MIU - Issue 139 - July 2022

Former Sigma Healthcare general manager sentenced for insider trading

Mr Michael Story, of Elwood, Victoria, was sentenced to 14 months’ imprisonment for insider trading, to be released immediately upon payment of $5,000 and on the condition of good behaviour for three years. In addition, Mr Story was ordered to pay a $30,000 fine.

Mr Story, a former general manager of Sigma Healthcare Limited (Sigma), was also ordered to pay a pecuniary penalty of $70,179.37 under the Proceeds of Crime Act, representing the benefit he obtained from his insider trading.

The court found Mr Story sold Sigma shares while he was in possession of inside information regarding the status of negotiations to renew the supply contract between Sigma and Chemist Warehouse.

On 2 July 2018, Sigma publicly announced that its supply contract with Chemist Warehouse would cease on 30 June 2019. This contract was very significant to Sigma’s business. Proposed terms for a contract renewal had not been agreed. Following this announcement, Sigma shares closed 40% lower compared to the previous day.

Mr Story had been heavily involved in the negotiations and knew that it was unlikely that the contract would be renewed. Mr Story knew this information was not generally available and would have had a material effect on the Sigma share price. With this knowledge, Mr Story sold 250,000 shares in Sigma for $202,629.

His Honour Judge Moglia denounced the inherent dishonesty in Mr Story’s conduct finding Mr Story to be a true insider and that there was no explanation for the conduct other than an attempt to avoid significant losses. Had Mr Story not pleaded guilty he would have imposed a sentence of two years’ imprisonment, to be released after 14 months upon a recognisance.

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OTC derivatives provider Sirius Financial Markets surrenders licence, former executives handed eight-year bans

Following our investigation, over-the-counter (OTC) derivatives provider Sirius Financial Markets Pty Ltd, trading as ‘Trade360’, has surrendered its Australian financial services licence.

We’ve also banned two of Sirius Financial’s former executives, Mr Jonathan Schneider and Mr Oskar Pecyna, from controlling an entity that carries on a financial services business or performing any executive or management role in relation to a financial services business for eight years.

Our investigation uncovered concerning consumer losses from trading in contracts for difference (CFDs), including a Sirius Financial investor, who had limited knowledge of the market, losing over $400,000 after being told CFDs were a safe investment.

Sirius Financial engaged an off-shore call centre, Toyga Media Ltd (Toyga), to source clients to trade in high-risk CFDs and margin foreign exchange contracts products issued by Sirius Financial. Our investigation found the call centre representatives persuaded Sirius Financial clients to trade using pressure selling tactics and provided clients with personal advice when Sirius Financial was not licensed to do so. Sirius Financial was also found to have engaged in unconscionable conduct and conduct that was likely to mislead or deceive.

Our investigation also found that, in failing to take adequate steps to address Toyga’s conduct, Sirius Financial breached its licence obligations to:

do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly
take reasonable steps to ensure that its representatives comply with the financial services laws
have in place adequate arrangements for the management of conflicts of interest.

In banning Mr Pecyna and Mr Schneider, we found both men were involved in Sirius Financial’s breaches of its licence obligations and were not adequately trained or competent to be involved in the control of a financial services business. In reaching these findings, we found that both men failed to adequately perform their duties as responsible managers and lacked the necessary professionalism, integrity, judgement and diligence to play a role in the management or control of a financial services provider.

Also following our investigation, Sirius Financial will surrender its licence and wind down retail and wholesale operations and will cease providing financial services on 29 July 2022.

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Review of ‘pump and dump’ events in micro-cap securities

Our review of a series of ‘pump and dump’ events in listed equity markets between January 2019 to July 2021 identified significant impacts on the traded prices of micro-cap securities.

Report 732 Pump and dump of micro-cap securities (REP 732) summarises our review and sets out good practices to help market participants detect, prevent and respond to ‘pump and dump’ activity.

We found that the anomalous price moves were sometimes driven by ‘pump and dump’ events in the form of momentum ignition and organised campaigns on social media.

We identified a small number of aggressive day-trading accounts targeting company disclosures by micro-caps, which amplified intraday price movements. In many cases, individual traders accounted for 30% of a targeted security’s turnover. We also saw an increase in social media platforms being used to promote coordinated trading in illiquid securities.

Momentum ignition, coupled with high volatility, may have led to average losses of $6.3 million per month for retail investors over the review period. We also found that 81% of accounts that participated in organised social media pumps realised a financial loss or zero benefit.

We worked closely with ASX and market participants to identify and disrupt ‘pump and dump’ activity. Market operators paused trading and market participants closed suspected client accounts. We also issued warnings in social media forums and instigated action against perpetrators.

As gatekeepers to Australian markets, we encourage market participants to vet all client orders and implement the good practice expectations in REP 732, including reporting any suspicious activity through ASIC’s Regulatory Portal or by email to markets@asic.gov.au.

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IOSCO publishes report on operational resilience of trading venues and market intermediaries during the COVID-19 pandemic

The International Organization of Securities Commissions (IOSCO) published its final report identifying operational resilience lessons learned by trading venues and market intermediaries during the COVID-19 pandemic.

IOSCO’s report emphasises that regulated entities continued to service clients during the pandemic while facing unprecedented challenges, with opportunities to learn the following lessons to improve operational resilience.

Operational resilience means more than just technological solutions; it also depends on processes, premises and personnel.
Dependencies and interconnectivities need to be considered to assess potential risks and changes to controls, especially for service providers and offshore services.
Business continuity plans should be reviewed, updated and tested to ensure they continue to reflect lessons learned from disruptions.
Effective governance frameworks facilitate and support operational resilience.
Compliance and supervisory processes may need to be adjusted to accommodate remote working, with regular reviews of monitoring and supervision arrangements to help ensure their effectiveness.
Information security risks may require amended processes to mitigate heightened cyber and other unauthorised access risks.

Market intermediaries are encouraged to familiarise themselves with the IOSCO report and incorporate learnings into their businesses where appropriate.

Market intermediaries encouraged to review ongoing supervision and controls for remote working

For many market intermediaries, remote or hybrid working arrangements now form part of their normal business operations and plans beyond the prolonged COVID-19 pandemic.

As market intermediaries transition from ‘temporary’ business continuity arrangements, we encourage you to review your operational risk management framework under remote working arrangements. We expect you to ensure that well-designed, ongoing systems and controls for managing operational risks are embedded and operating effectively.

In reviewing your arrangements, we further encourage market intermediaries to consider the following questions which build on our observations and expectations published in March and December 2020, and compliment the new technological and operational resilience market integrity rules that will apply from 10 March 2023.

How do you maintain effective controls and supervision over staff and third-party service providers who are working remotely, and what enhancements mitigate additional remote working risks?
Did you follow robust change management and governance processes when implementing or changing remote working arrangements?
Have you formalised and regularly reviewed policies and procedures relating to remote working and expected staff behaviour?
How do you regularly assess the effectiveness of controls and supervision under remote working arrangements within established risk frameworks and risk appetite?
What training is provided to staff to ensure they understand additional requirements and expectations if working remotely?
Have you reviewed business continuity plans to ensure they remain effective, considering any remote working arrangements? Do these reviews incorporate extreme but plausible scenarios?
How might remote working arrangements impact services provided by third parties and how do you ensure risk management controls and supervisory arrangements remain effective?

In the year ahead, we will continue to review market intermediaries’ supervisory arrangements and controls relating to remote working arrangements.

Consulting on remaking class order on financial requirements for retail OTC derivative issuers

We’re consulting on our proposal to remake our class order on the financial requirements for issuers of over-the-counter derivatives to retail clients. The class order is due to expire (‘sunset’) on 1 October 2022.

The financial requirements in Class Order [CO 12/752] Financial requirements for retail OTC derivative issuers aim to ensure AFS licensees have adequate financial resources to operate their business in compliance with the Corporations Act, and to manage the operational risks inherent in the OTC derivatives market.

Under [CO 12/752], retail OTC derivative issuers must:

meet a net tangible asset (NTA) requirement where the licensee must hold the greater of $1,000,000 or 10% of average revenue
prepare, each quarter, projections of cash flows over a 12-month period based on their reasonable estimate of revenues and expenses over that term
meet an NTA liquidity requirement where the licensee must hold 50% of the required NTA in cash or cash equivalents and 50% in liquid assets
financial trigger point reporting obligations if licensees fail to hold the required NTA.

Consultation Paper 363 Remaking ASIC class order on financial requirements for retail OTC derivative issuers  (CP 363) outlines our rationale for proposing to remake the instrument for five years, including that the financial requirements remain appropriate and are operating effectively and efficiently.

Submissions on CP 363 are due by 29 July 2022.

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ASIC