4 Use of Fictitious Devices and Other Forms of Deception

Section 92(5) of the FSMR

(1) Section 92(5) of the FSMR provides that Market Abuse constitutes Behaviour which:

"...consists of effecting transactions or orders to trade which employ fictitious devices or any other form of deception or contrivance."
(2) Under section 92(5) it is necessary for there to be a transaction or order to trade. The transaction or order to trade must either itself or in conjunction with other factors create an effect that is fictitious, deceptive or a contrivance. The FSMR does not define what is meant by a "fictitious device" or "any other form of deception or contrivance". In the Regulator's view, these terms have a potentially broad meaning. This section would, for example, in the Regulator's view, cover situations where the transaction or order to trade when viewed in the context of other related conduct (such as dissemination of information) has an overall effect that is fictitious or deceptive. Factors which may indicate that a fictitious device or other form of deception or contrivance has been used include:
(a) where orders to trade given or transactions undertaken in Financial Instruments by persons are preceded or followed by the dissemination of false or misleading information by such persons; and
(b) where orders to trade are given, or transactions are undertaken in Financial Instruments, by persons before or after the production or dissemination of research or investment recommendations which are erroneous, biased or influenced by material interest.
Examples of fictitious devices etc
(3) The following are examples of conduct that, in the Regulator's view, may contravene section 92(5):
(a) voicing misleading opinions through the media - a person with access to the media (such as a newspaper columnist) enters into a transaction to buy a Financial Instrument and then voices an opinion in the media about the Financial Instrument (or its Issuer) which results or is likely to result in the moving of the price of the Financial Instrument in a direction favourable to the position held by the person. The person does not disclose his conflict of interest when voicing the opinion;
(b) concealing ownership — a person enters into a transaction or series of transactions that are designed to conceal the ownership of a Financial Instrument, by holding the Financial Instrument in the name of a colluding party, with the result that disclosures are misleading in respect of the true identity or value of the underlying holding;
(c) trash and cash schemes — for example, a trader takes a short position in Financial Instruments in a Company and then begins spreading false rumours that the Company is facing funding difficulties and is in serious financial difficulty in order to drive down the price of the Financial Instrument; and
(d) pump and dump schemes — this is the opposite of 'trash and cash': for example, a person takes a long position in a Financial Instrument and then disseminates misleading positive information about the Financial Instrument with a view to increasing its price. As a result of his conduct the person is able to sell his Financial Instruments at an inflated price.
The Regulator notes that some of the above examples may also breach other sections such as section 102 (misleading statements).