Can Investors Recover Losses Caused by Market Misconduct in PNG?

A Port Moresby retiree buys shares on the strength of a rumour that turns out to have been planted by the seller. A superannuation fund sells a parcel to a buyer who knew of an unannounced takeover. Both have lost money to conduct that Part VII of the Capital Market Act 2015 makes criminal. Prosecution punishes the wrongdoer; Division 3 of Part VII is about getting the money back.

The victim’s own claim: section 323

The plaintiff must prove the contravention on the civil standard, the loss, and that the loss was caused by or by relying on the conduct. Section 323(2) preserves liability under any other law, so a claim in deceit or negligent misstatement can be pleaded alongside it. Section 323(1) also lists “Section 203”, which in the published Act is the provision for court appointment of an interim trustee of a unit trust. That cross-reference appears to be a drafting error, probably for a Part VII provision, and a claim should not be built on it without advice.

The Commission’s civil action: section 324

Where it appears to the Securities Commission that someone has contravened sections 299 to 303 or 305, section 324 lets the Commission bring civil proceedings in the National Court itself, again regardless of any prosecution. If it considers this in the public interest, the Commission may recover up to three times the gross pecuniary gain made or loss avoided by the wrongdoer, and claim a civil penalty of up to K10,000,000 fixed by the Court according to the gravity of the contravention (section 324(2)). Section 324(3) fixes the order in which recoveries are applied: first to reimburse the Commission’s investigation and litigation costs, then to compensate the people who suffered loss. If distribution is impracticable because the amounts are small or the victims cannot be identified, the Commission may decline to distribute (section 324(4)) and pay the balance to the Capital Market Compensation Fund or keep it for investor education or the cost of regulation (section 324(5)). Section 324(7) confirms that the Commission’s action does not take away the victim’s own claim.

Section 324(6) sets the limitation period for both the Commission’s action and a section 323 claim: 12 years from the date the cause of action accrued or the date the contravention was discovered, whichever is later.

Insider trading: section 325

Section 325 does the same job for insider trading under section 307, with formulas. A person who suffers loss by reason of or by relying on an insider’s conduct may sue (section 325(1)), and “loss or damages” expressly includes an unrealised loss or gain: the difference between the price in the transaction and the likely price had the contravention not occurred (section 325(2)). Two specific measures follow:

• Where the insider bought from a seller who lacked the information, the seller recovers the difference between the price paid and the price that would have been likely had the information been generally available (section 325(3)).
• Where the insider sold to an uninformed buyer, the buyer recovers the difference between the price paid and the likely price with the information public (section 325(4)).

Both claims lie against the insider “or any other person involved in the contravention”, and section 312 deems anyone who incites, induces, encourages or directs the trade to have procured it. For securities traded on a stock exchange, section 325(5) and (6) let the Commission recover three times that price difference plus a civil penalty of up to K10 million. Recoveries go first to costs, then to compensate the sellers (or buyers) who traded in the same class on the market between the first contravention and the time the information became public (section 325(7)), with the same fall-back to the Compensation Fund (section 325(9)). The limitation period is again 12 years from accrual or discovery (section 325(10)).

Derivatives: sections 334 and 335

Sections 334 and 335 repeat the section 323 and 324 scheme for the derivatives offences in sections 326 to 332: a direct claim, a Commission action for up to three times the gain and a civil penalty of up to K10 million, costs first and victims second, 12 years to sue. Undistributed money goes to the fidelity fund under Division 2 of Part IX.

Prospectuses, takeovers and convictions

Losses caused by breaches of Part IV (issues and prospectuses) or Part VI (takeovers) are recoverable under section 446, and the Commission may sue on the victim’s behalf under section 447; the limitation period there is six years from accrual or awareness. See prospectus liability. Section 463 adds that a person convicted of an offence under Part IV, V or VI is liable to pay such compensation as the Court determines to anyone who suffered loss, so a convicted unit trust trustee can be ordered to compensate members. Restitution may also be ordered by the Commission (section 443(3)(d)) or the Court (section 449(1)(q)); see court orders.