An Analysis of Market Manipulation under the Securities Services Act 36 of 2004 (Part 1)
| Jurisdiction | South Africa |
| Published date | 25 May 2019 |
| Pages | 33-60 |
| Author | Rehana Cassim |
| Citation | (2008) 20 SA Merc LJ 33 |
| Date | 25 May 2019 |
An Analysis of Market Manipulation under the
Securities Services Act 36 of 2004 (Part 1)
REHANA CASSIM*
University of the Witwatersrand
‘An integrated and efficientfinancial market requires market integrity. The smooth functioning
of securities markets and public confidence in markets are prerequisites for economic growth
and wealth. Market abuse harms the integrity of financial markets and public confidence in
securities and derivatives.’**
1 Introduction
It is disturbing to observe that South African financial markets have
weakened considerably in recent years, posing a danger to the local African
economy.
1
One reason for this state of affairs is that international banks and
other speculators with unlimited financial resources have been engaging in
market manipulation.
2
Market manipulation generally involves an attempt to
interfere with the operation of the market.
3
Most stock markets operate on the
principle of a free market, according to which supply and demand regulate the
price of securities so that, presumably, the price of a security reflects its true
value.
4
Any interference with this process of price determination amounts to
market manipulation.
5
Market manipulation may result in investors being
misled into buying worthless shares or selling their otherwise valuable
investments at a loss.
6
The Securities Services Act 36 of 2004 (the ‘SSA’),
7
which came into effect
on 1 February 2005, has as two of its declared objects the promotion of the
international competitiveness of securities services
8
in South Africa and the
* BA LLB LLM (Witwatersrand). Lecturer, School of Law, University of the Witwatersrand,
Johannesburg. Attorney and Notary Public of the High Court of SouthAfrica.
** Recital 2 to Directive 2003/6/EC of the European Parliament and of the Council of 28 Jan 2003 on
insider dealing and market manipulation (market abuse): Official J L96 of 12 Apr 2003 (the ‘EU Market
Abuse Directive’).
1
See the Memorandum on the Objects of the Companies Amendment Bill, 1999, B 17D-99.
2
Ibid.
3
See the New Zealand Ministry of Economic Development Reform of Securities Trading Law:
Volume Two: Market Manipulation Law Discussion Document (2002) in par 41, available at
http://www.med.govt.nz/templates/MultipageDocumentPage____6861.aspx (last consulted on 17 Mar
2008).
4
See JJ Henning&SduToit‘High-pressure Selling of Securities: From Rigging the Market to False
Trading, Market Manipulation and Insider Dealing’ (2000) 21 The Company Lawyer 257 at 257.
5
Ibid.
6
See Shazeeda Ali ‘MarketAbuse: It’s not Just a Wall Street Thing’ (2006) 27The Company Lawyer
222 at 222.
7
The SSA repealed and replaced the Stock Exchanges Control Act 1 of 1985, the Financial Markets
Control Act 55 of 1989, the Custody and Administration of SecuritiesAct 85 of 1992, and the Insider
Trading Act 135 of 1998 and consolidated them into one piece of legislation.
8
Section 2(d) of the SSA. Section 1 defines ‘securities services’ as services provided in terms of the
SSA in respect of (a) the buying and selling of securities; (b) the custody and administration of
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(2008) 20 SA Merc LJ 33
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enhancement of confidence in the South African financial markets.
9
The SSA
aims to achieve these objects firstly by requiring securities services to be
provided in a fair, efficient and transparent manner, and secondly by
contributing to the maintenance of a stable financial market environment.
10
In
accordance with this aim, detailed legislative provisions have been enacted in
the SSA to regulate the offence of market abuse, which is contained in
Chapter VIII of the SSA. ‘Market abuse’ is described in the SSA as
constituting three offences: insider trading; engaging in a prohibited trading
practice; and the making or publishing of false, misleading or deceptive
statements, promises and forecasts. This article will discuss and analyse only
the latter two offences,
11
which together constitute market manipulation, and
which will be collectively referred to as such.
Although market manipulation has become increasingly important in recent
years and although more international focus has been placed on eliminating
and regulating it, it is not by any means a novel concept. The American
Securities and Exchange Commission was established at the beginning of the
last century in response to a stock market which was plagued by insider
trading and market manipulation.
12
In South African law, market manipula-
tion is prohibited by our common law and was statutorily prohibited in the
now repealed Stock Exchanges Control Act of 1985 and the Financial
Markets Control Act of 1989.
13
As at 13 April 2007, the JSE Securities
Exchange had since the enactment of the SSA referred about seven cases of
market manipulation to the Financial Services Board (the ‘FSB’).
14
It was
recently reported that the FSB had launched a full forensic investigation into
market manipulation stemming from a story published on 11 April 2007 by
financial news agency Bloomberg News that a consortium led by an unknown
American financier had made a bid of USD12.5 billion for mining house Gold
Fields Limited, which resulted in Gold Fields’ shares increasing by 11 per
cent on 11 April 2007 and adding almost R10 billion to the market value of its
shares.
15
The prevailing view was that the story was a hoax.
16
securities; (c) the management of securities by an authorised user; (d) the clearing of transactions in
listed securities; and (e) the settlement of transactions in listed securities.
9
Section 2(a) of the SSA.
10
Section 2(a)(i) and (ii) of the SSA.
11
For a critical discussion on the insider trading provisions of the SSA, see Rehana Cassim ‘Some
Aspects of Insider Trading – Has the Securities Services Act 36 of 2004 Gone Too Far?’ (2007) 19 SA
Merc LJ 44.
12
Central Bank of Denver NA v First Interstate Bank of Denver NA 511 US 164 (US SC,1994) at
170-1; Ernst & Ernst v Hochfelder 425 US 185 (US SC,1976) at 194; Ali op cit note 6 at 222.
13
The Stock Exchanges Control Act in s 1 prohibited the manipulation of ‘securities’, which included
stocks, shares and debentures, while the Financial Markets Control Act of 1989 in s 1 prohibited the
manipulation of ‘financial instruments’, which included futures contracts, option contracts and loan
stock on a financial market.
14
See the report by Justin Brown ‘FSB May Probe Bloomberg Story on Gold Fields’ 13 Apr 2007
Business Report at 1.
15
See Justin Brown ‘Gold Fields Zooms 11% on Bid Talk’12 Apr 2007 Business Report at 1.
16
When questions were raised as to whether the offer was realistic, the price of Gold Fields’ shares
dropped. This movement in the share price prompted the FSB to launch an investigation into whether
there had been any market manipulation. Key issues behind the investigation were whether Bloomberg
News had been negligent in publishing information which it knew was false or ought to have known
(2008) 20 SA Merc LJ
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