On market manipulation and umboðssvik/mandatsvig

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This scholarly article is written in honor of supreme court justice Jón Steinar Gunnlaugsson as a contribution to his heiðursrit (afmælisrit) in the autumn of 2017. It contains some reflections on two serious offenses which have given cause to indictment, often combined in the same case, under some of the criminal cases in the aftermath of the financial crisis: market manipulation, governed by EEA/EU law, however here in a national context for criminal law purposes, and fraud of agent (umboðssvik, mandatsvig) governed by national criminal law, however in the article compared with the Danish concept of mandatsvig and its demands for a certain proof of intent. - The conclusions of the article are:
1. On market manipulation: 1.2 Market making by a financial undertaking in own shares is not illegal as such, but special care must be taken. 1.3 When the issuing company chooses to conduct market making in its own shares by itself, it is important that the issuer adapts its orders to the trades that have taken place on the stock exchange between independent parties with opposite interests. The price of the bank’s shares must not reach a level that is “artificial” or “not normal”. 1.4 The Danish Financial Inspection recommends that the issuer establish internal procedures for market making in its own shares. Clearly, these non-binding (Danish) guidelines from 2014 must build on experience gained during the financial crisis and the years thereafter. One cannot disagree with them, however they may not be applied as guidelines for judging actions which took place years before the guidelines were issued. 1.5 A bank’s transactions with its own shares to facilitate creation of a market price are not automatically unlawful, even if the transactions are not part of a buy-back programme or stabilization of financial instruments. 1.6 Purchases which are made on the basis of buy-back programs, or on the basis of stabilisation of financial instruments, according to Regulation No. 2273 are always lawful. if a buy-back-program meets all the requirements of Regulation No. 2273, the prohibitions of the MAD (especially Article 3 on insider trading, and Article 5 on market manipulation) shall not apply to the trading in own shares which take place under the buy-back program. 1.7 The concept of safe harbour for such programmes is carried on in MAD’s legal ‘successor’, Regulation No. 596/2014 on market abuse (“MAR”), which came into force on 3 July 2016. Article 5 of the MAR provides exemption (‘free harbour’) for buy-back programmes and stabilisation. The MAR gives more details on the requirements to be fulfilled by such programs than the MAD did, however the MAR is still dependent on the adoption by the Commission of regulatory technical standards, cf. MAR Article 5/6), in fine. 1.8 The purpose of a company’s purchase and selling of its own shares will, especially for listed companies, often be to ensure a harmonic development in the price for the issuer’s shares. 1.9 Another example concerning the issuer’s motives for buying and selling its own shares is to take care that shareholders who wish to dispose of their shares in the company, will always be able to find a market for such sell. This is relevant for all listed issuers, but it is of special relevance for listed issuers within the financial sector, such as banks. Their shareholders, who are often not only shareholders, but also customers in that bank, will naturally expect that there always be a market for their shares if they wish to sell them (provided that it is a portion of reasonable size), and the bank is at any point of time expected to be ready to buy such shares to the bank’s stock of own shares. 1.10 The purpose is also to be in possession of a stock of own shares through which the issuer can help interested buyers to become shareholders of the issuer. As with the preceding sentence, this purpose is of special relevance for listed issuers within the financial sector, such as banks. Anyone, including the bank’s customers, will naturally expect that the bank be at any point of time ready to sell shares from the bank’s stock of own shares, at least as regards portions of shares of reasonable size. 1.11 In this connection, liquidity in the specific share plays a crucial role. It must, if possible, be ‘as good as cash’ to possess that share. Most listed companies enter into contracts with one or more market makers to ensure such liquidity; if the listed company is a bank, it may choose to act as its own market maker, very often as a result of the question: Market making through a foreign market maker (normally a bank) is expensive; why should we entrust this important and costly job to another bank, when we are ourselves a bank? 1.12 Liquidity also plays a key role in protection of minorities in such companies, as it is particularly important in large companies that small shareholders are able to dispose of their equities at any time. Economic research would seem to demonstrate that an illiquid investment is around 30 pct. less worth than a liquid investment in the same company.
2. On the Danish concept of mandatsvig: 2.1. You may have “abused” your position, and you may have exceeded your authorization, without thereby having committed ‘mandatsvig’, if it cannot be demonstrated 1) that you were acting with the intent of obtaining enrichment for yourself or for others, and 2) that you have also acted with the intent of acting against your principal’s interests. In some of the Icelandic bank cases it would rather seem that the accused acted with the quite opposite purpose: i.e. with a purpose of obtaining “enrichment” for their bank, and acting in the bank’s interest. 2.2. It must thus be demonstrated that the intent of the offender covers each of the following three elements: 1) Intent to obtain enrichment for himself or for a third party (”… for derigennem at skaffe sig eller andre uberettiget vinding…”). This intent requires intent to enrich another person/entity than the entity that is intended to suffer the loss, i.e. the enriched party cannot be identical to the offended party. 2) Intent to cause the other party an economic loss (“…påfører en anden formuetab …”), whereby case law and theory agree that a substantial risk of loss (“væsentlig risiko for formuetab”) is sufficient here. 3) Intent to act against the interest of the other party (”…handle mod dennes tarv …”).
Translated title of the contributionOm markedsmanipulation og umboðssvik/mandatsvig
Original languageEnglish
Title of host publicationAfmælisrit Jón Steinar Gunnlaugsson : Sjötugur 27. september 2017
EditorsGuðrun Gauksdóttir, Hafsteinn Thor Hauksson, Hákon Árnason , Heimir Örn Herbertsson, Hörður Felix Harðarson, Katrín Helga Hallgrimsdóttir
Number of pages21
Place of PublicationReykjavik
PublisherBókaútgáfan Codex
Publication date27 Sep 2017
ISBN (Print)9789979825968
Publication statusPublished - 27 Sep 2017

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