Select Vantage's traders actively engaged in layering as alleged by the defendants, that the company's compliance and surveillance systems were inadequate to detect this manipulation and that its responses when alerts and queries were raised were feeble and ineffectual. On the other hand, nor does Mr Kruyne's evidence persuade me that either he or Mr Schlaepfer was knowingly concerned in the manipulative conduct of the traders or that he encouraged or assisted this in any way.

Mr Veidners' evidence

1. The only part of Mr Veidners' evidence that I find it necessary to refer to is his cross examination by the plaintiffs' counsel wherein he identified various levels and stages at which filtering of order placement takes place. By this questioning it was sought to lay the ground for an argument that layering activity really could not take place because it would be blocked at one or other of a series of barriers. For example it was put to Mr Veidners, and he agreed, that a client such as Select Vantage may be expected to have its own filtering and alert system, that the broker would also have and apply such a system and so would the exchanges themselves. Lastly it was put that ASIC's own market surveillance system would create alerts for certain types of anomalous trading.
2. No doubt all of these filters and systems were in place but that does not diminish the force of the analyses made by Mr He and Professor Putnins. In fact, all of these systems were activated by the activities of Select Vantage's traders, albeit inconclusively. Macquarie's records show that the compliance monitoring systems of Chi-X raised a significant number of alerts. Macquarie's surveillance systems were activated and its compliance personnel were moved to report their concerns to senior executives. Select Vantage's filters were set to identify layering only on the very restrictive criterion of 10-second-cancellation, yet alerts and queries were raised although they were not rigorously addressed. I regard it as quite clear that the aggressive and extensive layering activity of Select Vantage's traders was able to take place in September, October and November 2014 despite the existence of multiple mechanisms intended to prevent it.

Failure to prove that Mr Schlaepfer was knowingly concerned in layering

1. To prove the truth of each of the imputations pleaded in par 12 of the statement of claim, on the assumption that they were published of Mr Schlaepfer, the defendants would have to establish, in broad terms, that Mr Schlaepfer was knowingly concerned in the layering activities that I have found proved as against Select Vantage's traders. Insofar as imputations (c) and (d) speak of Mr Schlaepfer having "misconducted" his business, even this could only be true if Mr Schlaepfer was knowingly concerned.
2. I do not accept the defendants' submission that an inference of knowing concern is in any way supported by the circumstance that the traders were using capital that belonged to a company of which Mr Schlaepfer was the principal. Nor does the inference of personal involvement flow from the remuneration structure with respect to the traders. No doubt that structure gave them a powerful incentive to engage in market manipulation. The ownership of multiple locations by a single manager and the requirement that all traders be physically present at the location when they were active in the market were features that facilitated collaboration. The constraints of day trading would make it difficult for traders to make significant profits consistently without some form of manipulation. There is no evidence to suggest that they would be placed in possession of timely and commercially significant information about target stocks ahead of other investors. In my view the whole structure was calculated, in an objective sense, to result in the traders attempting to manipulate in a collaborative fashion. However that conclusion falls well short of a basis for imputing to Mr Schlaepfer actual knowledge of manipulative activity.
3. The defendants also rely upon deficiencies of the training and instruction afforded to traders. Merely having traders sign the compliance agreement (see [63] above) was hardly sufficient. There does not appear to have been any specific instruction with respect to the terms and meaning of ss 1041A and 1041B. To deter traders from attempting to manipulate the market they would need careful direction that they should avoid known strategies, such as layering, that would infringe these provisions. No such direction was given. However, the absence of adequate instruction, even against the background of a system that was objectively calculated to encourage market misconduct, does not support an inference that Mr Schlaepfer was knowingly concerned in the unlawful activities.
4. The defendants have amply demonstrated, in cross-examination of Messrs Schlaepfer and Kruyne and in submissions, that Select Vantage's internal alert and surveillance systems were inadequate to prevent manipulative activity. The defendants have shown that when alerts in the monitoring systems were triggered and queries were issued to the traders, no effective action was taken. I find that in numerous instances the people within Select Vantage who were responsible for following through on these alerts allowed themselves to be fobbed off with absurd "explanations" from traders. There is sufficient evidence to show that Mr Schlaepfer knew of these inadequacies, both in the system and in its application to particular instances, and that he did not act to improve them. Again, however, his knowledge of the demonstrable inadequacy of the company's controls and responses is not a sufficient basis for inferring that Mr Schlaepfer knew of or acquiesced in the layering conduct that I have found was taking place on the Australian market.
5. Innuendoes (a) and (b) only concern meanings with respect to Merlito and Select Vantage and those have been proved true. If, contrary to my conclusion, imputations (a) to (d) and innuendoes (c) and (d) were conveyed of Mr Schlaepfer then justification has not been shown, for want of proof of Mr Schlaepfer's knowing concern in the illegal conduct of his traders. None of the traders or their managers were called by either party. There is no direct evidence of knowing concern on the part of Mr Schlaepfer. The circumstantial evidence on the subject is too sparse to support a finding one way or another on the balance of probabilities.

Failure to prove that Morgan Stanley terminated for layering

1. Imputation (d) and innuendo (b) (see [17] above) are concerned with the proposition that two brokers had terminated their services to Select Vantage "for layering". It has been proved true that Macquarie "turned off" Select Vantage for this reason but truth of the whole proposition would depend upon the defendants establishing that Morgan Stanley also withdrew their DMA services "for layering". This is another matter that has not been proved or disproved on the balance of probabilities. The significant impediment to making an affirmative finding upon this topic is the absence of any witness from Morgan Stanley.

Issue 5: Common law and statutory qualified privilege

Common law qualified privilege

1. As with the defence of truth, the common law and statutory defences of qualified privilege do not need to be resolved given that it has not been proved either that Mr Yanco's oral statements were published of Mr Schlaepfer or that they conveyed the defamatory meanings pleaded. However, again for completeness, I will consider whether the elements of these defences are established.
2. In Papaconstuntinos v Holmes a Court [2012] HCA 53 at [8] French CJ, Crennan, Kiefel and Bell JJ said (citations omitted): The defence of qualified privilege at common law has been held to require that both the maker and the recipient of a defamatory statement have an interest in what is conveyed. This is often referred to as a reciprocity of interest, although "community of interest" has been considered a more accurate term because it does not suggest as necessary a perfect correspondence of interest. The interest spoken of may also be founded in a duty to speak and to listen to what is conveyed.
3. In Cush v Dillon; Boland v Dillon (2011) 243 CLR 298; [2011] HCA 30 French CJ, Crennan and Kiefel JJ said at [12] (citations omitted): The defence of qualified privilege is based upon notions of public policy, that freedom of communication may in some circumstances assume more importance than an individual's right to the protection of his or her reputation. The question of whether the person making a defamatory statement was subject to some duty or was acting in the protection of some interest, in making the statement, is to be understood in this light.
4. The subject of the conversations, generally, was ASIC's oversight of Market Participants, particularly with respect to their duty to ensure that DMA clients should place only bona fide orders and should trade in a manner that would maintain the integrity of the market. The subject also extended to concerns held by ASIC about the trading of a recently terminated client of a particular participant and the need for any other participant who might take on that client to ensure that it placed orders and effected trades in a bona fide and lawful manner.
5. I am satisfied that what Mr Yanco said to the brokers was published to them in the course of giving information on the subjects referred to in the preceding paragraph and, further, that Mr Yanco had a legal duty and interest to convey that information and to make the statements that he did in his capacity as senior compliance officer of ASIC. He spoke to the brokers in discharge of a public duty created by legislation for the economic benefit of the entire community. ASIC's functions and powers were, and remain, as set out in s 1 of the ASIC Act. Section 1(2)(a) and (b) require that ASIC should strive to "maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty …" and "promote the confident and informed participation of investors and consumers in the financial system". Section 1(2A) provides that: Without limiting subsection (2), ASIC must consider the effects that the performance of its functions and the exercise of its powers will have on competition in the financial system.
6. Section 12A(2) of the ASIC Act imposes the function of monitoring and promoting market integrity and consumer protection in relation to the Australian financial system.
7. The Corporations Act imposes additional functions and confers complimentary powers upon ASIC. Section 798F of the Corporations Act is in these terms: ASIC has the function of supervising financial markets the operators of which are licensed under subsection 795B(1). As has already been outlined, s 798G empowers ASIC to publish the Market Integrity Rules as a means of regulating and supervising financial markets. The MIR for the ASX and for Chi-X put brokers at risk of intervention by ASIC if their DMA clients should trade in a manipulative or otherwise unlawful manner. Ultimate sanctions could be suspension or loss of a broking licence.
8. I am comfortably satisfied that each of the brokers to whom Mr Yanco spoke had an interest in receiving information on the subjects referred to at [264]. They had as much interest in receiving a caution to ensure that their licence obligations were observed as ASIC had in giving that caution.
9. In Bashford v Information Australia (Newsletters) Pty Ltd (2004) 218 CLR 366; [2004] HCA 5 Gleeson CJ, Hayne and Heydon JJ recognised (at [7] and [27]-[30]) that this common law defence is only attracted if "the matter which defamed the [plaintiff] was sufficiently connected to the privileged occasion". In that case the published matter wrongly identified the plaintiff as the person who had made erroneous assertions about another party's misuse of material safety data sheets, whereas it was a company that had been responsible for the erroneous assertions. The defamatory publication was connected with occupational health and safety and their Honours held that the fact the plaintiff was wrongly identified as the maker of the false assertions "did not alter or reduce the connection between the privileged occasion and the defamatory matter".
10. In the same case at [132] Gummow J quoted the following passage from the joint judgment of Dawson and McHugh JJ and himself in Bellino v Australian Broadcasting Corporation (1996) 185 CLR 183; [1996] HCA 47: [A]t common law, privilege only attaches to those defamatory imputations that are relevant to the privileged occasion. Where a potentially privileged communication consists partly of matters relevant to the privilege and partly of matters that are not relevant, qualified privilege only attaches to that part which is relevant to the occasion.
11. I find that the statements by Mr Yanco, even assuming that they conveyed imputations about Mr Schlaepfer as alleged in pars 12 and 16 of the statement of claim, were relevant to the occasion of these communications and to the brokers' and ASIC's common interest in compliance by licensed participants and their DMA clients with the Market Integrity Rules and the Corporations Act. Mr Schlaepfer contends that Mr Yanco spoke to the brokers when he had no more than "a bare suspicion" that layering was being undertaken by Select Vantage's traders and that such a suspicion "could never give rise to a duty to take such extraordinary steps when other lesser options remained open which the regulator could have chosen and which would have completely satisfied any real concern about protecting market integrity".
12. It is not correct that Mr Yanco and ASIC had no more than "a bare suspicion" of layering by Mr Schlaepfer's companies. Mr Schlaepfer's submissions seek to capitalise on the careful language in which Mr He's analytical reports are couched. Those reports refer to "suspected layering"; a concern that layering "may be creating a false and misleading appearance of active trading"; "early stage regression results"; the need for further analysis and the results of "initial observations". The underlining is as it appears in the plaintiffs' submissions. I have concluded in connection with the defence of justification that the market analysis carried out by Mr He alone constituted a strong circumstantial case of manipulation by layering. A case on this type of activity, concerned as it must be with the intent of the traders, would almost invariably be circumstantial. Mr He and Mr Veidners both said that in their respective substantial careers in this field neither of them had ever seen order placement of this scale and nature. The restrained terms in which Mr He described what he had found reflects his professionalism as a market analyst. For a regulatory officer in Mr Yanco's position, who was required to make a decision on whether or not to act to protect the market, the accumulated evidence was ample.
13. In submitting that the evidence ASIC had accumulated was insufficient to warrant the "extraordinary step" of communicating with brokers whom Merlito and Select Vantage might approach, Mr Schlaepfer characterises the conversations as a "warning off" to those brokers. I reject that characterisation. They were advices to exercise caution. I do not consider that the conversations were "extraordinary" in the sense that Mr Schlaepfer apparently intends to submit, namely, that they exceeded what was reasonably incidental to the purposes of the occasion or that they were gratuitous. I reject the submission of malice.
14. Mr Schlaepfer has made extensive submissions as to alternative courses that ASIC might have taken, mostly in the nature of further information gathering under statutory notices; contacting personnel of Merlito and Select Vantage directly or arranging to have Mr Schlaepfer examined by market regulatory authorities in Canada. The obvious disadvantage of pursuing any of these courses would be that in the meantime Merlito and Select Vantage would engage another broker, who would provide DMA services to them in ignorance of ASIC's concerns and of the need for vigilance. There might well be a continuation of what appeared, on substantial circumstantial evidence, to be aggressive layering. Damage to the reputation of the market might be done, individual investors might suffer loss and another broker might find its own compliance, and perhaps its licence, compromised. It was not extraordinary or excessive in the whole of the circumstances for Mr Yanco to have eschewed these less satisfactory alternatives and, instead, to have alerted brokers to ASIC's concerns about the substantial new client that might in the near future approach them.
15. Mr Schlaepfer submits that Mr Yanco and ASIC had no basis for believing that Morgan Stanley had terminated its services to Merlito/Select Vantage for layering. On that basis he contends that it was malicious for Mr Yanco to state that this client had been "turned off" by two brokers for market activity of that type. However, I am satisfied on the balance of probabilities that Mr Yanco had a proper basis for making this statement in reliance upon information that had come from Merlito's/Select Vantage's former broker, Morgan Stanley.
16. According to Mr Veidners, in about August 2014 he was in regular discussion with Mr Szalajko, the Executive Director of Legal and Compliance at Morgan Stanley. The discussions concerned matters unrelated to the subject of these proceedings but in the course of them Mr Szalajko said: Morgan Stanley has taken a risk-averse position and has terminated providing trading facilities for Merlito as a result of the regulatory action taken against it in Japan.
17. No contemporary file note of this conversation was tendered but on 20 November 2014, in an email to Mr He, Mr Veidners referred to: [the] recent Japanese regulatory outcome which prompted Morgan Stanley to cease providing market access for Merlito in Australia.
18. Although this email does not refer to Mr Veidners' conversation with Mr Szalajko it is corroborative of his recollection in that regard. On the whole of Mr Veidners' evidence and from reading his reports and email correspondence I find him to be a careful and professional officer. The Court has no reason to think that he would have written in the above terms to his junior colleague, who was working on an investigation of Merlito's/Select Vantage's market activities, unless he had a reasonable basis for saying that the SESC's regulatory action had caused Morgan Stanley to terminate its relationship with this client. I would not be prepared to attribute to Mr Veidners that he would simply make this up or that he would express mere speculation in such definitive terms when communicating on an important subject to a fellow officer.
19. I am satisfied on the balance of probabilities that Mr Szalajko did inform Mr Veidners in words to the effect that Mr Veidners recalls. I am further satisfied that Mr Veidners accepted this information at face value and had no reason to doubt it. The terms of the SESC's conclusions, published in February 2014 and reiterated in early June and early July 2014 by the International Bankers Association of Japan (see [93] above), were damning of Merlito/Select Vantage. It would have been highly plausible to Mr Veidners that this would have caused the client's then broker to terminate the relationship in order to avert ongoing regulatory scrutiny and risk to its licence.
20. Mr Schlaepfer submits that Morgan Stanley did not in fact terminate its relationship with his companies on account of the SESC's action but for a different and blame-free reason that he described (see [86]-[88] above). However, it was reasonable for Mr Veidners to have accepted at face value the information that I find he received from Mr Szalajko in about August 2014. There is no reason why Mr Veidners should have doubted or enquired further into this information, coming as it did from the senior compliance officer of the broker that had effected the termination of services.
21. I am further satisfied that this information from Mr Szalajko must have been passed on by Mr Veidners to Mr Yanco. In his statement and in oral evidence Mr Yanco was unable to recall a specific conversation on the subject but he did recall, in general terms, that in about August 2014 he was informed Morgan Stanley had "turned off" Merlito/Select Vantage. In oral evidence he said that he had assumed this occurred because of the client's trading behaviour. He also said that throughout September and October 2014 he had frequent conversations with Mr He and Mr Veidners about their concerns with respect to layering activity by Select Vantage (see [119] above). I make the inference that these conversations would inevitably have included what Mr Veidners had learned from Mr Szalajko and that Mr Yanco, like Mr Veidners, would have had every reason to accept that explanation of the end of the Morgan Stanley-Merlito/Select Vantage relationship.
22. Written closing submissions on behalf of Mr Schlaepfer develop at length the proposition that ASIC had acted wrongfully in the teleconference involving Mr Price, Mr Veidners and Mr Packham on 20 November 2014 (see [125] above). It is submitted that ASIC "quite deliberately determined to apply pressure to Macquarie to end the relationship with Select Vantage/Merlito/Mr Schlaepfer" and that the reason Macquarie terminated DMA services "is quite plainly because of the pressure ASIC applied to them". ASIC's conduct on this occasion is not directly the subject of any cause of action and it appears these propositions are advanced as a secondary indication of malice on the part of Mr Yanco in his conversations with the brokers.
23. I find nothing improper, let alone unlawful, in the terms of the teleconference on 20 November 2014. To ASIC's perception Merlito/Select Vantage was layering the market. Macquarie, as a licensed Market Participant providing DMA services, was obliged at least to make all reasonable endeavours to prevent this occurring. Having regard to the conclusions Mr He had reached by 20 November, ASIC would have been in dereliction of duty had it not informed Macquarie of Mr He's findings thus far and of its ongoing investigation and its intent to pursue breaches of the Market Integrity Rules and of the Corporations Act if such should be confirmed. It was appropriate for ASIC to remind Macquarie in very direct terms that it had a responsibility under its licence and that it needed to act. Of course, if Macquarie could satisfy itself that no improper trading was taking place then it had a strong commercial incentive to defend its client's market activity. Alternatively, if Macquarie could not provide an innocent explanation for the impugned trading then it could implement further controls and closer scrutiny in order to reassure ASIC. Merlito was a substantial and valuable client of Macquarie, generating substantial brokerage fees on high volumes of order placements.
24. Mr Schlaepfer's attempt to portray Macquarie as a vulnerable middleman, in fear of losing its licence and subject to unfair pressure from the regulator, is unrealistic. Macquarie's internal communications show that its own compliance personnel were just as concerned about Merlito as ASIC's analysts. Macquarie's termination of the relationship was a rational commercial response to prima facie evidence of manipulative trading, fairly and properly brought to the broker's attention by the regulator, and coincident with its own assessments. Neither the nature of ASIC's approach nor the fact of Macquarie's response is indicative of mala fides on the part of ASIC that could in any way contribute to a finding of malice with respect to Mr Yanco's subsequent conversations with other brokers.
25. The occasion of Mr Yanco conveying to the brokers that ASIC was concerned about the trading behaviour of a client who may be looking to engage their DMA services was privileged by the community of interest of himself and the listeners. The occasion protected his communications even if they conveyed defamatory meanings with respect to Mr Schlaepfer. The common law defence of qualified privilege is established.

Statutory qualified privilege

1. For the purpose of considering the defendants' plea of qualified privilege under s 30 of the Defamation Act 2005 (NSW)it is sufficient to quote the following extracts from the section: 30 Defence of qualified privilege for provision of certain information (1) There is a defence of qualified privilege for the publication of defamatory matter to a person (the recipient) if the defendant proves that: (a) the recipient has an interest or apparent interest in having information on some subject, and (b) the matter is published to the recipient in the course of giving to the recipient information on that subject, and (c) the conduct of the defendant in publishing that matter is reasonable in the circumstances.
2. Paragraphs (a) and (b) of s 30(1) are satisfied by the circumstances adverted to at [263]-[271] above. As the defendants have not proved that the alleged defamatory meanings were true of Mr Schlaepfer, in order to establish that their conduct in publishing them was reasonable for the purposes of paragraph (c) they had to prove that they attempted to verify the imputations before Mr Yanco spoke to the brokers: Austin v Mirror Newspapers Ltd (1985) 3 NSWLR 354 at pp 361B, 362G-365C. That was a decision of the Privy Council on s 22 of the Defamation Act 1974 (NSW) (repealed), which was in materially the same terms as s 30 of the current Act.
3. Section 30(3) permits the Court to take into account, among other things, the following matters when determining the reasonableness or otherwise of the defendants' conduct: (g) the sources of the information in the matter published and the integrity of those sources, and (h) whether the matter published contained the substance of the person's side of the story and, if not, whether a reasonable attempt was made by the defendant to obtain and publish a response from the person, and (i) any other steps taken to verify the information in the matter published.
4. The statements made by Mr Yanco to the brokers were very important to the discharge of his and ASIC's statutory duties. The Market Integrity Rules placed a burden upon the brokers to control the market activity of their clients through direct access utilising AOP. ASIC was empowered to direct the brokers as necessary to try to ensure that their clients did not undermine the integrity of the market. There was a significant public interest in Mr Yanco expeditiously notifying these brokers that they should be wary of taking on an unnamed client whose direct market access via Macquarie had just been terminated. The enquiries that had been made, both by way of Mr He's analysis of Select Vantage's trading and by ascertaining that Mr Schlaepfer was the principal behind Merlito and Select Vantage and had previously been concerned in Swift Trade when it engaged in layering other markets, were in my view as reasonably thorough as could be expected having regard to the urgent need to protect the Australian share market.
5. If Mr Yanco's communications with brokers in the circumstances of this case should be regarded as unreasonable for the purposes of s 30(1)(c), thereby denying Mr Yanco and ASIC the protection of qualified privilege under the Defamation Act, then the defendants would be strongly inhibited against intervening proactively to protect market integrity. If subs (1)(c) should be applied in such a way as to require more thorough enquiry than occurred in this case - as to Select Vantage's misconduct and Mr Schlaepfer's involvement and responsibility - the fairness and transparency of the market could be heavily compromised and its reputation for fair dealing severely damaged by a manipulative trader going from broker to broker while the regulator collected more circumstantial evidence. The difficulty of proving infringements of ss 1041A and 1041B, particularly as against an individual executive, is obvious. A great deal of damage could be done to the reputation of the stock exchange if Mr Yanco should be required to gather more extensive evidence than he did before warning other brokers.
6. The defence of qualified privilege under s 30 has been established in respect of Mr Yanco's conversations, on the assumption that they carried the imputations pleaded and that those imputations were published of Mr Schlaepfer.

Issue 6: Damages for defamation

1. In summary Mr Schlaepfer's defamation action fails at the following points: Issue 1: The impugned oral communications by Mr Yanco with brokers were not as alleged in Annexures A and B to the statement of claim (repeated at [137] and [144] above) but were in the terms found at [153]. Issue 2: Mr Schlaepfer was not identified in the conversations and any imputations or innuendoes conveyed were not of or concerning him. Issue 3: The imputations and innuendoes alleged in pars 12 and 16 of the statement of claim (repeated at [15] and [17] above) were not conveyed. Issue 5: If the imputations and/or the innuendoes were conveyed, the defendants are protected from liability by the common law and statutory defences of qualified privilege.
2. There is therefore no occasion for me to assess damages. It would not be practical to do so on a contingent basis, to facilitate an end to the litigation if an appeal against my decision on liability should be filed and should be successful. In that event, the assessment would depend upon which imputations or innuendoes might be found to have been conveyed. It would also depend upon the basis for denying the defendants the protection of qualified privilege, in particular whether the privilege was lost through malice. In short, if my dismissal of the action is reversed damages will have to be assessed in light of the Court of Appeal's reasons.

Issue 7: Representations concerning the plaintiffs

1. The representations alleged as the foundation of the plaintiffs' injurious falsehood case are set out at [33] above. Representations (a) and (b) (that Select Vantage was engaging in market manipulation and had been terminated by two brokers for layering) were not conveyed by Mr Yanco's spoken words, taking into account the extrinsic facts, for the reasons given at [172]-[182]. Representation (c) (that Select Vantage was related to Peter Beck or his entities) was not conveyed because there was nothing in Mr Yanco's words, as I have found them, or in the extrinsic facts to suggest that Select Vantage was such a "related entity" in any relevant sense. Representation (d) (that Mr Schlaepfer engaged in market manipulation) was not conveyed for the reasons given at [172]-[184].

Issue 8: Alleged falsehood of the representations

1. If representation (a) was conveyed (that Select Vantage was engaged in market manipulation by layering), the plaintiffs have not proved this false. On the contrary, I have found that the defendants have proved it true, as explained under the heading "Issue 4: Justification" commencing at [185].
2. If representation (b) was made (that two brokers had terminated Select Vantage for layering), the defendants have not proved this true for the reasons given at [260] above. On the other hand, for the purposes of the cause of action for injurious falsehood the onus is borne by the plaintiffs to prove this representation untrue. I am affirmatively satisfied that Macquarie terminated its relationship with Merlito/Select Vantage "for layering". Therefore, proof that the representation was untrue would depend upon the plaintiff satisfying me on the balance of probabilities that Morgan Stanley terminated its services for some other reason. I am not so satisfied. The account Mr Schlaepfer gave of Morgan Stanley asking him to find another broker for a reason concerned with the use of a product that had attracted unfavourable public comment was to my mind not convincing or satisfactory. Even if he took part in conversations with Morgan Stanley personnel to the effect that he described, this does not persuade me that the broker's ultimate decision was not based at least substantially upon Select Vantage's conflict with the Japan SESC over layering. In the absence of evidence from witnesses who could speak on behalf of Morgan Stanley, the question whether termination by that broker occurred "for layering" is neither proved nor disproved.
3. If representation (c) was made (that Select Vantage was a related entity of Peter Beck) then it was untrue. I accept the evidence of Mr Schlaepfer that neither Select Vantage nor any intermediate or connected entity is in any relevant sense related to Peter Beck or his entities.
4. If representation (d) was made (that Mr Schlaepfer was engaging in market manipulation by layering), then with respect to proof of falsehood the position is much the same as for representation (b). The defendants have not proved this true, for reasons given at [255]-[259] above. On the other hand, nor has Mr Schlaepfer satisfied me on the balance of probabilities that he was not knowingly concerned in the layering that, as I have found, was clearly undertaken by Select Vantage's traders.
5. Mr Schlaepfer expressly and repeatedly denied such knowing concern, including during his long cross-examination. Notwithstanding these denials I am not persuaded to make an affirmative finding in his favour with respect to the alleged falsehood of this representation. I take into account Mr Schlaepfer's extensive experience of trading on share markets, his intimate knowledge gained through working with Swift Trade of the kind of manipulation that has been proved here, his knowledge of and responsibility for the Select Vantage internal controls and his knowledge of frequent internal alerts raised by traders' actions and the company's wholly inadequate responses. I add to this Mr Schlaepfer's comprehensive knowledge of the structure of his company's traders and trader locations and of the parameters within which traders were required to operate. From all of this it must have been obvious to Mr Schlaepfer that Select Vantage's business model provided fertile ground for repetition of the kind of manipulation that a previous entity in which he had been involved as a trader, Swift Trade, had carried out.

Issue 9: Malice

1. The reasoning I have set out under the heading "Issue 5: Common law and statutory qualified privilege" commencing at [261], contains affirmative findings that the impugned communications by Mr Yanco took place in a setting of legitimate common interest between Mr Yanco and the persons addressed and that the matters communicated were relevant and appropriate to that common interest. Those findings negate the plaintiffs' allegation of malice, which the plaintiffs bear the onus of proving if their injurious falsehood claim is to succeed. Malice is not proved.

Issue 10: Actual damage

1. In Palmer-Bruyn and Parker Pty Ltd v Parsons Gummow J said at [73] (citation omitted): [W]hatever may be its origins, an action in injurious falsehood requires either that the defendant intended to cause the harm or that the harm be the "natural and probable result" of the publication of the false statement.
2. Gummow J held that limiting criteria of remoteness and reasonable foreseeability are not applicable in determining whether damage has been caused by an injurious falsehood or in determining quantum. At [96] his Honour said that "an injurious falsehood is a legal cause of pecuniary loss if 'it is a substantial factor in bringing about the loss'". Gummow J accepted, on the basis of Bowen LJ's judgment in Ratcliffe v Evans [1892] 2 QB 524 at 527-528, that proof of "general loss of business" without proof of a particular amount is sufficient to establish special damage, which is an element of the cause of action.
3. I am not satisfied that either Mr Yanco or ASIC intended to cause harm to either of the plaintiffs through the words spoken by Mr Yanco to the various brokers on 21, 24 and 28 November 2014. In accordance with the passage quoted above from the judgment of Gummow J the question is therefore whether the plaintiffs have proved that some damage was occasioned to them, at least in the nature of "general loss of business", that this was the natural and probable result of Mr Yanco's spoken words and that those words were a substantial factor in bringing about the loss.
4. In final written submissions the following was put by the plaintiffs: On the issue of special damages Select Vantage does not submit that any quantifiable loss arises for calculation by the Court. However, it does submit that the Court can infer the existence of some loss.
5. Following the above submission the plaintiffs set out references to Select Vantage's consolidated financial statements showing the company's total revenue from trading worldwide in 2014. They assert that the statements disclose direct costs of such an order as to give rise to a gross margin of 4.53%. There is no evidence from which I could be satisfied that this margin, or any margin, held true for the component of Select Vantage's trading that was conducted on Australian markets. No accounting opinion has been tendered to that effect. No evidence was led from any witness with appropriate accounting qualifications who is familiar with Select Vantage's financial records. The plaintiffs have not tendered evidence upon which I would be prepared to find on the balance of probabilities that Select Vantage derived gross revenue from trading on Australian markets, to which a gross margin percentage could be applied. All that was tendered in that regard was an email dated 2 May 2018 from someone named "Olga" asserting that the "total Gross for AUD trading from Nov 22, 2013 until Nov 21, 2014 is 10,926,173.57 AUD". I am not prepared to find special damage upon the basis of this brief and bald assertion.
6. Select Vantage submits that no part of its head office costs is attributable to its trade on Australian markets and that therefore the gross margin that it asserts, being 4.53% of the $10,926,173, is the measure of the profit it was making on its Australian trade in the period November 2013 to November 2014. Again, I am not prepared to accept that there was no component of head office costs attributable to the Australian trade in the absence of qualified accounting opinion based upon an examination of the company's records.
7. If the plaintiffs had proved that Select Vantage was trading profitably on the ASX and Chi-X up to 21 November 2014, they would still have had to prove that such profitable trading would have continued but for Mr Yanco's conversations with brokers on 21, 24 and 28 November 2014, by which the alleged injurious falsehoods were conveyed. The plaintiffs submit: [A] strong inference can be made that Macquarie would have continued to provide brokering services to [Select Vantage] (subject always to [Select Vantage] complying with trading regulations) had ASIC not directed Macquarie to cease doing so. […] There is no dispute that when Merlito was terminated by Macquarie, [Select Vantage] lost its Australian business and that it never recovered that business. The publication of the matters complained of, to a targeted group of brokers who might realistically have replaced Macquarie, had the effect of confirming and establishing [Select Vantage's] exclusion from the Australian market.
8. An obvious problem with this submission is that it attributes the alleged loss primarily to ASIC having caused Macquarie to terminate its relationship with Merlito/Select Vantage, which is not the foundation of the plaintiffs' cause of action. Macquarie's termination not only does not found any claim against the defendants, it becomes a circumstance relevant to the drawing of an inference as to what would have occurred absent Mr Yanco's conversations with the brokers. I would not infer that any of those brokers would have been willing to enter into a DMA agreement with Select Vantage against the background of the Japan SESC's findings of February 2014 and the cessation of Select Vantage's relations with, first, Morgan Stanley and then, within three months, Macquarie, regardless of the reason for either of these terminations. In order to persuade the Court that, but for Mr Yanco's conversations, any of these brokers could have been expected to commence a relationship with Select Vantage after 21 November 2014 there would need to have been some convincing affirmative evidence in that regard. None was tendered.
9. Further, if Select Vantage had proved that it was unable to continue trading on Australian markets because of the impugned conversations, the Court would also need to be satisfied that this sounded in loss. Loss of access to this market is not to be equated with loss of a client. There is no evidence from which I could find that, when Select Vantage's traders were precluded from trading on the Australian stock market, they were unable to turn their attention and their application of the company's capital to the markets of Japan, Hong Kong, Singapore or anywhere else around the world, with equal effect.
10. In summary the plaintiffs' injurious falsehood action fails at the following points: Issue 7: The impugned oral communications by Mr Yanco with brokers were not as alleged in Annexures A and B to the statement of claim (repeated at [135] and [142] above) but were in the terms found at [151]. Taking those conversations together with the extrinsic facts relied upon by the plaintiff's, the representations they allege were not conveyed. Issue 8: If, contrary to my judgment, the representations were made, the plaintiffs have proved the falsehood of only representation (c). They have not discharged their onus of proving that representations (b) and (d) were false and I am affirmatively satisfied that representation (a) was true. Issue 9: If the representations were made, there was no malice on the part of the defendants. Issue 10: It has not been proved that any actual damage was caused to either of the plaintiffs as a result of the alleged representations, if they were made.

Conclusion and orders

1. In reaching the conclusions expressed here I have considered the entirety of the evidence and submissions although I have not referred to everything that was put before the Court; it would be impractical to do so. I have noted earlier the extent and detail of the expert opinion evidence. The lay evidence was also voluminous. Mr Schlaepfer's evidence, alone, occupied more than five days. As for the documents tendered, the main body of them were in seven volumes comprising over 3,000 pages. Many further documentary exhibits were added separately. I have reviewed all of the lay and documentary evidence but in these reasons I have confined my consideration to the events and records that appear most decisive.
2. In accordance with directions made at the conclusion of the trial on 11 April 2019 and subsequent supplementary directions, the defendants' closing submissions in writing were received on 10 April 2019 and the plaintiffs' were received on 14 June 2019. Exchanges of reply submissions were then permitted and these concluded on 27 September 2019. The written submissions run to approximately 230 pages on each side and are extremely thorough. The numerous arguments, counter-arguments, rejoinders and subsidiary points that I have not addressed specifically in these reasons are those that I have not found to carry significant weight towards my conclusions, which are based upon the more central considerations articulated above.
3. The plaintiffs' case has been advanced upon submissions that reflect indignation concerning the conduct of ASIC and its senior market surveillance officer. The following passage is quoted from the plaintiffs' closing written submissions: Mr Yanco had no reasonable basis to believe that [Select Vantage]/Merlito/Mr Schlaepfer were actually layering the Australian market. He had no reasonable basis to believe in the truth of the other (very serious) imputations. His belief in the truth of the imputations is itself enough to establish unreasonable conduct on the part of the defendants. The failure to enquire and the inconclusive, inadequate and speculative investigations that had occurred cannot be considered in isolation from the identity of the publisher. The ASIC is a regulator. It is not supposed to make pre-judgments or jump to conclusions. It should fulfil its statutory responsibilities soberly and dispassionately. Mr Yanco's and the ASIC's belief in the truth of the imputations as at 21 November 2014 is inconsistent with the proper mindset of a regulator.
4. The umbrage in these arguments is misplaced. The plaintiffs' assertions about what ASIC did and what it is not "supposed" to do are inaccurate and self-serving. The high ground they take is cut away by the facts. Select Vantage's traders, operating in their hundreds from beyond the jurisdiction, were deliberately creating false impressions on the Australian stock market by placing orders that they never intended to execute. Between September and November 2014 they were trying to induce other traders to buy stock in reliance upon false impressions created by layering. This was being done for Select Vantage's profit and for the traders' share. Meanwhile other stock market participants were, at least, put at risk of being defrauded. The integrity of the market was subverted. If this had been allowed to continue genuine investors' confidence in the stock exchange would have been diminished and the efficient flow of capital would have been compromised.
5. From 30 October 2014 Macquarie was well aware of strong indicia that its client was trading in a manipulative manner. The warnings of Macquarie's compliance personnel were discounted by its commercial executives. Macquarie was evidently not going to act to stop its client's misconduct. If Commissioner Price and ASIC's surveillance officer Mr Veidners had not phoned Mr Packham to remind Macquarie of its legal obligations under the Market Integrity Rules, Select Vantage's traders would likely have continued their fraudulent assault on the market.
6. ASIC did not "make pre-judgments" or "jump to conclusions". It acted properly in accordance with its charter by intervening upon the sound prima facie evidence that Mr William He had collected. The warning to Macquarie to fulfil its license responsibilities was the first intervention. Mr Yanco's alert to other potential brokers, that they may be approached by a client whose market conduct was concerning to ASIC, was the second intervention. ASIC's judgment on the prima facie evidence has since been vindicated by Professor Putnins' more comprehensive post-trade analysis, the luxury of which Mr Yanco did not have when he had to make a decision about action to protect this important financial institution.
7. Although it has not been proved that Mr Schlaepfer was knowingly concerned in the market misconduct of his company's traders, he has no legal basis for complaint against the defendants. If he and Select Vantage have suffered loss, fault lies with the traders. They collaborated to place orders in a manner that any trader would know intuitively, would be likely to mislead the market and to create artificial prices.
8. For the reasons stated herein there will be judgment for the defendants. Subject to any submissions that may be made when this judgment is handed down, the plaintiffs will be ordered to pay the defendants' costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 26 November 2019