A market only works if the prices on it are real. When a trader buys and sells the same shares to himself to make a stock look busy, or a group of friends takes turns bidding a price up so that others pile in, the price stops telling the truth. Part VII of the Capital Market Act 2015 makes that kind of conduct a serious crime in Papua New Guinea.
Where the rules reach: section 298
Section 298 gives Part VII a long arm. It covers acts and omissions in Papua New Guinea concerning securities of any body corporate wherever formed, carrying on business or listed, and acts and omissions abroad concerning securities of a body corporate formed, carrying on business or listed in Papua New Guinea. For derivatives it covers acts here in relation to derivatives traded anywhere, and acts overseas in relation to derivatives traded here. A trader in Sydney who rigs the price of a company listed on PNGX Markets Ltd is within the Act.
False trading and market rigging: section 299
A person “shall not create, or cause to be created, or do anything that is calculated to create, a false or misleading appearance of active trading in any securities on a stock market within Papua New Guinea or a false or misleading appearance with respect to the market for, or the price of, any such securities”.
Section 299(2) adds a second prohibition: a person must not maintain, inflate, depress or cause fluctuations in the market price of securities by purchases or sales that involve no change in beneficial ownership, or by any fictitious transaction or device. Section 299(3) then deems three classic techniques to create a false appearance of active trading:
- Wash sales — any sale or purchase that does not involve a change in the beneficial ownership of the securities (section 299(3)(a)). Under section 299(5) there is no change in beneficial ownership if a person who had an interest before the trade, or a person associated with him, still has an interest after it.
- Matched orders to sell — offering to sell at a price when the seller, or a person associated with him, has placed or proposes to place an offer to buy substantially the same number at substantially the same price (section 299(3)(b)).
- Matched orders to buy — the mirror image (section 299(3)(c)).
Section 299(7) extends “transaction” to the making of an offer or of an invitation to offer, so an order placed and withdrawn before execution can still be an offence. “Associated person” is defined widely in section 3 to include spouses, minor children, employees, partners, related companies and their directors.
The defences
Because wash sales and matched orders are deemed manipulative, the Act supplies defences that place the burden on the accused. For a section 299(3) act, section 299(4) requires the defendant to establish both that his purpose was not, and did not include, creating a false or misleading appearance, and that he did not act recklessly. For a section 299(2) charge based on a trade without a change in beneficial ownership, section 299(6) requires him to show that his purpose did not include creating a false or misleading appearance of the market or the price.
Stock market manipulation: section 300
Section 300(2) prohibits a person from effecting, taking part in or being concerned in “any number of transactions” in a corporation’s securities that have, or are likely to have, the effect of raising, lowering, pegging, fixing, maintaining or stabilising their price on a stock market in Papua New Guinea, where the purpose includes inducing others to buy or sell securities of that corporation or a related corporation. The transactions need not succeed in inducing anyone, a single transaction may be enough, and offers and invitations count as transactions (section 300(1)). A promoter who buys small parcels at rising prices before a landowner company’s share offer closes, so that the offer looks attractive, is the paradigm case.
Spreading the word: section 305
Section 305 prohibits circulating or disseminating a statement that the price of a corporation’s securities will or is likely to rise, fall or hold because of a transaction that contravenes sections 299 to 303, where the person (or an associate) took part in that transaction or received or expects a benefit for spreading the statement. A paid social media post that talks up a stock the poster is rigging falls squarely within it. False statements that are not tied to an illegal transaction are dealt with separately by sections 301 to 303; see false statements about securities.
Penalty, exemptions and derivatives
Section 306 makes a contravention of sections 299, 300, 301, 302, 303 or 304 an offence punishable by a fine of up to K10,000,000 or imprisonment for up to ten years, or both. Section 304 lets the Head of State make regulations taking particular classes of persons or transactions outside sections 299 and 300, the usual route for exempting genuine price stabilisation after a public offer; no such regulation is known to have been made. Division 4 contains parallel offences for derivatives: false trading (section 326), bucketing (section 327), spreading information about false trading (section 328) and manipulating or cornering a derivatives price or its underlying instrument (section 329), each carrying the same K10 million or ten-year maximum under section 333.
Anyone who loses money in reliance on manipulative conduct may sue under section 323, and the Securities Commission may claim up to three times the gain and a civil penalty of up to K10 million under section 324, whether or not a prosecution is brought. See recovering losses and the offences table.
Sources
- Capital Market Act 2015 — ss 3, 298–300, 304–306, 323, 324, 326–329, 333
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.