Is It an Offence to Make False Statements About Securities in PNG?

“Buy now, this stock will double by Friday.” “The company has a secret deal with a Chinese buyer.” “Our fund has never lost money.” Statements like these circulate in Papua New Guinea on Facebook pages and in WhatsApp groups every week. When they are false or misleading and concern securities, the person who makes them commits an offence under Part VII of the Capital Market Act 2015, and other provisions of the securities laws punish lies told to the regulator, in prospectuses and in company records.

False or misleading statements: section 301

Four points follow. The statement must be false or misleading in a material particular; a trivial error is not enough. It must be likely to induce trading or move the price; it need not actually do so. The mental element is satisfied by recklessness (“does not care”) or by negligence (“ought reasonably to have known”), so a person who passes on a rumour without checking it can be guilty. And “disseminate” includes forwarding: the person who reposts a false “pump” message to a 200-member WhatsApp investment group is making a statement to each of them.

Fraudulently inducing dealing: section 302

Section 302(1) prohibits inducing or attempting to induce another person to deal in securities by making or publishing a statement, promise or forecast known to be misleading, false or deceptive; by dishonest concealment of material facts; by recklessly making or publishing a misleading statement, promise or forecast; or by recording or storing information known to be false in any mechanical, electronic or other device. The published text joins the four paragraphs with “and”, which read literally would require all four; the structure of the section and its equivalents elsewhere show that each is an independent way of committing the offence. A promoter who tells a church investment committee that a fund is “guaranteed by the Government” when it is not, or who leaves out that the fund’s trustee has lost its licence, is within section 302. Section 302(2) gives a defence to the data-storage limb where the accused had no reasonable grounds to expect the information would be available to anyone.

Manipulative and deceptive devices: section 303

Section 303 is the catch-all. A person who deals, directly or indirectly, in connection with the subscription, purchase or sale of securities must not use any device, scheme or artifice to defraud; engage in any act, practice or course of business that operates or would operate as a fraud or deceit on any person; or make an untrue statement of a material fact or omit a material fact necessary to make the statements made not misleading. A seller of shares in a landowner company who truthfully describes last year’s dividend but omits that the royalty stream funding it has ended is making a misleading statement by omission.

Penalty and civil consequences

Section 306 fixes the penalty for sections 301, 302 and 303 at a fine not exceeding K10,000,000 or imprisonment for up to ten years, or both. Any person who suffers loss by relying on the statement may recover it under section 323, and the Commission may sue for up to three times the gain and a civil penalty under section 324; see recovering losses. Where the statement is part of a scheme to rig prices, sections 299, 300 and 305 may also apply; see market manipulation.

Lying to the regulator, in prospectuses and in records

Part VII is not the only source of liability for untruths about securities. The main companion offences, all carrying the same K10 million or ten-year maximum, are:

• Section 120 — submitting false or misleading statements or information, or information with a material omission, to the Securities Commission in connection with an application for approval under Part IV, or engaging in conduct known to be likely to mislead the Commission. There is a defence of reasonable enquiry and honest belief (section 120(2)), and a duty to correct a statement later found to be wrong (section 120(3)).
• Section 142 — authorising or causing the issue of a prospectus containing a false or misleading statement or a material omission. See prospectus liability.
• Section 47 — a false or misleading statement, or wilful omission, in an application for a capital market licence.
• Section 69 — a false or misleading statement or wilful omission made to a person who invests in a capital market product.
• Section 457 — entering false matter in, or falsifying, the books of a stock exchange, clearing house, licensed firm or listed corporation, or failing to record a matter with intent to falsify.
• Section 458 — making or furnishing, with intent to deceive, a false or misleading statement or report to the Commission, a stock exchange or a clearing house.
• Securities Commission Act 2015, section 94 — giving false or misleading information to the Commission’s investigators, in an examination or at a hearing. Section 94(3) provides a defence of reasonable belief, and section 93(b) separately punishes deceiving the Commission with a fine of up to K5 million or seven years.