The Financial Markets Authority (FMA) is to take civil action against one of the founders of listed company Diligent Board Member Services for alleged market manipulation of its shares.
The authority has filed six claims against Brian Henry alleging that certain orders and trades he made in 2010 breached the market manipulation provisions of the Securities Markets Act.
Mr Henry, who left Diligent in March 2009, faces a maximum fine of $1 million for each contravention of the act. It is the first time a market manipulation case has been taken in New Zealand.
The FMA's investigation followed a referral from stock exchange operator NZX.
FMA head of enforcement Belinda Moffat says market manipulation interferes with the integrity of New Zealand's financial markets and harms the function of open, transparent and efficient capital markets.
In a statement, Mr Henry says he raised the matter with the Securities Commission in 2010 when he realised that he had made the errors.
Mr Henry says the Securities Commission, which has now been replaced by the Financial Markets Authority, decided to take no action. He says the trading had a minimal effect on the market, with the net effect of the trades being just $1500.
Mr Henry, who now lives in New York, says he will respond vigourously to the legal action.
Corporate lawyer Stephen Franks says the FMA will need to prove that Mr Henry knowingly and deliberately manipulated the market.
"I think they will have been looking for a case to establish principal and it could well be that if they think he had both the knowledge and the intent they would bring a prosecution just to show that the law has teeth."
Mr Franks says the market will be watching the outcome of the case closely.