A qualified victory for trader against regulator

Financial regulators around the world will be approaching the fourth quarter in a vigilant mode. Over the summer, the credibility and impartiality of the Australian Securities and Investments Commission (ASIC) came into question in a judgement following a prolonged legal fight. The judgement went substantially against the regulator and provided a moral victory for a day trader whose company, Select Vantage Inc (SVI), had already seen ASIC’s investigation into them dropped. Daniel Schlaepfer, SVI’s CEO, had been suing ASIC since 2016 for defamation following comments their Head of Market Supervision made to brokers in 2014 implicating SVI in potential market manipulation.

Schlaepfer commented on the judgement that: “We are glad that this lengthy process has come to a conclusion. Suing powerful regulators for inappropriate conduct is not an endeavor one enters into lightly. We felt forced to do so in light of what we perceived to be unfair behavior by ASIC.” The judgment found that while ASIC was not without cause in the communications it made that they had nevertheless defamed Mr. Schlaepfer – in essence ASIC officials were found to have played the man and not the ball. The victory is partial because the judge allowed that ASIC was permitted under qualified privilege to raise suspicions about market manipulation, even though their suspicions proved to be unfounded.

The regulator had suspected SVI traders might have been engaged in illegal ‘layering’ activity, which involves placing orders for a stock which the trader never intends to fulfil, creating interest in the market by suggesting there is demand present. The fake orders quickly disappear but can have an impact on the price which the trader can make a profit on if they act in seconds.

The context is that in 2010, a firm called Swift Trade for which Schlaepfer worked was accused of layering, fined $100,000 and its founder Peter Beck eventually barred from trading. Schlaepfer bought the company’s assets to set up Select Vantage with the aim of professionalizing the business by implementing rigorous compliance systems.

Schlaepfer’s firm quickly grew to engage over 2,000 traders in 264 offices in 39 countries around the world, including Australia. So when he learnt that the Australian regulator had implicated to brokers without evidence that SVI was itself engaged in layering, it struck a nerve. Schlaepfer chose to sue the regulator in 2016 and refused to settle, eventually taking ASIC to court in Sydney in 2019.  A three-week trial was unsuccessful, with the judge stating that the regulator was merely responding under its market integrity rules when it communicated its concerns about SVI to major stockbrokers, despite never having informed Schlaepfer about their concerns, let alone their communications about them.

Core to Schlaepfer’s case was that his firm should have been informed about the regulator’s concerns and provided with the opportunity to respond, in this case to explain any trading patterns which ASIC might have thought suspicious. However, the regulator did not contact SVI about any specifically suspicious activity before it called around the market to voice its concerns. As such Schlaepfer claimed their communications to brokers amounted to no more than damaging unsubstantiated hearsay – or in other words, defamation.

The ruling was appealed on this basis, with Schlaepfer’s lawyers arguing that the judge had “worked a miscarriage of justice and produced a mistrial.” The decision to appeal was vindicated. The judge found that the fact that ASIC’s communications “were made without any opportunity for Mr. Schlaepfer to respond was fatal to the element of reasonableness required to be established in order to make out the statutory defence.”

The conclusion to the appeal judgment was even more emphatic, stating that Schlaepfer had been found “successful on most issues including the defence of truth, which occupied a substantial portion of the proceedings. That success has achieved what was said to be an important outcome of the appeal, namely, the vindication of Mr. Schlaepfer’s reputation. Although ASIC has succeeded in establishing the defence of qualified privilege at common law, that is a defence of confession and avoidance. To put the matter another way, Mr. Schlaepfer has established in the appeal that he was defamed, but defensibly so.” The regulator was also ordered to pay two-thirds of its costs arising from the proceedings.  

A central issue raised by this case is the need for greater and more frequent communication between regulators and market participants. This is especially important as financial technology continues to develop at a rapid pace, creating more areas where misunderstandings may arise concerning what constitutes legitimate practice, particularly in the sphere of trading. Unless a culture of deeper communication is cultivated, we will see more cases in which regulators feel bound to express opinions on financial technologies and trading practices they do not fully understand.