INTRODUCTION
South Africa has come a long way in its efforts to combat market abuseFootnote 1 in financial markets. Its arduous efforts date back to the early 1970s.Footnote 2 South Africa has employed various measures, including enacting anti-market abuse laws, amending those laws from time to time, establishing regulatory bodies and imposing penalties against offenders.Footnote 3 Nonetheless, the enforcement of these anti-market abuse measures has sometimes been marred by inconsistencies relating to the successful prosecution and timeous settlement of market abuse cases, especially from the mid-1990s until 2005.Footnote 4 This position changed positively after 2005,Footnote 5 partly due to the introduction of anti-market abuse administrative sanctions that are enforced by the Enforcement Committee (EC or second respondent).Footnote 6 Consequently, this article examines the High Court judgment in Pather and Another v Financial Services Board and Others [2014] 3 All SA 208 (GP) (Pather), which exposed the challenges associated with the second respondent's jurisdiction to settle market abuse cases in South Africa. The court held that the second respondent has jurisdiction to settle retrospectively market manipulationFootnote 7 cases that commenced before the amendment of the Securities Services Act.Footnote 8 This judgment is important because it has satisfactorily reinforced the advantages of anti-market abuse administrative sanctions in South Africa. The Pather judgment is also significant because it: authoritatively confirms the second respondent's jurisdiction to adjudicate all market manipulation cases; usefully exposes the confusion associated with the second respondent's retrospective jurisdiction to adjudicate such cases; and correctly exposes the historical legislative flaws regarding anti-market abuse in South Africa from the mid-1990s to 2005.Footnote 9 This article endorses certain aspects of the High Court verdict in Pather regarding the second respondent's jurisdiction, by discussing the facts, initial EC decision and the High Court verdict.
FACTS
Maslamon Theegarajan Pather (first applicant) and Ah-Vest Limited (second applicant)Footnote 10 contravened the market manipulation provisions of the Securities Services Act during the period between 31 May 2005 and 14 October 2005.Footnote 11 The Directorate of Market Abuse (DMA)Footnote 12 investigated the appellants’ conduct on behalf of the Financial Services Board (FSB) (first respondent)Footnote 13 during the period between November 2006 and May 2007.Footnote 14 The DMA conducted its investigations in accordance with the Securities Services ActFootnote 15 before it was amended. The second applicant has been listed on the Alternative Exchange of the Johannesburg Stock Exchange (JSE) since July 2004.
The DMA held that both appellants engaged in disclosure-based market manipulationFootnote 16 by falsely representing to the auditors that recorded credit sales transactions of R830,486.18 were genuine transactions, made in the ordinary course of business in April 2005 for audit purposes in relation to the second applicant's accounting records and financial statements for the year ending 28 February 2005. The first applicant recklessly caused its false audited financial statements for the year ending 28 February 2005 to be published on the JSE's Securities Exchange News Service (SENS) on 31 May 2005.Footnote 17 The DMA referred this matter to the second respondentFootnote 18 under the Securities Services Act.Footnote 19 Nonetheless, the actual referral took place after the amendments of the General Laws Amendment Act had come into effect.Footnote 20
The second respondent found the appellants guilty of contravening section 76 of the Securities Services Act in 2009 and imposed administrative penalties against them. The appellants then approached the Appeal Board and argued that the administrative penalties had been imposed against them erroneously. However, the Appeal Board confirmed the second respondent's determination on 16 August 2010.Footnote 21 This determination was supported by the Minister of Finance (third respondent). Consequently, the appellants filed for a review of the determination in the High Court, arguing that the second respondent: lacked jurisdiction to impose administrative penalties against them by operation of section 79 of the Securities Services Act; lacked jurisdiction since its former jurisdiction to impose administrative penalties had been abolished by section 78(4) of the General Laws Amendment Act; applied the incorrect standard of proof; and erroneously relied on sections 102 to 105 of the Securities Services Act, which were unconstitutional.Footnote 22
SECOND RESPONDENT DECISION
The second respondent held that the appellants contravened section 76 of the Securities Services Act after the referral from the DMA.Footnote 23 Section 76 of the Securities Services Act prohibited disclosure-based market manipulation through the making or publication of false, misleading or deceptive statements, promises or forecasts in respect of listed securities. Similar provisions are currently contained in section 81 of the Financial Markets Act. The Financial Markets Act now requires any person who unknowingly has made or published a false, misleading or deceptive statement, promise or forecast to promptly publish a full and frank correction when he or she becomes aware that such statement, promise or forecast was false, misleading or deceptive.Footnote 24 The second respondent decided the matter involving the appellants under the Securities Services Act before its amendment by the General Laws Amendment Act and subsequent repeal by the Financial Markets Act.Footnote 25
The first respondent obtained evidence under oath from witnesses concerning the applicants’ conduct and business affairs, and held that both appellants were guilty on two counts of disclosure-based market manipulation.Footnote 26 On the first count, the first applicant was found guilty of falsely representing to the auditors that R830,486.18 worth of recorded credit sales transactions were genuine transactions made in the ordinary course of business. On the second count, the first applicant was guilty of knowingly causing the second applicant's fictitious audited financial statements to be published on the SENS on 31 May 2005. The first appellant caused another false publication to be made on the SENS on 14 October 2005 to the effect that the overstatements in the financial statements were caused by human error. The EC rejected this position.
HIGH COURT DECISION
First, the appellants argued that the second respondent did not have the jurisdiction to enforce market manipulation administrative penalties by operation of section 79 of the Securities Services Act, since only High or Regional Courts had such jurisdiction. The High Court held that, when determining the second respondent's jurisdiction, plain language and statutory interpretation rules must be carefully considered. Consequently, the High Court held that section 79(1) of the Securities Services Act did not preclude the second respondent from enforcing its own anti-market abuse administrative penalties. Thus, the criminal jurisdiction of the High or Regional Courts to try market abuse offenders could be exercised concurrently with the second respondent's jurisdiction to impose anti-market abuse administrative penalties against such offenders.Footnote 27
Secondly, the appellants argued that the second respondent lacked jurisdiction to enforce anti-market manipulation penalties because its former jurisdiction had been abolished by section 78(4) of the General Laws Amendment Act.Footnote 28 However, the High Court held that section 78(4) of the General Laws Amendment Act did not deprive the second respondent of its jurisdiction to adjudicate upon market abuse cases by virtue of the presumption against retrospectivity and / or section 12(2) of the Interpretation Act.Footnote 29 The High Court held that certain market abuse contraventions could continue to be sanctioned under the Securities Services Act as if it had never been repealed, due to the common law presumption against retrospectivity.Footnote 30 Moreover, since section 78(4) of the General Laws Amendment Act impacted on existing substantive rights of the concerned parties at common law, it was not applicable to the respondents’ case.
Thirdly, the appellants argued that the second respondent erred by applying a civil standard of proof to proceedings that were more criminal in nature, thereby undermining the rule of lawFootnote 31 and their right to be presumed innocent. However, the High Court held that the enforcement authorities had discretion to enforce either criminal or civil anti-market abuse penalties.Footnote 32
Fourthly, the appellants submitted that the second respondent's reliance on sections 102 to 105 of the Securities Services Act was unconstitutional, since it contravened sections 1(c), 2, 7(2), 34 and 35(3) of the South African Constitution of 1996 (the Constitution).Footnote 33 Nevertheless, the High Court held that the applicants were not “accused persons” within the meaning of section 35(3) of the Constitution and that anti-market abuse administrative penalties were correctly applied.
HIGH COURT JUDGMENT ANALYSIS
Kgomo J correctly held that, when determining the second respondent's jurisdiction, the courts must consider statutory interpretation rules to avoid prejudicing the relevant parties. The plain language ruleFootnote 34 stipulates that, in the absence of a contrary or ambiguous meaning within a statute, its words must be given their ordinary and literal meaningFootnote 35 even though the intention of the legislature might have been different.Footnote 36 This could have influenced the appellants to conclude that the EC lacked jurisdiction to try market manipulation offences, since section 79 of the Securities Services Act could be interpreted literally as limiting such jurisdiction to the High or Regional Courts. Thus, the appellants failed to comprehend that the courts must broadly consider the statutory context of legislative provisions in the light of the Constitution.Footnote 37 The Constitution requires courts to promote the objects of the Bill of Rights when interpreting legislation and / or developing common law or customary law.Footnote 38 Kgomo J correctly held that the courts may override the plain wording of a statutory provision if such an approach is consistent with the Bill of Rights.Footnote 39 The appellants maintained that the High Court must apply the plain language rule, while the respondents argued that this rule was inconsistent with the Securities Services Act,Footnote 40 which empowered the second respondent to scrutinize market abuse offenders’ submitted documents or hear their oral evidence.Footnote 41 Nevertheless, no similar provisions are found in the Financial Markets Act but they are found in the Protection of Funds Act, which empowers the second respondent to summon and cross-examine offenders.Footnote 42
Kgomo J correctly held that section 104(6) and (7) of the Securities Services Act confirmed that both the second respondent and the courts were empowered to impose administrativeFootnote 43 and criminal sanctions respectively against market abuse offenders. No similar provisions are found in the Financial Markets Act, but they are currently contained in the Protection of Funds Act.Footnote 44 Despite the literal meaning of section 79(1) of the Securities Services Act, this provision did not imply that the second respondent had no jurisdiction to impose its own market abuse administrative penalties against the offenders.Footnote 45 This provision granted the courts and second respondent an option to elect whether or not to impose administrative or criminal sanctions against market abuse offenders.Footnote 46 Thus, the appellants erroneously concluded that the second respondent's decision was ultra vires. Therefore, the High Court correctly adjudicated this matter under the original jurisdiction of the old EC to avoid prejudicing the relevant parties.
The appellants merely focused on the fact that sections 94(e), 97 to 99, 100 to 106 and 111(1)(b) of the Securities Services Act were repealed and incorporated into the Protection of Funds Act, without taking into account that this repeal did not affect the second respondent's market abuse jurisdiction as stipulated by section 78(4) of the General Laws Amendment Act. Accordingly, the respondents postulated about three conceptual possibilities that were probably brought by this provision. The first possibility is that section 78(4) of the General Laws Amendment Act rendered market manipulation offences that were committed before its enactment immune from administrative penalties. The second possibility is that administrative penalties could still be imposed on market abuse offenders under the old EC. Lastly, section 78(4) of the General Laws Amendment Act preserved the jurisdiction of the old EC to enforce market abuse administrative penalties. The first possibility was incompatible with the common law presumption against retrospectivity.Footnote 47 Thus, although the common law presumption against retrospectivity can be rebutted by the express terms of a statute, the law as existing before the enactment of new legislation must be applied if the court is left in doubt regarding the operation of that legislation.Footnote 48 Therefore, the second respondent was still empowered to hear market abuse cases under section 78(4) of the General Laws Amendment Act.Footnote 49 Consequently, Kgomo J correctly held that the common law presumption against retrospectivity enabled the old EC to retain its jurisdiction.Footnote 50
On the second and third possibilities, Kgomo J held that section 78(4) of the General Laws Amendment Act impacted existing substantive rights of the concerned parties at common law, since its amendments were not applicable in respect of the market abuse contraventions that occurred before its enactment.Footnote 51 Substantive rights are those rights that are crucially important to the existence and well-being of any human being and are different from procedural rights that may be utilized by any person to enforce certain procedures under procedural law. However, Kgomo J failed to provide other practical measures that could be employed to distinguish between the jurisdiction of the old and new EC.
Moreover, the fact that the amending statute is procedural in nature does not automatically mean that it will always be interpreted as having retrospective effect.Footnote 52 Accordingly, where the substantive rights and obligations of the parties concerned are not negatively affected by the new statute, the provisions of that statute must apply. Thus, although the administrative penalty that could be imposed by the new EC under section 6D(2)(a) of the Protection of Funds Act is similar to the penalty that was stipulated in section 104(2)(d) of the Securities Services Act, the compensatory order that is provided in section 6D(2)(b)(i) of the Protection of Funds Act was not found in the Securities Services Act.Footnote 53 The Financial Markets Act provides for no such compensatory order.Footnote 54 Unlike the former position under section 104(5) of the Securities Services Act, the new EC is now empowered to make orders for costs for constituting its panel and related expenses incurred by the DMA.Footnote 55 Thus, section 78(4) of the General Laws Amendment Act negatively impacted the substantive rights of the relevant parties at common law, since it did not abolish the second respondent's anti-market abuse regulatory jurisdiction by virtue of the presumption against retrospectivity and / or the Interpretation Act.Footnote 56 The wording of section 78(4) of the General Laws Amendment Act must be interpreted as referring to any investigation that was instituted by the DMA but awaited referral to the second respondent before this provision came into force. This correct approach was followed in The Directorate of Market Abuse v Brown and Two Others.Footnote 57 Therefore, the High Court correctly decided that section 78(4) of the General Laws Amendment Act preserved the jurisdiction of the second respondent in respect of market abuse offences committed before its enactment.
The courts conduct a civil standard of proof on the balance of probabilities, while they conduct a criminal standard of proof beyond any reasonable doubt. Accused persons are entitled to be tried by the courts under the criminal standard of proof. It is not clear why the appellants concluded that their alleged offences were more criminalFootnote 58 than administrative in nature. The appellants’ decision was probably influenced in part by the judgment in Woodlands Dairy (Pty) Ltd and Another v Competition Commission,Footnote 59 which held that administrative penalties are closely related to criminal penalties. The appellants overlooked the fact that they were never brought to court as accused persons and that it is debatable whether administrative penalties are absolutely criminal in nature. Therefore, Kgomo J correctly held that the administrative penalties for market abuse in South Africa are both criminal and civil in nature.Footnote 60 Moreover, section 104(8) of the Securities Services Act provides that an administrative penalty does not constitute a previous conviction, as contemplated in the Criminal Procedure Act.Footnote 61 A related provision is found in section 6I(3) of the Protection of Funds Act, while the Financial Markets Act has no such provision. Section 103(2) of the Securities Services Act stipulates that the DMA or registrar may file with the clerk of any competent High Court a certificate stating the market abuse administrative penalty to be paid by an offender; that certificate has the effect of a civil court judgment made in favour of the FSB. A similar provision is found in section 6E(2) of the Protection of Funds Act but not in the Financial Markets Act.
The second respondent correctly exercised its discretion to apply a civil standard of proof to the appellants’ case as echoed by Luiz,Footnote 62 who submitted that the primary purpose of the administrative penalties that the second respondent may impose against market abuse offenders is to enhance deterrence and / or provide adequate redress to affected persons, but not to punish offenders. This approach is expressed in Financial Services Board and Berman and Stacey,Footnote 63 which held that market abuse proceedings were an administrative enquiry and not criminal proceedings per se and that the market abuse administrative penalties should be severe enough to discourage other offenders.Footnote 64 Moreover, in both Davidson & Tatham v Financial Services Authority Footnote 65 and Parker v Financial Services Authority,Footnote 66 the civil standard of proof was applied in order to determine appropriate anti-market abuse penalties.
Obviously, the second respondent is not empowered to hear any market abuse criminal proceedings, since it is not an ordinary court within the meaning of section 35(3)(c) of the Constitution.Footnote 67 Thus, the nature of the proceedings should be considered to determine whether the offenders are accused persons.Footnote 68 This determination is complicated by the fact that the Constitution does not define the term “accused persons” for the purposes of section 35.Footnote 69 In De Lange v Smuts NO and Others,Footnote 70 the court held that the purpose and nature of the committal proceedings under section 66(3) of the Insolvency Act 24 of 1936 did not constitute criminal proceedings that could give rise to a criminal conviction. Thus, a mere examinee is not an accused person as indicated in National Director of Public Prosecutions v Phillips and Others,Footnote 71 where a person facing a confiscation order was not treated as an accused person; such an order is not meant to punish but rather to deprive offenders of their illicit benefits. This ultimately shows that the market abuse proceedings instituted by the second respondent are either civil or administrative in nature, and designed for the purposes of deterrent.
The appellants erroneously held that the second respondent's decision to impose anti-market abuse administrative penalties against them violated sections 1(c), 2, 7(2), 34 and 35(3) of the Constitution, since they were not “accused persons” within the meaning of section 35(3) of the Constitution. The second respondent did not contravene section 34 of the Constitution, since the appellants were never denied access to the courts or independent tribunals as their matter was heard by an independent administrative tribunal and the High Court. The appellants had no legal basis to seek an anti-market abuse criminal proceedings trial before the ordinary courts, since they were not accused persons and their constitutional challenge relating to section 34 of the Constitution should fail because it was not part of the initial papers that were filed in the High Court.Footnote 72 The determinations of the second respondent and the Appeal Board could amount to an administrative action as defined in the Promotion of Administrative Justice ActFootnote 73 and section 33 of the Constitution. Consequently, the appellants cannot successfully argue that the second respondent was not empowered to hear market abuse cases.Footnote 74
As discussed above, the appellants’ right to a fair trial was not violated by the decision of the second respondent to impose administrative sanctions against them because: the main object of the second respondent's proceedings is not to punish the offenders but to protect the integrity of South Africa's financial markets; and the appellants were not regarded as accused persons.Footnote 75 Thus, the second respondent's administrative sanctions are more preventative rather than criminal in nature.Footnote 76 In conclusion, it is submitted that Kgomo J correctly dismissed the appellants’ constitutional challenge to the second respondent's reliance on sections 102 to 105 of the Securities Services Act. Kgomo J was also correct to dismiss the appellants’ entire application for the review of the decision of the second respondent with costs.
CONCLUSION
The verdict in Pather should be welcomed, as it clarifies the confusion and challenges that are usually associated with the jurisdiction of both the old and the new ECFootnote 77 to enforce market abuse administrative penalties in South Africa. For instance, the appellants in this case erroneously concluded that the second respondent (old EC) had no jurisdiction to impose administrative penalties against them. Accordingly, the aberration in Woodlands Dairy (Pty) Ltd and Another v Competition Commission,Footnote 78 which held that administrative penalties are closely related to criminal penalties, could have wrongly influenced the appellants to dismiss the second respondent's jurisdiction to enforce such penalties in favour of a criminal trial. This confusion by the appellants could have been worsened, in part, by the fact that the DMA's investigations into the appellants’ offences took place before the General Laws Amendment Act amendments were introduced, yet the actual referral of the matter by the DMA to the second respondent took place afterwards. Consequently, the High Court in Pather should have outlined some practical measures that could be considered by the courts and other relevant persons to distinguish between the jurisdictions of the old and the new EC to avoid similar confusion and interpretational challenges in the future. Despite this, the decision in Pather is crucially important because it satisfactorily confirms that both the old and new EC have the jurisdiction to adjudicate upon market abuse cases and to impose administrative sanctions against offenders in South Africa. The old EC's retrospective jurisdiction is limited to market abuse cases that were pending before the enactment of section 78(4) of the General Laws Amendment Act, while the new EC has jurisdiction in respect of market abuse cases that were instituted thereafter.