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Market Manipulation and False Trading in Malaysia with Reference to Penalties

Regulatory Framework

The securities industry is currently governed by the Capital Markets and Services Act 2007 (“CMSA”), an Act that consolidates the Securities Industry Act 1984 and Futures Industry Act 1993. The purpose of the CMSA is to regulate matters relating to the activities, markets and intermediaries in the capital markets.

The CMSA is primarily administered by the Securities Commission Malaysia (“SC”), a statutory body established under the Securities Commission Act 1993 having various functions[1] including:-

(i) regulating all matters relating to securities and derivatives;
(ii) ensuring compliance of the securities laws; and
(iii) licensing, registering, authorising and supervising all persons engaging in regulated activities or providing capital market services as provided for under any securities law.

The SC also exists to promote and maintain the integrity of all licensed persons in the securities industries and to take reasonable measures in maintaining the confidence of investors in the securities markets by ensuring adequate protection for such investors[2]. This is vital for the development of the Malaysian capital market, without which investors would not be able to actively participate in the market due to lack of trust. Apart from the SC, Bursa Malaysia Securities Berhad (“Bursa”) plays the role as the regulator of the Malaysian capital market, undertaking surveillance of all trading activities on the exchange covering all dimensions. If there is any evidence of market manipulation, both the SC and/or Bursa will investigate and take appropriate enforcement action.[3] Bursa has the duty to ensure orderly dealings in the securities deposited with Bursa. In furthering these duties, Bursa has put in place its regulatory and supervisory framework to regulate the market and its participant’s fair market[4].

Much focus is also placed on identifying the presence of any manipulative or artificial nature of trading on the market.[5] In a nutshell, Bursa administers and monitors compliance with the rules and takes enforcement action for breaches of these rules and supervises the listed issuers and the brokers.

Prohibition under the CMSA

Stock Market Manipulation

Section 176 of the CMSA defines stock market manipulation as an offence whereby a person effects, takes part, engages in, be concerned in, or carries out, either directly or indirectly, any number of transactions in securities of a corporation, which have or are likely to have the effect of raising, lowering or pegging, fixing, maintaining or stabilizing the price of securities of the corporation on a stock market in Malaysia, for the purpose of inducing other persons to acquire or dispose of the securities of the corporation or of a related corporation.

A person is liable under the same section regardless of whether or not the other person has been induced to acquire or dispose of the securities.

False Trading and Market Rigging Transaction

Section 175 of the CMSA prohibits creation by persons of a false or misleading appearance of active trading in any securities on a stock market within Malaysia or a false or misleading appearance with respect to the market for, or the price of, any such securities. Such persons would have an interest in the securities both before and after the purchase or sale[6]. These are transactions where they do not involve a change in the beneficial ownership of those securities.

Insider Trading

This involves the effecting of acquisition or disposal of securities by or on behalf of a person who possesses information that is not generally available which on becoming generally available it would be expected to have a material effect on the price or value of the securities and knows or ought reasonably to know that the information is not generally available[7].

Penalties

Civil Remedies

Rules of Bursa Malaysia Securities Berhad (“Rules”)

The Rules have the effect of a contract between a company that carries on the business of trading in securities on the Bursa’s stock market and is admitted as a Participating Organisation (“Participating Organisation”) and persons registered with the Bursa (“Registered Persons”) to observe the Rules and to perform the obligations that the Rules impose[12].

Hence, Participating Organisations and Registered Persons must observe the general requirements in the conduct of its business by adhering to just and equitable principles and acting with due skill, care and diligence and with due regard for the integrity of the market. They must not through any act or omission, do anything which may result in or has the effect of the market not being orderly and fair[13].

Enforcement History of SC and Bursa

The power of the SC to take action derives from Section 354 of the CMSA in situations where a person contravenes securities laws or fails to comply and observe rules of the stock exchange when under an obligation to comply with. The SC is empowered to take any one or more of these actions against persons in breach, for instance, directing such person to be in compliant, imposing penalties in proportion the severity or gravity of the breach, reprimand, require the person to take steps to remedy the breach etc.

In 2018, there were criminal prosecutions initiated against several persons who were charged for insider trading under the CMSA as well as several outcomes of criminal prosecution on insider trading. An example would be an individual who was charged under Section 188(2)(a) CMSA for allegedly disposing of 350,000 APL Industries Berhad shares in 2007 while in possession of inside information. She was charged in 2014 and was sentenced to 5 years’ imprisonment and a RM7 million fine in 2018[14]. In respect of civil liability, SC has taken civil action in 2017 against 7 which resulted in a settlement in 2018 after the defendants agreed to pay a settlement sum of RM2,354,672.13 out of which RM2,154,672.13 is the sum of the unlawful gains from engaging in false trading, market rigging and market manipulation of shares whilst RM200,000 is the sum of the civil penalty. Following the settlement agreement, SC withdrew its suit against the 7 defendants.

The Bursa has also publicly reprimanded and fined persons involved in manipulative dealing activities and made orders either for mandatory training, suspension or to strike off the person if he or she was still a Registered Person of the Bursa by virtue of its power granted under Rule 15.02 of the Rules to exercise its disciplinary powers against a participant if he or she is found to have breached any of its Rules[15].

An example would be its enforcement in 2018 against 3 dealer representatives for engaging in manipulative trading activities in the securities of 5 counters, which resulted in a public reprimand, a fine, 10 months suspension (deferred for 2 years) and mandatory training that were imposed against the representatives[16]. On another account in 2017, Bursa had also publicly reprimanded, imposed a fine and suspended/restricted an individual from being a Registered Person for engaging in manipulative trading activities in the securities of Lay Hong Berhad[17].

Recent Warnings on Stock Market Manipulation

Recently, the SC has issued a warning to investors on stock market manipulation in relation to pump and dump schemes[18]. This warning came approximately a year after Bursa issued the same caution when Bursa discovered certain groups of market participants were using social media and internet trading to carry out manipulative activities last year[19].

Pump and dump schemes are known as highly illegal schemes which carry the purpose of artificially increasing the value of the stock by misleading investors. The ultimate goal is to purchase a stock, artificially pump the price, and dispose the stock at a massive profit.[20]

In summary, perpetrators would acquire huge amount of shares in a company and create a lot of hype by posting positive sentiments about the company via social media to ‘pump’ up its share price. This involves the spreading of false and misleading information to attract investors.

Perpetrators will then ‘dump’ the shares to unsuspecting investors at an inflated price earning huge profits, while causing investors to suffer losses once the hype eases[21].

With technology emerging and the increase use of social media, perpetrators have been given a platform to reach out users in a quick and easy manner. As such, investors should be aware of such deceptive schemes and be vigilant in conducting their own research before making such investments.

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1 Section 15, Securities Commission Act 1993
2 Ibid.
3 SC and Bursa to act against market manipulators (18 June 2009)https://www.thestar.com.my/business/business-news/2009/06/18/sc-and-bursato-act-against-market-manipulators/
4 http://www.bursamalaysia.com/market/regulation/structure/overview/
5 Ibid.
6 Section 175(5), Capital Markets and Services Act 2007
7 Section 188, Capital Markets and Services Act 2007
8 Section 182, Capital Markets and Services Act 2007
9 Section 188(4), Capital Markets and Services Act 2007
10 Section 199(1), Capital Markets and Services Act 2007
11 Section 201(1), Capital Markets and Services Act 2007
12 Chapter 1, Rule 1.05, Rules of Bursa Malaysia Securities Berhad; http://www.bursamalaysia.com/misc/system/assets/14969/CHAPTER1[02.01.2019].pdf
13 Chapter 5, Rule 5.01, Rules of Bursa Malaysia Securities Berhad; http://www.bursamalaysia.com/misc/system/assets/14985/rules_bm_securities_CHAPTER_5_[1.3.2018].pdf
14 https://www.sc.com.my/regulation/enforcement/actions/criminal-prosecution/updates-on-criminalprosecution-in-2018
15 http://www.bursamalaysia.com/misc/system/assets/5665/rules_of_bm_securities_chapter_15_281116.pdf
16 http://taadress.ta.com.my/Circular/G%20016%20of%202018.pdf
17 http://taadress.ta.com.my/Circular/G%2046%20of%202017.pdf
18 https://www.sc.com.my/news/media-releasesand-announcements/sc-warns-investors-overpump-and-dump-schemes-via-internet-andsocial-media
19 https://www.thestar.com.my/business/businessnews/2017/03/22/bursa-warns-of-pump-anddump-schemes/
20 https://www.equities.com/news/how-does-aclassic-pump-and-dump-actually-work
21 https://www.thestar.com.my/business/businessnews/2018/03/24/pump-and-dump-activitiesunder-scrutiny/

Prepared by:

Moo Eng Thing (Partner) mooengthing@azmilaw.com

Jasmine Lo Shyen Pey (Associate) jasmine.lo@azmilaw.com