ABSTRACT
According to Article 1071 of Capital Markets Law No. 6362 (“CML”), there are two types of market fraud crimes: information-based market fraud crime and transaction-based market fraud crime.
I. INTRODUCTION
With this article, various dimensions of the capital market fraud crime within the scope of capital markets legislation will be discussed through cases in Türkiye and around worldwide, and transaction-based and information-based fraud types their legal structures and their effects on the market will be examined. Furthermore, the importance of protecting the fair & transparent functioning of capital markets will be emphasized by a discussion of laws and regulations aimed at preventing such offenses, supported by international instances.
II. THE CRIME OF MARKET FRAUD WITH IN THE SCOPE OF THE CML AND THE HISTORICAL DEVELOPMENT OF THE CRIME
Under capital markets law, manipulation generally refers to unlawful actions aimed at artificially changing the prices of capital market instruments by using false and/ or misleading information to influence investor behaviors.
The crime of “manipulation” contained in Article 47 /a-2-3 of the former CML numbered 2499 was abolished with the CML. It has been replaced and regulated under Article 1071 of the CML under the title “Manipulation”.
The historical development of the market fraud varies depending on the economic and legal context of different countries. Australia and the United Kingdom are notable as the first states to establish prohibitions against market manipulation. After the2 Great Depression of 1929, the United States prohibit activities involving manipulation through the Securities Exchange Act of 1934 in response to speculators who were responsible for the crisis. In Russia, market manipulation offenses were relatively regulated later, with the initial regulation taking place in 2009. Regulations prohibiting market fraud in the European Union were not implemented until early 2000s, and in Germany, the first regulation linking currency fraud to criminal sanctions was implemented in 19862. The initial regulation on manipulation at the EU level is the Market Abuse Directive 2003/6/EC, and before this directive, the main document representing the common opinion of the regulatory authorities in EU member states was the FESCO Report dated 2000. This directive introduced a regulation at the EU level by combining the trading activities of insiders and manipulation actions3.
III. THE DIFFERENCE FROM MARKET ABUSE ACTIONS
The crime of market abuse actions and market fraud is regulated in the CML. The purpose of both being regulated in the CML is to ensure the efficient operation of the capital market and to maintain investor confidence in the market.
Article 104 of the CML, titled “Market abuse actions” states that;
“Actions and transactions which cannot be explained with a reasonable economic or financial justification, which are of a nature deteriorating the functioning of exchanges and other organized markets in security, openness and stability, shall be regarded as market abuse actions, provided that they do not constitute a crime. An administrative fine from twenty thousand Turkish Liras up to five hundred thousand Turkish Liras shall be given to those who perform the market abuse actions determined by the Board. However, in case when a benefit has been procured by this means, the amount of the administrative fine to be given cannot be less than twice of this interest4."
The acts specified in articles 103-105 of the CML are considered as misdemeanors. As stated in Article 104, actions that disrupt the market, if not constituting a crime, are classified as misdemeanors within the scope of the law.
Due to the possibility of committing the same acts both as market fraud crimes and market-disruptive misdemeanors, there is currently no consensus in the doctrine on whether they should be considered as crimes or misdemeanors. The regulations within the Capital Markets Board’s Market Disruptive Actions Communiqué numbered VI-104.1, prepared under the scope of the Capital Markets Law, contain provisions acknowledging the similarities between the aforementioned crime and misdemeanor. Article 6/1 of the Market Disruptive Actions Communiqué contains regulations regarding market disruptive actions carried out with communication or messaging tools. This provision states that providing false, misleading, or incorrect information, spreading rumors, creating news, making public disclosures, giving opinions, or preparing reports related to the prices, values, or investor decisions of financial instruments or market indicators that may affect these elements will be considered as market abuse actions. In this context, the Communiqué introduces regulations against behaviors similar to the crime of information-based market fraud with the aforementioned acts5.
While capital market instruments constitute the focal point of the crime of market fraud, according to the doctrine, it is understood that market abuse actions are also fundamentally related to financial instruments. Therefore, it is observed that the subjects overlap in both cases.
According to the Communiqué on Re-appraisal, individuals engaging in market disruptive actions determined by the Capital Markets Board (for the year 2024) will be subject to administrative fines ranging from 246,511.47 Turkish Liras to 6,168,483.34 Turkish Liras. In case benefits are obtained, the amount of the administrative fine shall not be less than twice the amount of such benefit. When examining Article 107 of the CML, in the case of market fraud crime, imprisonment is regulated in addition to administrative fines. Pursuant to Article 107/1, those committing transaction-based market fraud crime may face imprisonment from 3 to 5 years, and under Article 107/2, individuals involved in information-based market manipulation offenses may also face imprisonment ranging from 3 to 5 years.
Despite these and other similarities described above, there is no need for direct consequences for market abuse to occur. In this context, regarding transaction-based actions, as a natural consequence of the regulation encompassing transaction-based manipulation crimes, whether the act is considered a crime or a misdemeanor will depend on whether a benefit is obtained or not, and the sanction applied will be shaped accordingly6.
IV. THE EVALUATION OF THE MARKET FRAUD CRIME WITH IN THE SCOPE OF N E/ NON - BIS IN IDEM
“Although insider trading and market fraud are defined as crime in the CML, even if no criminal complaint has been filed yet, the capital market board has been granted the authority to take measures related to securities for individuals, whether natural or legal persons, and officials of legal entities who are reasonably suspected of committing this crime”7. Due to the similarities in terms of the subject matter, purpose, and punishment, market disruptive actions and market fraud are intertwined as per the provisions of the Capital Markets Board. Therefore, it has become necessary to evaluate the principle of ne/non bis in idem regarding these two crimes specifically. The principle of ne/non bis in idem emphasizes the legal principle that an individual cannot be punished twice for the same offense or subjected to double jeopardy. While this principle prevents multiple punishments for the same act, it is not absolute because it does not mandate uniformity in the consequences of punishment. Despite the similarities in the subject of the crime and misdemeanor, it is possible to evaluate the same act differently under different legal disciplines due to differences in their elements, purposes, protected legal interests, and outcomes. In this context, the imposition of different sanctions for an action prescribed by various legal disciplines does not violate the principle of the rule of law or the principle of non bis in idem, which prohibits double jeopardy for the same offense.
V. THE LEGAL NATURE OF MARKET FRAUD CRIME
“Capital market crimes and misdemeanors have been regulated by the CML No. 6362 with the aim of ensuring the reliable, transparent, efficient, stable, fair, and competitive operation and development of the capital markets, and for the regulation and supervision of the capital markets to protect the rights and interests of investors”8. The legislator considers actions that prevent the determination of prices under fair conditions and in a free competitive environment, resulting from the intersection of real supply and demand, as a crime. In legal doctrine, there is no universally agreed-upon definition for the concept of market fraud. The diversification of manipulative actions with technological advancements has made it challenging to define this concept clearly. In other words, a definition covering manipulative actions may emerge over time; however, if it does not include the typical characteristics of specific actions that constitute the crime of market fraud, it may lead to situations of impunity. In this instance, it should be understood that in order to accomplish the purpose of criminal law—namely, to prevent crimes from being committed—it is critical to accurately define the typical features of criminal behavior9. “There is no universally agreed-upon definition for manipulation, especially for its types based on information and transactions. Manipulation is a concept that can be defined in various forms depending on different perspectives”10.
A. Transaction-Based Market Fraud Crime (CML Article 107/1) with Examples from Turkey
In the first paragraph of Article 107 of the CML, transaction-based market manipulation is regulated, and the relevant provision is as follows: “Those who make purchases and sales, give orders, cancel orders, change orders or realize account activities with the purpose of creating a wrong or deceptive impression on the prices of capital market instruments, their price changes, their supplies and demands, shall be sentenced to imprisonment from two years up to five years and be punished with a judicial fine from five thousand days up to ten thousand days. However, the amount of the judicial fine to be imposed due to this crime cannot be less than the benefit obtained by committing the crime".
The person who consciously aims to create an artificial market through manipulative actions engages in transaction-based market fraud crime by creating unusual volatility in the prices of financial instruments and supply-demand dynamics. The execution of transactions causing unusual movements in the capital market alone is not sufficient to constitute the offense of market fraud. In Turkish law, the motive of the person engaging in manipulative transactions is a determining factor in the occurrence of the transaction-based market fraud crime. In this context, the presence of both objective and subjective elements is required for the occurrence of the transaction-based market fraud crime11.
This crime involves artificially changing the value of a specific stock or other financial instrument in financial markets with the intention of misleading investors. The legal interest protected by the crime is generally market integrity, and therefore, the victim of the crime encompasses a broad community. What is essential is that the individual who committed the offense has an explicit intent to create a misleading or deceptive impression. Transaction-based market fraud crime is of great importance in ensuring fair competition and trust in financial markets.
We have mentioned above that the transaction-based market fraud crime is a serious crime that refers to the unfair loss of investors through manipulative activities that take place in financial markets. As in various countries of the world, such fraud cases have been encountered in Turkey and legal measures have been taken. This crime is usually carried out by people who speculate on the market with fake information, manipulate prices, or try to make a profit through unreal transactions. The Turkish legal system has established various legal regulations and oversight mechanisms to protect capital markets and prevent such crimes. As a result of different transactions made on the shares of Sınai Ticari Mali Yatırımlar A.Ş, the Court of Cassation concluded in a decision involving multiple defendants that the transactions made from the accounts directed by the defendants were effective and manipulative transactions made with the intention of causing artificial price and market formation. Considering the connections and communications among the defendants, it was concluded that the elements of the crime were present, and there was a joint intent to participate in the offense. This conclusion was reached after the Supreme Court examined a number of factors, including the volume and ratios of buying and selling transactions from group accounts, the share and ratios of orders transmitted to group accounts in the total order quantity, the volume and ratios of intra-group transactions, particularly those involving self-dealing and mutual transactions, the ratio of buy transactions raising the price within the overall transaction volume, the quantity and characteristics of changing-direction orders that were submitted quickly, changes in stock prices, and increases in transaction volumes during the examination period12. In another decision related to the crime of transaction-based market fraud, given by the Supreme Court; it was determined that a group of 5 investors formed by the defendants dominated the market as a result of significant transactions on Derimod shares. During the examination period, it was found that the transactions of the investor group constituted a large percentage of the total buying and selling volume, changing-direction orders were created at similar prices, and these orders were not based on market opinions. Additionally, considering money transfers among the defendants, transactions conducted through the same computer network, and their familiarity with each other, it was determined that there were serious evidence indicating that the defendants acted together and dominated the market. Expert reports also provided an assessment in this direction, emphasizing that despite the low transaction volumes of the defendants, the ratio of the investor group’s total transaction volume was high. In this context, it was concluded that the defendants dominated the market with the investor group and there was causality between the unusual price changes in the stock market and the transactions of the investor group13.
B. Information-Based Market Fraud Crime (CML Article 107/2) with Examples from Turkey
The information-based market fraud crime is regulated in the second paragraph of Article 107 of the CML, and the relevant provision is as follows:
“(2) Those who give false, wrong or deceptive information, tell rumors, give notices, make comments or prepare reports or distribute them in order to affect the prices of capital market instruments, their values or the decisions of investors, shall be sentenced to imprisonment from two years up to five years and be punished with given a judicial fine up to five thousand days”.
Information-based market fraud is a type of fraud related to deceptive and manipulative activities in financial markets. These frauds typically aim to gain profit by influencing investors’ emotions and market perceptions through misleading information. Such frauds are often conducted with information that can affect investors, such as fake news, investment advice, or financial reports. Manipulations of this kind can be observed in various asset classes such as stocks, cryptocurrencies, commodities, or other financial instruments.
These manipulations, used to prevent investors from making informed decisions and to mislead them, often involve methods like speculation, misunderstandings, and the exploitation of investor trust. This situation can lead to a loss of confidence in financial markets, investor losses, and undermining market stability. To protect themselves from such frauds, investors should use information from reliable and verifiable sources, carefully evaluate their financial decisions, and make an effort to understand market conditions. The effective operation of regulatory and oversight mechanisms can also help prevent such frauds.
Information-based capital market fraud has become an increasingly prevalent crime with the complexity of financial systems and the rapid advancement of technology. As mentioned above, this type of crime aims to deceive investors using false information, manipulation, and deceptive methods to achieve unjust gains. Some examples in Turkey demonstrate that this type of crime not only affects individuals but also threatens financial stability and trust. In this context, it is evident that significant legal efforts are required toprotect investors from information-based capital market fraud cases in our country. In one of the decisions by the Supreme Court, it was stated that in the prospectus of the public offering, misleading and incomplete information was provided regarding the revenues obtained from the shopping center named “... Park”. The company officials responsible for the entire prospectus and the research officer who prepared the valuation report were accused of actions aimed at not reflecting the true value of the company. The complaint included allegations of providing misleading information about the revenues obtained from the “... Park” shopping center, manipulating the valuation report to show higher incomes and values, and failing to reflect the true value of the company. The allegations also mentioned issues such as not disclosing problems related to zoning, sales process, and operational difficulties in the “... Park” shopping center, and not providing information about the termination of lease contracts and vacated shops in the prospectus. The complaint emphasized that the valuation report did not consider the actual conditions of the shopping center, including vacant or abandoned shops, and presented misleading information by showing more income than actually obtained. The report allegedly did not reflect the true situation of the shopping center during the preparation period. It was further claimed that the report did not take into account the problems faced by tenants, such as termination of contracts and non-payment of rent, resulting in an inaccurate assessment. In this regard, a public lawsuit was initiated based on sufficient evidence indicating that the suspects had committed the alleged offense, as required by the CML 107/2 regulation, despite the initial court’s failure to consider the evidence14.
VI. NOTIFICATION OBLIGATION REGARDING MARKET FRAUD CRIMES
Article 102/1 of the CML provides for a notification obligation to investment firms and designated capital market institutions concerning the offense of capital market fraud. According to this provision, these entities are required to report to the Capital Markets Board or other designated competent authorities when there is any information or suspicion that a transaction may constitute an offense under Article 107.
The requirement to inform is critical for increasing transparency in capital market activities, safeguarding market integrity, and preventing fraudulent transactions. This aims to maintain a fair and reliable environment in financial markets. This obligation aims to increase confidence in the markets by enabling the relevant organizations to intervene early by detecting possible crimes in advance. Moreover, this practice seeks to strengthen the regulatory authority’s ability to effectively supervise capital market activities. Additionally, to prevent potential crimes in the Turkish capital market, the Regulation on Reporting Obligation Regarding Market Manipulation or Fraud Crimes (V-102.1) has been issued, including suspicious transaction patterns related to market fraud as an annex to the relevant Regulation.
VII. CAPITAL MARKET FRAUD CRIME WITH EX - AMPLES FROM AROUND THE WORLD
Capital markets play a vital role in meeting the capital needs of companies, providing returns to investors, and supporting economic growth. However, within this complexstructure, some individuals and organizations may resort to unethical and illegal methods with the aim of gaining unjust profits. Capital market fraud involves efforts to deceive investors, manipulate, and engage in fraudulent practices to gain financial benefits. Historically, various capital market fraud actions worldwide have adversely affected both financial institutions and individual investors, leading to a loss of trust and a decrease in market credibility. In this context, there is a need to provide examples from around the world for this type of crime, which is prevalent not only in our country but also globally.
1. United States of America vs James Patten, Peter Coker Sr. and Peter Coker Jr.
The U.S. Public Prosecutor, Philip R. Sellinger, announced that 64-year-old James Patten from North Carolina, along with co-defen - dants Peter Coker Sr. and Peter Coker Jr., or - chestrated a large-scale market manipulation scheme with the intention of manipulating two publicly traded companies. Patten admitted guilt from 2014 to September 2022, collaborating with the co-defendants, in planning to manipulate securities prices by injecting false information and employing a coordinated trading model. The scheme targeted Hometown International Inc. and E-Waste Corp., involving reverse merger transactions and strategies to gain control of shares. The defendants artificially inflated the market value of the shares, aiming to profit from the scheme. Facing charges of securi - ties fraud, the defendants could potentially face up to 20 years in prison and a $5 mil - lion fine. Sentencing is scheduled for April 23, 2024. Organizations such as the FBI and IRS-Criminal Investigation are conducting the investigation. Charges against Coker Sr. and Coker Jr. are currently allegations and they will be presumed innocent until proven guilty.
2. FCA vs Konstantinos Papadimi - trakopoulos and Dimitris Gryparis
The Financial Conduct Authority (FCA) has filed a compensation lawsuit against the former CEO (Mr. Konstantinos Papadimitrakopoulos) and CFO (Mr. Dimitris Gryparis) of Globo Plc, alleging that they made misleading statements by exaggerating the company’s share values before its complete collapse. The FCA claims that these statements caused harm to investors and is seeking compensation for the damages incurred.
However, extradition requests for these defendants residing in Greece were rejected by the Greek Court of Appeals. Following this decision, the FCA initiated legal proceedings in the Supreme Court. During this process, former CEO Papadimitrakopoulos’s attempt to dismiss the FCA’s case was denied, but the court determined that some evidence was unlawfully obtained. Therefore, it was stated that the FCA may need permission from Greek authorities to use these pieces of evidence.
The court noted that this aspect of the legal process would not affect the FCA’s overall case but acknowledged that a separate permission process might be necessary regarding the use of certain evidence. The FCA, however, maintains that this situation will not impact the case, and they will proceed. Despite the inability to use some of the evidence obtained by the FCA in this process, the general case was decided to continue.
VIII. CONCLUSION
The capital market is a financial market that enables companies to meet their financial needs and provides investors with the opportunity to deploy their savings. However, due to unlawful profit in stock markets, there has been a need for special regulations to fight against market fraud. Article 107 of CML No. 6362 regulates market fraud in two forms: transaction-based and information-based. These regulations aim to strengthen supervision in financial markets and effectively combat manipulation.
Market fraud involves deceptive actions that affect the prices of capital market instruments. Unfair benefit conditions have been added for the occurrence of the offense, and repentance provisions have been introduced for economic crimes. The capital market is subject to regulations to protect the trust of society and ensure its healthy functioning.
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FOOTNOTE
1 Capital Market Law (CML), Official Gazette (OG) dated 06.12.2012 and numbered 28513, Article 107.
2 Dilek Özge Erdem, Sermaye Piyasası Kanununda Düzenlenen Piyasa Dolandırıcılığı Suçları, Adalet Dergisi, 2020/2 65. sayı, p. 335-363.
3 Seçil Coşkun, Avrupa Birliği Hukukunda Piyasa Dolandırıcılığı (Manipülasyon), Galatasaray Üniversitesi Hukuk Fakültesi Dergisi, 2021/1, p. 559-613.
4 Sermaye Piyasası Kanunu (SPK), 06.12.2012 tarih ve 28513 numaralı Resmi Gazete (RG), m.104.
5 Yeliz Neslihan Akın, Ekonomik Bir Suç Olarak Piyasa Dolandırıcılığı Suçunun Değerlendirilmesi, Maliye Çalışmaları Dergisi, 2020, p. 25.
6 Yetkin Kaan Gençtürk, İşlem Temelli Piyasa Dolandırıcılığı (Manipülasyon) Suçu ile Piyasa Bozucu Eylem Kabahati İlişkisi, Adalet Dergisi, 2023/1 70. Sayı, p. 301.
7 Burak Adıgüzel, Sermaye Piyasası Hukuku, 5. Baskı, Ankara, 2023, p. 334.
8 Yeliz Neslihan Akın, Ekonomik Bir Suç Olarak Piyasa Dolandırıcılığı Suçunun Değerlendirilmesi, Maliye Çalışmaları Dergisi, 2020, p. 1.
9 Sinan Bayındır, Türk Sermaye Piyasası Hukukunda Manipülasyon Suçu, İstanbul 2011, p. 55.
10 Çağlar Manavgat, Sermaye Piyasasında İşleme Dayalı Manipülasyon ve Özel Hukuk Bakımından Sonuçları, Ankara, 2008, p. 240.
11 Seçil Coşkun, Sermaye Piyasası Hukukunda Piyasa Dolandırıcılığı Suçu (6362 Sayılı SPK’nın MD.107), 1. Baskı, İstanbul 2021, p. 49.
12 Yargıtay 19. C.D., T. 04.07.2018, E. 2018/1323, K. 2018/8134.
13 Yargıtay 19. C.D., T. 11.02.2019, E. 2018/7815, K. 2019/4066.
14 19th Criminal Chamber of the Court of Appeals T. 09.01.2017, E. 2016/108 K. 2017/37.
