A Sydney courtroom maybe half the world away from Brussels, London or Washington, but a judgement that will soon be handed down in Australia could have repercussions on the culture of financial market regulation in major markets in Europe, the UK, and the US for years to come.
In one of the first defamation cases brought against a regulator, the Australian Securities and Investments Commission (ASIC) is being sued by Daniel Schlaepfer, the President and CEO of Canadian day trading firm Select Vantage Inc (SVI), which employs thousands of traders worldwide, including in Italy and Hungary.
The regulator’s Head of Market Supervision, Greg Yanco, is accused of spreading false and defamatory allegations that Schlaepfer and SVI were engaged in a form of market manipulation known as ‘layering’. Yanco made the claims through a series of personal correspondences with major banks without proper investigation, behind the back of SVI, the Supreme Court of New South Wales heard, causing the firm to “vanish overnight” from the Australian market.
It’s a fascinating case. Suing a regulator for defamation is almost unheard of globally, and certainly in Europe. But it also places an unusual spotlight on the question of regulators’ infallibility.
Regulatory powers have grown in the last decade through legislation like the Dodd-Frank Act and the EU’s own Second Markets in Financial Instruments Directives (MiFID II). ASIC’s own powers and budget have also just been significantly increased. In a world of increasingly globalised markets, the rules that apply to them are becoming increasingly global too, driven by firms aligning to the rules of other jurisdictions to maintain market access.
Financial markets in both Europe and Australia have seen remarkable convergence in the reach of financial regulations set by lawmakers. ASIC published new benchmark rules for the Australian financial markets last year which closely followed the rules set by the EU.
We are likely to see further integration and regulatory alignment between Australia and the EU in the coming years. The EU is Australia’s biggest investor while the 27 member-bloc represents Australia’s second largest market in services, and both sides have recently launched negotiations for a free trade agreement.
With regulatory influence looming so large across borders, regulators themselves very rarely receive legal redress. And so, with this ever-closer EU-Australian regulatory alignment, Schlaepfer’s case against ASIC is a must-watch for European market players looking to see what international precedent it may set.
Qualified or Privileged?
ASIC’s defence relies on the “qualified privilege” of a national corporate regulator, arguing that the correspondences that it made to market participants were undertaken in the course of its mandated duties.
It is this defence that has piqued the interest of international legal and regulatory observers in the trial. Did ASIC have the right to communicate its suspicions, allegedly without sufficient evidence to back them up? Did they act with a ‘reasonableness’ that was in line with the privileges – and responsibilities – of a regulator?
Some argue that regulators should be allowed more freedom to make instinctive judgement calls to protect the market. For others, allegations such as those made against ASIC would constitute an arbitrary abuse of power which eschews substantiation for mere hunches. Such a presumed right could be especially damaging when the regulator wields huge market influence, such that their actions can irreparably taint individuals and firms.
In court, Yanco conceded that ASIC did not afford Schlaepfer or SVI the opportunity to explain any supposedly problematic trading patterns before making his suspicions known to third parties. Schlaepfer only found out about the correspondences two years after their occurrence. Yanco also acknowledged that ASIC could have advised brokers to merely suspend business with Select Vantage until a full investigation had been undertaken – but the regulator chose not to do this.
The outcome of the case will set a significant precedent either way. If the judge rules that ASIC’s actions were defamatory, regulators are likely to pay closer attention to their investigatory procedures before acting against market participants. If not, should market participants fear being effectively barred from the market without knowledge of a regulator’s concerns, and without the opportunity to respond?
Who is regulating the regulators?
The pressures on international regulators are mounting. Recently, U.S. stock exchanges took legal action against the Securities and Exchange Commission, arguing the regulator had overstepped its authority in a pilot project which banned payments exchanges, a lucrative source of income for markets operators.
Regulatory overreach was also the subject of a stinging rebuke in the US Commodity Futures Trading Commission’s (CFTC) recent case against Don Wilson and his Chicago-based trading group DRW, a leading derivatives trader. It was ruled that Wilson was not guilty of market manipulation, but rather that his firm owed its success to “superior knowledge” of the mechanics of the futures market. The judge heavily criticised the CFTC for bringing such a flawed case to court in the first place.
With high-profile cases being brought against regulators around the world, and the potential for Brexit to redraw the regulatory map of Europe, the judgement to be released by the Supreme Court of New South Wales this summer could bring significant scrutiny to the power of regulators over the fate of market participants.