What is market manipulation?
Market manipulation is a type of white collar crime which involves intentionally increasing or decreasing the value of a financial product, including stocks, or influencing the behaviour of the market to do so.
Section 1041A of the Corporations Act 2001 (Cth) prohibits market manipulation. The Act defines market manipulation as conduct which has, or is likely to have, the effect of creating or maintaining an “artificial price” for trading in various financial products, including shares and futures.
Section 1041A states that market manipulation occurs when a person takes part in or carries out:
- A transaction that has or is likely to have, or
- 2 or more transactions that have or are likely to have,
the effect of:
- Creating an artificial price for trading in financial products on a financial market operated in this jurisdiction, or
- Maintaining at a level that is artificial (whether or not it was previously artificial) a price for trading in financial products on a financial market operated in this jurisdiction.
The Act defines financial product at s 763A as a “facility” through which, or through the acquisition of which, a person does one or more of the following:
- Makes a financial investment (see section 763B).
- Manages financial risk (see section 763C).
- Makes non-cash payments (see section 763D).
Facility is defined in s 762C to include:
- Intangible property, or
- An arrangement or a term of an arrangement (including a term that is implied by law or that is required by law to be included), or
- A combination of intangible property and an arrangement or term of an arrangement.
Chapter 7 of the Corporations Act covers a wide range of financial products including superannuation, banking, general and life insurance, managed fund, securities, derivatives, smart cards and non-cash payment facilities.
How is market manipulation usually committed?
Market manipulation is a complex financial crime that involves large scale interference with financial markets. Therefore, there is no one way in which individuals commit market manipulation, with larger scale crimes generally being committed in unique ways. This has led to the High Court, in DPP (Cth) v JM (2013) 298 ALR 615, stressing the need to assess each case on a fact-specific basis, given the wide range of financial products governed by section 1041A of the Corporations Act.
Recently, the Australian Securities and Investments Commission (ASIC) labelled the use of social media to coordinate “pump and dump” schemes as potentially amounting to market manipulation. ASIC described these schemes as pumping share prices by using posts on social media to announce a target stock, a designated time to buy and a target price or percentage gain to be reached before dumping the shares.
Other common forms market manipulation include:
- Spoofing – a disruptive algorithmic trading practice that involves placing bids to sell futures contracts and cancelling the offers prior to the deal’s execution. This process is repeated, which then drives down the price of the shares without any being sold. The practice intends to create a false picture of pessimism in the market. By creating a false sentiment in the market, a trader can manipulate the actions of other market participants and change the price of a security.
- Churning – when a trader places both buy and sell orders at the same price. The intent is to churn up the trade volume, making the stock look more interesting to other investors, and thereby increasing the price.
- Wash trading – selling and re-purchasing the same security or substantially the same security to generate activity and increase the price.
- Cornering – a person “corners” a market in shares by holding or controlling so many shares in a company that other persons, who urgently need shares to cover their short positions in the company, are forced to acquire them from their dominant holder on the holder’s terms. It is not a common form of market manipulation in Australia because of the regulation of short selling.
- Insider trading – this is the most infamous form of market manipulation. This conduct involves individuals trading stocks using confidential information about a company that is not available to the wider market.
Offences and penalties
The offence of market manipulation attracts both criminal and civil penalties.
Criminal penalties
Schedule 3 of the Corporations Act which lists penalties states that s 1041A (Market manipulation) has a maximum penalty of up to 15 years imprisonment.
Civil penalties
The penalty for an individual who contravenes the civil penalty provision is the greater of 5,000 penalty units (currently $1.11 million) or three times the benefit obtained and detriment avoided.
For companies, the maximum civil penalty is the greater of:
- 50,000 penalty units (currently $11.1 million), or
- Three times the benefit obtained and detriment avoided, or
- 10 percent of annual turnover, capped at 2.5 million penalty units (currently $555 million).
The value of a penalty unit is prescribed by the Crimes Act 1914 and is currently $222 for offences committed on or after 1 July 2020.
Who investigates market manipulation?
The investigation and prosecution of market manipulation falls within the scope of the Australian Securities and Investments Commission (ASIC). ASIC takes market manipulation seriously and conducts frequent investigations into potential market manipulation attempts. While ASIC does not disclose all its investigations, it successfully prosecuted four individuals for market manipulation in 2021.
Further, ASIC regularly publishes guidance for markets to regulate their participants. It also publishes guidance for participants to ensure their conduct does not amount to market manipulation.
Possible defences
Possible defences for an allegation of market manipulation are:
- Lack of Intent – you did not intentionally or deliberately engage in conduct that constituted market manipulation. This includes if you engaged in that conduct for a different purpose other than manipulating the market. However, this is not a total defence as “reckless” conduct can still constitute market manipulation.
- Factual Dispute – This defence is if the individual disputes the facts alleged by the prosecution.
- Due care and diligence – this defence may be invoked if the individual was acting in their capacity as a director or officer of a corporation or business. The individual would argue that they have discharged their due care and acted with diligence.
- Duress – the individual may argue that they were unlawfully coerced into engaging in market manipulation by a third party.
