New Securities Law for
Investment Advisers and Market Participants
2008
Market Manipulation
Introduction
This chapter describes the law in the Securities Markets Act 1988 that prohibits market manipulation1. The law aims to prevent conduct that harms the integrity of the New Zealand securities markets.
Some prohibitions apply only to particular conduct relating to securities of a listed issuer traded on:
A broader ban applies to conduct that relates to dealing in any type of security or futures contract.
Prohibition Against False or Misleading Statements or Information
Market manipulation law aims to stop manipulative behaviour that may affect the New Zealand securities markets. A person who spreads false or misleading market information might be able to move the price of a security in a way that favours them. They might be able to increase the price so they can sell a security they hold at a profit. They might be able to reduce the price of a security so that they can buy the security more cheaply.
Market manipulation law prohibits any person from making false or misleading statements or spreading false or misleading information that affects securities listed on a registered exchange or traded on an authorised futures market.
The law also bans false or misleading statements or spreading false or misleading information that is likely to affect the way a person votes on a transaction involving securities.
What kinds of statements or information are prohibited?
The ban applies to "statements" and "information". These terms are wide and include:
- written statements distributed in hard copy or electronically;
- spoken information;
- information provided in pictures or graphs.
A statement or information is prohibited if:
- a material aspect of the statement or information is false; or
- the statement or information is materially misleading.
Every important aspect of the information or statement must be accurate and balanced. The information or statement as a whole must be accurate and balanced. Statements or information will be prohibited if they omit important aspects, and the omission makes the statement or information as a whole materially misleading.
The law does not prohibit minor errors or inaccuracies that are of little significance or importance.
What must the person know about the truth of a statement or information?
A person breaches the prohibition if they make a statement or spread information that they know is false or misleading.
A person will also breach the law if they ought reasonably to know that a statement or information is false or misleading.
If a person is in a position that indicates they ought to know that the information is false or misleading, the law will assume that they do know the information is false or misleading.
Example: If a company issues a false press release about its business prospects, the Chief Executive is likely to be assumed to have known that the press release was false because the CEO is assumed to be in a position to know the truth, or to ensure that the press release is correct.
But, to be criminally liable, the person making the statement or disseminating the information must actually know that the statement or information is false or misleading.
What effect must the statement or information have to be prohibited?
The law prohibits a person from making a statement or spreading information that is false or misleading, if the statement or information is likely to:
- induce a person to trade in the securities listed issuer; or
- increase, reduce, maintain, or stabilise the price of the securities of a public issuer; or
- induce a person to vote for, or vote against, a transaction, or to abstain from voting in respect of a transaction.
Prohibition Against False or Misleading Appearance of Trading
The law bans behaviour that gives, or is likely to give, a misleading appearance of trading in listed securities. This type of activity might enable a person to move the price of a security in a way that favours them. Some examples of practices that the law is aimed at are2:
- painting the tape - engaging in a series of transactions that are reported on a public display facility to give the impression of activity or price movement in a security.Wash sales and improper matched orders are often used when painting the tape.
- wash sales - transactions in which there is no real change in ownership of the security.
- improper matched orders - transactions where buy and sell orders are entered at the same time, with the same price and quantity, by different but colluding parties.
- advancing the bid - increasing the bid for a security to increase its price.
- pumping and dumping - buying at increasingly higher prices. Securities are sold in the market (often to retail investors) at the higher prices.
- marking the close - buying or selling securities at the close of the market to try to alter the closing price of the security.
- corner - securing sufficient control of any commodity or security so that its price, or the price of derivatives that rely on the commodity, can be manipulated or controlled.
- squeeze - taking advantage of a shortage in an asset on a particular date to artificially raise the price.
The ban applies to both acts and omissions. Sometimes a person can be presumed to have breached the prohibition unless they can prove they had a legitimate reason for their behaviour.
What effect must the act or omission have?
An act or omission is prohibited if it creates, or is likely to create, a false or
misleading appearance regarding:
- the extent of active trading in the securities of a public issuer; or
- the supply of or the demand for the securities; or
- the trading price or the value of securities.
What must the person know about the effect of the act or
omission?
If the person knows that their act or omission will have, or is likely to have,
a particular effect, they will breach the prohibition.
A person who ought reasonably to know that their act or omission will have,
or is likely to have, a particular effect, will also breach the prohibition.
To be criminally liable, the person must have actual knowledge that the act
or omission will have, or is likely to have, that effect.
A person can be presumed to have contravened the prohibition
A person who is a direct or indirect party to trading in listed securities will be
presumed to have breached the market manipulation law if there is no change
in beneficial ownership.
A person will be presumed to have breached the ban if they make an offer to
trade securities and then make, or propose to make, an opposite offer that
largely matches the number and price of securities in the first offer.
A person will be presumed to have breached the ban if they make an offer to
trade securities knowing that their associate has made, or proposes to make, an opposite offer that largely matches the number and price of the securities
they offered to trade.
Exemptions
The SecuritiesMarkets (MarketManipulation) Regulations 2007 set out three exemptions from the market manipulation provisions of the law.
Market stabilisation
Market stabilisation is where someone buys securities at a certain price in order to stabilise the price of those securities. The Regulations set out conditions under which a company that is undertaking an initial public offer of securities can arrange for market stabilisation to occur. These conditions are detailed, and any company considering using this exemption should take legal advice to ensure that the conditions are carefully followed.
The conditions formarket stabilisation under the Regulations aimto ensure that the potential for stabilisation is disclosed in advance to investors, that stabilisation bids are not used to raise the price of securities and are identified and reported regularly to the market. Any company undertaking market stabilisation must appoint in advance a stabilisation manager to oversee the process. This person must satisfy the Securities Commission that it has satisfactory Chinese walls in place to prevent confidential information about the market stabilisation from passing to employees or others who are not concerned with the stabilisation.
Short selling and crossing of trades
Short selling is a sale of a security by a person who does not, at the time of the trade, actually own the security.
A crossing is a trade where the same market participant acts as agent for both
the buyer and the seller, or acts as agent for one and is the principal on the
other side of the trade.
It is possible that both of these activities could give a misleading appearance
of trading. The Regulations clarify that short selling and crossings are not
market manipulation for the purposes of the law merely by reason of being
short selling or crossings.
Footnote
- Sections 11 to 19, Securities Markets Act 1988
- The Technical Committee of the International Organization of Securities Commissions give these examples of methods of market manipulation in their report "Investigating and ProsecutingMarketManipulation" May 2000.
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