Manipulation
| Pages | 117-133 |
| DOI | https://doi.org/10.1108/eb026013 |
| Date | 01 April 2001 |
| Published date | 01 April 2001 |
| Author | Marvin G. Pickholz,Jason Pickholz |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 9 No. 2
Manipulation
Marvin G. Pickholz and Jason Pickholz
INTRODUCTION
The last decade of the prior millennium witnessed
many revolutionary, not evolutionary, changes in
the way business is done and information is
exchanged globally. The Internet has changed and
speeded up the ways we exchange and use infor-
mation and the time necessary for doing so. This
revolution has the potential to reshape the world
we live in; to draw us closer together in a global com-
munity; and to allow businesses to sell products and
services and to raise capital on a global basis simul-
taneously. Instantaneous satellite transmission of
tele-
vision news coverage informs us of critical events,
including financial developments, in distant lands.
E-mail allows us to establish business and personal
relationships and communicate ideas rapidly with
foreign individuals. And we have also seen increased
interest among businessmen and others in investing
capital in foreign nations and in the securities of com-
panies publicly traded in foreign or international
markets. The Internet allows investors to create
'chat rooms' to exchange information and ideas
about issuers.
Yet, while these advancements help us to recognise
our similarities and share our common hopes and
dreams for better lives, they also illuminate our
dif-
ferences, be they cultural, political, or otherwise.
These differences have frequently contributed to per-
ceptions of the same events or ideas differing from
one country to the next. What individuals in one
country might consider immoral or illegal, indivi-
duals in other countries might deem acceptable or
even admirable. Regrettably, throughout human
history the recognition of these differences has often
led to fear, distrust, prejudice and even hatred of
that which we find strange or do not understand,
or with which we disagree.
How then, in this age of international business and
investment, are we to alleviate those fears and instil
confidence in international securities markets? On
the one hand, the answer is very simple; on the
other, it is quite complicated and still unresolved.
Investors need to feel comfortable that the foreign
markets they invest in operate according to estab-
lished laws and regulations, however those may be
defined by the governments of the various nations.
They need to know that those laws and principles
apply to all participants in the markets, regardless of
whether they are foreign or domestic. They need to
know that issuers engaged in the same types of
businesses based on different countries report their
results of financial operations, recognise sales and
profits and deal with contingencies and liabilities in
the same manner for accounting purposes. And
they need to know that they can enforce those prin-
ciples and regulations through fair and efficient access
to impartial courts of law.
But, with different historical experiences, different
cultures and different levels of economic develop-
ment, are there any basic laws or rules pertaining to
securities transactions that can be applied universally,
so as to afford investors the level of comfort they need
to invest money in foreign securities markets and,
likewise, to enable developing nations to attract for-
eign capital? Few if any would disagree with the
notion that the unfair 'manipulation' of securities
markets by unscrupulous individuals or entities can
ruin the personal savings of law-abiding individual
investors; cause the bankruptcy or stunt the economic
growth of companies whose stock is traded publicly;
and, if widespread enough, have severe economic
consequences for entire nations, with corollary
political ramifications for their respective govern-
ments. Therefore market activity must be regulated
to prevent such manipulations.
But this only begs the question: what is market
'manipulation'? The answer is that no one can
define it in advance, with exactness, but everyone
knows it when it has occurred. Attempts to define
'manipulation' result in no more than enunciation
of broad, normative conduct. In truth, 'manipula-
tion' is more aptly described in moral concepts than
with the precision expected of 'law'. This paper dis-
cusses various attempts in the USA to define
market manipulation, all of them fact-specific or
'results-oriented' and none of them completely satis-
factory. But if we are correct in thinking that a nation
with perhaps the largest and most extensively regu-
lated securities markets has no satisfactory definition
of 'manipulation' upon which its market participants
can rely to ensure compliance with the law, is it
possible to establish a universal definition that can
Journal of Financial Crime
Vol.
9,
No.
2.
2001.
pp. 117-133
© Henry Stewart Publications
ISSN 1359-0790
Page 117
Pickholz and Pickholz
be applied to all international securities markets? In
the end, we posit that it is not the literal definition
of 'manipulation' that is nearly so important as the
commitment of each nation (1) to adhere to a uni-
form, internationally recognised system for solicit-
ing, conducting, recording and accounting for
transactions; (2) to seek out and prosecute unscrupu-
lous 'manipulative' activity — however that nation
defines it — and (3) to allow foreign and domestic
market participants equal and impartial access to its
courts to prove violations and obtain redress for
their injuries.
WHAT IS THE STATUTORY
DEFINITION OF MANIPULATION?
'Manipulation — to manage or control artfully or
by shrewd use of influence, often in an unfair or
fraudulent way'.1
Perhaps the best starting point for an inquiry into
what 'manipulation' means is to look to how it is
defined in ordinary usage. Employing the dictionary
definition cited above, it is apparent that 'manipula-
tion' is as old as mankind
itself.
The manipulation
of commercial data, information, facts and figures,
has been part of human endeavours, good and evil,
for thousands of years. For example, military and
intelligence units and governments 'manipulate'
information and data, in what are supposed to be
the interests of national security. National banks
adjusting interest rates 'manipulate' markets and
economies. Politicians running for election 'manipu-
late'
the media. Corporations contemplating public
offerings increase their business announcements and
conduct 'road shows', another form of manipulation.
Prosecutors and police, as all lawyers who participate
in an adversarial system, 'manipulate' information, in
the sense of partial disclosures with emphasis on facts
favourable to their proposition and cause.
As with many words, though, 'manipulation' in
the context of securities regulation is often considered
a term of art, and has been referred to as such by the
United States Supreme Court.2 It would seem logi-
cal,
then, to look to the definition of that term of
art as set forth in the securities laws and rules.
Which leads us to our first dilemma: the Securities
Exchange Act of 1934 ('the 1934 Act')3 does not
define 'manipulation' or 'manipulative'. The Rules
promulgated by the United States Securities and
Exchange Commission (SEC) setting forth 'manipu-
lation' actually describe and relate to specific acts or
activities that are then proscribed as 'manipulation'
or 'manipulative'. The notion of 'manipulate' or
'manipulative' is described in relation to specific
acts and, often, only through the overlaying of
'motive' and 'intent' to punish a result deemed
societally undesirable. In fact, in the abstract, many
acts characterised as 'manipulation' are engaged in
regularly by securities professionals and others,
although in contexts not predetermined by the legis-
lature to be undesirable. For example, broker-dealers
acting as underwriters are permitted to over-allot or
sell more shares than advertised on the face of the
prospectus. This creates a short position and potential
for after-market buying power to hold or increase the
price. Yet this is viewed as a 'good' manipulation,
because it allows the managing underwriting to
maintain (or peg) the secondary market price for a
reasonable period of time.4 Prior to the widespread
use of over-allotments, underwriters engaged in
'stabilising' transactions which were designed to peg
the market price and keep it from falling. This
activity is covered by former Rules 10b-6 and 10b-
7,
new Rule 104 of Regulation M, under the 1934
Act. Another example of accepted 'manipulation' is
the practice of underwriters to impose 'penalty
bids'
on syndicate members who sell back into the
market underwritten shares within less than 30 days
of the offering. The seller is penalised by being
required to return the commission or selling conces-
sion and, in addition, will charge the seller with costs
associated with the repurchase.
Often in the USA, when the meanings of certain
words are unclear, it falls to the courts to interpret
the legislative intent behind the laws in question.
This,
then, should be the next avenue of inquiry as
to the meaning of 'manipulation' as used in the
1934 Act and the SEC Rules. Which leads us to our
second dilemma: there is no consensus-definition in
the numerous reported court decisions, and even
the individual definitions themselves are vague and
abstract.
For instance, one United States Court of Appeals
tried to define 'manipulation' as 'the creation of an
artificial price by planned action'.5 Another appellate
court tried to describe the vacuous expression 'artifi-
cial price' to mean a price that does not 'reflect basic
forces of supply and demand'.6 Yet no uncontrover-
sial list of those 'basic forces' exists. Some effort has
been made to categorise these 'artificial' factors into
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