3/19/2019

READ SECS. 24-27

PROHIBITIONS ON
FRAUD, SEC. 24: Manipulation of Security Prices; Devices and
Practices. – 24.1 It shall be unlawful for any person acting
MANIPULATION AND for himself or through a dealer or broker, directly or
indirectly . . .
INSIDE TRADING SEC. 25: Regulation of Option Trading
SEC. 26: Fraudulent Transactions. – It shall be unlawful
READ SECTIONS 24-27 for any person, directly or indirectly, in connection with the
purchase or sale of any S to . . .
SEC. 27: Insider’s Duty to Disclose When Trading . . .

85 86

MANIPULATION OF SECURITY FRAUDULENT TRANSACTIONS

PRICES It shall be unlawful for any person, directly or
indirectly, in connection with the purchase or sale
Ex. Creating a false or misleading of any S to:
appearance of active trading in any 1) Employ any device, scheme, or artifice to
defraud;
listed security traded in an Exchange
2) Obtain money or property by means of any untrue
of any other trading market (ex. Wash statement of a material fact of any omission to state
sale, pretended sales) a material fact necessary in order to make the
statements made, in the light of the circumstances
under which they were made, not misleading; or
87 88

FRAUDULENT TRANSACTIONS MANIPULATIVE DEVICES

It shall be unlawful for any person, directly or indirectly, in connection 1. Marking the close
with the purchase or sale of any securities to:
2. Painting the tape
3. Squeezing the float
3) Engage in any act, transaction, practice or
4. Hype and dump
course of business which operates or would
operate as a fraud or deceit upon any person 5. Improper Matched Orders
6. Boiler Room Operations
7. Scalping
8. Daisy Chain
89 9. Flipping 90

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MANIPULATIVE DEVICES MARKING THE CLOSE

Buying and selling S

any scheme which will cause an at the close of the market
artificial reduction or shortage of in an effort to alter the closing price of the
security
available shares in the market while
falsely showing activity therein

91 92

PAINTING THE TAPE SQUEEZING THE FLOAT

Engaging in a series of transactions Taking advantage
that are reported publicly of a shortage of S in the market by
controlling demand side, and
to give the impression of
exploiting market congestion
activity or price movement in a security
during such shortages
in a way as to create artificial prices

93 94

HYPE AND DUMP IMPROPER MATCHED ORDERS

Engaging in buying activity Engaging in transactions
at increasingly higher prices and where both the buy and sell orders
then selling the S in the market at are altered at the same time
higher prices with the same price and quantity
by different but colluding parties

95 96

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BOILER ROOM OPERATIONS

SRC Rule 24.1(b): “improper
matched orders” A well-organized operation
– engaging in transactions where both the buy and sell orders are
where in a room,
entered at the same time with the same price and quantity by
different but colluding parties
there would be well-trained salesmen
operating over several phones and
Ex. Investor A instructs the broker to buy certain S using high-pressure sales talk
at a given price, knowing that Investor B has also
instructed her broker to sell the same kind of S at to get investors
the same price. to invest in S offered
97 98

SCALPING DAISY CHAIN

Where a person,
like an investment advisor, •A pattern of fictitious trading activity
purchases S by a group of persons
for his own account before who lures innocent people
recommending that security, and then into the scheme
sells the share at a profit upon the rise
in the market price following the
recommendation 99 100

FLIPPING
Operated where one office CHURNING
buys a particular stock for customers,
while another office simultaneously – involves the excessive trading by a
recommends that its customers sell the
broker dealer in a customer’s account
stock,
with a view to generating commissions
with the stock being shifted from one
office to another,
and the firm makes a profit,
and the brokers earn their commissions 101 102

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WASH SALES WASH SALES

✓involves transactions (the illegal ✓Carried out to either hide paper losses
buying and selling of S) in which there is or inflate paper gains temporarily, or to
no genuine change in actual ownership show increased trading volume and
✓Have the effect of distorting market raise their financial institutions’ ranking
dynamics, affecting the prices of S in the league tables compiled by the
local bond exchange

103 104

WASH SALES MARKET RIGGING / JIGGLING

✓Because of this, many wash trades
✓By performing similar act
are executed toward the end of
reporting periods, like the end of the where there is no change in beneficial
month or the end of a quarter ownership

105 106

SHORTSWING TRANSACTION SHORTSWING PROFITS RULE

✓(SRC Sec. 23.2) ✓any profit realized by insiders of an issuer from
Elements: the purchase and sale, or any sale and
1. Purchase AND sale or vice-versa purchase, of any equity security of the issuer
2. Within 6 months within any period of less than six months, unless
3. By a director, officer, principal SH, beneficial owners such security was acquired in good faith in
or those holding more than 10% of any class of any connection with a debt previously contracted,
equity security of the issuer shall inure to and be recoverable by the issuer
Rationale – “prevent the unfair use of info which may (Section 23.2, Securities Regulation Code)
have been obtained by said person by reason of his
relationship with the company”
107 108

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SHORTSWING PROFITS RULE SHORTSWING PROFITS RULE

✓separate and distinct from the insider trading rule, ✓a strict liability, prophylactic rule designed to
which is governed by a different provision under prevent the possibility of insider trading.
S27 of the SRC Neither intent nor actual use of inside info is
✓not intended to prohibit the named insiders from required
transacting and earning profits from such S ✓All that is required is that profit was made
✓put in place to prevent them from unfairly using and from a combined purchase and sale of
benefiting from info that may have been obtained by equity S within a period of six months by the
reason of their relationship with the issuer and in insiders in question
order to ensure a fair and honest market
109 110

SHORTSWING PROFITS RULE SHORTSWING PROFITS RULE

✓an action to recover such short-swing profits ■Short swing profit is prohibited under the
may be instituted before a RTC by the issuer, SRC, and an action may be filed against
or by the owner of any security of the issuer in such director, officer, principal SH
the name and in behalf of the issuer if the
latter shall fail or refuse to bring such suit ■the action belongs to the issuer company
within 60 days after request or shall fail ■to prevent unfair use of info
diligently to prosecute the same thereafter
✓The suit should be brought within 2years
from the date the profit was realized
111 112

SHORTSWING PROFITS RULE SHORT SALE

Element to maintain action [Short Swing profit] Includes the following:
1. Must involve an equity security 1) Any sale of a security which the seller does
2. Matching sale and purchase or purchase and sale not own; or
3. Purchase at a low price/ bought back at a lower 2) Any sale which is consummated by the
price delivering of a security borrowed by or for
a) Company or issuer must bring the action the account of the seller with the
b) Subject to a 2 year prescription period from the commitment of the seller or securities
date the profit is realized borrower to return or deliver said S or their
equivalent to the lender on a determined or
113 determinable future time 114

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SHORT SALE SALE AGAINST THE BOX

There is no absolute prohibition on short sale EXCEPT in
the following instances: (Sec. 23) ■when a seller anticipates a decline in the
1. Directors, officers or principal SH of a corp. CANNOT price of stock he owns, he will sell it to the
make a short sale in S of the corp in which he is a
director, officer of principal SH (possibility of abuse) buyer at the present market value, but
2. Whenever the SEC, motu proprio or upon deliver it later, when hopefully the market
recommendation of the Exchange, prohibits short selling price will have fallen below the sale price,
indefinitely or for such period as it may deem proper for thus creating a paper profit for the seller –
the protection of the investors or as an emergency
measure or whenever such short selling is necessary or Hazen, 1985.
appropriate in the public interest
115 116

Elements according to the Defense

SRC IRR (Valid upon substantial proof)
■Non-delivery of security within 20
days after sale or ■Good faith / due diligence
■Inability to deposit the security ■Inconvenience or expense
within 5 days from sale

117 118

INSIDER TRADING INSIDER

Means –
“the illegal buying and selling of a) The issuer;
b) A director or officer (or person performing similar
stocks on the basis of info that is functions) of, or a person controlling the issuer;
generally unavailable to the public c) A person whose relationship or former relationship
by an INSIDER” to the issuer gives or gave him access to material
information about the issuer or the security that is
not generally available to the public;

119 120

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INSIDER INSIDER TRADING (S27)

Means –
It shall be unlawful for an insider to
d) A govt employee, or director, or officer of an exchange,
sell or buy a security of the issuer,
clearing agency and/or SRO who has access to material while in possession of material
info about an issuer or a security that is not generally
available to the public; or information with respect to the
e) A person who learns such info by a communication from issuer or the security that is not
any of the foregoing insiders
generally available to the public,
UNLESS:
121 122

INSIDER TRADING DEFENSES INSIDER TRADING

a. The insider proves that the info was not A purchase or sale of a security of
gained from such rel’p; or
b. If the other party selling to or buying from the issuer made
the insider (or his agent) is identified, the by an insider, his/her spouse, or
insider proves:
i. that he disclosed the info to the other relatives by affinity or
party, or consanguinity within the
ii. that he had reason to believe that the SECOND degree, legitimate or
other party otherwise is also in
possession of the info 123
common-law, . . . 124

INSIDER TRADING INSIDER TRADING

shall be presumed to have been effected while
in possession of material nonpublic info
•The presumption is rebuttable.
❑if transacted after such info came into
existence
❑but prior to dissemination of such info to the
public
❑and the lapse of a reasonable time for market
to absorb such info
125 126

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INSIDER TRADING INSIDER TRADING

•SCENARIO: purchase of company shares
❑BY WHOM: “INSIDER” RESULT and HOW DONE:
✓a member of the board of the concerned making profits in the market on the
company
✓firm’s “investment bankers, proxy printers,
“surprisingly good info” not yet
lawyers, company officers or large SHs with made public
holdings equivalent to 10% of the company”
✓employees who have direct access to info not
yet made public
127 128

Fact of Special Significance INSIDER TRADING

a. One which in addition to being material, would be
•Info is "MATERIAL NONPUBLIC“
likely to affect the market price of a security to a (S27.2) if:
significant extent on being made generally a. It has not been generally disclosed to
available
the public and would likely affect the
b. One which a reasonable person would consider market price of the security after being
especially important under the circumstances in
determining his course of action in the light of disseminated to the public and the
such factors as the degree of its specificity, the lapse of a reasonable time for the
extent of its difference from information generally market to absorb the info; or
available previously and is nature and reliability
129 130

INSIDER TRADING THE CASE OF DBP (2014)

•Info is "MATERIAL NONPUBLIC" if: COA Findings: unsafe and unsound banking
practices
b. would be considered by a reasonable
person important under the ✓January to March 2014: P14.3B in wash sales
circumstances in determining his = totaling 28 transactions
course of action whether to buy, sell or ✓the sales were all made with a single
hold a security counterparty, First Metro Investment Corp.
(FMIC), the investment banking unit of the
Metrobank group
131 132

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THE CASE OF THE CASE OF

DBP (2014) DBP (2014)
COA Findings: unsafe and unsound banking SEC 2016
practices ✓the transactions between DBP and FMIC had
indeed violated the provisions against market
✓DBP’s government securities were sold to manipulation in the SRC, the law governing the
FMIC and bought back on the same day at trading of negotiable instruments such as bonds
the same price, but resulting in a P717- in the country
million loss for the government bank at the
end of the scheme
133 134

THE CASE OF THE CASE OF

DBP (2014) DBP (2014)
Administrative Sanctions: FINE
SEC 2016
✓Some DBP Directors were slapped with a
✓violation of Section 24.1 (a)(iii) of the SRC that penalty of P500K each — a 50% reduction from
prohibits the creation of “misleading appearance
the earlier recommendation of a P1M fine each.
of active trading” and performing acts “where
there are no change in beneficial ownership” ✓Some FMIC Directors & officers were also
fined.
Criminal Charges: Graft
135 136