13.10.2021 Banking and Finance

The Supreme Court specified the preconditions for securities’ market manipulation – investor’s securities’ transactions with itself are not prohibited

Pursuant to § 398¹ of the Penal Code, market manipulation is punishable. On September 27, 2021, the Supreme Court made a judgment in  case no 4-20-2732 in which it clarified what circumstances must be proved in order for a person to be accused of committing market manipulation and punished for it.

As can be seen from merits of the case, the person subject to proceedings made transactions with himself six times for three weeks, using own accounts in two different banks, transferring the financial instruments from one own account to another.

The Financial Supervision Authority (FSA) found that the transaction were artificial and by making such artificial transactions with him or herself in such a way that the owner receiving the income from the securities does not actually change, the person gave or is likely to give misleading signals about the demand for shares at the market. By a decision of the FSA, a person was fined with EUR 500 penalty for market manipulation.

The County Court also agreed with the FSA, but the Supreme Court as the highest court annulled the decision of the County Court and terminated the proceedings. The views of the Supreme Court are briefly summarized as follows.

The concept of market manipulation provided for in § 398¹ of the Penal Code must be furnished with obligations or prohibitions arising from law or other legislation. Article 12 of Regulation (EC) No 596/2014 of the European Parliament and of the Council (Market Abuse Regulation) defines, inter alia, market manipulation as giving or likely to give false or misleading indications as to the supply of, demand for, or price of a financial instrument. However, the Supreme Court noted that the mere identification of such activities is not sufficient to fulfil the composition of market manipulation.

The Supreme Court pointed out that the purpose of § 398¹ of the Penal Code is to protect the reliability of securities’ markets. Therefore, only acts that actually undermine the credibility of financial market turnover should be considered as market fraud and punishable. Thus, manipulation must have a real effect on the overall impact on the securities’ market in order to be considered punishable. However, such features of market manipulation were not reflected in the financial supervision’s report drawn up in respect of the person concerned in the case. Merely transferring a security to another securities’ account does not always mean market manipulation. The investor’s (instrument holder) transactions with him or herself are not prohibited.

In order to affirm the market manipulation, the transaction must therefore in any way actually and generally affect the market or be at least factually appropriate and relevant for such an effect. If such has not been established, the manipulation may not be assumed. In addition, according to the Supreme Court, the very modest value of the transactions of the person subject to the proceedings (approximately EUR 7,000) and the fact that traded instruments accounted for a negligible share of the total amount of the instrument (less than 0.007%) also militate against securities’ market’s manipulation in the case.

Lada Riisna
Cuesta Law Office partner
Head of Banking and Finance