Make sure the punishment fits the crime
The Financial Services Board (FSB) is responsible for administering a number of Acts in the financial services industry. We are most familiar with the FSB's interventions in abuses of the Long-Term Insurance Act, the Short-Term Insurance Act, the Pensions Funds Act and FAIS.
More recently, the spotlight has fallen on the category known as market abuse. In this category the FSB monitors transgressions which take place in the buying and selling of shares on the local stock market. The most common abuses investigated in this category are insider trading and market manipulation, both regulated by the Securities Services Act. Insider trading is the process of profiting from buying or selling shares using knowledge which is privileged or not publicly known. Market manipulation is any activity which attempts to alter the fair value of a security.
To date, the major problem in this type of illegal activity is that allegations of market manipulation and insider trading are extremely difficult to prove. Successful prosecutions are practically unheard of and the cases which are investigated are in all likelihood the tip of the iceberg.
This makes recent developments in a market manipulation case involving Michael Berman all the more interesting. His case will be a first in many respects, not least because it is the first case of its kind to be publicly heard. It certainly seems that the FSB is out to make an example of this hedge fund trader.
Leave 'window dressing' to the high-street retailers
Berman is accused of two instances of market manipulation dating back to March 2005. The FSB alleges that trades placed by Berman were placed with the intention of changing the closing price of a particular share, thereby improving the value of a client's portfolio. This type of market manipulation is often referred to as 'window dressing'.
The trades under question hardly seem worthy of a full scale investigation by the FSB's enforcement committee for market manipulation. The first trade involved just 500 SA Retail shares which Berman put up for sale at a price of R8.75. His transgression in this regard was that he placed a buy order for the same 500 shares on behalf of the Mayibentsha Fund for whom he also managed funds. This trade was made at the end of March 2005 in the hope of inflating the value of the client portfolio at the close of the quarterly reporting window...
The second trade involved an order for 4, 100 iFour shares which Berman placed at a price of up to R9.40 per share. The ruling price at the time the order was placed was R8.70 and the FSB believes the order was placed in this manner to 'bid up' the price of the share to make a client portfolio look better.
Taking a sledgehammer to an ant
In an article published in the Financial Mail, 10 August 2007, Berman indicates that the FSB is taking a "sledgehammer to an ant." He believes that the suspension of his licence to act as a financial adviser was enough punishment for the transgression.
While the punishment might appear sufficient, Berman's claim that his company only benefited to the tune of R500 does not reduce the nature or intent of his transgression. Market manipulation is a serious offence and the size of the benefit received is unlikely to function as a defence. That said, we doubt that the FSB will be able to push for the maximum fine of R10 million should the defendant be found guilty.
There will be a number of traders and fund managers watching this case with interest. And we are sure that many of them will be thinking long and hard about some of the buy and sell orders they have placed over the years.
Editor's thoughts:
Many transgressions have been committed by indiscriminate traders and fund managers on the JSE in recent years. We firmly believe that the extent of the benefit received from an act of market manipulation should not be argued in mitigation of the transgression. Should the FSB apply its full legal resource to a case of this size, or should they rather be looking to catch and prosecute the big 'fish'? Send your comments to [email protected]
