Market abuse Is a very general term to describe actions by investors that unfairly take advantage of other Investors, It includes not only insider dealing but various actions attempting to mislead the market, such as providing false Information about a company’s performance or giving a misleading impression of the market in the sharers . It is very important for a state to curb the problem of market abuse and to keep its markets clean. Markets should not only be clean and fair but also should seem to be clean and fair in order to encourage investment.
We live in an information-led society. Information and knowledge have become more Important than ever. It cannot be argued that the first one with Information or knowledge Is likely to confer an advantage. It has been argued that market abuse through Insider trading and market manipulations are victimless and not immoral crimes as some see it as the sharper market participants simply making a well earned shilling due to their shrewd knowledge of the markets and the people in tit’. But it is clear on a closer Inspection that it is the society, which bears the loss.
Market abuses through insider trading and market manipulations (market manipulation Includes techniques Like ‘Pump & Dump’, Trash & Cash’ etc,) have a negative Impact on the other players in the market. In R v Haines, the courts viewed the investors as cities of insider trading transactions. Moreover, the court stated that the defendant’s act had undermined the integrity of the securities market and noted that this would lead to a loss in market confidence and market efficiency. In DIP v Reilly Justice T.
Forrest stated that in insider trading cases I consider there are at least two victims; the seller or sellers of the stock at the lower price and the public, upon public confidence in the market is an important factor. The securities markets could not survive and flourish without the confidence of those who elect to invest in it. Section 118(1)9 of The Financial Services and Markets Act, 200010 defines the specific offence of ‘Market Abuse’ to occur when a user of the market has been unreasonably disadvantaged (whether directly or indirectly) by other players in the market who have 1.
Used to their own advantage information which is not generally available; 2. Created a false or misleading impression; or 3. Undertook activities that distort the markets 1 . These three categories of market abuse have the effect of reducing confidence in the market and impairing its efficiency. Insider Trading/ Dealing is perhaps the most now form of Market Abuse. Most insider trading cases involve private information that corporate managers know about the prospects of their companies. Insider trading also may involve information that that traders improperly obtain from other sources(generally an ‘Insider’).
The U. S. Supreme Court in U. S. V. Dirks came up with two categories of Insiders, one included the Core Insides like the directors, majority share holders etc. And the other category included Constructive Insiders, people who due to their special position have access to the special information and re subject to an expectation of confidentiality. Section 57 of the Criminal Justice Act 1993 also deals with the definition of an insider and inside information. A person is said to have information as an insider when the following conditions are satisfied: 1 .
That the information is in fact inside information and the person knows it to be so, and 2. That the person has it from an inside source, and that he knows that to be so. Thus the following inferences may be drawn from above; first, the information obtained through the person in question being a director, employee or shareholder f an issuer of securities. Second, it might be constituted that the information was available by virtue of his employment, office or profession. Third, the information may be received form a person in the first two categories.
Market Manipulations on the other hand when profitable trades are made with ‘bad’ intent which include the following: 1. The trading is intended to move prices in a certain direction; 2. The trader has no belief that the prices would move in this direction but for the trade; and 3. The resulting profit comes solely from the trader’s ability to move prices and to from his possession of valuable information. There are various techniques of Market Manipulation such as ‘share ramping and trash & cash’. These are the basic ways in which a dealer may earn profits by creating false information.
Techniques like ‘churning’ are not covered under market abuse in I-J but by the Fraud Act 2006 in order to increase the severity of the punishment. Thus in order to keep the markets clean and fair, in order to maintain efficiency and to encourage investment, it is very important for a nation to curb the problem of insider trading and market buses. The inside information or knowledge of an information being false gives the trader and unfair advantage. A student who has taken cheat sheets to an examination will obviously have an unfair advantage over the students who don’t have cheat sheets.
The main problem with market abuse is that there is no smoking gun left behind after the offence is committed, thus it is very hard to monitor these abuses. Even to track these manipulations, a huge amount of data has to be analyzed and sometimes even the minutest discrepancy in patterns needs to be noted. Technology has been p to par to combat these abuses but at the end of the day one has to realize that these are subject to human behavior and physiology, thus there is no foolproof way to detect these abuses.
Also this makes it very hard for the authorities to collect evidence. Indian laws relating to market abuse are inline with the laws of United Kingdom. The Securities and Exchange Board of India (SUBSET) regulate the Markets in India. It performs three kinds of functions 1. Quasi-legislatively: thus it is empowered to draft regulations for the markets and the firms and the traders in the arrest. 2. Quasi-executive: thus it is empowered to conduct investigations and enforcement actions. 3.
Quasi-Judicial: thus on violation any of the norms and regulations, it pass rulings and orders. The main advantage of having an administrative body to govern and regulate the markets is its specialization and expertise. Accountability of decisions and orders of such an authority is maintained through an appeal process. Due to the data available with such an authority, it is easier for it to monitor the markets and track market abuses. But to even though an authority like SIB has so many powers, it is unable to discourage traders from practicing various forms of market abuses.
The Financial Services Authority (FASTS) is a similar authority working in the United Kingdom. The US federal securities law against insider trading on the fiduciary theory. This used to be the backbone of most of the laws on Insider trading around the world but with time, most of the countries have clearly moved away from the notion of fiduciary theory due to the grey area it leaves open for exploitation. In US v Dirks, the respondent was a Whistle-blower’ ho provided a securities analyst with information on fraudulent activities in an insurance company.
As the discloser was for the best interest of the shareholders, it did not involve a breach of the insider’s fiduciary duty to the shareholder. Had this case been tried in I-J or India, Dirks would have been liable as he acted improperly by passing the sensitive information to the firm’s clients for their personal benefits. It is true that imposing criminal sanctions on the offence of insider trading and market manipulations will serve the purpose of deterrence. An individual may be in a way his liberty due to Jail sentences in addition to the social stigma attached.
A rational criminal commits an offence only when expected returns are greater than the expected loss or cost. Thus to discourage traders from committing the offence of insider trading, it is important to impose a cost higher than the expected profits. The probability of getting caught should also be noted in order to come up with a penalty, which has a deterrent effect. 24 Thus there is no doubt criminal sanction imposes harsher liabilities than both civil and administrative sanctions.
However, the burden f proof required (I. E. The level of certainty required for a guilty verdict to be delivered) is also significantly higher. But as stated above, the crimes of insider trading and market manipulations do not leave behind a smoking gun. Market abuse is largely inferential. Cases are often based around circumstantial evidence relating to meetings, phone calls and presumed possession of information, making it difficult to establish guilt to the criminal standards, beyond a reasonable doubt. 6 It has been noted that ‘regulators will often find themselves in a position where they can identify a person with inside information on a particular security, a person who traded in that security, a relationship between the two persons and even evidence of communications between them (such as telephone records). This however may still not be enough unless there is some evidence of the content of the communications and, in particular, the conveying of price sensitive information that was not generally available.
Further, though a circumstantial case for communication may exist, it is usually necessary to establish what was said to identify it as price sensitive information. Also, given the seriousness of such an allegation it is unlikely that evidence of such communication can be inferred from the surrounding circumstances’27 This means that mere circumstantial evidence of possession of sensitive information, and communication with another person who then deals or trades in a matter consistent with the information is not enough if the actual contents of the conversation are not available, I. . It is necessary to prove that the information was actually transferred. It has been argued that for insider trading laws, the enforcement of the law is very important otherwise it may have a negative impact n the economy. In February 2008, the New Zealand government enacted the Securities Market Amendment Act 200629 (SOMA), which introduced criminal sanctions. Prior to this act, the law allowed for civil penalties of three times the value of the gain made or loss avoided or one million dollars, whichever is greater.
The SOMA introduced a maximum penalty of 5 years imprisonment and/or a NZ$300,OHO fine for an individual found guilty of insider trading. This model has been considered a failure by many critiques due to the lack in conviction because of the higher evidentially needs. It is believed that the introduction of criminal sanctions has failed to improve efficiency of the market and in fact has made it workers. In R v Arriving, the court took into consideration the loss of market confidence as a determinant in assessing the quantum of penalty.
The court also stated that it intended to use imprisonment as a method of sending out a deterrent message to the securities market and those who are engaged in the industry. The court emphasized on the fact that detection in insider trading cases is so difficult that the only effective deterrent assuage that could be sent to the public is through penalties and sentencing. Mr.. Imprisonment, to be served by way of periodic detention, and fined $30,00032. The number of people acquitted facing criminal charges for the offence market abuse in the United Kingdom is nineteen in fifteen different cases.
While the success rate of the same since 1986 when it was first criminality is five people convicted in two different cases. On the other hand civil liabilities were imposed on twenty-two different people in sixteen cases of market abuse since 2000 under the FASTS. It can e easily seen that the conviction rate is much greater in civil cases than the criminal cases. But one must also note whether civil actions provide the deterrent purpose sought to be achieved in order to discourage traders from practicing various techniques of Market Abuse.
In certain cases the civil liability imposed does not even make a difference to the accused as the amount may be to nominal. In a few cases, especially where the accused are top-level executives in a firm, the civil liability imposed may be treated as an easy escape route. Thus only imposing civil liabilities may not be adequate. Administrative Sanctions is another tool to curb the problem of market abuse. Different market regulatory authorities have a wide range of administrative actions up their sleeves. The FSP has three weapons in its arsenal when it comes to administrative sanctions.
First it may censure a person engaged in market abuse. Second it may impose a penalty of such amount, as it considers appropriate. Third, it is empowered to order the disgorgement’s of gains by the infringing party to the party from whom the gains are derived, or it may order the compensation of losses to adversely affected parties. The FSP may also apply to court or a variety of Judicial orders: injunctions, remedial and asset-freezing orders, as well as restitution and compensation orders in the particular case of market abuse.
The Securities & Exchanges Commission takes administrative action on the offence of Market Abuse in USA. The Commission can seek a variety of sanctions through the administrative proceeding process. Administrative sanctions include cease and desist orders, suspension or revocation of broker-dealer and investment advisor registrations, censures, bars from association with the securities industry, civil monetary penalties, and disgorgement’s. Administrative proceedings differ from civil court actions on the bases that an Administrative Law Judge (ALAS) hears them.
The authority on the bases of expertise and experience may select this AL]. This also results in a speedy disposal of cases. Monetary penalties through administrative sanction should be at least at par with the profits made and should also carry interest as a fine. Actions like bars from Association and trading may affect the livelihood of a person, thus it provides a deterrent purpose civil liabilities cannot offer. Along with Administrative sanctions, the Administrative Authority should also aka regulations in order to ensure that the firms also discourage their staff from indulging in market abuse activities.