FMA fines Milford Asset Management $1.5m for trading conduct breach; 'trader' at the centre of saga still in the gun

The Financial Markets Authority (FMA) has fined Milford Asset Management $1.5 million, following its investigation into a trading conduct breach by one of its "traders" between December 2013 and August 2014.

The Milford employee breached the market manipulation prohibitions of the Securities Markets Act 1988, and the Milford Board failed to adequately monitor the trading activity, the FMA said.

The conduct has, or had the potential to create a “false or misleading appearance with respect to the extent of active trading in the relevant securities; or the supply of, demand for, price for trading in, or value or those securities”.

While the FMA is yet to announce what will happen to the trader, it says Milford has received one of the “most sizable” fines of its kind, which it wants the market to consider a “wake-up call”.

Milford denies that it's liable for any alleged breaches, and the FMA acknowledges its conclusions haven't been tested in court.

However the FMA says Milford is the relevant trader’s employer, so has to take responsibility.

The FMA is still working through “enforcement processes” regarding the trader, and clarifies the $1.5 million fine doesn’t include the trader.

"The FMA’s enforcement processes regarding the trader are continuing and the FMA is unable to comment further on these specific matters."

Milford and its board accepted responsibility for the inadequate oversight and control of the trading, the FMA said.

“Milford has carried out a thorough review of its systems and processes and has undertaken a programme of improvement for its trading systems and controls.

“Milford appointed PwC to review its governance, risk and compliance capability and to provide recommendations. That review has now been completed and provided to the FMA. Milford undertakes to complete a further external review following implementation of PwC’s recommendations.”

FMA not investigating effects of breach

The FMA said its investigation did not relate to the security of Milford’s client funds or assets.

Addressing media over a conference call, FMA chief executive Rob Everett said: “In market manipulation cases, generally speaking, what the regulators are looking to respond to is the damage to the broad integrity of the market; confidence among people trading, that they know they’re trading to a true price and not one that’s been manipulated.

“[Gains or losses are] generally difficult to assess – particularly over a broad number of trades, or long period of activity.

“We have not gone down that route - and don’t propose to - of trying to assess whether there are gains or losses in particular areas in this case.”

FMA publicly cracking the whip

Nonetheless, Everett stressed that neither the FMA nor Milford saw the $1.5 million penalty as a “slap on the wrist”.

“I believe it’s probably the most sizable one [settlement] that we’ve issued of this nature, but again we’re relatively early into a regulatory framework where these sorts of settlement amounts are going to become more frequent.

“When put against some of the compensation payments we’ve secured in the finance company cases, obviously it looks quite different.”

Everett clarified that those payments were focused on ensuring redress for the affected parties.

He  said this settlement “reflects our wish to make sure that people know we’re here, and that people know we’re watching, and that we will respond even if it takes a significant, lengthy and expensive investigation to do so”.

Everett wouldn't comment specifically on whether the FMA could be certain no one else in the broking community or more widely in the marketplace knew about the breach.

“I’m not going to discuss any dialogue we’re having elsewhere in the industry.”

He would not say whether the trader involved was still employed by Milford, or any other firm.

Milford will pay $1.1 million to the Crown in lieu of a pecuniary penalty, and $400,000 as a contribution to the costs of the FMA’s investigation.

Milford: improvements have been made

Milford managing director Anthony Quirk confirmed that the company had carried out a thorough review of its systems and processes and undertaken a programme of improvement for its trading systems and controls.

He said the review referenced in the settlement agreement had been initiated by Milford before it was aware of the investigation.

“As a result we have upgraded our trading activities, including the introduction of centralised dealing and the imminent implementation of a globally recognised investment management system.

“We believe this will move Milford to international best practice. One feature of this is that all trades are now executed by a separate dedicated team not involved in the management of funds.”