What's behind the FMA investigation into Milford?

Milford’s decision to out itself and fess up to being the fund manager at the centre of the FMA’s market manipulation investigation earn the company a tick.

Tuesday, February 10th 2015, 10:50AM 6 Comments

by Philip Macalister

It mightn’t be the Healthy Food Guide tick but it was the right thing to do.

One of the problems with these types of stories is that that information is as sparse as the proverbial hen’s teeth.

Apparently everyone involved in this investigation has had to sign a confidentiality agreement with the FMA. The penalty for breaching it is a fine of a couple of hundred thousand dollars.

That hasn’t deterred someone as there has clearly been a leak along the line. This shows how competitive the funds management industry is that someone wants to knock a high-performing, high-profile manager. Then on the other hand there are allegations that market manipulation is something done to help managers place well in league tables.

Likewise we understand Milford had to get permission from the FMA to even make a public statement.

What is market manipulation? I’m not sure people really know and this is where FMA and NZX, in its role as a regulator, should be giving guidance to market participants.

In a press release earlier this year the FMA alleged an individual online trader had been given a warning for using “bait and switch” tactics to manipulate the market.

Not many people I know can describe what this is. Thankfully the FMA has now helped out.

The bait and switch technique is used to generate trading activity and attract people into the market by creating a misleading appearance about the extent of active trading in, supply of, price for, or value of the shares traded.

Bait and switch is where a person ‘baits’ other traders by putting in a large order of shares to sell on the stock market that is different to the market price to influence the balance of supply and demand and to create more interest from other traders. The trader then ‘switches’ and either doesn’t complete the order or only completes for a small number of shares. This then means the trader has set a higher price for the share and can trade at a more significant level.

The part which is hard to reconcile in this latest story is that Milford says no one lost money and no one made a fortune out of this alleged market manipulation.

If there is neither a victim nor a profiteer what is this all about?

Tags: FMA Market Manipulation Milford Asset Management

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Comments from our readers

On 10 February 2015 at 2:09 pm Brent Sheather said:
The practice of manipulating the prices of illiquid stocks is as old as the stockbroking profession. Three questions spring to mind – firstly, why did it apparently take a year for the FMA to do something about this behaviour and secondly, why is the FMA trying to suppress information about the affair? Thirdly is the identity of the broker who facilitated the manipulation going to be disclosed and that person disciplined as well or has some plea bargain deal been done already (suppressed no doubt). All very dodgy in my view.

In fact this is the sort of institutional behaviour we might expect from some Asian country whose planes keep disappearing. The FMA is supposed to foster confidence in the market place. Suppressing information just makes the rumour mill work harder, not to mention upsetting people. Feels like the rules are being made up as we go along. The framework should be disclosed by the FMA immediately.
On 10 February 2015 at 5:52 pm Realist said:
There have long been doubts about some funds performance for many years. A small sell and buy order at above market prices may not attract much attention but can easily change the apparent performance of a fund where there is very limited liquidity.

Of course some of these funds have generous performance fees. And of course the buy/sells don't need to be made from the actual fund itself. If they were, the trustee should be able to spot what is going on. But do they really check any transactions. They didn't appear to do so with the finance companies.
On 10 February 2015 at 9:51 pm Headmaster said:
Brent, I have no relationship whatsoever with Milford, but I cannot fail to take issue with the comments you have made, which are thoughtless.

And I have to say how surprised and disappointed I am that you would make them, given your standing and given that the facts have yet to be made clear.

The real issue here is not the subject of the investigation itself, but the person who made the fact of the investigation public. That was an illegal and harfmful act, and your comments have aided and abetted that person's cause.

The FMA has made scores of investigations of this type, none of which have been made public before the results of the investigation were known. There is a very good reason for that.

If the subject of this investigation is subsequently cleared of any wrong doing, how will you be able to take your words back?

The wise person does not jump to conclusions. He or she never takes the bait in that way.
On 11 February 2015 at 8:21 am Pragmatic said:
Agree that it's a bit silly to speculate / pass judgement until all the facts are known
On 11 February 2015 at 10:43 am Steven Popodopolus said:
The principles of natural justice would dictate that due process and investigation should be allowed in confidence for the reasons stated by headmaster above.
On 11 February 2015 at 5:01 pm Brent Sheather said:
Hi Headmaster

Thanks for your comment and I accept your points but as Fran O’Sullivan writes in the Herald today the FMA “should simply tell the market exactly what its probe into alleged market manipulation at one of the country's highest profile funds manager entails”. The FMA has a responsibility to keep the market informed. In my view there is a culture of suppression of information in local financial markets. This case is fast becoming more about the regulators handling of it than the actual indiscretion itself which as we all know regularly occurs at the end of the year and at the end of each quarter. When I was a stockbroker I saw this sort of activity happen all the time. A policeman friend told me this morning that in criminal cases name suppression is not guaranteed so why should these sort of cases be any different.

This whole business is hugely complicated by the fact that there is far too much movement between Government, the regulators and industry and indeed an ex FMA employee works for Milford. Goodness me, a former Minister of Commerce with responsibility for the FMA now works for Westpac.

Another issue is the fact that because the FMA has allowed ridiculous performance fee structures, illegal in more civilised countries, to proliferate locally that this sort of thing happens as a result.

This matter highlights the fact that there is a lot more work that needs to be done before the average person can have confidence in our financial markets. This would start with refreshing the FMA board and making the minimum level of equity in banks at least 10%.


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