JSE fights order to disclose investor information

A six-year battle over allegations of market manipulation involving a company no longer listed on the JSE has reignited, adding fuel to a legal tit-for-tat over how transparent Africa’s largest stock exchange is with trading information.

The issue harks back to a convoluted dispute involving trades in industrial group enX, investment firm Inhlanhla Ventures, and stockbroker Peresec.

The story is that Inhlanhla owned a large block of shares in enX but, after the share price fell sharply in May 2020, it was forced to sell its stock back to Peresec as a result of a margin call triggered by the slide. But a few days after it was forced to sell, enX’s share price rebounded dramatically, which Inhlanhla argued was evidence of market manipulation.

Years of legal wrangling followed, with Inhlanhla demanding information, filing a Promotion of Access to Information Act (Paia) request for what the JSE calls “confidential, proprietary, personal and other” information of parties that traded in enX stock, in 2023. The JSE refused, after which Inhlanhla wrote to the Information Regulator to complain; in January, the regulator ordered the JSE to give Inhlanhla all the trading information it had asked for.

Now the JSE has gone to court to overturn the regulator’s decision.

Louis Cockeran, the JSE’s legal head, tells Currency that even though the exchange is viewed as a public body, “it does not follow that [anyone] is also entitled to confidential trading information” of firms involved in trading stock.

“If the man on the street could get Goldman Sachs’ trading information per a normal [Paia] request, no-one will invest in our market anymore,” he says.

Functional financial market

In his affidavit for the legal case, Cockeran says there are commercial transactions between parties where “it is often necessary that they do so without alerting their competitors or the market”. He describes this as the key mechanism for any functional financial market.

“If persons like Inhlanhla may access this information, this will mean that they can request details and documents of all share transactions on the JSE … this result will have very serious negative consequences on the confidence of investors and businesspeople,” the affidavit says.

The JSE argues that if the regulator’s decision is not set aside, “the effect will be that it will not be possible to implement a transaction in the confidence that a competitor will not become aware of it [and] it will no longer be possible to build a stake in a listed company without alerting others to that fact, which would likely result in a speculative run on the price of that share”.

Cockeran tells Currency that the sort of “granular” and confidential trading data that Inhlanhla wants is something that the JSE would only provide to the Financial Sector Conduct Authority (FSCA), the independent regulator which is mandated to investigate and act on market abuse. And, he says, it is the FSCA that Inhlanhla should have approached – not the exchange.

Principle aside, the JSE argues that in this enX case, the claims of market manipulation aren’t justified. Inhlanhla provided “no facts” to support its claims, and instead “appeared to want to embark on its own, unsanctioned investigation into unspecified price manipulation”.

‘Attractive, but rubbish’

Adam Pike, Inhlanhla’s lawyer, tells Currency that it approached the JSE because the exchange runs the broker-dealer accounts and has a record of the trades. By contrast, the FSCA doesn’t.

“What the JSE is trying to do is say that because you’ve got a dispute, go and deal with the FSCA. But they’re misreading what we want,” he says.

“We’re saying: you’ve got records, Paia says we are entitled to them, please hand them over so that we can deal with our private dispute, rather than filing a regulatory complaint to the FSCA.”

Cockeran, however, argues that Inhlanhla “had all the time in the world to subpoena us for that information and they haven’t – for the sole reason that it’s completely irrelevant to their dispute with Peresec”.

So why not issue a subpoena?

For starters, Pike says that in 2023, they asked the JSE for the trading records, but because there was no legal case over the fight between Inhlanhla and Peresec, the powers to subpoena weren’t available at the time.

Either way, one insider tells Currency, Paia shouldn’t be used as a “fishing expedition” to obtain documents to buttress a client’s case.

As for the JSE’s view that revealing these details would spook investors, Pike calls this argument “attractive, but rubbish”.

“The JSE is entitled to disclose information for four specific purposes. Two are relevant: if the information is required for the purposes of legal proceedings, and if it is permitted in terms of a law. Paia is a law that permits disclosure.”

The JSE also argues that no “reputable” exchange would disclose the kind of information Inhlanhla is after “on demand”.

‘Material harm’

The exchange says that if the Information Regulator’s decision stands, “it signals to international investors and market participants that the JSE does not offer the protections that comparable exchanges do”.

This, it argues, would represent “a material and concrete harm to the JSE and to South African capital markets”.

Cockeran tells Currency that the international ramifications “may be severe and long-lasting”. Because the JSE belongs to the World Federation of Exchanges, he fears that non-compliance “would lead to loss of global institutional trust, and potential membership suspension or expulsion”.

“Investor confidence would also be damaged, and probably severely so, as investors would not be able to participate in the South African market with the assurance that their granular trading data is private and protected,” he says.

“They would also have no guarantees that bad-faith actors would not gain access to their private information in a bid to gain an unfair advantage over them, simply by lodging a request with the Information Regulator.”

The bottom line is that if the JSE became an international outlier, this could ultimately result in “significant disinvestment” from the exchange.

Again, Pike rejects this argument, pointing out that the JSE is not bound by any of the jurisdictions it cites – such as the UK, the US, Singapore or Australia.

“We’re not governed by best practice. We are subject to our own laws and the constitution. The mirage of foreign best practice is not an answer to a legal question,” he says.

Fear of ‘unfettered transparency’

In its decision, the Information Regulator referred to Paia’s intention to promote “transparency, accountability and effective governance”.

Investigative reporting outfit amaBhungane, which has reported extensively on the Peresec case, has flayed the JSE for what it calls a “betrayal” of these principles.

Asked about this backlash, Cockeran tells Currency that the JSE understands the need for transparency in public affairs, especially given South Africa’s history of corruption, but says this “cannot be a one-size-fits-all approach”.

So how does the JSE balance the need to play open cards with trust in the financial market in general?

Cockeran says the exchange is unequivocal about its support for transparency, but argues that “unfettered transparency will lead to unintended and undesirable consequences”. He likens the JSE’s stance to the same sort of safeguards when it comes to medical records or people’s personal tax affairs.

“The irony of the Information Regulator’s approach is that if confidential trading data is available to third parties simply on request, that is a position that is likely to enable, rather than prevent improper conduct in the financial markets,” says Cockeran.