• Brent Sheather is an authorised financial adviser. A disclosure statement is available upon request.

One of the biggest threats to a healthy stock market, characterised by wide participation by retail and institutional investors, is a perception that the market is rigged and thus unfair.

Regulatory authorities around the world have thus put a lot of effort into prosecuting instances of insider trading and market manipulation. In the 30 years that I have been involved in the local sharemarket, things have changed for the better.

In the 80s insider trading was rampant. Indeed, back then a stockbroker's main comparative advantage was being able to give clients bits of market information ahead of their release to the general public. With the advent of the Financial Markets Authority (FMA), the internet and the instant availability of information, the playing field is a lot more even.


Rob Everett, chief executive of the FMA, recently said "the integrity of New Zealand's financial markets is a core part of the FMA's mandate. Global research tells us it is not enough to have laws around market manipulation or insider trading, but that they have to be successfully enforced".

There are historic instances whereby certain players may have attempted to manipulate prices, and attitudes to such activities have evolved over time.

First up, we go back to 1914 and the unlikely perpetrator in our first scam is none other than the Bank of England (BOE). In a paper on the BOE website, the story is told of how, back in the period 1914-19, the UK government's borrowings soared from about 20 per cent of GDP to around 150 per cent of GDP.

The increase was almost entirely due to financing the war, and winning the war depended vitally on getting the money to pay for it. The prime instrument for raising money in 1914 was the War Loan offered to the public through newspaper advertising.

In order to be sure that they would successfully raise the required 350 million, the BOE offered an interest rate of 4.1 per cent, well above the 2.5 per cent payable on other UK government debt at the time. Despite this high yield only a third of the 350m was raised.

If news had got out that the fundraising for the first of a series of War Loans had failed, this would have been disastrous. The government and the BOE could not countenance a failure therefore they resolved to "manipulate the market".

The BOE study reads, "revealing the truth would doubtlessly have led to the collapse of all outstanding War Loan prices, endangering any future capital raising. Apart from the need to plug the funding shortfall, any failure would have been a propaganda coup for Germany".

To cover its tracks the BOE lent money to several senior employees who purchased the residual War Loan bonds in their own names and these holdings were hidden on the BOE balance sheet.

Despite the actual failure of the issue, the BOE encouraged positive press coverage and the Financial Times reported in November 1914 "that the loan had been oversubscribed, and still the applications are pouring in".

The famous economist and one-time BOE director John Maynard Keynes, who was one of the few officials to know of the deception, described it as "a masterful manipulation".

Next up we move forward to the late 80s when the NZ stockmarket was having a glorious run - the Labour Government had freed the economy from various constraints and anything was possible.

The stockmarket was something of a jungle where small investors were regularly devoured by larger predators. Insider trading, price support and all sorts of deviant behaviour were commonplace but I recall one possible manipulation in particular. The trading action in question, which at the time I thought looked contrived, took the form of listing a certain company on the NZ stock market then, despite the absence of profits, cash flow and dividends, pushing the share price up from around $1.00 to almost $5.00 over a six-month period.

Presumably the aim was to achieve a high share price and then use these shares as currency for acquisitions of companies with real assets and earnings. Unfortunately, the stock didn't manage to defy gravity indefinitely.

As stockbrokers we got an order to sell 500,000 shares of this company when they were about $3.00. We started selling and a related party phoned suggesting that he buy the shares we had for sale. We declined and instead sold the stock on market.

A few months later demand for the shares collapsed. Trading was eventually suspended and it was reported that when the company went into receivership, liabilities exceeded assets by more than $20m. Needless to say, those poor souls who held on to the bitter end lost the lot.

Lastly, we look at a more recent manipulation involving a local fund manager in 2013.

Compared to the two manipulations detailed above, this example is something of a non-event but the perps in this case got fined and suffered reputational damage so the case illustrates how the law and attitudes to such behaviour have evolved.

The High Court found that the fund manager manipulated the price of Fisher & Paykel Healthcare and A2 Corporation.

Even though this last case is the least significant in terms of actual damage done, knowledge of it is arguably of most value for retail investors.

Firstly, it sheds light on just how much pressure performance fees can put the employees of fund managers under.

Secondly, it shows how difficult it is to beat the market.

So good work by the FMA for prosecuting this situation but there are lessons to be learned from it: the regulator needs to look at what best practice is in more civilised markets like the UK and reflect on the fact that this case is an unforeseen consequence of the poor regulation in NZ around performance fees.