Research On Legal Regulation Of Securities Manipulation

Customarily referred to as market manipulation, history of securitiesmanipulation is almost as old as market itself. Stock pool on the U.S. stock market inthe1920s is considered to be of the most far-reaching impact on today’s legislation. Itis considered to be the direct cause of the1929stock market crash and followed bythe United States Securities Exchange Act of1934. However, some contemporaryscholars prefer the joint operation as imformed traders rather than manipulators.Securities manipulation has a diversity of characteristics， and the means tomanipulate the market is still relatively simple and original during the early stage ofthe securities market. With the development of the securities market, the new kind ofmanipulation emerged. At the same time,there is correlations between securities fraud.Belonged to securities fraud, insider trading has a long history, and the harm whichdoes to the securities market may be even greater than the market manipulation. TheSecurities Exchange Act of1934treated insider trading with less emphasis thanmarket manipulation.In terms of its core content, the Act can be seen mainly aslegislation for market manipulation，while containing regulations about insidertradings and other behaviors. But in the next few decades, Duing the process ofimplementation of the Securities Exchange Act of1934, the U.S. Supreme Courtshowed some tendency to play down to the regulation of market manipulation.Manipulation of securities generated from a lot of reasons, including thefollowing aspects. First, on the emerging markets, the lack of a sufficiency oftransparency. In practice, non-standard disclosure of information can even becomeone of the means of market manipulation. Second, the long term lower cost of illegalmarket manipulate is an important factor. The cost of illegal market manipulation,including: the opportunity cost of rent-seeking, punished costs, litigation costs and thecredibility cost. Market manipulation caused high external social costs in contrastwith low private costs of offenders. Third, the existence of "herding" objectively lead to irrational investor decision-making. Stocks subjected to market manipulationoccurs, tend to exhibit extraordinary trading volume or price, so the stock is morelikely to attract the attention of investors.Such stocks will attract more and moretraders,and "herding" makes market manipulation easier.Another major reason is of market speculation. Speculation is a commonphenomenon in the market, traditional economics, Keynes first study of therelationship between speculation and hedging, asserting that the two are different.Later hedging theory disproved Keynes‘theory, basically negating any motive on thedistinction between speculators and hedgers. However, one has to admit that marketspeculation is necessary and unavoidable, because in many occasions of securitiesinvestment, the possibility of loss and profit are actually there, and investors have tobear those risks. Once the nature of the distinction between "investment" and"speculation" is transformed into quantitative difference between the two boundaries，it is increasingly difficult to be observed the difference in practice. Regardless of howto define "speculation", this behavior is endogenous to the stock market.Somescholars elaborated speculative activity on the securities market has a positivemeaning. Friedman thinks that rational speculators buy low and sell high, to ease theshort-term fluctuations of securities prices, has a role to stabilize the market price.The U. S. Securities Exchange Act of1934established the tendency of strictregulatory legislation on market manipulation, and this tendency is obviouslyexpressed in section2of the Act. Speculators exhibit risk-preference tendencys, withpursuit of high-risk investment return.The manipulated securities often exhibitincreased trade volume and volatility, amazing short-term price increase, or otherfeatures that precisely in line with the preference of the speculators. Thus, thegeneration of market manipulation and the presence of speculators have greatrelevance.Economists,Allen and Gale,hold that market manipulation should be divided intothree categories: action-based manipulation,information-based manipulation andtrade-based manipulation. Based on Allen and Gale, Jarrow further studied whetherthe big money traders can manipulate stocks by virtue of information. Chakrabortyand Yilmaz Allen and Gale theoretical basis for further research on the the newsinvestors manipulation. Under the pressure of competition, the the insider traders maytake a manipulation strategy to pursue greater return on investment. Another scholar,from the point of view of behavioral finance, taking pulling and dumping forexample, discussed the possibility of manipulation based on transactions.Otherscholars questioned trade-based manipulation and deny the possibility of suchmanipulation.Among legal researchers on securities manipulation, Fischel and Ross arethemost important opponents to the current manipulation legislation. Mahoney and otherscholars re-examined the legislative background of the United States SecuritiesExchange Act of1934,.His study suggests that stock pool can be characterized asinformed trader rather than securities manipulator.Steve Thel also investigated in detail the legislative background and thelegislative process of the United States Securities Exchange Act of1934, but putingdifferent emphases on them cntrast with Mahoney and others. Steve Thel wasadvocates for securities manipulation regulatory system established by the UnitedStates Securities Exchange Act of1934.His views were different from Fischel andRoss ’, at the same time, he also opposed to the United States Supreme Court’stendency to narrowly interperate in the practice of the1934Securities ExchangeAct.American common law take general control of the securities market speculation,also involving in the regulation of securities manipulation.All market manipulationsare fraud in the common law. Among state securities market regulations of the U.S.,"Blue-sky Laws"of many states are the most influencial ones. There are also otheranti-fraud state legislature on security regulation. Securities Act of1933is the firstfederal legislation to protect investors in the securities markets in the United States,not to regulate the exchange transactions but to make provision for fraud on issuemarket. There are36sections in the Securities Exchange Act of1934, includingsection9(a) and10(b) which are the principal parts deal with securities manipulation.Section9(a) extends to exchange-traded and over-the-counter market transactions bymembers of the exchanges. The purpose of this provision is to prohibit the use of avariety of means to enable investors to misunderstand supply and demand. Section10(b) can be seen as a catch-all provision to regulate those other behaviors that shouldbe prohibited. Its purpose is to ensure that the securities market can operate in a freeand open market environment, preventing the weakening of the development of thesecurities market by all kinds of manipulation. According to section10(b), marketmanipulation must meat at least two conditions at the same time: First, to use or employ any manipulative or deceptive decive or contrivance; second,in contraventionof the regulations and rules of the SEC. Under the authority of section10(b), SECprescript Rule10b-5for the regulation of securities manipulation and fraud in1942.Although the Sarbanes-Oxley Act "does not point directly to securities manipulation,but for general fraud of listed companies in financial operation,in reply to scandalsappeared frequently in recent years.In a series of cases alleged to violate SEC Rule10b-5, The United StatesSupreme Court discussed the scope section10(b). The Court held that, conduct is notmanipulative within the meaning of the Securities Exchange Act of1934unless it isdeceptive.‘Scienter’—intent to deceive, manipulate, or defraud,was Emphasized InErnst&Ernst v. Hochfelder, and subjective intent element was established intosecurity manipulation. In Santa Fe Industries, Inc. V. Green,the Court state that "tosubstitute a philosophy of full disclosure for the philosophy of caveat emptor.’’. InChiarella v. United States,the intend to fraud was emphasizedin again.Fischel criticized market manipulation legislation of the Act,holding thatmanipulation regulations should be absorpted by anti-fraud regulations. On one hand,they hold that trade-based manipulations ware not likely to be carry outsuccessfully.Because they believed that two conditions must be met at the same time,if it is possible to produce a profitable trade-based manipulation: one condition, thetransaction must be able to cause stock prices to rise, another condition, the operatorcan sell the stock he holds at higher price than the bid price. However, the probabilityfor these two conditions satisfied at the same time was very low. On the other hand,they believe that false trading manipulation can be classified into fraud, whiletrade-based manipulation is a perfectly legitimate market transactions.Steve Thel, opponents to point of view of the Supreme Court,criticized the Courtdid not do a detailed study of the legislative process of the Securities Exchange Act of1934, departing from the original intention of the legislation of the Congress in theinterpretation of the section10(b). The underlying doctrine of Thel is based on his"price theory" that the price of securities stands not only for traders but also for thesocial and public interests, and the target of the Securities Exchange Act should not belimited to prohibit only fraudulent transaction, but also expand to all artificialinfluence on the price of securities.The damage to securities market made by stock pool and other marketspeculations has been greatly exaggerated, according to the economic and social environment in the United States in the1930s. Stock pool almost serve as a targetobject for legislation of section9(a) of the Act. On the one hand, the stock pool didengaged in speculative behavior in the stock market on behalf of the investors, but theimpact of these speculators on market, after all, limited. Duing the investigation inU.S. Congress, no enough evidence that these speculators engaged in the behavior ofmarket manipulation has been provided. In recent years, some scholars look stockpool up as stock market speculators, ruther than typical securities manipulator. On theother hand, even these stock pool traders indeed engaged behavior of marketmanipulation, the reasons that the securities market collapse should be attributed tothem may be too more over stated.There is a fundamental distinction between speculation and stock manipulation,fraud on nature, means, function, and other aspects. The typical trade-basedmanipulation does not have the obvious characteristics of the fraud.Compared tofraudulent manipulation, trade-based manipulation undertake normal market risk andshoud not be labeled as manipulation. In practice,it is difficult to distinguish betweena trade-based manipulation with speculation.Prohibiting trade-based manipulationmeant expand the range of sanctions inappropriate, which will hurt the stock marketitself.Outstanding problems in China’s securities market manipulation is comprised ofthe offense mainly led by institutional investors and the imperativeness of issuemarket manipulation. The main reason for China’s securities market manipulation canbe summarized as follows, China’s securities market being positioned biasing towardsthe financing function, lacking of proper legal environment for value investment and"zero-sum game", lower long-term cost of illegal behaviors.Major defects in the performance of China’s regulation of securities manipulationlegislation, on the one hand, lie in the lack of systemic securities tort system."TortLaw" and "Securities Act" lack systematic legislation for security tort system.Because of the vague nature of legislative and judicial interpretation about securitiesfraud, except for a relatively specific operational rules for the false statement, othertypes of securities fraud can not be determined according to the nature of theviolations,and choose corresponding rules. Consequently，manipulation litigationcannot be commenced. On the other hand, securities manipulation Legislation exhibittype settings defects. Of the Securities Act and the SFC regulation for securities manipulation of the outstanding problems that exist on the type setting, for transactionbehaviors which hould not control or the need for moderate control, Chinaregulations Implement too much control; for those need urgent control, such as issuemanipulation, especially favor bids, regulations are absenct.Proper legislative policy to regulate China’s securities manipulation need to betaken, including maintenance of the social environment and the legal environment thatcan nurture and ensure the integrity, legislative policy that can correct and restore thecorrect positioning of securities market functions, improving the securities marketlegislation, law enforcement and judicial aspects of the legal system.