Corporate Law Assignment
Criminal sanctions for market abuse by traders and investors are not adequate and we need other forms of enforcements –like the administrative sanctions, the civil penalties/fines etc.?
Answer: Administrative sanctions may be the most viable solution to curb the problem of Market Abuse as there is a lower burden of proof for prosecution and it solves the purpose of deterrence.
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 shares1. 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 victimless2 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 it3’. But it is clear on a closer inspection that it is the society, which bears the loss. Market abuses through insider trading4 and market manipulations (market manipulation includes techniques like ‘Pump & Dump5’, ‘Trash & Cash6’ etc.) have a negative impact on the other players in the market. In R v Hannes7, the courts viewed the investors as victims 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 DPP v O’Reilly8 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, whose confidence in the integrity of the market must be diminished. The impact 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 market11.
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 known 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 sources12(generally an ‘Insider13’). The U.S. Supreme Court in U.S. v. Dirks14 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 are 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...
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