The Securities Law prohibits fraudulent influence on fluctuations in the securities' prices. The rationale behind this provision is to ensure the existence of orderly and fair trading in an efficient and sophisticated capital market. Section 54 of the Law is designed to ensure that the mechanism for the determination of the prices on the Exchange will remain clean of external influences and that the prices of the securities will be measured against real economic operations based on the evaluations of investors concerning the value of the security. In addition, the aim of the provision is to improve the ability of the reasonable investor to take decisions on the basis of all relevant information, while neutralizing distortions and gaps in information in the market which may impact the decision making process. These distortions are likely to cause direct and immediate economic damage to the trading public, as well as damage to the general investing public, through damage to their investments (both direct and those managed by institutional bodies) and to the public trust in the capital market.
The term "means of fraud" which appears in Section 54(a)(2) of the Law is a critical concept, which is not detailed in the Law. This term has been interpreted over the years by the Courts, which have decided that means of fraud take various and many shapes and forms. These means are not limited to 'straw' activities alone and can be found in what appear to be substantive activities. According to the Securities Authority, while means of fraud are many and various, the patterns of fraud and its nature are clear. The feature of these patterns puts prices of securities at the centre and purpose of activities, while concealing the scope of those activities, failing to disclose relevant information and so creating the appearance of an activity affected by market forces alone.
Recently, the Securities Authority has issued a position paper including an open-ended list of patterns of behavior, patterns of trading and signs which indicate a suspicion of fraud on the securities. The Securities Authority clarified in this paper that, notwithstanding the interpretation issued by it, each case will be examined on its own merits against the elements of the offence and that this is only a general interpretation paper. The Authority adds that, in any event, the provisions of the law and the Court decision on the offence of fraud in trading are what is binding and it is necessary to act in accordance with the same.
Section 54 of the Law provides that: (a) fraud in securities is an offence which attracts imprisonment of 5 years or a fine (as provided in the Law) for a person who "induced or attempted to induce a person to acquire or to sell securities and did so by written, verbal or other statement, promise or forecast, which he knew or ought to have known to be misleading, or by concealment of material facts; (b) he fraudulently influenced the fluctuations of securities quotations …". Section 54(A1) provides: (a) that a supervised party or an investor in securities who is convicted of doing one of the followed is deemed to have committed securities fraud if he stated something or delivered a promise or projection – either in writing, verbally or otherwise – which the person should have known to be false or misleading, or hid material facts from another person, when the first person knew that these acts could induce the other person to acquire sell securities; (b) he executed a single trader securities transaction in securities, a coordinated securities transaction or a stabilization of securities prices.
The position paper (hebrew) issued by the Securities Authority details type of behavior which demonstrate a suspicion of fraudulent trading, including: single trading transactions; coordinated transactions; transactions creating a misleading representation on the trade in the securities; provision of instructions absent an intention for a real transaction performance; influencing the closing price; control over the security in order to influence the price; maintaining the minimum price of the security; influencing the price in order to revaluate the security; activities on the exchange with a view to influencing the result of a substantive event as a result of changes in the prices of the securities; influencing the securities in order to influence a connected security – and the Authority's paper gives examples of such transactions.
Accordingly, the Authority provides an open-ended list of 10 'indicative signs' which are likely to be relevant when the Authority is considering whether to exercise its discretion at to where there is fraudulent securities' trading – the scope of the instructions or the transactions which were performed by the same party over a certain period; the extent to which the instructions or transactions of a party or a number of parties acting together bring about a change in the price of the securities; lack of change in ownership of the securities or economic substance of the transactions; the extent to which instructions or transactions, carried out within a short period of time, bring about changes of party and constitute a substantial part of the scope of trade on the same day or bring about changes in the price of the security which then within a short time reverts to the price which was in place before the transactions were carried out; the influence on the demand or supply in the security which were cancelled before actual performance, on the publicly available books; the extent of changes in the price, which were created by transactions which were carried out close to a substantial event in which the price was used for evaluation of assets, value, determinant of index, etc; how interest in the transaction impacts on the price; the extent to which the price changes were substantial in proportion to the range of prices at which the security was traded over a specific period; the extent to which those who trade in the security, were successful – in a continuous manner – in increasing or decreasing its price.
For further details please contact the following lawyers:
