The Trader Who Took On the Regulator

The lockdown enforced by the pandemic has resulted in a massive growth of online trading and a media focus on its practices and regulation. The combination of severe market volatility, people being deprived of regular income and confined to their homes has tempted millions of amateur traders to try their hand at the markets.

This trend reached a peak in January of this year when thousands of amateurs conspired on Reddit to send GameStop share prices through the roof, and many hedge funds into the ground in the process. As such the industry’s hot topic of recent months has been the proper regulation of amateur day trading.

Meanwhile, an important precedent has been set in the sphere of the proper regulation of professional day trading. For the last five years Daniel Schlaepfer, the founder and CEO of Select Vantage Inc (SVI), a Cayman Islands-based day trading firm and one of the largest liquidity providers in the world (engaging over 2,000 traders in 264 offices in 39 countries around the world) has been suing the Australian Securities and Investments Commission (ASIC) and its head of market supervision, Greg Yanco, for defamation. He has finally been declared the moral victor.

There is something of a personal backstory to this, more than the normal operations of markets and regulators. Schlaepfer’s prior job was at a company called Swift Trading. Founded in 1997, in 2010 the Financial Conduct Authority fined it $100,000 following allegations between 2007-8 of ‘layering’, a process in the stock market of placing orders for stock that are never intended to be fulfilled, fraudulently creating an impression of demand. Swift’s owner Peter Beck was subsequently barred from membership of the Financial Industry Regulatory Authority (FINRA) indefinitely. Schlaepfer took what had been Swift and re-founded it as Select Vantage Inc, aggressively restricting the company and its practices to avoid the same fate as Swift.

Therefore, when in 2016 Mr. Yanco called brokers around Australia to imply SVI was layering, it struck a deep blow beyond the cost to business, and stiffened Schlaepfer’s resolve to fight. Yanco claimed he had not named Schlaepfer but the courts have finally decided that he did enough to make it clear who was being attacked.

There are very few traders who have been prepared to challenge national regulators head on. In 2014, Stewart Ford, founder of failed investment firm Keydata, unsuccessfully attempted to sue the UK’s Financial Conduct Authority (FCA) for £371m, claiming a “politically motivated” abuse of power led to his firm being investigated and subsequently placed under administration. The case against the regulator was dismissed in 2016 at London’s High Court, with the claims described as ‘deficient and embarrassing’. In the same year, Hinton Associates tried to sue the FCA for libel. But the regulator’s immunity was deemed ‘sacrosanct’ and the claimants had to abandon their case.

Schlaepfer was also defeated after a 3-week trial in 2019. Three years and many millions of dollars later, he might have decided to give up. Instead, he chose to appeal. Schlaepfer’s lawyers argued that Justice Fagan had failed to engage with their case on truth, making little to no reference to their expert witness evidence surrounding the question of layering and arguing that the judge had thereby “worked a miscarriage of justice and produced a mistrial.” Core to Schlaepfer’s case for slander was that he had been personally identified, though not specifically named, in Yanco’s communications, and thereby implicated in criminal activity which had a material impact on his business. Fagan had found that Yanco’s wording was not sufficient to identify Schlaepfer, a claim the plaintiff’s lawyers stated “demonstrates a disregard for natural human curiosity.” In his communications, Mr. Yanco had referred to a firm run by ‘a trader formerly of Swift Trade’. There was only one individual that could possibly have been.

From Schlaepfer’s perspective, what was most egregious was that he had not been told of ASIC’s concerns. His firm had been found guilty without the opportunity to prove its innocence. Simply put, ASIC might have asked SVI to explain its traders’ behaviour before invoking its legal duty to inform major market players that it suspected illegal conduct. Ironically, at the time of the trial, ASIC’s then chair James Shipton had been on the conference circuit to promote the regulator’s newly established ‘Fairness Imperative’, espousing the precept that a regulator should only take action if certain that the law had been broken.

The judgment returned on the appeal last month found that ASIC had not followed its own code on this occasion. The judge highlighted “the fact that Mr. Yanco’s communications were made without any opportunity for Mr. Schlaepfer to respond was fatal to the element of reasonableness required to be established in order to make out the statutory defence.” In a statement issued after the verdict, Schlaepfer said he was glad the issue was resolved. However, he added that “the fact that ASIC’s defence of qualified privilege was upheld is worrying and could set a dangerous precedent for financial regulation,” allowing ASIC to act “with impunity”. It may not have been an absolute victory, but it had been a clear strike back for Schlaepfer against a regulator overstepping its boundaries.