Australian-based wealth management group Ord Minnett has been fined A$888,000 ($594,000) after being found to have twice broken market integrity rules when conducting a share buy-back. The case is interesting because crossings were seen to be pre-arranged outside the ordinary course of trading, which gave preference to the selling client by disclosing price information to them.

Ord Minnett received instructions to start a buy-back on behalf of AWN Holdings Ltd (AWN) on September 1, 2021. On September 15, Ord Minnett was instructed by a substantial shareholder in AWN (the selling client) to sell its shares at A$1.00 (0.67 cents), which was above the 89.5 – 87.5 cent range shares were trading at on the day.

On September 27, Ord Minnett executed crossings between the selling client and AWN under the buy-back. A total of 2,073,561 AWN shares at a price of 99.5 cents were involved. This, said the Australian Securities and Investments Commissions (ASIC) in its notice, “was the maximum price that AWN was allowed to buy its shares under the buy-back on this day and represented 52.4% of the total shares to be purchased under the buy-back”.

Pre-arranged crossings

Australia’s Markets Disciplinary Panel (MDP) viewed the crossings as pre-arranged, not done with indifference to the identity of the buyer, and not carried out in compliance with with ASX crossing rules. It also took the view that Ord Minnett facilitated the crossings by not charging brokerage so that the selling client received the same outcome as if its shares had sold at A$1.00.

The MDP says it had reasonable grounds to consider Ord Minnett breached market integrity rules on the following basis;

• It conducted the trades knowing them to be pre-arranged.
• It did not undertake the trades in the ‘ordinary course of trading’ as required by the by the on-market buy-back provisions in the Corporations Act.
• It created a misleading impression that the trades were executed as an ordinary crossing when they were actually pre-arranged.
• It gave information to AWN that the selling client would sell at AUS$1.00.
• It gave information to the selling client that AWN would buy at AUS$1.00 if market conditions allowed. This information was not available to others in the market;
• It gave preferential treatment to the selling client to participate in the buy-back; and
• It acted to the detriment of other AWN shareholders who did not get the same opportunity to sell their shares into AWN’s buy-back.

In the MDP’s opinion, this was serious misconduct, and a fine of A$777,000 ($520,000) was imposed. A further fine of A$111,000 ($74,000) was imposed after Ord Minnett purchased AWN shares under the buy-back at prices above the maximum limit allowable. The MDP had reasonable grounds to view this as a breach of market integrity rules as it was contrary to client instructions and in breach of ASX listing rules.

Genuine error

The MDP considered Ord Minnett to have made a genuine error, but observed it did not have adequate internal controls in place to prevent or detect the contravention. And it failed to take remedial steps once alerted to the contravention.

“Buybacks are not straightforward from a compliance perspective,” said Rob Mason, Director of Regulatory Intelligence at our parent company Global Relay. “It does seem that there was some benefit derived by both sides as the transaction was completed within the relevant price range, but the disclosure of price information potentially disadvantaged other participants and was viewed as pre-arranged, hence the regulators’ actions.

“Controls around this need to include oversight of communications and instructions to make sure sensitive information is not shared.”