Market Manipulation: what it is and how to avoid it

Financial crimes are gaining wider recognition among the business community, and the community at large. However, market manipulation remains one of the lesser known financial crimes. There are several reasons for that, too. Market manipulation is a complex crime that involves interference with financial markets on a relatively large scale. Interfering with markets is no straightforward task. Nevertheless, it does occur, and it is prudent for businesspeople to be aware of its manifestations. It is only with such an awareness that traders can avoid the surprisingly wide scope of the law as it pertains to market manipulation.

The Corporations Act prohibits market manipulation in respect of trades in financial products

Market manipulation is prohibited most notably by the Corporations Act. In section 1041A, market manipulation is both defined, and prohibited. As with all laws, definition is important; it establishes the scope of a crime. Section 1041A of the Corporations Act is not different. In that section, the scope of market manipulation is established as the trade of financial products. However, that term is quite broad; clarification is necessary in respect of what, exactly, a ‘financial product’ is. That clarification is offered by section 763A of the Corporations Act. There, financial products are defined generally as a facility through which – or through the acquisition of which – a person makes financial investments, manages financial risks, or makes non-cash payments.

In ordinary terms, such a definition offers little clarity. However, the Act goes further by defining facilities in section 762C. By virtue of that section, a facility could be any of the following:

1. Intangible property;
2. An arrangement or term of an arrangement; or
3. A combination of both.

With reference to sections 763A and 762C, the scope of section 1041A is established more firmly. Those three sections combine to limit market manipulation to conduct undertaken in the trade of intangible property or arrangements – and their terms – through which a person makes investments, manages risks, or makes non-cash payments. With the scope set, as it is, market manipulation is broken down into two elements by section 1041A.

The first element of market manipulation is taking part in or carrying out a transaction

Market manipulation is not a passive activity, and the Corporations Act recognises it accordingly. To manipulate a market, a person must directly or indirectly take part in or carry out at least one transaction. Pursuant to section 1041A of the Act, that is the benchmark of unlawful market interference. Unlike other parts of section 1041A, the wording of this section is relatively straightforward. Transaction is given no special meaning by the act, with respect to this provision specifically. Therefore, it is possible to take the term ‘transaction’ at its ordinary meaning, and assume that most financial dealings fall within its reach.

The second element of market manipulation creating or maintaining an artificial price

The second element of market manipulation is what distinguishes it in earnest from ordinary financial transactions. This element looks to the effect of the abovementioned transactions. Specifically, it looks at whether those transactions have the effect of creating an artificial price for trading in financial products, or maintaining such a price for the same. The operative term in the second element is ‘artificial.’ If the price for trading in a financial product is contrived through market interference, it will fall within the second element of market manipulation, pursuant to section 1041A.

Market manipulation is not restricted by jurisdiction in the same way that other offences are

Jurisdiction is ordinarily ascertainable with reference to the origin of legislation. However, in section 1041A, jurisdiction is dealt with in a somewhat unusual manner. Where the effects of manipulative transactions – as set out in element two of section 1041A – are felt in financial markets operated in the Commonwealth jurisdiction, jurisdictional pre-requisites are met. That is to say, the conduct will amount to criminal market manipulation. However, what is interesting about section 1041A, is that is does not require the manipulative transactions to have taken place in the Commonwealth jurisdiction. As a result, Australian regulations are trans-jurisdictionally binding to all transactors on the Australian financial market.

Market manipulation attracts criminal and civil liability, but relief from civil liability is possible

By virtue of section 1041A of the Corporations Act, market manipulation is an offence that attracts both civil and criminal penalties. Liability is therefore twofold for those who engage in market manipulation. However, there is an avenue in section 1317S of the Corporations Act through which relief may be sought from civil liability.  The application of these provisions, though, is complex, and interpreting or applying such laws is possible only with advanced commercial legal training. As a result, sound legal input is vital for those who trade in financial products. Market manipulation is a serious offence, and ought to be avoided with the assistance of professional legal advice.

By Finian McGrath

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

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