Reforming the Regulation of Financial Market Manipulation

Abstract

Fraudsters periodically attempt to enrich themselves by employing a raft of tricks and schemes to exploit investors and financial markets. Market manipulation (‘manipulation’) is one such class of illegitimate conduct. It perverts the market price formation process and undermines public confidence in financial market integrity. An effective prohibition on manipulation is thus required to protect investors from fraud and promote market integrity, thereby fostering investment and economic growth. Chapter 1 of this thesis defines manipulation and argues that the current anti-manipulation regime, ss 1041A–1041C of the Corporations Act 2001 (Cth), requires substantive reform. This regime is predicated on a conceptually unsound understanding of manipulation. It fails to articulate the nature and role of manipulative intention and is based on an unclear distinction between civil penalties and criminal offences. As such, the scope of liability is sometimes too broad and at other times too narrow. Additionally, the provisions are internally defective, as they suffer from ambiguous language. They are also overly complex and have inconsistent physical and fault requirements. The Criminal Code Act 1995 (Cth) exacerbates these problems. Chapter 2 advances a two-pronged proposal for substantive law reform. Principally, two criminal prohibitions on manipulation should replace the current regime. These will prohibit a person from executing a transaction, or doing, or omitting to do, an act, when motivated by the dominant purpose of manipulating the market for, or price of, a financial product. The provisions clearly articulate the requisite manipulative intention and have an appropriate scope of liability. They are also easier to enforce than the current regime, as two deeming provisions facilitate proof of manipulative intention. 4 The proposed regime is complemented by a Serious Financial Market Crimes Act 2014 (Cth). This contains prohibitions on manipulation and other conduct that undermines financial market integrity, reinforcing the serious criminal nature of manipulation and enhancing the credibility of ASIC’s enforcement actions. It may also motivate Parliament to articulate its policy objectives in greater detail. Together, these proposals would effectively deter manipulation and promote financial market integrity.