A type of white-collar crime, market manipulation refers to the intentional act of artificially affecting the value of a product or stock. Market manipulation is a complex crime as interfering with financial markets is not straightforward. With many forms of techniques to commit market manipulation, it is important for market participants to have awareness so they can prevent it or avoid getting caught up in it.
What is Market Manipulation?
Market manipulation (also known as price manipulation, stock manipulation, or stock market manipulation) is when an individual intentionally attempts to increase or decrease the price of a financial product for their own personal gain.
The price movement can change organically at any time in the financial market, influenced by factors such as investors’ decisions, the introduction of a new product, news announcements or earnings reports. The law aims to keep the trade market fair for all participants but market manipulators will attempt to use illegal means to artificially affect the price, such as spreading false information.
Market Manipulation Techniques
Market manipulation comes in many forms and the main techniques include:
- Spreading false or misleading news about a company online to be seen by investors
- Fixing quotes or prices to falsely portray the demand in the market
- Processing a string of transactions to make a product seem more in demand
Pump and Dump
Market manipulators target relatively unknown companies, or ‘penny stocks’, load up on the stocks and then entice other market participants to also invest and artificially increase the price. They then ‘dump’ or sell their stocks at a higher price and make a profit. As the inflation was artificial, the stock will return to its original or an even lower price and investors will be left with undervalued stock.
This pump and dump technique is a common concern in cryptocurrency markets as they are currently unregulated. Manipulators can target new buyers or enthusiasts on social media message boards and motivate them to buy an exciting new token. Once the price inflates, they then sell their crypto for a quick profit and the price crashes, leaving a large volume of buyers at a loss.
Front Running/Insider Trading
Front running (also referred to as insider trading) refers to an insider of a company taking financial action based on company-related information that is not yet public. To take financial action based on this insider information is called front running as this could affect the value of the security ahead of the public announcement. Financial action includes directly investing in the stock yourself, promoting others to do so, or ‘tipping off’ someone likely to invest.
Wash trading is used to make a stock look hugely active in order to entice buyers to invest and increase the value. In smaller cases, manipulators may open two accounts and process buy or sell orders between the two. This increases trade activity but the investor wash trading will most likely not make a profit at this stage.
A bear raid is a technique that short sellers use to artificially push down a price to make a profit. A short seller is someone who borrows shares from a broker and then sells them to pay the broker back. If they use the bear raid technique, usually by spreading false information about the company, they can influence investors to sell their stock and cause the price to drop. The short sellers then buy their stock back at a lower price, give them back to their broker and then keep the difference as a profit.
Cornering, often referred to as ‘cornering the market’, is when an entity aims to buy and hold onto the majority of a stock share to control the price. Such manipulation creates an unfair playing field as the investor with the most control can artificially inflate the prices and then short sell for a profit, causing the stock price to crash.
Spoofing is a form of market manipulation that refers to the practice of creating fake orders and cancelling them before the deal is made. Using bots and algorithms, the trader can repeat this process many times and create an illusion of demand, which will artificially affect the stock price.
Market Manipulation Examples
Market and stock manipulation examples are making the news every day. With stock prices inflating and crashing daily, there is potential for traders to take advantage of such a fast-paced market.
Market Manipulation and GameStop
In 2021, a retail investor kicked off a market frenzy over Gamestop by allegedly posting claims and misrepresenting information on Reddit channels. Gamestop’s share prices increased more than 2,700% within a few months before they peaked and then crashed. The trader involved has allegedly netted more than $30 million in profits through this, and investigations continue into whether the intent was to manipulate the market through a pump and dump technique.
Cryptocurrency Market Manipulation
As the cryptocurrency market is mostly unregulated and no internationally coordinated regulation has been formulated, market manipulation can happen. That does not, however, stop investigation into artificial price movement and prosecution proceedings. In 2022, the first-ever charge was made for insider trading in cryptocurrency. A former employee at Ozone Networks used inside information on the NFTs (non-fungible tokens) that were to be featured on the business’s homepage for his own personal trading gain.
Is Market Manipulation Illegal?
Market manipulation is illegal and initiates both criminal and civil penalties. The law aims to create a stable and fair trade market for all participants but manipulation can jeopardise this and destabilise financial markets.
Corporations Act 2001 – Sect 104A Market Manipulation
Section 104A of the Corporations Act 2001 states that, a person must not take part in, or carry out (whether directly or indirectly):
(a) a transaction that has or is likely to have; or
(b) 2 or more transactions that have or are likely to have;
the effect of:
(c) creating an artificial price for trading
(d) maintaining at an artificial level
Under the Corporations Act, the criminal penalty for market manipulation has a maximum sentence of up to 15 years imprisonment.
Under the market manipulation civil penalty provisions, the civil penalty for individuals has a maximum of either 5,000 penalty units (currently $1.11 million) or three times the benefit obtained and detriment avoided, whichever is greater.
For companies, the maximum civil penalty they face is the greater of:
- 50,000 penalty units (currently $11.1 million)
- three times the benefit obtained and detriment avoided, or
- 10% 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.
How is Market Manipulation reported?
ASIC (Australia Securities and Investment Commission) encourages the community to report market manipulation for investigation. It is important that whistleblowers make the suspicious activity report as soon as possible rather than investigating themselves.
Who Investigates Market Manipulation?
All suspicious activity reports are investigated by ASIC and they take every claim seriously, progressing to prosecution wherever necessary. ASIC also monitor the market meticulously and conducts its own research into suspicious activity.
Market Manipulation Defence Examples
To be guilty of market manipulation, there needs to be a financial action and an intent to manipulate the market. Although allegations are serious, there are possible defences:
Lack of Intent
If you engaged in conduct that manipulated the market but that was not your intention or goal, you may be able to use this as a defence. It should, however, be noted that even with a lack of intent, ‘reckless’ conduct can still count as market manipulation.
If your conduct was due to coercion by a third party, you may be able to argue that your intent was not to manipulate the market.
Due Care and Diligence
If the defendant was acting in their capacity as a director or officer, they can use the defence that they exercised their powers and discharged their duty to due care and diligence in order to make a business judgement.
You can use this defence if you dispute the facts presented by the prosecution
LY Lawyers and Market Manipulation
At LY Lawyers, we understand the complexities of the market and stock manipulation in its many forms and have a proven track record in defending charges.
We pride ourselves on our dedication to fighting hard to protect your rights. Whether you have been formally accused or feel you may have been a party to market manipulation, we are the corporate crime lawyers you need to help your defence case.