A Case Study from New Zealand
As the summer season lulls in the northern hemisphere, I decided to examine a smaller, yet illuminating case — one which contrasts with the large, often complex billion-dollar frauds that I normally probe. In this month’s analysis, we will look at a suspected price manipulation case that occurred in New Zealand, where the stated motivations for the market abuse are relatable for many of us – mounting kitchen renovation expenses. You can draw your own conclusions as to the authenticity of the reasons given by the trader in the New Zealand Financial Markets Authority (FMA) official warning letter, which outlines the trading activity and discloses many of the interesting facts from the FMA’s interview with the trader.
Official Warning Issued to Sharesies Trader
Late last month, the FMA issued the official warning to a Sharesies trader. Sharesies, aside from being the most distinctly Kiwi/Aussie word you will encounter today, is a New Zealand-based micro-investing platform. For those unfamiliar with micro-investing platforms, their stated goal is to enable smaller investors to participate in the market. They do this by allowing the trading of fractional shares and having a fee structure that promotes small periodic investments.
Through his wife’s account, the rebuked trader created a series of large (for him) sell limit orders at just above the best ask. At the same time, on his own account, the trader entered a series of significantly smaller buy orders. The buy orders had volumes and prices slightly higher than the prevailing best ask. According to the FMA, “These order terms allowed the key buy orders to clear the volume at the prevailing best ask price, then trade into the volume at the next higher price step. As a result, market spread and/or the last trade prices for <the stock> were moved higher on 10 occasions. The order terms of the Key Buy Orders had the effect of creating a false or misleading appearance with respect to the price for trading in shares.”
Suspicious Behavior: Price Driving
While there is no definitive term for this behavior, “price driving” is a term that is often used. Regardless of what it is called, the pattern of behavior is suspicious, which you can see and independently assess for yourself by looking at the table at the end of the complaint where it is laid out in considerable detail. The FMA clearly identifies the many small orders pushing the ask upwards.
It is interesting to understand the reasons why a person is buying and selling at the same time. Based on FMA’s interview with the trader, the reason given for the first batch of orders was that the trader and his wife were selling to fund kitchen renovation expenses, but that they were “gutted” (a colloquialism meaning to be extremely disappointed) to have to sell, so they then bought a little bit to help build them back up in the right direction. Though institutional traders aren’t funding kitchen renovations, these types of emotion-driven explanations are something with which compliance teams are getting quite familiar. This is a good example of a situation in which you need to look at the broader context of the trades, and the FMA was not convinced. However, given the small size and the individual’s background, the FMA felt a formal warning versus a hefty fine was an appropriate and proportional response.
Importance of Automation in Regulation
From my vantage point, there were a few key takeaways from this case. Firstly, it demonstrates that even with smaller dollar amounts involved, these schemes resemble larger-scale frauds in behavior, indicating how such schemes operate similarly regardless of scale. Secondly, it highlights how important automation is in allowing regulators with limited resources to be able to adequately cover the marketplace. The response should be proportionate, but to continue to ensure fair and safe markets we shouldn’t be ignoring the small cases.
Regulatory Updates
26 August: Following a joint investigation conducted by the Monetary Authority of Singapore (MAS) and the Commercial Affairs Department of the Singapore Police Force, an individual was convicted and sentenced to four weeks imprisonment for false trading by creating a misleading appearance of the price of a security on 79 occasions.
23 August: The U.S. Securities Exchange Commission (SEC) announced awards of more than $98 million to two whistleblowers whose information and assistance led to an SEC enforcement action and an action brought by another agency.
15 August: The Danish Financial Supervisory Authority (FSA) published guidance clarifying that entering into confidentiality agreements does not in itself constitute a legitimate reason for postponing the publication of inside information.
8 August: The U.S. Commodity Futures Trading Commission (CFTC) announced a whistleblower award of over $1 million to a whistleblower who provided significant information and assistance that led the CFTC to bring an enforcement action connected to digital asset markets.
2 August: The SEC and eight other financial regulatory agencies jointly proposed data standards under the Financial Data Transparency Act of 2022 to enhance interoperability by establishing common identifiers for financial data across agencies. The proposal aims to make financial data more accessible and uniform, aiding institutions in filing reports across agencies and regulators in effectively overseeing financial activities.
1 August: The European Securities and Markets Authority (ESMA) released three consultation packages concerning the implementation of the Markets in Financial Instruments Regulation review, impacting various market participants like investment firms and trading venues. With deadlines ranging from August to October 2024, these consultations focus on transparency, market data availability and competitiveness, addressing essential technical standards for markets in financial instruments under MiFIR and MiFID II revisions.
Enforcement Actions & Fines
The Thai Securities and Exchange Commission (SEC) imposed civil sanctions on two offenders for colluding in the insider trading of COL shares. The offenders are required to pay a total of $124,000 in civil penalties and are prohibited from serving as directors or executives of securities issuing companies or securities companies for specified periods.
New Zealand’s Financial Markets Authority (FMA) issued a warning to an online trader for suspected market manipulation, citing breaches of the Financial Markets Conduct Act during trading that likely misled share prices for a listed company over two weeks in November 2021.
The Hanoi People’s Court sentenced a former Vietnamese property and aviation tycoon to 21 years in prison for a $146 million fraud and stock market manipulation scheme involving his FLC empire. The Hanoi court highlighted the former tycoon’s leadership role in orchestrating the scam, which involved setting up brokerages with family members to artificially inflate stock values.
Liquidators for Three Arrows Capital (3AC) filed a lawsuit against TerraForm Labs, seeking $1.3 billion in damages. The lawsuit stems from losses suffered during the 2022 crash of TerraUSD and LUNA, alleging that Terraform’s market manipulation led to the crash in 2022 that contributed to 3AC’s collapse.
The SEC filed a complaint against four individuals in Texas and California for orchestrating a multi-year microcap fraud scheme, allegedly involving the secret acquisition of millions of shares of microcap stocks to generate $56 million in unlawful stock sales through various deceptive practices, including manipulating public disclosure requirements.
The CFTC issued an order against Truist Bank, a North Carolina swap dealer, for failing to maintain required records and diligently supervise its business activities as a CFTC registrant. Truist admitted to the violations, agreed to cease further breaches, pay a $3 million civil penalty, and undertake specified remedial actions.
The CFTC settled charges against the Toronto Dominion Bank (TD Bank) for inadequately supervising its electronic communications surveillance system over a five-year period, failing to monitor certain communications by hundreds of its swap dealer personnel. As part of the settlement, TD Bank agreed to pay a $4 million civil penalty, implement improved supervision measures and comply with specified conditions and undertakings.
The U.K. Financial Conduct Authority (FCA) fined PricewaterhouseCoopers LLP (PWC) £15 million
for failing to report to the regulator their belief that London Capital & Finance plc (LCF) might be involved in fraudulent activity, making this the first time the FCA has fined an audit firm.
The CFTC charged Vitol, Inc., and its affiliate for surpassing position limits on crude oil futures contracts and live cattle futures contracts, leading to a $500,000 civil penalty. The CFTC’s enforcement marks the first time it applied its authority to enforce position limits across multiple exchanges, emphasizing the importance of such limits in preventing manipulation in futures markets.
The SEC charged 26 financial firms for widespread and long-standing failures to preserve electronic communications, resulting in $392.75 million in combined civil penalties. The firms admitted violations of recordkeeping provisions, agreed to pay penalties and began implementing compliance policy improvements, with some firms receiving reduced penalties for self-reporting their violations.
The Autorité des marchés financiers’ (AMF) Enforcement Committee imposed fines ranging from €50,000 to €300,000 on Biosynex and its directors for breaches involving financial communications, insider trading and reporting obligations related to the company’s COVID-19 diagnostic test launch information. The Committee found that Biosynex failed to effectively disseminate inside information about PCR tests but did not breach rules regarding serological tests, while directors engaged in insider trading and failed to report transactions accurately.
The CFTC announced a consent order against FTX Trading Ltd. and Alameda Research LLC, requiring FTX to pay $12.7 billion in monetary relief to customers and victims of its fraud.
The SEC charged two individuals, along with their company NovaTech Ltd., for running a fraudulent scheme that amassed more than $650 million in crypto assets globally. The operation misled investors through a multi-level marketing program, promising secure investments while diverting funds to existing investors and promoters, leading to significant losses when NovaTech eventually collapsed.
The SEC charged an individual with orchestrating a fraudulent crypto asset scheme involving BitClout, raising over $257 million by falsely assuring investors that funds wouldn’t benefit him or his team, while allegedly using $7 million for personal expenses. To avoid regulatory oversight, the individual presented BitClout as decentralized, hiding his involvement under the pseudonym “Diamondhands” and securing legal opinions to evade securities scrutiny.
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