Bid to have JSE reconsider decision not to cancel R6m share trade ‘error’ fails

The Financial Services Tribunal has dismissed an application, with costs, by Overanet Investments to have the JSE reconsider its decision to refuse to cancel a share trade that, Overanet alleged, was entered into by mistake.

On 21 April last year, portfolio management and investment services firm Gerobos placed an order, on behalf a client, to sell 10 000 Karooooo (KRO) shares at R59 a share, using the direct market access provided by Peresec, a member of the JSE.

According to Overanet’s submission, the trade was conducted under the mistaken belief that this was a market-related price, because the broker was “unaware” of the impact of the consolidation of the shares following the delisting of Cartrack Holdings and the relisting as Karooooo. As a result, the shares were traded at about nine times less than their market value and 10 times more shares were sold than were held by Gerobos.

Once the shares were sold, the sale was recorded on Peresec’s suspense account. As a result of the mistake, the sale was not allocated to the seller, Intrepid Safaris Equity.

As there were insufficient shares to close the trade, Peresec, as the primary account holder, had to borrow the outstanding shares on the open market and deliver them to Merrill Lynch International, the purchaser’s counterparty.

The mistake was realised almost immediately, and Peresec, on behalf of Gerobos, asked Merrill Lynch International to cancel the trade, which it declined to do.

It also asked the JSE’s director of market control to cancel the trade, which it would not on the grounds that the trade was not the result of a “fat finger” error.

In an effort to unbundle the mistake, a subsequent CFD trade was entered into between Overanet, Gerobos and Peresec, with the intention that Overanet would carry the brunt of the financial loss of some R6 million. The reason Overanet decided to assume the loss was not disclosed.

Overanet submitted that Peresec had ceded any right to claims, and to remedial action to impugn the JSE’s decision to cancel the trade, to Overanet.

Overanet contended that it should have been clear to Merrill Lynch that the sell offer was erroneous, and it therefore had an obligation “to speak up” before accepting it.

It said Peresec was the party liable for the closing the trade, although one its clients executed the trade. Peresec, as member of the JSE, was entitled to seek reconsideration of the JSE’s decision. However, in terms of the cession agreement, it had ceded that entitlement to Overanet.

Applicant lacks locus standi

The tribunal said Overanet did not have locus standi to bring the application, drawing attention to the following:

• The word “member” in JSE Equities Rule 6.50.1: “Despite any other provision of the rules or any directive, the Director: Market Regulation may, where in his opinion an [on-book] trade has been matched as a result of a clear error by a member, grant permission to or instruct the respective members to execute a trade cancellation.”
• Section 230(1) of the Financial Sector Regulation Act (FSRA), which provides that a person aggrieved by a decision may apply to the tribunal for a reconsideration of the decision.
• Section 218(a) of the FSRA, which defines a ‘‘decision’’ as a decision by a financial sector regulator or the Ombud Council in terms of a financial sector law in relation to a specific person.

It said the following facts put paid to Overanet’s right to a reconsideration:

• The on-book trade was between two JSE members, Peresec and Merrill Lynch.
• The trade was executed by Gerebos on Peresec’s trading platform on behalf of Gerobos’s client, Intrepid Safaris Equity.
• The mistake was made by Gerobos, not Overanet. The trade was never allocated to Intrepid Safaris Equity or to Overanet.
• The trade remained on a proprietary Peresec account and was settled by Peresec.
• The JSE’s decision not to cancel the trade was made pursuant to a request by Peresec, not Overanet, on the basis that Peresec had acted as the selling broker on behalf of its client, Gerebos.

The tribunal said Overanet ultimately suffered the damage occasioned by the erroneous trade because of the arrangement reached between it, Peresec and Gerobos after the JSE had made its decision.

“It has no legal grievance, only a financial grievance caused by its decision to assume the loss (with no stated or apparent commercial reason) suffered by others after the loss had been incurred.”

Overanet is not the ‘specific person’

Turning to the provision of section 230(1) of the FSRA concerning a “person aggrieved”, it said a legal grievance is required before an objector can qualify as a “person aggrieved”. The critical question was whether the director’s decision amounted to an invasion of Overanet’s legal rights.

In this case, the “specific person” against whom the JSE’s decision had been made was Peresec, not Overanet.

“To clothe the applicant with standing, counsel relied on a back-dated cession from Peresec to the applicant allegedly reflecting the applicant’s intentions a year earlier. We have serious doubts about the cession, which carries all the signs of an ex post facto construct in an attempt to rectify the glaring difficulty it had with legal standing to bring the reconsideration application.”

The tribunal said Peresec had nothing to cede.

“It made no error and was not aggrieved by the decision of the director. Furthermore, one cannot cede an administrative or procedural right to lodge an application for reconsideration.”

It was also the tribunal’s opinion that the erroneous share trade was not a true error as understood in the law of contract, nor a clerical error. Gerobos’s broker acted because of a mistaken motive. “He intended to make an offer in the terms he did.”

Why the tribunal awarded costs

The tribunal acknowledged that it may grant costs only in exceptional circumstances, and “the fact that the applicant’s case had no merit in itself does not make it an exceptional case”.

It said what made the circumstances exceptional was that Overanet failed, from the beginning, to disclose the facts on which it relied and made “many misleading statements”.

“It had many opportunities to present its oral cession but did not until days before the hearing. Only then it accepted the correctness of the facts set out by the respondents during August/September. To establish the true facts, the respondents had to expend unnecessary costs and prepare additional papers.

“It persisted in its allegation, without proof, that Merrill Lynch snatched a bargain.

“Lastly, it missed the dates set months ago for heads of argument and filed new evidence and heads after the respondents had already filed their heads for the hearing. This required additional work for the respondents,” the tribunal said.

The tribunal ordered Overanet to pay the costs of the respondents, Merrill Lynch and the JSE, on the high court scale.