The regulation of fraud and manipulation in financial markets and its reform : a UK-EC perspective.
In the modem economic environment, financial markets play a strategic role in
facilitating efficient resource allocation and preserving desired levels of welfare for
individuals and states. Financial markets fulfil this role only if they are efficient and
free from abuse. Fraud and manipulation have often plagued the proper operation of
financial markets and created serious economic problems. They take the form of
dissemination of misleading information through a variety of means including
misrepresentations, artificial transactions and misleading trades. These practices
harm the integrity of financial markets and abuse their price formation mechanism.
Thus, their effective deterrence and punishment is a matter of serious concern for both
economic and moral reasons. The thesis examines three aspects of the relevant
offences: the definition of financial market fraud and manipulation; the rationales of
their prohibition; the effectiveness of their legal and regulatory treatment in the UK in
terms of enforcement and deterrence. It also attempts to answer two crucial
questions: how the present regime in the UK could be reformed? How could the
suggested reform acquire an EC dimension?
In classifying the various forms of financial market fraud and manipulation the
thesis argues that the legal separation of manipulation from fraud is meaningless.
Trading practices, which are commonly perceived as forms of market manipulation,
but do not present the characteristics of fraud in a broad sense, should be de-regulated.
Furthermore, the thesis provides an analysis of the relevant legal and regulatory
framework in the UK and the EC. It also explores aspects of the academic debate in
the US regarding the function and benefits of civil remedies in securities fraud cases
and highlights relevant US case law. It notes that outside the context of public offer
and/or listing of securities there is very limited scope in the UK for the exercise of
civil remedies by injured investors on the incidence of financial market fraud and
manipulation. On the other hand, extensive reliance on criminal law sanctions for the
deterrence and punishment of relevant abuses has led to investor under-compensation
and lengthy criminal trials that have produced very inconclusive results. Yet, the
Financial Services and Markets Bill 1999 addresses these issues only partially.
For this reason, the thesis proposes the introduction in the UK of a right of
action that could be exercised by aftermarket traders in the case of financial market
fraud and manipulation. The statutory enactment of a duty of care in the
dissemination of market information owed by persons with material interests in
relevant financial assets could provide the legal basis for the exercise of such a right
of action. Also, the statutory or judicial endorsement of the fraud-on-the-market
theory could greatly facilitate civil actions for market fraud. In this way the proposed
remedy would improve the effectiveness of the market abuse regime in the UK, as
private enforcement actions would augment regulatory initiatives. It would also
enable injured investors to obtain fair compensation for their losses. Finally, an
argument is made for an EC market integrity directive that would harmonise national
rules of conduct and incorporate a similar duty of care in the dissemination of market
information. This could be used as a means to create directly or indirectly a civil
liability regime in the legal orders of most Member States.