Market Manipulation and Market Abuse | FCA Investigations
Market manipulation is the deliberate attempt to create an artificial, false or misleading impression of the price of, or market for, a product, security or commodity.
Various regulatory bodies, principally the Financial Conduct Authority (FCA) enforce rules and regulations imposed by a variety of statutes, such as the Financial Services and Markets Act 2000, the Financial Services Act 2012 and the Fraud Act 2006, which are designed to maintain market integrity and investor confidence.
Market manipulation often overlaps with other offences such as fraud, insider dealing and other forms of market abuse. These are often more difficult to investigate, as they tend to be carried out by groups of individuals, sometimes over a long period of time, employing sophisticated procedures which are not immediately apparent.
Naz Maqsoom of KANGS explains various aspects of market manipulation.
The Relevant Law
Criminal Offences
The Financial Services Act 2012 provides that it is a criminal offence under:
- Section 89 to make a statement which is false or misleading in a material respect, whether reckless or otherwise or dishonestly conceals any material facts.
- Section 90 to create a false or misleading impression as to the market in or the price or value of any relevant investments.
- Section 91 to make a false or misleading statement for the setting of a relevant benchmark or impression in relation to specified benchmarks.
The Fraud Act 2006 states:
- it is an offence for a person to dishonestly make a false representation,
- intending to make a gain for himself or another, or cause loss to another or expose another to a risk of loss.
A representation is false if:
- it is untrue or misleading and
- the person making it knows that it is or might be untrue.
Civil Offences
The Financial Services and Markets Act 2000
Whilst the Financial Services and Markets Act 2000 (FSMA) remains the principal statute governing the regulation of financial services in the UK, it has received amendments to cover such events as Brexit. Market manipulation is primarily governed, on the civil side, by the UK Market Abuse Regulation (‘UK MAR’).
Amongst many other features, it created a far-reaching civil offence of market abuse which is defined as:
- behaviour, whether it be action or inaction, likely to be regarded by a regular user of the market, who is aware of the behaviour, as a failure on the part of the person or persons concerned to observe the standards of behaviour reasonably expected of a person in his or their position in relation to the market.
It covers the civil offences of:
- insider dealing,
- unlawful disclosure,
- market manipulation,
- attempted manipulation.
The civil offence of market abuse seeks to regulate behaviour according to its impact on the market and is less concerned with the individual motivation behind the behaviour in question.
How Can Markets Be Manipulated?
Market manipulation can take many forms in order to deceive investors and, although illegal, presents regulators with enormous challenges to detect and prove.
Recognised forms of manipulation include:
- Pump and Dump or Share Ramping: The is the practice of deliberately placing orders in such a way as to artificially increase the closing price of an instrument. Exaggerated or false information attracts buyers to purchase shares which artificially inflates the price, then selling personal shares at its peak.
- Poop and Scoop: This is the reverse of Pump and Dump. False, negative information about a stock will be released thereby causing the price to fall. The stock will then be acquired at the deflated price.
- Order Spoofing/Layering: Multiple fictitious purchase orders are placed into the order book when there is no intention of them being settled. This creates a false impression as to true trading intentions and creates the false impression that the security is in demand, thereby driving up the price.
- Wash trading: The security is artificially traded by, for example, someone selling to themselves, probably on several occasion, either directly or through a third party, creating the false impression that there is an active demand for that security.
- Printing: Falsely announcing that a trade has been conducted at a specified price or size, when no activity has taken place, with the intention of generating business.
- Flying prices: Falsely announcing bids or offers which are not supported by any factual proof of such trading activity.
Potential Signs of Market Manipulation
There are many factors which will potentially attract the attention of FCA investigators, some of them being:
- the frequency of high volume ‘rollover trade’,
- two or more participants acting in unison to manipulate the price in a market with a small number of participants,
- an order book containing multiple activity for an unusually short period of time,
- prices on orders being consistently above the prevailing market price,
- entering orders to buy shares on one exchange whilst simultaneously offering to sell them at a lower price,
- orders being disproportionate in size to those placed on the market generally.
Potential Penalties for Breach
The FCA pursues both regulatory investigations and criminal investigations.
In respect of breaches of UK MAR, it may:
- impose unlimited fines,
- seek injunctions,
- impose various trading restrictions,
- issue public censure to individuals and firms, both of which can have highly damaging consequences to professional image and reputation.
Individuals convicted of insider dealing and market manipulation can incur custodial sentences of up to ten years’ imprisonment and unlimited fines.
How Can We Assist You?
KANGS has been supporting and representing individuals accused of involvement in criminal fraud investigations of every nature for over twenty-five years.
We recognise that being subject to an investigation for alleged breaches of FCA regulations can be a challenging and stressful experience. Our solicitors have a proven track record of successfully defending clients facing a broad range of allegations, including insider dealing, market abuse, investment fraud and conflicts of interest.
The team at KANGS has earned a nationwide reputation for excellence in financial crime and white collar crime, as recognised by the leading legal directories Chambers UK and The Legal 500.
If we can be of assistance, our team would be delighted to hear from you.
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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