The manipulation of capital

market

Cristan Dutescu
DUTESCU CRISTIAN,

Born at 20th of February 1973, in Bucharest; married to Raluca.

Studies: Law Faculty, University of Bucharest (1995); Diploma paper – “The stock
exchange”.

Specialization: Dragan European Foundation- Capital Markets Course (1995).

Activity: lawyer in the Bucharest Bar Association (since 1995); collaborator lawyer in the
“Florin Barbulescu” Individual Lawyer’s Office, Bucharest (1995-1997); title lawyer in
the “Cristian Dutescu” Individual Lawyer’s Office (1998-2006); coordinator lawyer in
the “Dutescu and Associates” Civil Lawyer’s Society, Bucharest (2006); university
preparatory at the Civil Law Department in the Romania- American University (1996);
law consultant for the “Investment and Profit” capital market journal (since 2005).

Publications: The stockholders wrights, first edition (2006); The stockholders rights,
second edition, the “I.L. Georgescu” prize of The Union of Romanian Jurists (2007).
Author of over 30th specialized articles in the Commercial Law and Capital Market field,
published in the “Investment and Profit” Journal and Commercial Law Journal.

Cristian Dutescu

Manipulation of the capital market

Bucharest 2008
 Contents

INTRODUCTION .........................................................................................................................................7
CHAPTER I.................................................................................................................................................10
NOTION AND NATURE OF CAPITAL MARKET MANIPULATION. .............................................10
RATING MANIPULATION ACTIONS ...................................................................................................10
SECTION 1 .................................................................................................................................................11
SEMANTIC OF MANIPULATION NOTIONS AND MARKET MANIPULATION ......................................................11
§1. Definition of manipulation .............................................................................................................11
§2. Semantic of “capital market manipulation” collocation ...............................................................12
§3 Material object of the capital manipulation action. The meaning of “securities” .........................14
SECTION 2 .................................................................................................................................................15
LEGAL DEFINITIONS OF THE CAPITAL MARKET MANIPULATION NOTION ....................................................15
§1. General specifications....................................................................................................................15
§2. Definitions of Romanian legislation...............................................................................................16
§3. Definitions from comparative law..................................................................................................18
§4. Definition of capital market manipulation according to the European Directive no. 6/2003
regarding market abuse .......................................................................................................................20
§5. Specifications regarding the definition of capital market manipulation stated in Law no. 297/2004
and in Directive no. 6/2003..................................................................................................................21
SECTION 3 .................................................................................................................................................23
NATURE OF MARKET MANIPULATION ACTION ............................................................................................23
RATING OF CAPITAL MARKET MANIPULATION TYPES .................................................................................23
§1. Illicit nature of capital market manipulation actions.....................................................................23
§2. Penal character of the capital market manipulation action...........................................................25
§3. Comparison between capital market manipulation and others illicit actions................................26
§4. Rating capital market manipulation types .....................................................................................30
CHAPTER II ...............................................................................................................................................32
LEGISLATIVE EVOLUTION IN THE CAPITAL MARKET MANIPULATION FIELD................32
THE EUROPEAN NORMATIVE SYSTEM CREATED BY THE MARKET ABUSE DIRECTIVE
.......................................................................................................................................................................32
SECTION 1 .................................................................................................................................................33
CAPITAL MARKET MANIPULATION IN THE ROMANIAN LEGISLATION PRIOR TO THE LAW NO. 297/2004.....33
§1. Capital market manipulation in the normative acts in force until 2002 ........................................33
§2. Government Emergency Order no. 28/2002 regarding securities, financial investment services
and regulated markets..........................................................................................................................35
SECTION 2 .................................................................................................................................................37
CAPITAL MARKET MANIPULATION IN THE MAIN EUROPEAN LEGISLATIONS IN THE PERIOD PRIOR TO THE
ADOPTION OF DIRECTIVE NO. 6/2003 REGARDING MARKET ABUSE ............................................................37
§1. Legislative system in France..........................................................................................................37
§2. The legislative evolution in the matter of market manipulation in Great Britain ..........................39
SECTION 3 .................................................................................................................................................41
CAPITAL MARKET MANIPULATION IN AMERICAN LAW ..............................................................................41
§1. Securities Act 1933- the first modern regulation of the institution of capital market manipulation
.............................................................................................................................................................42
§2. Securities Exchange Act 1934. Establishing the Securities Exchange Commission ......................43
§3. Investment Advisers Act 1940 .......................................................................................................46
§4. Sarbanes Oxley Act 2002 ...............................................................................................................47
SECTION 4 .................................................................................................................................................48
CAPITAL MARKET MANIPULATION IN THE EUROPEAN UNION’S LEGISLATION ...........................................48

3
 §1. European Conduct Code regarding trading securities. Principles................................................49
§2. The circumstances of adopting the European Directive regarding market abuse .........................51
§3. Objectives of the European Union’s legislation in the matter of market abuse .............................53
§4. Sphere of application of the European Union’s legislation in market abuse field.........................54
§5. System of European norms issued in the application of Market Abuse Directive no. 6/2003 (level
2 and 3 of implementation of Market Abuse Directive) .......................................................................55
CHAPTER III..............................................................................................................................................58
SECURITIES MARKETS..........................................................................................................................58
CHARACTERISTICS AND METHODS OF TRADING ON DIFFERENT MARKET SEGMENTS
.......................................................................................................................................................................58
SECTION 1 .................................................................................................................................................60
RATING SECURITIES MARKETS ...................................................................................................................60
§1. Depending on the moment of listing trading securities.................................................................60
§2. Depending on the level of regulation and issuers obligations .......................................................61
§3. Depending on the type of trading orders .......................................................................................61
§4. Depending on the type of trading systems......................................................................................62
SECTION 2 .................................................................................................................................................63
MARKETS AND STOCK EXCHANGE SYSTEMS ACCORDING TO THE PARLIAMENT DIRECTIVE AND OF THE
EUROPEAN COUNCIL 2004/39/CE- MIFID................................................................................................63
§1. Regulated market ...........................................................................................................................63
§2. The multilateral trade system (MTF) .............................................................................................67
§3. The systematic internalizer ............................................................................................................68
§4. Main rules regarding trading securities in the system created by the Markets in Financial
Instruments Directive...........................................................................................................................70
SECTION 3 TYPES OF MARKETS ON WHICH STOCK EXCHANGE TRANSACTIONS ARE CLOSED IN ROMANIA .72
§1. Market segments regulated on site ................................................................................................73
§2. RASDAQ Market............................................................................................................................86
§3. Derivatives market .........................................................................................................................90
§4. The importance of the interdependence between transactions closed on the derivatives market and
the spot market in the analysis of market manipulation actions ..........................................................96
SECTION 4 .................................................................................................................................................97
SANCTION APPLIED TO MARKET MANIPULATION ACTIONS THROUGH OPERATIONS WITH SECURITIES WHICH
ARE NOT ADMITTED TRADING ON A REGULATED MARKET .........................................................................97
§1. The problem of applying the market abuse Directive and issued legislation in its application to
operations with securities which are not admitted at trading on a regulated market..........................97
§2. Sanctions applied to market manipulation actions through operations with securities which are
not admitted at trading on a regulated market ....................................................................................98
§3. Sanctions applied in Romania to market abuse actions committed through operations with
securities traded outside the regulated market ....................................................................................99
CHAPTER IV ............................................................................................................................................101
SUBJECTS OF CAPITAL MANIPULATION ACTION......................................................................101
SECTION 1 ...............................................................................................................................................102
ACTIVE SUBJECT ......................................................................................................................................102
§1. General considerations regarding the active subject...................................................................102
§2. Defining elements of the active subject of capital market manipulation action...........................102
§3. Qualified active subject................................................................................................................110
SECTION 2 ...............................................................................................................................................111
PASSIVE SUBJECT.....................................................................................................................................111
§1. General considerations ................................................................................................................111
§2. Defining elements of the regular user ..........................................................................................112
CHAPTER V..............................................................................................................................................114

4
ANALYSIS OF MANIPULATION ACTIONS ......................................................................................114
SECTION 1 ...............................................................................................................................................116
TRADING OR TRADING ORDERS WHICH SEND OR MIGHT SEND FALSE SIGNALS OR MISLEAD IN REGARDS TO
THE DEMAND, SUPPLY OR PRICE OF SECURITIES .......................................................................................116
§1. Trades which send or might send false signals or mislead regarding demand, supply or price of
securities ............................................................................................................................................117
§2. Trading orders which send or might send false signals or mislead regarding demand, supply or
price of delusive securities.................................................................................................................122
§3. Signals of capital market manipulation though misleading or issuing false signals....................125
§4. Practices of capital market manipulation through issuing false signals or misleading investors134
SECTION 2 ...............................................................................................................................................149
TRADES OR TRADING ORDERS WHICH MAINTAIN, THROUGH THE ACTION OF ONE OR SEVERAL PERSONS
ACTING TOGETHER, THE PRICE OF ONE OR SEVERAL SECURITIES, AT AN ABNORMAL OR ARTIFICIAL LEVEL
................................................................................................................................................................149
§1. Trades which maintain the price of one or several securities, at an abnormal or artificial level150
§2. Trading orders which maintain the price of one or several securities at an abnormal or artificial
level....................................................................................................................................................153
§3. Signals of capital market manipulation by orders or trades which maintain the price of one or
several securities, at an abnormal or artificial level .........................................................................154
§4. Situations considered by the Directive of market abuse no.6/2003 as capital market manipulation
by maintaining an artificial price through trade or trading orders...................................................162
§5. Practices of market manipulation by maintaining an artificial price ..........................................175
SECTION 3 ...............................................................................................................................................192
TRADES AND TRADING ORDERS WHICH ASSUME FICTITIOUS METHODS OR ANY OTHER TYPE OF FRAUD ..192
§1. General specifications..................................................................................................................192
§2. Defining elements.........................................................................................................................193
§3. Situation considered by the market abuse Directive and the Romanian legislation as capital
market manipulation by using fictitious methods- Scalping...............................................................196
§4. Signals of capital market manipulation by using fictitious methods or any other type of fraud in
the view of legislation and recommendations of the European Union...............................................200
§5. Manipulation practices by trades implying fictitious procedures ................................................209
SECTION 4 ...............................................................................................................................................226
DISSEMINATION OF INFORMATION THROUGH THE MASS-MEDIA, INCLUDING THE INTERNET OR ANY OTHER
METHOD...................................................................................................................................................226
§1. General specifications..................................................................................................................226
§2. Information that sends or might send false or misleading signals regarding securities ..............228
§3. Dissemination of information....................................................................................................235
§4. Subjective side..............................................................................................................................237
§5. Dissemination of information by journalists ................................................................................239
§6. Manipulation practices through disseminating of false information ...........................................244
CHAPTER VI ............................................................................................................................................246
DEFENSE AND EXCEPTIONS FROM APPLICATION OF SANCTION REGIME IN THE
MATTER OF CAPITAL MARKET MANIPULATION ......................................................................246
SECTION 1 ...............................................................................................................................................247
POSSIBLE DEFENSE FACING ALLEGATIONS OF CAPITAL MARKET MANIPULATION CHARGES .....................247
§1. Not meeting the conditions required by law for the capital market manipulation action ............247
§2. Trading strategies allowed by legal norms ..................................................................................251
SECTION 2 ...............................................................................................................................................255
ACCEPTED MARKET PRACTICES ...............................................................................................................255
§1. General specifications..................................................................................................................255
The purpose of the accepted market practices. Conditions in which accepted market practices are
exonerated of responsibility ...............................................................................................................255
§2. Relevant provisions ......................................................................................................................258
§3. The notion of “accepted market practice”...................................................................................258

5
 §4. Evaluation criteria of market practices .......................................................................................262
§ 5. Acceptance procedure of a market practice................................................................................267
§6. Examples of accepted market practices .......................................................................................267
SECTION 3 ...............................................................................................................................................271
LEGAL EXCEPTIONS FROM THE SANCTION REGIME OF MARKET ABUSE ....................................................271
§1. Express legal exceptions and virtual legal exceptions .................................................................271
§2. Transactions closed within the “buy-back” programs ................................................................272
§3. Stabilization actions.....................................................................................................................275
§4. Market maker ...............................................................................................................................278
§5. Trading based on the base of legal or contractual requests. Operations closed on certain types of
market segments.................................................................................................................................283
CHAPTER VII ..........................................................................................................................................288
THE ROLE OF THE MARKET AUTHORITY IN COMBATING MANIPULATION OF CAPITAL
MARKET ...................................................................................................................................................288
SECTION 1 ...............................................................................................................................................288
PRINCIPLES WHICH GOVERN THE ACTIVITY OF CAPITAL MARKET AUTHORITY. ........................................288
LEGAL AND REGULATING ATTRIBUTIONS OF THE CAPITAL MARKET AUTHORITY .....................................288
§1. Fundamental principles of the activity of the capital market authority .......................................288
§2. Functions and attributions of market authority ...........................................................................291
SECTION 2 ...............................................................................................................................................298
TERRITORIAL COMPETENCE OF THE REGULATION, SURVEILLANCE AND CONTROL AUTHORITY ...............298
COOPERATION BETWEEN THE COMPETENT STATE AUTHORITIES IN ORDER TO COMBAT MARKET ABUSE .298
§1. Territorial competence according to the normative system grounded on Directive no. 6/2003 ..298
§2. International cooperation ............................................................................................................298
SECTION 3 ...............................................................................................................................................304
INVESTIGATING AND SANCTIONING CAPITAL MARKET MANIPULATION ACTIONS .....................................304
§1. The competence of investigating and issuing sanctions ...............................................................305
Obligations of the competent persons to investigate..........................................................................305
Incompatibilities ................................................................................................................................305
§2. Procedure of investigation ...........................................................................................................310
§3. Sanctioning capital market manipulation actions........................................................................327
§4. Taking action against disposed sanctions....................................................................................331
§5. Legal grounds regarding maintaining in force and applying the juridical norms of the National
Securities Commission Regulation no.11/1997..................................................................................336
CHAPTER VIII .........................................................................................................................................340
OBLIGATIONS CAPITAL MARKET ACTORS REGARDING COMBATING MANIPULATION
.....................................................................................................................................................................340
SECTION 1 ...............................................................................................................................................340
THE OBLIGATION OF THE MARKET PROFESSIONALS TO NOTIFY SUSPICIOUS TRADES ................................340
§1. Legal ground for the obligation of notifying suspicious trades ...................................................341
§2. Notion of “reasonable grounds” .................................................................................................341
§3. Indications concerning possible suspicious trades ......................................................................342
§4. The procedure of reporting suspicious operations.......................................................................344
SECTION 2 ...............................................................................................................................................346
OBLIGATION OF THE MARKET AND SYSTEM OPERATORS ..........................................................................346
§1. Legal ground of the obligation of combating capital market manipulation.................................346
§2. Obligation of supervision of operations in order to prevent market abuse..................................347
§3. Obligation authority of supervision and control to inform ..........................................................348
CHAPTER IX ............................................................................................................................................350
THE CAPITAL MARKET MANIPULATION CRIMINAL OFFENCE ............................................350
SECTION 1 ...............................................................................................................................................350

6
 GENERAL CHARACTERISTICS OF CAPITAL MARKET MANIPULATION CRIMINAL OFFENCE. ........................350
JURIDICAL OBJECT AND MATERIAL OBJECT ..............................................................................................350
§1. Committing the action of capital market manipulation................................................................351
§2. The social danger of the action of capital market manipulation..................................................351
§3. Culpability....................................................................................................................................351
§4. Action foreseen by the Penal Law................................................................................................352
§5. Juridical object and material object of the capital market manipulation criminal offence .........352
SECTION 2 ...............................................................................................................................................352
OBJECTIVE SIDE OF THE CAPITAL MARKET MANIPULATION CRIMINAL OFFENCE ......................................352
§1. Material evidence of the manipulation criminal offence..............................................................352
§2. Immediate pursuit of the capital market manipulation criminal offence .....................................354
§3. Causal link ...................................................................................................................................357
SECTION 3 ...............................................................................................................................................357
SUBJECTIVE SIDE .....................................................................................................................................357
§1. Culpability....................................................................................................................................357
§2. Motive and purpose......................................................................................................................359
SECTION 4 ...............................................................................................................................................360
PUNISHMENT FOR THE CRIMINAL OFFENCE OF CAPITAL MARKET MANIPULATION ...................................360
CHAPTER X..............................................................................................................................................361
ANALYSIS OF FAMOUS MANIPULATION CASES .........................................................................361
SECTION 1 ...............................................................................................................................................361
TULIP MANIA ..........................................................................................................................................361
SECTION 2 ...............................................................................................................................................362
SOUTH SEE BUBBLE ................................................................................................................................362
SECTION 3 ...............................................................................................................................................364
THE SAVAGE AMERICAN CAPITALISM CORNERS ......................................................................................364
§1. The famous corners of Constant “Commodore” Vanderbilt with Harlem Railways titles ..........364
§2. Northern Pacific Corner ..............................................................................................................366
SECTION 4 ...............................................................................................................................................366
THE GREAT MANIPULATIONS FROM THE DOWNS OF THE XXI CENTURY ENRON, WORLD COM................366
§1. ENRON Case ...............................................................................................................................366
§2. World Com case...........................................................................................................................370
SELECTIVE BIBLIOGRAPHY..............................................................................................................373

7
 Introduction

The worst thing that could happen to a capital market is the fame of being easily
manipulated, either because of critical legislation, either because of the incompetence or lack
of will of authorities in taking actions against the stock exchange illicit.
The concept of capital market manipulation was relatively late announced in comparison
with the time from when you can speak about misleading actions of investors, regarding price
or real volume of demand and supply for some products on a certain market. Essentially, it can
be stated that on any market where sell and purchase actions are being closed following the
demand and supply law, is possible and even probable to have actions which could change the
trading price of different products, as certain participants on the market will sell at a higher
price and/or buy at a lower price.
The first “manipulations” are considered to be initiated by merchants that bought a large
quantity from a product on the market, therefore establishing the selling price in a discretionary
way.
Short time after founding the Amsterdam Stock Exchange, in 1602, brokers realized that
it is possible to obtain substantial profits from price manipulation. More brokers by acting
together through the initiation of sale operations determining price decrease determined the
scared investors of a market evolution to sell, and afterwards buying back the stocks at a very
low price. 1
In the last century, it has been intensively talked about the concept of manipulation from
different perspectives. This term is frequently used on the capital market, so that any
accentuated price evolution of securities is susceptible of being subdued to manipulation
accusations.
In these moments intervenes the decisive role of competent authorities, administrative or
juridical, authorized to determine the licit or illicit character of the investors conduct on the
capital market. This role of the authorities must be accomplished with objectiveness and
professionalism.

The main idea which sums up the relation between the state authority and the capital
market is that sanctioning of actions which affect the natural game of demand and supply on
the capital market is necessary, thus assuring the investors protection, however the punishment
must be applied with a high level of professionalism, so it won’t discourage the market trading,
but, on the contrary, will stimulate this activity by the trust climate created by the measures
adopted by authorities.
The United States Supreme Court, enjoying the prerogative of being last censorship
instance, but also a generous jurisprudence in the matter, considered capital market
manipulation as an “art piece” 2 , referring to practices which have as objective misleading the
investors through artificial encroachments in the capital market activity.

1 Fr. Allen, D. Gale, Stock price manipulation, The Review of Financial Studies, vol.5, No.3 (1992), p.503
2
Manipulation is “virtually a term of art when used in connection with securities markets”, Santa Fe
Industries, Inc. v. Green, 430 U.S. 462 (1997),
http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=US&vol=430&invol=462

8
 Looking into the past, it is easy to notice that almost all types of conducts on the capital
market or commodities market were considered, at their time, as market manipulations 1 .
Analyzing illicit actions to the stock exchange regime from an economic point of view,
recent doctrine has underlined that the two forms of market abuse, market manipulation and
insider dealing, not only had the effect of raising the company’s costs which intended to
finance through the capital market, but also affects the market’s financial integrity (Page XV)
and trust of the public in these markets 2 . In this context, it has been made obvious the thesis in
which the most important factor which affects the non- banking institutions is manipulation of
capital markets 3 .
In this paper will be discussed, from numerous situations, the antithesis between the
established price on the natural law of demand and supply and artificial price, determined by
actions with manipulative character.

The conjugated actions of all capital market operations, their high number and efficient
market mechanisms lead to establishing a real price which randomly fluctuates. This condition
is lost when a person succeeds to intervene on the market and influents through a singular
action the level of the course 4 .
Market manipulation can not be made by any market participant. The manipulator must
have, beside the abilities and knowledge in the capital market area, also the financial resources
which allow him to influence securities and commodities (in the case of the commodities stock
exchange). The presence on the market of important, institutional investors and some issuing
insiders, leads to the increasing risk of manipulation actions 5 .
In a European’s actor opinion, contemporary with the adoption of the Market Abuse
Directive 6 , it has been pointed out the idea that manipulation is bounded in general with the
shareholders activity which exerts control over the issuer generally market abuse implicating
deals with brokers and institutional investors.

Manipulative conducts vary depending on market characteristics. On the capital market

of states in process of development (emerging markets) “the lack of liquidities on the financial
markets and, in general, their under development, allows price manipulation of securities. This
situation is favored by the fact that the fresh financial information is monopolized, usually, by
a small group of persons” 7 .
In the analysis of behaviors suspicious of having an illicit, manipulative character are,
also, essential the characteristics of securities, but also the ones of the issuer. A security with a
non-liquid market, which doesn’t interest groups of large investors, will have to be treated
1
S. Craig Pirrong, The Economics, Law, and Public Policy of Market Power Manipulation, Kluwer
Academic Publishers, 1996, p.6
2
Grote, R., Marauhn, T., The Regulation of International Financial Markets: Perspectives for Reform,
Cambridge University Press, 2006, p.137.
3
E.Ferran, Ch. AE Goodhart, Regulating Financial Services and Markets in the 21st Century, Hart
Publishing (September 11, 2001), p. 29.
4
S. Loyrette, Les Contentieux des abus de marche, Joly Editions, 2007, Paris, p.266.
5
F. Allen, L. Litov, J.P. Mei, Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of
Market Corners, Review of Finance, Springer, vol.10(4), December, 2006, p.658.
6
M. Minenna, The Detection of Market Abuse On Financial Markets: A Quantitative Approach
http://search.ssrn.com/sol3/papers.cfm?abstract_id=483962, p.12.
7
J. Sabal, Financial Decisions in emerging markets, Oxford University Press, USA; 1st edition (February
21, 2002), p. 244.

9
differently towards the liquid securities which have transactions in large volumes and values on
a daily basis.

We will close the short introduction of this paper by adding some specifications regarding
the approach method of capital market manipulation theme and with regards of a few essential
terminological aspects.
I made the decision to approach the matter of capital market manipulation starting from
the legal texts contained in the normative acts of the European Union, as the entire legislation
from members states in the capital market field is based on the principles, norms and directions
contained in these texts adopted in the Parliament or in the European Commission. In some
situations, we deal with an identical reproduction of the European norms in member states
legislations (which is also, the situation of Romania), other times on the grounds of subsidiary
principle internal normative acts regulate a series of specific situations which however find
their grounds in norms and general principles of the European Union’s directives.
We will use the term of “investor” any other times it is about a person on behalf of which
transactions are being closed on the capital market, to be implied by this notion also brokers or
broker firms which close transactions for their own use, in the “House” account, and also
dealers, that act for their own account.
When we use the “market’s entities” collocation, we consider, in principle, those
institutions and societies which have the (auto) regulation power and, even, supervision of the
capital market. On the Romanian territory these competent entities are: National Committee of
Securities; Stock Exchange Market-Bucharest; Financial and Commodities Monetary Stock
Exchange- Sibiu; SC Central Depository SA etc.
Finally, we reveal the fact that this paper aims to the capital manipulation institution
although the manipulative techniques analyzed are also applied to commodities regulated
markets. In some situations, mainly in the case of presenting jurisprudence elements linked to
certain manipulative procedures, it was also about commodities market manipulation.

10
 Chapter I
Notion and nature of capital market manipulation.
Rating manipulation actions

By letting go in our daily language use, of the initial sense, of “control”, “operation”, the
notion of “manipulation” is generally used with an, eminently, negative connotation. When we
talk about manipulation, our minds go directly to the idea of misleading, generally through
“delusive manual handling”, through certain instruments capable to create on the manipulation
subject a false representation of reality.
Hiding the truth and inducing a parallel, false reality, always constituted a political
weapon or/and an enrichment method.
After December 1989, in Romania there were also published numerous papers which
analyzed “manipulation through mass-media”, as a method of political influence of the
citizens. It has been spoken and written about “the great manipulations of the public opinion”,
like the Romanian Revolution or the Golf War. Famous phrases made history, phrases which
incriminated manipulation of citizens with electoral purposes, showing “another type of truth”
by the politicians around the elections time, only to mislead the electoral people which were
about to presents themselves at the elections stands.
Manipulation is a neologism which entered the Romanian language from the French word
manipuler.
Practically, we can now say that, the figurative negative sense of the notion of
manipulation upscales the initial sense which regards an activity of manual use of an object.
In the semantic analysis of the “manipulation” notion, from the papers subject point of
view, we will be having in sight only this figurative negative sense.

Section 1

Semantic of manipulation notions and market manipulation

§1. Definition of manipulation

There must be said that the figurative sense of the “manipulation” notion doesn’t appear
in the Romanian dictionaries until 1990. Both the Explanatory Dictionary of the Romanian
language, edited in 1984, and the Little Encyclopedic Dictionary, 1978 and 1986 editions, offer
only the proper sense of the word.

11
 In the last edition of the Romanian Explanatory Dictionary 1 , it is made obvious also the
figurative sense of the transitive verb “to manipulate”, showing that it has the meaning of “to
influence through certain tactics (unfair), to deceive in order to reach it goals”. At the same
time, the Explanatory Dictionary indicates that this sense of the verb requires a direct
complement which indicates persons. Therefore, in the case of this figurative sense, it can be
talked about “manipulating someone” and not “manipulating something”, like in the case of its
proper sense.
This specification is interesting from the general perspective of this paper, in order to set
up exactly the content of the manipulation notion by reference to legal definition mentioned in
the European Directives and in the Romanian Law of Capital Market.
In dictionaries edited in other states, the figurative meaning of the manipulation notion is
present, sometimes being offered as an example for the meaning of “political manipulation” 2 .
In the most simple and eloquent definition of the manipulation notion, it is now seen as a
“maneuver meant to deceive” 3 .
In a British explication, more elaborated, manipulation means control, exploitation or
influencing someone through delusive, incorrect or insidious means, with the purpose of
realizing a benefit 4 .

In sociology, manipulation represents the action through which a social actor (person,
group, and collectivity) is determined to think and/or act in a compatible way with the
initiator’s interests, and not with his own interests, by using persuasion techniques and
intentionally distorting the truth, letting, although, the impression of freedom of thinking and
decision 5 .
The notion of manipulation is connected with the one of information. When you speak
about a manipulation action you have to consider the information given by the active agent of
manipulation, information which is capable to be received by the subject/subjects to whom the
action of misleading is directed. The information transmitted by the manipulator has the
purpose to form a false representation of reality in the minds of those which are being
manipulated.
On the other hand, persons which are mislead are not aware and can not objectively know
the delusive intent of the manipulator, intent which is hidden from certain apparent
circumstancing, which is powerful enough to create a false impression about the reality.

§2. Semantic of “capital market manipulation” collocation

When the legislator decided to include the notion which gives title to this paper on capital
market legislation, from reasons which keep the accuracy of the text, he used the market
manipulation collocation, instead of using its exhaustive sense: “the manipulation of capital
market participants”. It is beyond any doubt that the act of manipulation, which any legislator

1
Illustrative Romanian Explanatory Dictionary (DEXI), ARC Publishing, 2007, p.1092
2
Petit Larousse, 1967, Librairie Larousse, p. 629
3
Le petit Larousse illustre, 2007, Ed. Larousse, p. 660
4
Penguin Office Dictionary, Penguin Reference Library, 2006, p. 537
5
St. Buzarnescu, Public Opinion Sociology, E.D.P., Bucharest, 1996, p.102.

12
has in mind, (first the American one which used this collocation for the first time in 1934, in
the Securities Exchange Act) refers to misleading investors on the capital market.
An “abstract capital market manipulation”, as an illicit action, it is bound to have victims.
It is necessary that certain persons which have invested or have wanted to invest on the capital
market to be deceived, to have had their freedom to contract affected, in order to establish the
illicit of transactions or orders.

The French variant of this illicit action, the “course manipulation” (manipulation de
cours), refers to misleading of certain persons which participate or are willing to participate at
transactions closed on the capital market and not to a course manipulation of securities.
In a definition left intentionally incomplete, in the American juridical literature1 , market
manipulation was considered as trading with stocks of a company, leading the price of stocks
to fluctuate with the purpose of creating an incorrect profit for the person (trader, generally
speaking, not just as the person which professionally makes transactions) which generated
those transactions.
It is right to emphasize, that the manipulation action, if we want to not ignore the
meaning offered by the dictionary definitions, must always have the potential to produce a
result, meaning misleading the manipulated person/persons or determination of the capital
market participants to trade at artificial prices or not to trade, because of an abnormal price
level. In the absence of that result, we can only speak about an attempt to manipulate. In only
counts from the Penal Law perspective that the result which the manipulator wants wasn’t
reached because of improper methods used by manipulator or of objective conditions of the
market’s securities on which the manipulation action was attempted. The presence of result in
the action of misleading or creation of a factors complex, which objectively have the capacity
to mislead, even if mislead investors can’t be identified (for example, with the assumption that
certain investors abstain themselves from closing transactions, because of delusive
characteristics of manipulated market of securities) is essential to conclude that there was in
fact a capital market manipulation action.
Why do we make this affirmation? The price on the capital market forms as a result of the
meeting of demand and supply contained by the posted transaction orders, introduced in the
system. Investors can be deceived, first of all, by the characteristics of these orders, then by the
price and volume of closed transactions. If the investors don’t react to orders or deceiving
trades which lead the price to artificial levels, the manipulative action will not make any
victims. If the investors won’t be mislead, but they will be restrained to trading
to natural established prices or because of artificial maintained prices and will be forced to
trade at delusive values of securities, then we can speak about the existence of market
manipulation action. In this last hypothesis, the manipulation result is produced, even if the
investors which close transactions know that the price is not correct naturally established.
Seeing these considerations, we note that the definition of capital market manipulation
should contain two essential elements, mentioned before: the one that manipulation is a an
action made against certain people, capital market participants, and in order to speak about the
existence of manipulation, the manipulator’s action should have the capacity to succeed
effectively, meaning at least one person, a investor in titles which makes the object of the
manipulation action, on the capital market, be mislead or determined to trade at incorrect prices

1
A. Chatterjea, J.A. Jarrow, Market Manipulation and corporate finance: a new perspective, Financial
Management, vol. 22, no.2 (Summer, 1993), p. 201.

13
or to retrained himself from trading at natural established prices. Thereby, the manipulators
action doesn’t succeed and the price of securities remains at a naturally established level and,
on the other hand, transactions are closed with securities volumes which result from a normal
activity, licit of the participants on the market.
In the same time, by the notion of “market manipulation” we will understand the
misleading action of investors regarding the price or liquidity of one or several securities and
not regarding the securities dealt on the same market. Theoretically, when trading with a stock
exchange index 1 is made, situations may appear where investors were mislead regarding the
overall evolution of the entire market.
From this perspective, we consider the capital market manipulation, as the action by
which one or several participants on the capital market, because of transactions or orders of
trading which lead or maintained the price of one or several securities at an artificial level or
because of untrue information broadcasted by the media, internet or other mass communication
methods, were mislead regarding the demand, supply or securities price, or were determined to
close transactions at artificial prices or not to close transactions because of the delusive
character of the price.

§3 Material object of the capital manipulation action. The meaning of “securities”

Although establishing the juridical content of all righteous institutions present in the
capital market legislation is not the object of this paper, we have to make some essential
specifications regarding the content of fundamental notions.
Therefore, the present European legislation speaks about the manipulation of securities
market. The American legislation in the field of capital market uses the term of “securities”
which is covered by the definition given to the “securities” term by the Parliament and
European Council Directive 2004/39/CE regarding the securities market 2 , in Annex I Section
C.
This definition was introduced in the Romanian legislation by Law no. 29/2004 3 , article
2, point 11 and its content was extended through article 7, point 14.1, from the Government
Emergency Order no. 99/2006 4 regarding the credit institutions and arranging the capital,
approved and modified by Law no. 227/2007 5 . Thus, securities mean:
securities 6 ;
monetary market instruments;

1
Stock Exchange Index represents a numeric index determined on the base of the market price of stocks of
a fix number of issuers, whose fluctuations determine in principle the fluctuations of a whole market, S.
Bodu, Explicative Dictionary of judicial terms Romanian-English. Commercial Associations Right, Rosetti
Publishing, Bucharest, 2005, p. 91.
2
Official Journal of European Communities no L 145 from 30.04.2004
3
Official Monitor No.571 from 29 June 2004.
4
Official Monitor No.1027 from 27 December 2006.
5
Official Monitor No.480 from 18 July 2007.
6
According to the article no.2 (1) 33 from the Law no.297/2004, securities are: a) stocks issued by
commercial companies and other securities equivalent to those, negotiated on the capital market; b) bonds
and other title debts, including state titles with a due date of over 12 months, negotiable on the capital
market; c) any other usual negotiated titles, which give the right to purchase securities by subscription or
trade, giving space to a money discount, except payment instruments.

14
participation titles to the collective placement bodies;
options, futures contracts, swaps, forward contracts on the interest rate and
any other derivative contracts in linked to securities, currency, interest
rates and profitability or other derivative instruments, financial indexes or
financial indicators, which can be discounted naturally or in monetary
funds;
options, futures contracts, swaps, forward contracts on the interest rate and
any other derivative contracts regarding commodities which need to be
discounted in monetary funds or can be discounted in monetary funds on
the request of one of the parts (other than in the case of non-payment or
other incident which leads to cancellation);
options, futures contracts, swaps and other derivative contracts regarding
commodities which can also be discounted naturally, with the condition
that they are dealt on a regulated market and/or an trading alternative
system;
options, futures contracts, swaps, forward contracts and any other derivative
contracts regarding commodities, which can be naturally discounted, not
included in the same category with the ones from point f) and not having
commercial purposes, which have the characteristics of other derivative
securities, keeping in account, among others, if they are compensated and
discounted through some known compensation houses or are the subject of
margin calls regularly;
derivative instruments for the credit risk transfer;
financial contracts for differences;
options, futures contracts, swaps, forward contracts on interest rate and any
other derivative contracts regarding climate variables, lading, emission of
substances approvals or inflation rates or any other official economic
indicators, that need to be discounted in monetary funds or can be
discounted on the request of one of the parties (other than the case of non-
payment or other incident which leads to cancellation), as well as any
other derivative contracts regarding actives, rights, obligations, indexes or
indications, not included in the present definition, which have the
characteristics of other derivative securities, keeping in account, among
others, if they are dealt on a regulated market or in a trading alternative
systems and are compensated and discounted through known
compensation houses or make the object of margin calls regularly.

15
 Section 2

Legal definitions of the capital market manipulation notion

§1. General specifications

At this point, we will resume mentioning a series of definitions contained in normative

acts that were in force or are in force in Romania and in different states with advanced market
economy, making, where is the case, short specifications and clarifications, but not entering in
the detailed analysis of facts considered by the legislator as capital market manipulation.
It is noticeable that these legal dispositions are not going to offer an exhaustive definition
of capital market manipulation, but, rather, enumerate circumstances in which this illicit
manipulation action can be identified. This situation is usually seen in the Anglo-Saxon states
(less in Great Britain), while in the European Union states, once the approval of market abuse
Directive in 2003, the entire member states implemented its dispositions in the internal law,
taking over with no major changes definitions offered by the community normative act.
For example, in Securities Act (1933) 1 , is not foreseen any definition of manipulation of
the course of securities, neither it is mentioned the notion of “manipulation”, but there are
enumerated a series of prohibitions for all market participants, in which there are mentioned
some specifics to the market manipulation. Neither in the Securities Exchange Act (1934) 2 is
introduced a definition of the market manipulation notion, although in this normative act there
are two sections (IX and X) which refer to capital market manipulation actions.
A similar situation is seen in the Australian legislation, where the extreme complex law
of commercial companies, Corporations Act in 2001 3 , although enumerates and details the
situations in which is considered that the capital market is manipulated, doesn’t offer in
terminis a definition of this illicit action in the stock exchange regime.
In New Zeeland, the Economical Development Ministry considers that capital market
manipulation refers to practices which create a false impression regarding trading securities,
evolution of price or the real market information 4 . In neither case, we are not dealing with a
legal definition of market manipulation notion, but with an interpretation of the state’s
authority of the questioning collocation, without any normative support.

1
Securities Act, voted by Senate and Congress in 1933 as the effect of the difficult economic crises started
in 1929, was the first normative act adopted in the USA on a federal level regarding trading with securities,
being one of the ground documents of the American juridical system in the matter of capital market.
2
Securities Exchange Act, adopted on 6 June 1934, represents the ground of financial market regulations
and of participants on these markets in the USA.
3
Corporations Act, Law no. 50/2001, modified many times by different normative acts, last time by Law
no. 154/2007, represents the normative act which reunites all dispositions regarding commercial
companies, products and financial services.
4
www.med.govt.nz.

16
 §2. Definitions of Romanian legislation

The legal definition seen in the capital market Law no. 297/2004, in the article 244, (5) is:
“Market manipulation is:
transactions or trading orders:
which give or might give false signals or misleads regarding demand, supply or price
of securities;
which maintain, by the action of one or several persons acting together, the price of
one or several securities, at a abnormal or artificial level;
transactions or trading orders which refer to fictitious methods or any other form of
fraud;
dissemination of information through the media, including internet or any other
method, which give or might give false signals or might mislead regarding the
securities, including dissemination of rumors or false or misleading news, in the
conditions in which the person that disseminated the information knew or should
have known that the information was false or misleading. Referring to journalists,
when doing their job, dissemination of information will be taken into account
keeping in mind the rules which regulate their activity, with the exception of
persons that use this information with the purpose to obtain, directly or indirectly,
advantages or profits”.
According to dispositions in the article 244, paragraph (6) from the law, from the
previous dispositions make exception the persons which carry on transactions or send out
trading orders and prove their legitimate reasons and, also, that these transactions or trading
orders are according to the market practices accepted on the regulated market.
Emergency Government Order no. 28/2002, in force for two years, time in which took
place incriminated trading in the most notorious penal file in this field, defined, inside article
130, capital market manipulation as:
“a) carrying out transactions or sending out trading orders which give or are fit to give
false or delusive information regarding the supply, demand or securities price or which
maintains, by the action of one or several persons, the price of securities at an artificial
level or which use other fictitious methods or any other trading forms violating honest
practices;
b) disseminating information by any means possible which give or are fit to give false or
delusive indications regarding supply, demand or securities price, including
dissemination of rumors or false or delusive news”.
In the same time, Procedure no. 4.5 of the Bucharest Stock Exchange, issued in the
application of Bucharest Stock Exchange Regulation no. 4, in force until the appearing of
Bucharest Stock Exchange Code- market operator, contained specific dispositions regarding
capital market manipulation and operations considered to be manipulative.
Therefore, according to the dispositions of article 4.5.3 paragraph (1) there were
considered “activities with manipulative character, those practices used with the intent of
blocking the free development of price and free confrontation of demand and supply of market
securities”. The Bucharest Stock Exchange procedure shows that “these activities may lead to
creating a false image of the market by influencing, in an artificial way, price and volume,
statistic indicators, clients of securities companies and public opinion in general”.

17
 Until the Government Emergency Order no. 28/2002 became effective, a definition of
capital market manipulation wasn’t included, neither in the first law of capital market which
became effective after the re-establishment of Romanian stock exchange, Law no. 52/1994
regarding securities and stock exchange values and, neither in the normative acts of the
secondary legislation issued in the application of this law. There were only certain prohibitions,
vaguely enumerated in the Law no. 52/1994, without mentioning in terminis that it was
regarding illicit capital market manipulation actions.
In these conditions, there is no legal text for sanctions applied to capital market
manipulation actions by investors, situation which leads to the absence of any penal or
administrative sanction, in the period 1995-2002 for actions which formed an artificial course
of traded securities or misleads other investors regarding demand, supply or price of securities
transactions on the capital market in Romania.

§3. Definitions from comparative law

3.1 Capital market manipulation according to the New York Stock Exchange (NYSE)

Capital market manipulation, according to the official definition posted by the NYSE 1
website, represents “an illicit operation. Buying or selling a security for the purpose of creating
false or misleading appearance of active trading or for the purpose of raising or depressing the
price to induce purchase or sale by others”.
This definition synthesizes eloquently all the legal specifications in Securities Act and
Securities Exchange Act and regulations for applying these specifications in the matter of
capital market manipulation, although in the United States legislation doesn’t exist a legal,
official definition of capital market manipulation.
Regarding the praetorian approach, there were expressed certain definitions of the
manipulation action, with the purpose to establish a signification considered by the trial court
or capital market authority for this lawful institution, which didn’t found a legal definition in
terminis in the codified American law.
Therefore, the Securities Exchange Commission (SEC) considered 2 , in a synthetic way,
that market manipulation represents “an intentional interference with the forces of supply and
demand”.
The American trial courts offered, through time, a series of synthetic definitions of the
manipulation action. Therefore, market manipulation was described as “creating an artificial
price through a planed action by a person or a group of persons” 3 .

In the vision of The Commodity Futures Trading Commission (CHTC) 4 , manipulation

represents any planned operation, transaction, or practice which causes or maintains an

1
www.nyse.com/glossary
2
Opinion of the Commission (SEC) in the matter of Amr Elgindy
http://www.sec.gov/litigation/opinions/34-49389.htm
3
The case General Foods Corporation v. Brennan, in L.N. Edwards , F.R. Edwards “A Legal in Economic
Analysis of Manipulation in Futures Markets”, Journal of Futures Markets, Wiley Periodicals, 1984, p. 336.
4
Commodity Futures Trading Commission (CFTC) represents an independent agency that has the role of
regulating the market of futures contracts and options on commodities in the United States.
http://www.cfftc.gov/aboutthecftc/index.htm.

18
artificial price. Specific types include corners and squeezes as well as unusually large
purchases or sales of commodities or securities in a short period of time in order to distort
prices and spread false information in order to distort prices 1 .

3.2 Capital market manipulation in the vision of French Financial Market Association

We will enunciate, for example, the market manipulation definition from French
legislation, noticing that it was introduced after the adoption of European Directive. The
General Regulations of the Financial Markets in France 2 , contains in the article 631-1, a
definition of market manipulation/course of security, similar with the one from the Romanian
law and, as we will see, semi-identical with the one in the European Directive regarding market
abuse.
“Course manipulation is:
Carrying out transactions or sending out orders:
Which give or are susceptible to give false or delusive indications regarding supply,
demand or course of securities or
That settles, through the action of one or several persons that act together, the course
of one or several securities at an abnormal or artificial level with the exception of
a situation in which a person, which is trading or sends out orders, determines the
legitimate motives of these transactions or orders and their correspondence with
market practices accepted on the regulated relevant market.
Carrying out transactions or sending out orders that resort to methods which give a
fictitious image on the market’s situation or any other form of deceit or artifice.
More over, course manipulation is:
Assuring by one or several persons, acting together, a dominant position over the
security market, with an effect on fixing directly or indirectly the price of
purchase or sale or to create other inequitable conditions of trading.
Sending out, at the moment of opening or closing the trading session, of selling or
purchasing orders of securities with the purpose of blocking the settled market
price or misleading investors which act on the base of that securities course.
It must be said that these last two paragraphs of the General Regulations of the Financial
Markets in France are also texts resumed from the European Directive regarding market abuse.

3.3 Definition of manipulation in the British legislation

In Financial Securities and Markets Act 2000 (FSMA 2000) 3 , the market abuse is defined
in section 118, without making an express difference between market manipulation and insider
dealing. For both aspects of the market abuse, the British legislator accentuates the behavior of
the person which realizes market abuse, as it is right, but also on the result made by this
behavior. It can be said that Financial Securities and Markets Act 2000, subjects the abstract

1
http://www.cftc.gov/educationcenter/glossary/glossary_m.html.
2
The Financial Market Authority in France was established at August 1st 2003, by the Law 706/2003, on
this base were merged Stock Exchange Operations Council (COB), Disciplinary Council of the financial
administration (CDGF) and Financial Markets Council (CMF).
3
http://www.opsi.gov.uk/Acts/acts2000/ukpga_20000008_en_10pt8-pb1-11g118.

19
notion of market manipulation, giving an optimum sense to be applied successfully in precise
cases with specific elements.
Therefore, synthesizing the regulation from section 118 of the Financial Securities and
Markets Act 2000, market manipulation represents that behavior, of one person acting alone or
several persons acting together, which sets a link with qualified investments 1 , realized on
markets where Financial Securities and Markets Act 2000 2 is applied, and can be seen by a
regular investor 3 , which takes knowledge of that behavior as a violation of the behavior
standards reasonable in the given situation, in conditions that:
- the behavior is meant to give, to the regular investor on that market, a false
or wrong impression regarding demand, supply or price of titles in discussion;
- to an regular investor on that market, taking in consideration that this
behavior might affect (denature) the market for those securities or might be in
the situation of affecting (denature) that market.

3.4 Definition of market manipulation, according to the Dutch law 4

In section 334 of the Dutch Penal Code, price manipulation is defined as spreading false
news, with the purpose of raising or lowering the course of commodities, capital titles or
monetary instruments, to obtain for own account or another person an “undue advantage”. It
was shown 5 that this phrase has no practical or special relevance, because is difficult to
establish if the news given to publicity were false and, more over, if the news influenced the
price of securities.
The capital market association from Holland, in a circular issued on September 10th 1993,
defined manipulation as the process of disseminating false news in order to influence the price
of capital determined titles. Also, manipulation consists in actions which give or have as a
result a false or wrong impression of the market.

§4. Definition of capital market manipulation according to the European Directive

no. 6/2003 regarding market abuse

1
Art.3 from the Prescribed Markets and Qualifying Investments Order of the Royal Treasury in 1999
considers qualified investments all the investments (titles) admitted to the transaction on the markets
enumerated by the Order, by B. Rider, K. Alexander, L. Linklater, Market Abuse and Insider Dealing, Total
Publishing, 2002, p.52.
2
The markets enumerated in The Prescribed Markets and Qualifying Investments Orders and on which
Financial Securities and Markets Act 2000 is applied are the main London markets, London Stock
Exchange, London Metal Exchange Limited, London Financial Futures and Options exchange
Administration and management, etc.
3
According to the section 118, paragraph 10 from the Financial Securities and Markets Act 2000, usual
investor (regular user) means a medium person (pater familias, from the roman right) which regularly
invests on that market.
4
H. de Doelder, V. Mel, M. Van den Enden, Regulation of financial markets with particular reference to
market abuse: a perspective from the Nederland’s,
http://library.uu.nl/publarchief/jb/congres/01809180/15/b23.pdf.
5
Ibidem

20
 According to dispositions of article 1, paragraph 2, in Directive no. 6/2003 of the
European Parliament 1 “market manipulations” mean:
transactions or trading orders:
which give or are susceptible to give false or delusive indications regarding
supply, demand or course of securities, or
which set, through the action of one or several persons that act together, the
course of one or several securities at a abnormal or artificial level, except
for the case in which the person which made the transaction or which
issued the orders, considers that the motives which determined her to act
this way are legal and the transactions or orders are according to market
practices admitted on the regulated market in cause;
carrying out transactions or issuing orders by fictitious methods or any other type of
fraud or artifice;
disseminating, by means of mass communication (including the internet) or any other
methods, information which supply or are susceptible to offer false or delusive
indications about securities, including rumor spreading and disseminating false or
delusive information in the context in which the person that spread the
information knew or had to know that the information is false or delusive.
As it can be seen, the Romanian Law no. 297/2004 resumed over almost identically the
definition contained by Market Abuse Directive (Directive no. 6/2003). This fact was natural,
because, first, Romania was adopting that year the current law of capital market, was a state in
course of adherence to the European Union and was having as one of the major objectives
adapting the legislation to the European norms, and second, the absence of a native practice in
this field was encumbering elaboration of a definition on its own, which could foresee
situations that were not advised by the definition given in the European Directive.
All the European Union’s states adapted their legislation by introducing definitions semi-
similar for “market manipulation” with the one in the European Directive.
Financial Services and Markets Act 2000 and the “Code of Market Conduct” in Great
Britain, The General Regulation of the Financial Market Authorities in France (mentioned
before), The Regulations “Statutory Instrument” no. 342/2005 of the Irish Parliament
(Oireachtas) of application of the European Directive no. 6/2003, The Italian law no. 62/2005
(Legge comunitaria 2004, of carrying out the obligations of Italy which derive from the quality
of being a member of the European Union), The Royal Decree 1333/11th of November 2005 of
the Spanish Kingdom, regarding transposing communitarian norms in the matter of market
abuse, The law of improving the protection of investors in Germany
(Anlegerschutzverbesserrungsgestz, AnSVG) on 29th of October 2004, The law no. 3340/2005
regarding the capital market protection against abusive use of privilege information and market
manipulation in Greece, The law of financial supervision 2007 from Holland (Wet op het
financieel toezicht-Wth) 2 and other normative acts issued in the European Union’s states in the
application of the Directive no. 6/2003 (Market Abuse Directive –MAD), contain similar
definitions of capital market manipulation.

1
Official Journal of the European Union (OJ) no L 96 from 12.04.2003
2
The law of financial supervision, The Act of Financial Supervision, was put in force at January 1st 2007
and reunited dispositions of many normative acts in matter, implementing the last norms of the European
Directives, according http://www.afm.nl/corporate.

21
 In the national laws of member states of the European Union, there were equally adopted,
as a result of implementation of the Directive no. 6/2003, definitions similar to collocations
relevant for this field, like, for example “securities”, “regulated market”, “accepted market
practices” etc.

§5. Specifications regarding the definition of capital market manipulation stated in

Law no. 297/2004 and in Directive no. 6/2003

Market manipulation means closing transactions by a person which manipulates or, at

least, issuing orders or giving false information through the media or internet by this person
which determines others participants on the market to close transactions at artificial prices. In
case of absence of these transactions that are closed at a price which causes prejudice to
manipulated people, these fictitious orders of false rumors that were spread, caused effects on
investors, we can’t speak about manipulation.
According to the literary interpretation of article 244, paragraph (5) from Law no.
297/2004 1 , but also to article 4.6 in the First guide of CESR (Committee of European
Securities Regulators) 2 for uniform implementation of Directive no. 6/2003, the assumption of
accepted market practice can be invoked only in connection with the first two categories, the
one named in the article 1, paragraph 2, line a) in the Directive or inside article 244, paragraph
(5), line (a) from Law no. 297/2004. This assumption can not be granted regarding the others
categories.
The first guide of the Committee of European Securities Regulators gives also a synthetic
enunciation, under the form of titles, the other three types of market manipulation named in the
Market Abuse Directive and resumed by the Romanian legislation in article 244, paragraph (5)
in Law no. 297/2004.

Therefore, manipulation, defined in article 244, paragraph (5), line a), point 1, which
regards transactions or orders which mislead, is named –“false or delusive transactions”, the
one defined in article 244, paragraph (5), line a), point 2, which refers to maintaining of price
at an abnormal or artificial level is named “price manipulation”. Manipulation named in the
text of article 244, paragraph (5), line b) - transaction or orders which presume fictitious
methods or any other type of fraud- is called “fictitious methods”, while the last type of
manipulation mentioned by law, named in article 244, paragraph (5), line c), regarding
dissemination of information through the media, internet, etc. which misleads is called “false or
delusive information”.
Given the definition of capital market manipulation, as it is mentioned in Market Abuse
Directive and in Law no. 297/2004, results that to be considered illicit, the conduct of a
investor or a intermediate, must be framed in one of the three big categories of manipulation

1
“The literary interpretation of the law imposes the conclusion that between the formulation of the
interpretive text and the cases in practice that form its hypothesis there is agreement”- Gh. Beleiu,
Romanian Civil Law. Introduction to civil law. The subjects of the civil law, Publishing House and Press
“Sansa” SRL, Bucharest, 1992, p.53.
2
Adopted on 11 May 2005, published on http://www.cesr-eu.org/index.php

22
actions, mentioned in article 244, paragraph (5) from Law no. 297/2004, and also, in article1,
paragraph 2 from Directive no. 6/2003, enumeration of these texts being exhaustive. The
Market Abuse Directive is also a level I Directive in the legislation system of the European
Union, containing base principles which can not be violated through level II legislation 1 , this
one, having the role of supporting the implementation of first level norms.
On the other hand, as shown in paragraph 2, it must be said that manipulation, to be
treated as such, must “create victims”. Manipulation is directed against other market
participants, generally, the purpose which the manipulator has in mind is to mislead them in
order to close transactions at artificial prices, considerably higher or lower than the real price
and to generate an incorrect profit for the manipulator. In certain cases, manipulation can have
as objective, also, abstention of investors from trading with titles which make the purpose of
manipulation.
From the definition of market manipulation in the Market Abuse Directive and resumed
by the Romanian Law of capital market might be concluded that it is enough to send out
orders or to trade at prices or in different volumes than the ones that existed until then, to be
established the existence of a manipulation action. Therefore, there should be a interpretation
option, agreed, unfortunately, for the capital market in Romania by the National Securities
Commission, in which the collocation “…might give false or misleading signals”, inside the
legal definition of the manipulation action in article 244, paragraph (5), line a), point 1, might
attract the illicit for all transactions or orders, which could have parameters different from the
ones existing until then on that specific security market.
This type of interpretation is extremely dangerous and against the spirit and fundamental
principles of capital market, which states the contractual freedom by closing transactions based
on the natural law of demand and supply.
In reality, interpretation of the definition of market manipulation should have a restrictive
character 2 , which limits to the situations in which there is a result of manipulation actions,
either because they consist in closed transactions by market participants that were “mislead” to
incorrect prices, either that market participants don’t close transactions because of an abnormal
level of price or demand or supply, either because they are constrained to close transactions at
artificial prices, although these participants realize that price and demand or supply was
manipulated.

Section 3

Nature of market manipulation action

Rating of capital market manipulation types

The 12th paragraph of the Preamble of the European Directive regarding market abuse,
determines that the essential objective of the legislation of combating abusive use of
confidential information and the one regarding to market manipulation is: to assure the

1
http://www.cnvmr.ro/normeeuropene/MIFID.htm.
2
The interpretation is restrictive when “between the formulation of a legal text and the cases of practical
application there is a non-agreement, in the sense that the formulation is too wide in reflection to the
hypothesis in which this text can be included”, Gh. Beleiu, cited book, p. 54

23
integrity of the financial community markets and to consolidate the trust of investors in those
markets. In this context, it is natural that the institution of capital market manipulation has a
detailed description of its elements, specific sanctions for situations in which the legal
situations are infringed.
Once an investor’s action is classified as manipulation, its illicit character is presumptive.
When speaking about capital market manipulation, it automatically attracts the application of
administrative and, sometimes, penal sanctions from the competent authorities.

§1. Illicit nature of capital market manipulation actions

It has been stated that market (or course) manipulation is indissoluble linked with the one
of speculation 1 . The same author, realizing a comparison between the two notions, states that
speculation is not a practice which can be sanctioned.
The speculator, as it shown in the mentioned paper, knows that his operations are
susceptible to affect the regulated functioning of the market, in a ascendant or descendent way,
but ignores that his intervention on the market can cause these evolutions, and a fortiori, that
price can not evolve in the desired way, still taking that risk.
In exchange, the manipulator doesn’t take any risk. Through his actions he will eliminate
the possibility that the market would evolve in an unwanted way, knowing for sure that his
intervention will affect the market, the price of securities following the desired trend.
The action of manipulating the price of traded securities on the capital market has, in the
vision of the quasi-unanimity of legislations, an illicit nature.
In many situations, the boundary between speculation and manipulation is very thin and
hard to identify 2 .

In the American doctrine 3 , there were certain opinions about the absence of the illicit
character in the case of capital market manipulation, starting from the fact that it doesn’t exist,
in the American legislation, a legal definition of the manipulation notion. All and all, the
jurisprudence of Securities Exchange Commission and American courts have given sanctions
to actions circumscribed to the notion of market abuse, outlining on a praetorian way the
content of the market manipulation notion, before it was introduced in the European
legislations.
First of all, capital market manipulation action subscribes to the illicit civil of
contravention. It is unanimous accepted in the legislations which define, describe and sanction
market manipulation action that the violation of legal dispositions comes with an
administrative responsibility.
European Directive no. 6/2003 sets, even from the title, that manipulation of capital
market represents “an abuse”, an incorrect action, regulated as such and included in the illicit

1
S. Loyrette, Le Contenttieux des abus de Marche, Joly editions, L.G.D.J., 2007, p.249.
2
The Paris Appeal Court appreciated that since 1984 “speculation, even hazarded, doesn’t constitute a
crime, outside the situation which implies manipulation of the course”, CA Paris, 28 June 1984, in S.
Loyrette, cited book, p.249.
3
D.R. Fischel, D.J. Ross, Should the Law Prohibit “Manipulation” in Financial Markets?, Harvard Law
Review, vol. 105, no.2,1991, p.503-553.

24
sphere. In this case, article 5 states prohibition for any person who wants to be involved in
market manipulation activities.
Market Abuse Directive underlines in article 14, paragraph 1 the necessity of applying
administrative sanctions for capital market manipulation actions. The Market Abuse Directive
and other European norms presented in this matter, leave to the national legislations opinion’s
to establish the nature and extension of applicable sanctions for violation of legal dispositions.
From the analysis of article 14, paragraph 1 from the Market Abuse Directive, what does
differentiates particularly, is the thesis about the possibility of cumulating administrative
responsibility with penal responsibility, in case of executing market manipulation actions: “the
member states assure, that according to the internal legislation, administrative measures can be
taken, without touching their right to impose penal sanctions”. The states in the European
Union made the option, in general, to realize this plurality, although the distinction between
civil illicit and penal illicit is not clearly realized in national legislations in this matter, by the
fact that the boundary where the contravention responsibility ends and the penal responsibility
begins is not emphasized.

§2. Penal character of the capital market manipulation action 1

Capital market manipulation is considered, in certain circumstances, as having a criminal

character. The demarcation criteria’s between the penal area and the contravention area varies
from one state to another.

2.1 Comparative law regarding the penal character of capital market manipulation action

Capital market manipulation is considered a crime in the states of the European Union,
although dispositions of the Market Abuse Directive no. 6/2003 do not impose, with obligatory
title a penal character, but had left open the possibility to cumulate administrative sanctions
with penal ones for violation of legal dispositions regarding market abuse.
Legge Comunitaria 2004 (Italian law of implementation of Market Abuse Directive no.
62/18.04.2005 2 ) states in article 185 the penal nature of the action, but in the conditions in
which this has certain features and the effect „of a sensible alteration of price of securities”.
In Great Britain, capital market manipulation is considered either a contravention, either a
crime, the content of the action being described in Section 397 of Financial Services and
Markets Act from 2000 (FSMA 2000). The market abuse description is realized, as seen, in
section 118 of the Financial Services and Markets Act 2000.
In France, article L 465-2 from Monetary and Financial Code, contains sanctions with
penal character for all the persons which exert or try to exert directly or indirectly, through
dealers, actions which have as objective encumbering regulated functions of market and
misleading others 3 (market participants). Enclosing the manipulation action in the category of
crimes is made according to a procedure of enquiry by the Financial Market Authority (AMF),
having the possibility to inform the Prosecuting Magistracy, if there are information which

1
We will later analyze, in The Chapter IX, the features of the manipulation crime of the capital market and
the sanction penal regime of the market manipulation.
2
Published in Gazzete Ufficiale from 27.04.2005
3
http://www.legifrance.gouv.fr, Code monétaire et financier (Partie Législative).

25
indicates the existence of an action with penal character (L621-15-1 from Monetary and
Financial Code). Legal dispositions don’t state in terminis, what are those elements which
indicate the existence of market manipulation crime in order to distinguish it from the action
with a contravention character.
In Belgium, by the Law from 2 August 2002, regarding supervision of the financial sector
and other financial services, capital market manipulation was incriminated from the penal point
of view 1 ; the material evidence of the crime was presented in the form stated in article 1,
paragraph 2 from the European Directive of the Market Abuse no. 6/2003.
As we have seen 2 , Section 334 from the Dutch Penal Code punishes price manipulation
of capital titles, commodities or monetary instruments, the material evidence consisting in
spreading false news which affects the price of these titles.
In China, extremely clear criteria are determined for establishing the penal character of a
manipulation action, eliminating the subjectivism dose still present in the Europeans Union’s
legislation, but especially in regulations applicable to the American capital market. Therefore,
price manipulation actions are treated as crimes by the Chinese legislation 3 in the case that:
have as result an illicit profit which exceeds 500.000 Yuan;
have as result a serious variation of price or volume of securities which make
object for manipulation actions;
culpable person forces other persons to manipulate the price of transactions
using violence or threat;
culpable person makes multiple actions of market manipulation or previously
suffered two or several administrative sanctions for market manipulation.
In Japan 4 , market manipulation represents a crime. The punishment is prison up to 10
years and/or a penal fine of 10 millions Yens (approximately 100.000 dollars USD). In the
same time, there is also the possibility of applying administrative sanctions.
In Korea 5 , manipulation of capital market, spot market and on futures market is
considered a crime. In case the obtained profit or the avoided lost exceeds 500 millions Won,
meaning approximately 363.000 Euros 6 , the punishment can be prison for life, depending on
the size of profit or avoided lost.
In Hong Kong 7 , there is a sanction regime that is also civil and also penal. The capital
market authority can, either, apply administrative sanctions for market abuse actions either
institute penal procedures against culpable persons.

1
http://bnb.be/doc/ts/Enterprise/juridisch/LO20020802.pdf.
2
At the point 3.4., page 15-16.
3
“Guide to Financial Services Regulation in Asia “, www.herbertsmith.com/NR/rdonlyres/C45A8A7D-
97DD-4854-B00D-642A21FE2762/4227/FSGuideAsia07.
4
Ibidem
5
Ibidem
6
1Euro=1337, 1 Korean Won at 31.12.2007, according to http://finance.yahoo.com.
7
“Guide to Financial Services Regulation Asia”, www.herbertsmith.com/NR/rdonlyres/C45A8A7D-97DD-
4854-B00D-642A21FE2762/4227/FSGuideAsia07.

26
 2.2 Regulation in the Romanian Law

The generic social danger of capital market manipulation was evaluated by the Romanian
legislator as having sufficient severity for this action to be framed in the criminal offence
category, when made with intent.
The capital market Law no. 297/2004 considers criminal offence, in article 297,
paragraph (1), as executing with intent capital market manipulation action, as it is described in
article 244, paragraph (5) form Law no.297/2004 regarding capital market.
Sanctions with penal character can be accumulated with the ones with administrative
character.

§3. Comparison between capital market manipulation and others illicit actions

3.1Capital market manipulation and the cunning

3.1.1Similarities
In the civil matter, market manipulation action has similar features with the cunning,
regarding misleading of one or several persons through cunning or delusive methods to
determine closing a juridical act 1 . It can be stated that manipulation is described as an
intentional error and not a spontaneous error.
Elements which constitute capital market manipulation action overlap with the ones
mentioned by the doctrine in the case of cunning. Therefore, as in the case of market
manipulation action, we can speak about the existence of an objective material evidence which
consists in using delusive methods (delusive manual labor) to mislead other participants to the
market, and of a subjective evidence, intentionally, consisting in the intent of misleading other
market participants with the purpose of determine them, to close transactions at prices or
volumes wanted by the manipulator.

3.1.2 Differences

Differences between the cunning and capital market manipulation intervene in the matter
of sanctions applicable to violation of incident legal dispositions. In the situation of the
cunning, the Civil Code states in article 960, that this is a nullity cause of the convention when
it is proved that without of use of delusive methods by the one of the parties, the other part
wouldn’t have traded. Regarding market manipulation, the sanctions are of two types,
administrative and penal, for the manipulator. It is to discuss if, in the present stage of the
special Romanian legislation, you can speak about the possibility of annulment of transactions
made as a result of capital market manipulation action. In the same time, there is no legal
impediment for applying norms of common law which lead to that solution.

1
Gh. Beleiu, Romanian Civil Right. Introduction in civil law. The subjects of the civil law, V edition,
House of Publishing and Press “Sansa” SRL, Bucharest, 1998, p.147.

27
 In other state’s legislations, there is deliberately stipulated the possibility of a direct
action in response of prejudiced persons by the manipulation actions directed against the
manipulator 1 .
On the other hand, the cunning is a consent vice, in the light of dispositions of article 953
from the Civil Code, which can intervene in the situation of any civil juridical act, while capital
market manipulation represents a illicit action in the juridical regime of the capital market,
having the possibility to intervene only in the matter of transactions with securities or
commodities, admitted for trading on a market or a transaction system supervised by a state
authority. Outside the regulated market or trading systems subdued to juridical regime of the
market abuse, we can’t speak about a market manipulation. For example, a transaction having
as objective social parts of a commercial company with limited responsibility will not be in a
situation suspected of representing a market manipulation action of those social parts.

3.2 Capital market manipulation and fraud

3.2.1 Similarities

In penal matter, capital market manipulation action has similar features with the criminal
offence of fraud, foreseen and punished by article 215 of the Penal Code. Regarding the
juridical nature of stock exchange transaction, the contract one, it can be stated that the content
of the criminal offence of capital market manipulation is very close to the one of a fraud
criminal offence in conventions, foreseen and punished by article 215, paragraph (3) of the
Penal Code.
The material evidences of the two actions in penal illicit sphere are closely similar.
In the case of fraud, it is about misleading by presenting as real a false action, or as false,
a true action. In the case of market manipulation it is about:
either “emission of false signals or misleading” [article 244, paragraph (5) line
a) point 1 from Law no. 297/2004];
either “maintaining an artificial level of price”[article 244, paragraph (5) line
a) point 2 from Law no. 297/2004] which logically represents an
occultation of the truth- consisting in a price formed on a natural way-
towards the other market participants;
either of the use of “fictitious methods or any other form of fraud” [article
244, paragraph (5) line b)];
either “dissemination of information through the media […] which gives or
might give false signals or which mislead in regard to securities”, which
means that both penal actions are based on the action of misleading.
The immediate following of the fraud action consists in a prejudice brought to the
patrimony of the criminal offence victim, as the immediate following of capital market crime
consists in generating damages in the patrimony of persons that closed misleading transactions
by manipulation actions. In the case of market manipulation, it is sometimes difficult to

1
For example, in Japan, according to the “Guide to Financial Services Regulation Asia”
www.herbertsmith.com/NR/rdonlyres/C45A8A7D-97DD-4854-B00D-
642A21FE2762/4227/FSGuideAsia07

28
determine exactly the prejudice, considering that not always it can be established precisely the
correct price of securities, on which there were exerted price manipulation actions in the
hypothesis in which those illicit actions wouldn’t have existed.
The special juridical object of the two crimes consists in patrimony related social
relations and their development, which depend on the protection of the good faith on which the
participants in these social relations are counting on 1 .
The purpose pursued by the author of the fraud crime coincides with the one pursued by
the market manipulation author: obtaining a material, but incorrect good for himself or another
person. From this point of view, we are showing that the subjective side of the two crimes
presents important similarities, so neither of the two penal actions which were analyzed can be
put in execution, only under the form of intention. The culpability doesn’t attract the penal
responsibility for a misleading action put in execution by mistake, either because it regards
trading with securities closed on the capital market, either because it is about any other type of
conventions.

3.2.2. Differences

Regarding differences which exist between those two actions from the penal illicit sphere,
it must be underlined that there is an essential demarcation of the premise situation.
If in the situation of capital market manipulation, the premise situation consists in the
existence of some securities admitted to trading on a regulated market or a supervised trading
system and controlled by state authority, through transactions or trading orders which are used
in the manipulation action and we can only referred to these titles, in the case of fraud we are
dealing with a premise situation only in the case of the hypothesis noted by article 215,
paragraph (3), line (3) second thesis, which consists in the existence of a contract 2 (the fraud
committed in the course of executing the contract).
The material object of the criminal offence fraud can consist in any movable or
immovable good, or, in the case noted by article 215, paragraph (3), the object of rights and
obligations mentioned in the convention. In case of capital market manipulation, accepting the
opinion mentioned in the doctrine 3 , according to which the value protected by legislator is any
patrimonial value, direct immediate object (material object) of this action consists in securities
on which the manipulation acts are exerted by the manipulator. These securities have the
juridical nature of movable incorporated values, being considered dematerialized.
The author of the criminal offence of fraud can be, according to dispositions of article
215 from the Penal Code, any person. The law doesn’t advertise a certain quality for the active
subject of this crime. In regards to capital market manipulation, the author of the criminal
offence can be, in principle, only one person which issues orders or closes transactions on the
capital market (having in this purpose an open account to the intermediary - company of
financial or bank investment services), which carries out professional financial investment
services. It is also true that the statement in article 244, paragraph (5), line c) from Law no.
297/2004, opens the way for any person to become an active subject of capital market
manipulation criminal offence, noting that the material element of this crime can also be

1
This definition of the juridical special object is offered for the fraud crime in C. Bulai, A. Filipas, C-tin
Mitrache, Penal Law Institutions, Three Publishing, Bucharest, 2001, p. 387.
2
Ibidem, p.388
3
Ibidem, p. 387

29
“dissemination of information through the media, including the internet or any other methods,
which gives or might give false or misleading signals on securities, including dissemination of
rumors or false or misleading news”. From this perspective, practically any person has the
capacity to disseminate false information through the media and especially the internet.
The passive subject of the fraud criminal offence is any prejudiced person through a
misleading action made by the author. In the case of capital market manipulation, in the
position of passive subject can only be those persons which closed traded titles on which the
manipulation action was committed.
The place where the fraud criminal offence was committed is not delimited by the Penal
Code dispositions; practically, this penal action can happen anywhere. In the case of capital
market manipulation, the place where this action is committed is directly or indirectly
determined by dispositions of Law no. 297/2004. Therefore, in the form stated by article 244,
paragraph (5), lines a) and b) the action can only be committed on the regulated market or the
alternative system of trade on which securities are listed on which the manipulation action is
exerted. In the hypothesis stated in article 244, paragraph (5), line c), action can only be
committed through the media, internet or any other similar communication methods.
Therefore, we have the hypothesis: when it is not carried out, the condition of committing
the action in the place stipulated by law has as result the inexistence of the criminal offence,
because of the absence of one of the constitutive elements 1 .

§4. Rating capital market manipulation types

4.1 Depending on the used methods

Depending on the used methods, manipulation can be realized through effective trading
and/or trading orders or through dissemination of information.
The difference between manipulation types, between the ones based on effective trading
and the one based on dissemination of information is the first and the most spread
differentiation that is realized in the specialty literature.
Market manipulation by spreading false or delusive information was the manipulation
type which found the oldest incrimination in legal texts inside the written law 2 .
Manipulation by effective trading is, at least apparently, the most “costing” form of
manipulation.

4.2. Depending on the result that produces

Depending on the result which produces, manipulation can have as finalization
misleading of other participants on the market or maintaining an artificial course of securities.
Manipulation through misleading other participants on the market approaches, evidently,
the constitutive elements of the fraud criminal offence, as it presumed as real of delusive action
(price or volume of demand or supply is not real, naturally determined).

1
C-tin Mitrache, C. Mitrache, Romanian Penal Law
General Part, House of Publishing and Press “Sansa” SRL, Bucharest, 2002, p.104.
2
To see over, Chapter II, p.34-75

30
 Manipulation by maintaining an artificial course impedes other participants on the market
to trade at a natural determined price, through the normal game of demand and supply.

4.3 Depending on the active subject

Depending on the active subject, manipulation can be realized by any investor or only by
certain persons that have a certain position or exert a certain profession, as annalists,
journalists, persons from the issuers committee, etc.

Most of capital market manipulation types can be put into application by any investor that
has enough resources, skills and knowledge to start illicit operations.
In some cases, like scalping operations, market manipulation means action by a qualified
subject, such of a person that has a certain profession, exerts a certain activity or has a certain
position in the issuer’s administration or in entities of the capital market (market operator,
supervision authority, etc.). Also, a qualified subject of the manipulation action can be the
issuer himself or a person (entity) which controls the issuer.

4.4. Depending on the number of persons

Depending on the number of persons which were involved in the activity of capital
market manipulation, manipulation can have a unique active subject or a plurality of active
subjects.
In general, it is hard for only one person to realize a market manipulation operation, thus
there is necessary the cooperation of several investors which have information on securities
transactions from the capital market.
Only one person can be incriminated for market manipulation in the hypothesis in which
the operation succeeds exclusively because of stock exchange orders which have as result price
distortion or misleading investors or because false or delusive information which are given to
the public. In this last situation, the manipulation action is easier to realize, because
participants on the market can be mislead exclusively by the content of delusive information,
and the price reaches artificial levels, followed by the manipulator, without implicating his
transactions or trading orders.
In case where only one person is implicated in capital market activities suspected of
being manipulated by orders or transactions which give false signals and can not be identified
neither co- authors or accomplices, it will be extremely difficult to establish if the activity of
the person is a illicit action or not, as it will be delimitated without any doubt from the licit
operations, even they are less usable, which an investor is developing, with good faith, on the
capital market.

4.5 Depending on the liquidity of securities

Depending on the liquidity of securities as an object of manipulation, this can regard

liquid titles or titles without liquidity.
In general, most of the capital market manipulation methods regard titles which don not
have a special liquidity. The manipulator realizes operations by which he brings in the attention
of investors securities poorly transacted by that time, but on which he initiated previously a

31
position, mainly of purchasing, counting on the price increase. In the United States of America,
Securities Exchange Commission has different regulations for small size company titles, non
liquid one, called “stock penny”, valued at under five dollars/stock.
In the case of manipulation of liquid titles, there are necessary important funds to be
given to that operation, although the spread of false information or use of other fictitious
methods can produce, in certain conditions, the result of price distortion.

32
 Chapter II
Legislative evolution in the capital market manipulation field
The European normative system created by the market abuse
directive

In this chapter it will be presented a short image of the development of legislation in the
capital market manipulation field, in our country and in states with significant history and
interesting legislation in the stock exchange field, Great Britain, France and USA.
The interest will no be on the regulations which are effective now in the European Union
(so, in France and Great Britain), therefore these are going to be analyzed in following
chapters, considering that these communitarian judicial norms are applicable for the time being
also in Romania.
We will try to take a closer look over the American legislation, to not come back with
detailed descriptions of that when we will mention on the course of this paper different cases
from the Securities Exchange Commission jurisprudence and American courts.

Section 1

Capital market manipulation in the Romanian legislation prior to the

Law no. 297/2004

§1. Capital market manipulation in the normative acts in force until 2002

I have delimited the reviewing legal dispositions in the matter of capital market
manipulation depending on the moment when Emergency Order no. 28/2002 became effective,
since this was the first normative act in our country which used the term market
“manipulation” and gave a definition of this notion.
By that moment, although there were no actions considered illicit by different legal
norms, those, either didn’t get a clear description, either there weren’t presented differently as
criminal offences at the stock exchange regime, either they aimed only certain aspects from the
more wide spectrum of capital market institution.
In the pre-war period there were considered as illicit actions at the stock exchange
regime, having the manipulation aspect on, only spreading news or false information, but not
trading or introducing stock exchange orders which have the nature to mislead other investors.

1.1. Penal Code Carol the Second 1936 1

1
Official Monitor, 65/18 March 1936. Abrogation of the Law 30/1968 at 13 November 1968.

33
 In the Penal Code which became effective in 1936, article 417 from Title X “Crimes
against the state credit or the particular credit” punished “the public spread of news or untrue
facts, exaggerated or tendentious, or by different manual labors, which caused the retreat of
deposits from the credit and economy institutions, or with the purpose of speculation which
caused the decrease of titles or values admitted at the stock market or negotiated in commerce,
or the decrease or increase of price things or first hand or general necessity commodities, or
abstaining from purchase or oversubscription of titles or values”.
In the same time, in article 418 it was punished “the one who, with the purpose of
shaking or lowering the financial credit of a commercial or industrial company, spreads in
public, news or untrue facts, exaggerated or tendentious, regarding the activity, business,
credit, commodities or products, commits the crime of compromising the particular credit”.
This type of crime was not included in previous drafting of the Penal Code, the one in
1912. Development of stock exchange life in our country after the economic “Great
Depression” in the period 1929-1933 generated the appearance of some new economic and
juridical situations, and the need to elaborate judicial norms to correspond to those realities was
felt.
As you can see, market manipulation institution, although wasn’t called that way, found
in the first phase, the legislation consecration, through the presence of a norm which
incriminated the “spread of news or untrue facts” which “caused the decrease of titles or
values admitted at the stock exchange”. You can notice that what was seen as illicit was only
the activity which lead to the decrease of price of titles traded at the stock exchange and not the
one which had as a result their increase.
Also as a form of manipulating the course of stocks of a company appeared the criminal
offence punished in article 418 of the Penal Code Carol the Second which aimed the public
spread of “news or untrue facts, exaggerated of tendentious” regarding the business of a
commercial or industrial company, with the purpose of “shaking or decreasing financial
credit”. In the term of “credit” was included in the vision of the legislator any economical
value attached to the company, including stocks and bonds.
The Penal Code adopted in the period of Communism in 1968 didn’t sanction actions
which mislead regarding the value of titles traded at the stock exchange, thus at that moment
there was no stock exchange in Romania. The post-Decembrist modifications of the Penal
Code didn’t include this criminal offence, leaving the regulation of the stock exchange illicit to
the special legislation.

1.2 Law no. 52/1994 1 regarding securities and the stock exchange

In the first law of capital market adopted after the fall of Communism capital market
manipulation wasn’t even definite or incriminated.
The only entities on which there was a prohibition regarding the alteration of natural
course of transaction titles were the securities companies.
Therefore, in article 40, paragraph (1) line a) from the law it was mentioned that “it is
forbidden to the securities companies […] to affect in a artificial way the free account between
the demand and supply of securities by registering fictitious transactions or by price
oscillations not based on a effective transfer of property on securities”.

1
Official Monitor, no.210 at 11 August 1994
Abrogation of the Government Emergency Order no.28/2002 at 9 April 2002

34
 The violation of this legal disposition is not considered a contravention, article 40 from
Law 5o. 2/1994, enumerating, from a limitative statement, certain actions with an illicit nature
for which there were provided administrative sanctions, here being included the one mentioned
in the article 40, paragraph (1), line a).
In the application of these legal dispositions, there were issued the ones of the National
Securities Commission Regulation no. 3/1996 regarding the authorization and exercise on
securities intermediation. In this normative act of the secondary legislation, issued by the
National Securities Commission, dispositions of article 28, line c) and d) not only that stated
the prohibitions mentioned before but had as finalization, without any doubt, also the
introduction of norms, which added to the organic law of capital market: “There is forbidden to
the companies of securities to trade with the purpose of influencing in a artificial way the price
of securities or to create the impression of a high volume. It is forbidden to the company of
securities to post quotations or to introduce orders with the nature to create a false impression
on the real market price of a security”.
In Regulation no. 3/1996 was mentioned possibility of affecting the market by creating
the sensation of a high volume, and also creating a false impression on the real price by
introducing certain orders in the system. Violation on any regulation disposition was
considered a contravention, opposed to dispositions of Law no. 52/1994 which, as we have
seen, offered a limitative count of the actions considered to be illicit.
We don’t consider that this encroachment of the administrative authority represented by
the National Securities Commission in the legislative activity had on its base a intention and a
negative role, being generated by the extremely lacunose drafting of Law no. 52/1994, which
got very fast to the point where it will not longer be adapted to the economical and juridical
realities. However, violation of the principle of hierarchy of normative acts (situation which
will become a habit repeated in the next years, until now), and, especially, the absence of any
regulation which would sanction the market manipulation by other persons and/or entities other
than the dealer, have encumber the healthy faster growth, of the Romanian capital market.
Maybe with clear regulations, introduced in the law, regarding the capital market manipulation
by posting unreal quotations of background titles wouldn’t have exist a FNI case as big as it
was.
Anyway, the existence of legal prohibitions just for the dealer, with a questionable
sanction regime, was a serious lacunose, in the conditions in which Regulation no. 3/1996 of
the National Securities Commission imposed to the securities companies the execution of all
the clients orders, without having the right to refuse, except in the situation when the client
didn’t put as down payment money or necessary titles before trading (article 21). In these
conditions, theoretically, a series of stock exchange orders which had as objective misleading
other participants to the market had to be executed by the securities agents 1 , although there
were enough clues regarding the illicit intent of the person which issued the orders.

1
According to the article 2, line 1 from the Regulation of the National Securities Commission no. 3/1996,
agent for a movable value was “a natural person legally authorized that, acting as an exclusive
representative of a securities company, executed selling and/or purchasing orders for securities, in the name
and on the account of that company”.

35
 §2. Government Emergency Order no. 28/2002 1 regarding securities, financial
investment services and regulated markets

It is the first normative act with express dispositions in the matter of capital market
manipulation.
The definition of capital market, as it was presented in article 130 from Government
Emergency Order no. 28/2002, was given in the first chapter of the paper.
The legislator of the year 2000 tried to detail the aspects which could indicate the
existence of market manipulation actions, accentuated in article 131 of the decree.
Therefore, it was forbidden for a company of financial services and its agents, directly or
indirectly, to:
“to execute a order from an investor, knowing that there will not be made a real
transfer of the property right or that the operation of purchasing will be actually
made between that investor and a person close to him or one of his employee,
simultaneously with a re-sale;
to execute a order from an investor regarding the negotiation of selling a securities
package, with receiving in the same time of a order from the same investor
regarding the purchase of the same securities package at the same price;
to execute a order from the investor regarding the negotiation of selling a securities
package, knowing that another securities company received in the same time an
order from the same investor regarding the purchase of the same securities
package;
to put in circulation information about a issuer, contrary to the data written in his
financial reports”.
On the grounds of the article 172, line d) reported to article 130 and article 131 from the
Government Emergency Order no. 28/2002, the execution of any manipulation action was
considered a contravention, and according to dispositions of article 181, the execution with
intent of that type of action was considered a criminal offence.
In the Government Emergency Order no. 28/2002 were introduced orientations in that
time with regards to those actions which encumber the natural function of capital markets and
affect the formation on natural bases of securities price admitted to trading. Market abuse
thesis wasn’t introduced in the legislation, but insider dealing and elements which regarded
market manipulation were treated in the section of the same normative act- Section II “The
prohibition of market manipulation and insider dealing”.
Through new elements introduced in the Romanian legislation in this matter by the
Government Emergency Order no. 28/2002 there were:
recognizing as illicit the action of a investor which by orders or transactions gives or
it is fit to give false or delusive indications regarding supply, demand or price of
securities. Until that time an investor couldn’t be sanctioned for capital
manipulation actions;
it was introduced the mandatory refusal by licensed dealers of clients orders which
contained elements of manipulation: the absence of a real transfer of property
right on securities, trading between a person and persons hired or affiliated to that

1
Official Monitor 238 from 9 April 2001. Abrogated by law 297/2004 at 29 July 2004

36
 person, similar orders of contrary sense to the ones issued by the same investor,
either given to the same dealer, either to different dealers;
it was established that manipulation can regard either the price, either the volume of
securities;
it was added in the illicit sphere also the hypothesis of maintaining securities price at
a artificial level by “transactions or issuing trading orders”.
From the previous post – December regulations, the Government Emergency Order no.
28/2002 resumed, in a another type of formulation, the market manipulation thesis by
“dissemination of information by any means which give or are fit to give false or delusive
indications regarding supply, demand or price of securities”.
Under the juridical regime of the Government Emergency Order no.28/2002 there was a
notorious case in which there were made market manipulation accusations 1 , this actually being
the first situation in which there was a penal file in our country after 1990 for the action of
market manipulation.

Section 2

Capital market manipulation in the main European legislations in the

period prior to the adoption of Directive no. 6/2003 regarding market
abuse

§1. Legislative system in France

In France, the Napoleon Penal Code from 1810 incriminated certain actions which
encumber the good movement of the stock exchange, according to the purpose for which it was
created. These prejudiced brought to the stock market regulations might be considered types of
capital market manipulation.
According to the article 419 from the old French Penal Code 2 , there were punished with
prison from one month to a year or a fine:
delusive maneuvers, like spreading with intent in public false news,
calumnious facts, in order to raise or lower the price, of the commodities
or goods, either of the political effects contrary to the law of natural
competition;
association or coalition between main holders of the same commodities or of
the same goods with the purpose of not to sell or not to sell only at a
certain price 3 .

1
It is regarding the Rompetrol file, in which there were incriminated actions that happened in April 2004.
2
That stood in force from 1810 to 1994.
3
E. Thaller, Traite élémentaire de droit commercial, 4eme édition, Librairie Nouvelle de Droit et de
jurisprudence, Paris, 1910, p.491

37
 It is true that the French jurisprudence looked with reserves the application of this legal
text in the French Penal Code, showing that it is not an incident of the maneuvers which have
as purpose raising or lowering the course of stocks and bonds 1 .
By the Order no. 833/28 September 1967 regarding founding a Commission of stock
exchange operations and regarding the process of informing the holders of securities and
advertising certain stock exchange operations 2 it was incriminated the crime of providing false
information, in article 10-1 paragraph 3, meaning the release in public of information with a
litigious character, of nature to influence the course, with a false or delusive character 3 .
Course manipulation is incriminated in article 10-3 from the previous mentioned Order 4 ,
this crime consisting in the exertion or the attempt to exert maneuvers on the course of stocks,
by using the technique called “bouilloire” (“boiler room”) 5 .
The Order no. 833/28 September 1967 had a special role in the evolution of French
legislation in the capital market field, since on its ground it was founded the Commission of
Stock Exchange Operations (CSEO), organism which had as responsibility, initially, the
supervision of French financial markets. By this normative act, to the Commission of Stock
Exchange Operations, was given the right to investigate violations of the capital market
legislation by market participants6 .

By Law 70/22 January 1988 it was reaffirmed the competencies and prerogatives of the
Commission of Stock Exchange Operations, in the context of privatization which had place in
that period in France. This law, in its original drafting, proposed by the Government, instituted
enhanced prerogatives for the Commission of Stock Exchange Operations, but the Parliament,
having also the support of the Constitutional Council, limited the right of this institution to
realize searches or to apply punishable measures against the persons that were investigated for
breaking dispositions of the stock exchange legislation 7 .
Law no. 531 from August 2nd 1989 regarding the security and transparence of the
financial market gave Commission of Stock Exchange Operations the power to sanction the
violations of legal dispositions in that matter. According to this normative act, Commission of
Stock Exchange Operations had the possibility to issue sanctions against the persons which
restrained the market’s function, which created unjustified benefits which could not be
obtained from the normal function of the market, which attempted to the equality of
information and treatment of the investors or their interests etc. 8
In regards to the right to investigate, Commission of Stock Exchange Operations could
convoke to interrogation any person which was suspicious of holding information, could
request all the relevant documents, its agents having the right to enter in any place
professionally used.
Law no. 531 from 1989 instituted also the right of the Commission of Stock Exchange
Operations to execute searches at the place of residence of investigated persons, but under a

1
Ibidem, mentioning a decision of the Cassation Court, Cass.com. 30 July 1885, D.86, 1,389
2
Official Journal from 29 September 1967.
3
http://www.soficom.fr
4
Ibidem
5
The manipulation technique boiler room is a criminal action that has the purpose to pursue persons to
invest in less known titles, obtaining this way an artificial raise of their price.
6
S. Loyrette, cited paper, p.17-18.
7
Ibidem, p.20-21
8
Ibidem, p.21-22

38
juridical control. It was considered, in the doctrine 1 , that this regulation satisfies the
constitutional requests regarding individual freedoms, having in consideration the institution of
this juridical control which censors the right exercise prerogatives by the administrative
authority of the capital market (Commission of Stock Exchange Operations at that time).
In the year 2000 it was adopted the French Monetary and Financial Code 2 . This
normative act punishes, by article 465-1 and 465-2, also the spread of false or wrong
information which affects the price of transaction titles on the regulated market or the
perspective evolutions of the course of these titles, and also the maneuvers which have the
purpose to affect the ordered movement of the capital market through misleading investors.
At August 1st 2003, by the Law no. 706/2003, there were merged the Council of Stock
Exchange Operations (CSEO), the Council of Discipline of the Financial Administration
(CDFA) and the Council of the Financial Markets (CFM) and was created the Financial
Markets Authority (FMA). This organism had, from the start, the purpose to apply the
legislation which appeared from the implementation of the market abuse Directive norms and
the following directives adopted in its application.

§2. The legislative evolution in the matter of market manipulation in Great Britain

Price manipulation actions of commodities were described and incriminated in England

since de early middle age period. Around the year 1300, during the reign of King Edward the
First, was elaborated the Statute of Forestallers or the Statutory of Forstallariis. The
“Forestallers” were those persons that bought most of the quantity of goods on the market, in
order to concentrate the offer and resell those goods at considerably high prices 3 . There was a
distinction between the “forestallers” which would resell the whole quantity of purchased
goods and the “regrators” which would divide the purchased goods in small quantities,
reselling those like retailers 4 .
“Forestalling” meant also the action of intercepting goods before they reach the market,
on the way to the market or just before the market opened, in order to buy those goods and
resell them after the market opened, at high prices.
These illicit practices, similar to “cornering” in the modern times, were incriminated
according to sources 5 since the XI century of common law (juridical practice).

In time, the ground of punishing the culpable persons for manipulation of price became
dispositions which were introduced in certain laws (also the Statute of Forestallers).
Until the XX century there wasn’t a legal incrimination specific to the stock exchange
investments, although there were many scandals on the London capital market with price
manipulative actions of transaction titles.
Until the legislative innovations in the XX century the key role in identifying and
sanctioning illicit actions in the capital market regime was kept by the common law system.
Without entering in the exemplification and analysis of some famous cases, we want to show

1
Ibidem, p.24
2
Order 2000-1223 from 14 December 2000 (Official Journal from 16 December 2000).
3
Medieval Sourcebook: Statute of Forestallers). http://www.fordham.edu/halsall/source/forestall.html
4
Medieval English Town-Glossary- http://www.trytel.com/~tristan/towns/glossary.html.
5
B. Rider, K. Alexander, L. Linklater, cited paper, p.109

39
that since the VIII century courts in England have pronounced decisions in which they
punished certain behaviors that might have been treated as capital market manipulation actions,
illicit actions at the stock exchange regime or violations of the investor’s rights.
The Prevention of Fraud (Investments) Act in 1939 stipulated that it is a criminal offence
to determine trading through issuing statements or false news or through intentional hiding of
material actions. These incriminated dispositions were resumed in the normative act with the
same title in 1958 1 . Under this regulation regime there were pronounced a few decisions
against persons carrying market manipulation actions, but the sphere of manipulation
institution was limited, according to legal dispositions at that time, regarding misleading
through untrue or false statements. Until 1986, market manipulation actions, creating a false
impression on the market by orders or transactions, were left under the incidence of either the
common law, meaning to the common law norms in the penal matter, either to the entities
regulations in the capital market matter 2 .
In these conditions, it can be said that it is relatively new in Great Britain the control on
legal bases of capital market manipulation practices 3 .

The legislation against the market manipulation was developed in 1986 by the Financial
Services Act. In Section 47 of this normative act it is incriminated for the first time capital
market manipulation 4 .
In Criminal Justice Act from 1993 5 is it sanctioned the market abuse under the form of
insider dealing. Also, there are dispositions which sanction the instigation to insider dealing.
In 2000, there is adopted the Financial Services and Markets Act from 2000 (FSMA
2000) 6 which contains specific dispositions regarding market abuse, also under the form of
insider dealing, and also under the aspect of capital market manipulation.
In Section 118 of this normative act there are included references to actions considered to
be market abuse. The behavior of an investor can receive the qualification as market abuse if
there are completed the following conditions:
a. person’s actions are connected to investments (securities) traded on a
organized market 7 ;
b. these transactions accomplish the single or several criteria mentioned in
subsection 2;
c. behavior of that person can be seen by a normal investor on the capital
market as a violation of reasonable conduct standards expected for that
type of market.
The criteria which attract the illicit conduct for executing an action in the market abuse
sphere, mentioned in subsection 2 of Section 118 of the Financial Services and Markets Act
from 2000 are:
a) person’s conduct is based on information which are not
generally available for investors which act on that market,
but which, if there were available for an regular user could
1
B. Pettet, Company Law, 2nd edition, Pearson Education Limited, Longman Law Series, 2005, p. 384.
2
B. Rider, K. Alexander, L. Linklater, cited paper, p.109.
3
Ibidem
4
B. Pettet, cited paper, p.384.
5
http://www.england-legislation.hmso.gov.uk/acts/acts1993/ukpga_19930036_en_1.
6
Promulgated at 14.06.2000, http://www.opsi.gov.uk/acts/acts2000/en/ukpgaen_20000008_en_1
7
To see Chapter I, 3.3, p.14-15

40
 be or might be seen by him as relevant in taking a
investment decision. Carrying out this criterion represents
insider dealing;
b) the conduct of that person has the potential of giving to a
normal investor a false or deceiving impression regarding
the demand, supply or price of securities. Carrying out this
criterion represents the execution of capital market
manipulation action by misleading investors;
c) a normal investor would consider that person as having a
conduct which distorts the market in question.
Section 397 of this normative act refers to “Misleading statements and practices”. In
paragraph 1of this section qualified as illicit actions are:
making a statement, promise or prognosis regarding to which his author knows that it
is false, wrong or delusive about certain aspects;
the incorrect hiding of any material act if it is regarding a statement, promise or
prognosis made by its author;
making, through an oversight, a statement, promise or prognosis which it is false,
delusive or wrong regarding certain aspects.
It also incriminated the action of making statements, promises or false prognosis to
determine a person to close or not to close a contract with securities traded on the capital
market, and also to exert or abstains himself from exerting any kind of rights given by the
investments in securities.
Paragraph 3 from this section, which took over the dispositions of section 47, paragraph 2
from the Financial Services Act 1986, sanctions the action of any person which executes any
act or initiates any type of conduct which creates a false or deceiving impression over the
market and over the prices of securities, if the followed purpose of that person is to determinate
other participants to the market to purchase, to sell, to subscribe securities or to exert any kind
of rights about securities.
The Financial Service Authorities elaborated, to apply Financial Services and Markets
Act from 2000- Section 119, The Code of Market Conduct “to offer a proper guidance in order
to determine the situations in which certain behaviors represent market abuse 1 ”. The code of
stock exchange conduct which became in force in 2001 indicated the vision of capital market
authority in Great Britain- FSA on the identification of practices which are “under the
standards expected by a normal investor on the capital market” 2 .
The regulation of this code accentuates, when the manipulation actions are described, the
behavior of the presumed manipulator, in the sense of the necessity of establishing if this
behavior may give a false or misleading impression on the market or to distort the market.
The code introduces and uses the institution of regular user. “The regular user” is,
according to the code, a hypothetical, reasonable person, whose behavioral judgment is
impartial and objective. The regular investor is familiarized with the securities market and
understands the markets standards.

1
http://fsa.gov.uk/pages/doing/regulated/law/focus/conduct.shtml.
2
B. Rider, K. Alexander, L. Linklater, cited paper, p. 26.

41
 Section 3

Capital market manipulation in American law

The United State legislation defined and incriminated explicitly the capital market
manipulation in the normative acts adopted starting with 1933, wanting to exit the great
economic crisis in 1929, in the same time with the devastating crash1 on Wall Street which
represented then, as it does now, the center of the world’s finances. New York Stock Exchange
was the biggest, the most developed stock exchange in the world.
After the release of the “Big Crisis”, brokers on Wall Street begun being accused of
“market manipulation”, thus entering in the daily vocabulary a notion which will occupy an
extreme important place in the capital market legislation elaborated in the 30’s 2 .

§1. Securities Act 1933- the first modern regulation of the institution of capital
market manipulation 3

Securities Act 1933 (known as the “Truth in Securities Act” or the “Federal Securities
Act”) 4 was adopted as a follow up to the devastating effects made by the world’s great
economic crisis from the period 1929-1933 (Great Depression) and has as objective imposing a
complete and correct information on the characteristics of capital titles sold in transaction
between states and nations and by post and to prevent frauds which might result from these
transactions 5 .
Prior to this crucial law in the legislative evolution of the capital market field, the stock
exchange frauds were regulated in the juridical norms issued at state level. The first statutes
(laws) in the capital market field were adopted in the state of Kansas in 1911 6 .
Securities Act was issued in the application of the American Constitution regulation
regarding the interstate commerce 1 , taking part in the economic program of president Franklin

1
In October 1929 had place the most catastrophic crash of the main capital markets on the globe, the
American one. The first day of the crash was “Black Thursday” (Thursday, the 24th 1929), when the stock
price dropped with an average of 13%, but the real disaster happened on “black Tuesday” (Tuesday, 29th of
October), when panic caused devastating effects. After Monday 28th of October 1929, the course dropped
with an average of 12.8%, followed “Black Tuesday”, when the stocks dropped with another 12%. In six
days the New York Stock Exchange lost approximately 25 billion dollars, about a third of the total value.
The sudden fall continued for a month. Those falls caused more falls, especially that the margin transaction
was spread, and to cover the margins were necessary massive sales in order to close all positions “Wall
Street Journal classroom edition”, November 2002
http://wsjclassroomedition.com/archive/02nov/ECON3/htm. In 1932 it hit the point with the lower
depreciation, the Dow Jones Industrial index representing with 90% less than its value in 1929.
http://news.bbc.co.uk/2/hi/business/6958091.stm.
2
D.F. DeRosa, In Defense of Free Capital Markets: The Case against a New International Financial
Architecture, Bloomberg Press, p.14.
3
Securities Act is codified in the USA legislation under no.15 USC, 77a,
http://www.law.cornell.edu/uscode/15/77a.html.
4
http://en.wikipedia.org/wiki/Securities_Act_of_1933.
5
Securities Act 1933- http://www.sec.gov/about/laws/sa33.pdf
6
B. Pettet, cited paper, p. 315.

42
Delano Roosevelt, initiated in the course of the great economic crisis, in 1933 and called “New
Deal”, destined to extract the United States from this great economic depression which affected
profoundly the entire American society 2 .
In the Section 17 of the Securities Act 1933 there are declared as illicit “selling or
offering securities 3 by any means or communication instruments in the interstate commerce or
through post office:
which use any methods, schemes or artifices with the intent of committing a
fraud or
in order to receive money or property right through false statements regarding
a material action or any omission to declare a material actions necessary to
make those statements, in the light of the circumstances in which there
were made or
in light of engaging in any transactions, practices or business which is or it
might be criminal or delusive for the buyer.
It has to be shown that Securities Act from 1933 was the first normative act at a federal
level 4 , initiated by the USA Congress which regulated the capital market in the United States,
until that time only existing regulation at state level.

§2. Securities Exchange Act 1934 5 . Establishing the Securities Exchange

Commission

2.1 General Presentation

Securities Exchange Act 1934 is considered as a complete normative act which, along
with the statutes adopted in the field, constitutes the grounds of the financial markets regulation
in the United States 6 .

1
Section 9 paragraph 6 from the USA Constitution http://www.usconstitution.net/const.html
2
The purpose of the “New Deal” was to extract the American society from the profound economic crisis.
This program- New Deal- represented one of the main themes of the electoral campaign of F.D.Rossevelt in
1932. After his election as president, F.D. Roosevelt supported the adoption of some normative acts in
fields like banking, labor, and agriculture. In the second part of the New Deal, after 1935, there were
included social protection programs- Social Security Act, programs which helped farmers and illicit
immigrants. The New Deal programs helped improve the economical conditions of the American citizens,
being a way out of the crisis, and on a long term, played an important part in the economic and social
relations of the USA. Many of the agencies founded because of the New Deal programs became known for
their acronyms: SEC, CCC (Civilian Conservation Corps), WPA (Works Progress Administration) etc. -
according http://memory.loc.gov/learn/features/timeline/depwwii/newdeal/newdeal.html (www.loc.gov is
the USA Congress libraries website).
3
The meaning of the term “securities” is the one of “financial active”. To see Oxford Business- English-
Romanian Dictionary, Bic All Publishing, 3rd edition, Bucharest, p.617
Considering the area of regulation of the Securities Act 1933, we will keep in mind the meaning use now
by the capital market legislation, the one of “financial instrument”.
4
The application of the dispositions of Securities Act was made, until the SEC was established in 1934, by
the Federal Trade Commission, B. Pettet, cited paper, p. 315.
5
Securities Exchange Act is codified in the USA legislation under no.15 U.S.C 78a
http://law.cornell.edu/uscode/15/78a.html.
6
http://en.wikipedia.org/wiki/Securities_Exchange_Act_of_1934.

43
 With this law, the USA Congress founded the Securities Exchange Commission, known
by its acronym – SEC, an institution which symbolizes in the world “an image of rigor and
complete application of the law” 1 . Securities Exchange Commission has extended
competencies in all the capital market fields. This include prerogatives of registering, regulate
and oversee brokerage firms, transfer agencies and clearance agencies, and the national
organizations with auto regulation power (Self Regulatory Organization- SRO), like New York
Stock Exchange, American Stock Exchange, National Association of Securities Dealers (which
operates NASDAQ market) 2 .

Securities Exchange Act 1934 identifies and prohibits, also, certain type of conduct in the
capital market and provides Securities Exchange Commission with disciplinary powers over
regulated entities and persons associated with them (employees, administrators etc.). In the
same time, this law provides to Securities Exchange Commission the competencies to request
periodical reports of information regarding companies listed on the capital market 3 .
Regarding market manipulation, Securities Exchange Act outlines for the first time the
defining elements of this institution creating also the ground for the sanction regime.

2.2. The main dispositions of the Securities Exchange Act 1934 4

Securities Exchange Act regulates the matter of reporting corporate events. The
companies listed which have actives valued at more than 10 million USD, titles which are held
by more than 500 persons must report annually and also periodical. These reports are available
to the public by an informative system of the Securities Exchange Commission, EDGAR 5 .
The analyzed law regulates also the mandatory public dissemination of all documents
used in the annual general meeting of shareholders (regarding the approval of financial
situations) or in the special meeting having on the agenda the election of administrators
(managers) and approval of other decisions in the company.
)
Securities Exchange Act imposes the information regarding important situations in which
a person wants to acquire more than 5% in a company, either directly, either by public offering,
in the case in which the person has the intention to obtain control over the company.
In case of market abuse, Securities Exchange Act prohibits any criminal activity with the
offer, selling or purchasing securities. These legal dispositions are the ground of different
disciplinary actions, including initiated actions following insider dealing or following capital
market manipulation.
1
B. Pettet, cited paper, p. 315.
2
http://www.sec.gov/about/laws.shtml.
3
Ibidem
4
Ibidem
It is preferably to guide the paper after an official synthesis of this normative act, made by Securities
Exchange Commission, for accuracy reasons and to give the correct official interpretations to different
judicial norms that were mentioned.
5
EDGAR, Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection,
validation, indexing, acceptance and dissemination of reports filed by the companies and other entities
required by the law to file forms to the Securities and Exchange Commission (SEC). Its primary objective
is to increase efficiency and fairness of capital market for the investors, companies and the economy by
accelerating the process of receiving, accepting, disseminating and analyzing the reports filed with the
SEC- http://www.sec.gov/edgar/aboutedgar.htm.

44
 Securities Exchange Act is the first normative act which speaks about price manipulation
on the capital market.
Section 9, called “Prohibition of manipulating price of securities”, contains a description
of the actions considered price manipulation in the vision of the American legislator in 1934.
Therefore, there are considered illicit, the actions of any person, which, directly or
indirectly, through the use of the post office or any other methods of commercial interstate
communication instruments or any facilities of national securities exchange 1 , also actions of
any employee of national stock exchange, which with the purpose to create a false or wrong
appearance of a active transaction or a false or wrong appearance regarding to a securities
market:
a. transacts with these securities which don’t presume a change of
ownership or
b. enters one or several purchase orders knowing that one or several selling
orders of approximately the same size and price and in the approximately
the same time were or will be issued by the same persons or different
persons or
c. enters one or several selling orders, knowing that one or several purchase
orders of approximately same size and price and in the approximately the
same time were or will be issued by the same persons of different persons.
There are also considered illicit actions, considered market manipulation actions, carrying
out by one person, alone or with other persons of a series of transactions with securities in
order to create a real or apparent trading activity for that security or to increase or decrease the
price of security in order to determine other persons to sell or purchase that security.
As illicit it is seen also the situation in which a dealer or a broker or any other person
which sells or offers to sell, purchases or make a purchase offer of a security, influents the
purchase or sell of any security transacted on a national market, by spreading/dissemination, in
the course of the natural development of transactions, of information having as effect the
decrease or increase of prices of titles or just the possibility that the price titles decreases or
increased because of operations on the market of one or several persons which act in order to
increase or decrease the price of that stock.
Securities Exchange Act considers as illicit the practice in which a dealer or a broker or
any other person, which sells or offers to sell, buys or make a purchase offer of securities,
makes statements regarding traded securities on a national market, with the purpose to
influence selling or purchasing these securities, statements which, at that time and in those
circumstances, are false or delusive about the action or statements about the person which
makes them or has good reasons to think that there are false or delusive.
It is considered illicit by this normative act also the action of the person which, for any
reasons, given directly or indirectly by a dealer, a broker or any other person which sells or
offer to sell, buys or offers to buy securities, to influence purchasing securities transacted on a
national market, spreads/disseminates, in the course of natural development of transactions,

1
“National Securities Exchange” represents a stock market authorized, according to the Section 6 of the
Securities Exchange Act, to fulfill all the conditions in these judicial norms. Now, there are ten stock
exchanges in the United States registered as national stock exchange markets: New York Stock Exchange,
American Stock Exchange, Boston Stock Exchange, Chicago Board Options Exchange, Chicago Stock
Exchange, International Securities Exchange, National Stock Exchange, The NASDAQ Stock Market LLC,
NYSE Arca, and Philadelphia Stock Exchange.

45
information having as affect the lowering or raising the price of those securities or only the
possibility that the price of the securities decreased or increases because of operations on the
market of one or several persons which act to decrease or increase the price of stock.
Finally, it is forbidden by the law the action of the person who makes on her own account
or with one or several persons a series of transactions with the objective of buying or/and
selling any securities traded on a national market, for maintaining, adjusting or poising the
price of those securities, in contradiction with rules and regulations which Securities Exchange
Commission issues in the interest and for the protection of investors.
In Section 10 of the Securities Exchange Act, it is prohibit the use of manipulative or
deceiving practices in order to carry out transactions with securities. In the same time, in this
section there are forbidden short sales and stop loss order which contravene the specific
regulations of the Exchange Commission, but this text is not applicable to the futures contracts.
In applying Section 10 of Securities Exchange Act, Exchange Commission issued many
regulations, of which a major importance has the “Rule 10b-5”, regarding the manipulation
through the use of fictitious methods. The regulation prohibits and declares illicit any actions
which consist in:
a. using any method, scheme or artifice for fraud;
b. making untrue statements about material actions or issuing statements of
material actions necessary to that statement, considering the circumstances
in which it was made;
c. initiating any action, practice or business which represents or might
represent fraud or deceit to any person regarding the purchase or sell of
any type of securities.
Section 15 contains a series of legal interdictions applicable to brokers and dealers, about
the prevention of market manipulation.
It is forbidden to any broker or dealer to use means by which they can make commerce
actions at distance/interstate, with the aim to make transactions or to influence or to try to
influence the sell or purchase of securities (others than notes of hand, warranty letters), in any
other place than on to the national market on which there are transacted, by devices, delusive,
manipulative mechanisms, by deceiving practices or by introducing fictitious quotations.
The competence of the Securities Exchange Commission is to define, through regulating
the criminal, delusive or manipulative actions or practices, the regulation of methods to prevent
such actions and to set up the circumstances in which quotations are considers fictitious.
Securities Exchange Commission is, before the adoption of regulations regarding the definition
of these actions or practices, needed to consult with the Treasury Secretary (The Minister of
Finance) and other agencies with the power or regulation in similar areas. In case the Treasury
Secretary considers which these norms would affect the liquidity and efficacy of the govern
market titles (bonds, treasury bonds, deposit certificates etc.), Securities Exchange Commission
will try to adapt those regulations in order to correspond to the observations received from the
Treasury.
Section 15, also, includes prohibitions regarding the violation of the rules set up by
Securities Exchange Commission in the area of compensation and clearance, in the action area
of the market maker institution or in the area of securities custody.
It must be shown that the European Directive of market abuse is deeply inspirited by the
text of the Securities Exchange Act 1934, adopted seven decades before the European norms
became in force.

46
 §3. Investment Advisers Act 1940 1

This law, which is part of the New Deal program, deals with investments advisers,
especially, with establishing the legal frame in which they can develop their activity. It is built
the principle of registering at the Securities Exchange Commission of all the persons which
develop investment advisement services ( with certain exceptions, like the advisers which have
as clients only insurance companies, consultants which represent charitable organizations,
consultants which in the last 12 months had less than 15 clients and didn’t publicly acted as
investment advisers etc.).
From the capital market manipulation point of view, Investments Advisers Act 1940
contains a series of important norms which govern the activity of this professional category in
the United States.
In Section 206 of this normative act it is specified that it is illicit the conduct of any
investment adviser which:
1. uses any method, scheme or artifice to commit fraud on his clients or potential
clients;
2. engages in transactions, practices or business which causes prejudices for his
clients or potential clients;
3. act on their own by buying or selling securities to one of his clients or acts as a
broker for one person, other than his client, making any sale or purchase in the
account of his client without putting in writing, before making of any transaction,
the quality upon he acts, and without having his previous consent; this
prohibitions don’t apply if the broker doesn’t act, also, as investment adviser in
that transaction;
4. engage in any action, practice or business which is criminal, delusive or
manipulative.

§4. Sarbanes Oxley Act 2002

In 2002, after the famous financial disasters of big companies listed on the capital market,
Enron, World Com, Tyco etc., with very serious effects in reference to the protection of
investors and the credibility of the American market, the USA Congress adopted Sarbanes-
Oxley Act of 2002 2 , having as objectives protection of investors by improving the accuracy
and credibility of corporate information through creating of useful arms of the capital market
legislation. Sarbanes- Oxley Act of 2002 was considered the most important normative act of
the capital market in the United States after the adoption of the base rules of this act in the
beginning of the 30’s 3 .

1
This normative act was codified under no.54 Stat. 847, 15 U.S. Code, Section 80b-1-80b-21.
2
This law is known also under the name of Public Company Accounting Reform and Investor Protection
Act of 2002 or SOX is codified under Pub. L. No. 107-204, 116 Stat. 745
http://www.sec.gov/about/laws/soa2002.pdf
3
According to PricewaterhouseCoopers –
http://www.pwc.com/Extweb/NewCoAtWork.nsf/docid/D0D7F79003C6D64485256CF30074D66C.

47
 The reasons which this normative act was adopted were multiple.
Synthesizing 1 , they caused, first of all, the failure of Administration Council, and
especially, of the Commissions of audit to exert proper supervision over the system of
companies financial reports, this failure being generated by the fact, which in many situations
(as it happens also in Romania in most cases), administration councils weren’t independent
from the companies management, meaning the executive of the company. In the same time, an
important role was played by the conflict of interests which existed in the audit firms, because
these firms, on one side, had the quality of a financial consultant of the issuers based on
consultancy contracts, and, on the other side, audited financial situations, verifying practically
their own activity.
Other causes which influenced the adoption of this normative act significant for the
American capital market which extended its effects in the legislations of the European Union
states which were generated by the conflict of interests at the level of financial analysts
(financial analysts were connected with the issuers through a consultancy contract and losing
this way the necessary objectivity), by the absence of taking into account the risks of banks
which gave loans to the issuers with financial problems, by the unjustified growth, only on
speculative grounds, of the price of internet companies stocks and the existence of stock
options plan (programs of granting benefits by managers of the issuers consisting in stocks of
those issuers) which created for these managers the will to grow by any means the price of the
stocks of those issuers.
These financial frauds were made easy by the adverse and delusive elaboration of the
audit reports, creating the premises of public dissemination of false financial data, having the
nature to mislead investors in those titles. Capital market investors were deceived by
information which was included in the audit reports and transacted titles of companies whose
financial situations were lighter than the ones disseminated to the public.
In these conditions, the Senate and the Representatives Chamber adopted with a wide
majority a normative act which would broad the regulation sphere in the capital market field,
by including enlarged obligation for the accounting and audit firms. The result which was
expected was restraining public dissemination by the management of financial data which
would not reflect the real economic position of that company and the annihilation of any
possibility of complicity in this sense of audit and accountancy firms.
Section 303 of this law, named “Improper influence of the auditors conduct”, is
considered illicit, which contravene Securities Exchange Commission regulations issued in
reference to the public interest and the protection of investors, the action of clerks, managers
and administrators of the issuers, and of any other person under their subordination, through
which it is attempted the influencing, constraining and misleading of accountants which audit
the issuer’s financial situations, with the purpose of including in these financial situations
errors/ material faults.
Title VIII of the Sarbanes Oxley Act, known as a substantive normative act under the
name of “Corporate and Criminal Fraud Accountability Act of 2002”, includes a series of
dispositions regarding illicit actions from the accounting registers area. In this title there are
described actions considered to be financial frauds, which include manipulation, destruction or
alteration of financial books or encumbering investigations on issuer’s accountancy.

1
G. Farrell, America Robbed Blind, Wizard Academy Press: 2005.

48
 Section 4

Capital market manipulation in the European Union’s legislation

In this section we will review main normative acts which were adopted in the European
Union in the capital market domain, which contain dispositions regarding market manipulation
of securities. We will analyze judicial norms from the European regulation which are in force
at the moment in the following chapters of this paper.
The legal base of regulations in the European Union with regards to the capital market in
member states is represented by Article 95 from the Basic Treaty of the European Community,
the consolidated form, as a follow up to the adoption of the Amsterdam Treaty in 1997 1 .
According to this legal text, “The Council” 2 , deciding according to procedure in article 251
and after the consultation with the Economic and Social Committee, is competent to adopt
measures regarding connecting legal power acts and administrative acts of the member states
which have as objective establishing and operating the common market”.
It must be shown that the preoccupations of states which initially formed Common
Market with regards to an honest and equitable conduct of the capital market participants from
the member states date back from the 8th decade of the XX century. These thesis included in
the European Commission had a before its time note, since the national legislations of the
members states were sort of lacunose with regards to the regulations and sanctions applied to
actions in the sphere of what we call today “market abuse”.

§1. European Conduct Code regarding trading securities. Principles.

In 1977, it was adopted the European Commissions Recommendation no.534 from 25th of
July 1977 3 regarding the European Conduct Code regarding trading securities (transferable
securities) 4 .
At that time, given the particularities which rule the connections between the member
states of the European Economic Communities 5 , in the European Commission was appreciated

1
The Amsterdam Treaty, as an alteration of the treaty regarding the European Union, of the treaties of
forming the European communities and other connected acts (JOCE no. C 340 from 10.11.1997)
2
The Council of the European Union, named also the Council of Ministers, represents, along with the
European Parliament, the legislative branch of the European Union, having its grounds in the article 4 of
the European Union’s Treaty –Maastricht Treaty, its competencies being included in article 202 from the
Amsterdam Treaty:
assures coordination of general economic policies of member state;
has decision attributions;
gives the Commission, through the adopted acts, the competences of executing norms which adopts.
The Council can impose conditions to exert these competencies. The Council can, also, reserve the
right, in certain cases, to exert directly the execution competencies. These conditions must be
according to the principles and norms that will be established by the Council, with unanimity
decided at the Commissions proposition and after getting the European’s Parliament notice.
3
Official Journal of European Communities no L 212 from 20.08.1977
4
According to the Conduct Code, “transferable securities” are all the securities admitted to trading on an
organized market.
5
European Economic Communities had only 9 states in 1977: France, Germany, Italy, Holland, Belgium,
Luxemburg (founder states), to which added in 1973 Denmark, Ireland and Great Britain.

49
that the most suitable for establishing common rules about the correct conduct of the
participants on the capital market is the “Recommendation” and not the “Directive”, normative
act which would impose precise obligations, being susceptible from that reason of not to be
approved by the European Economic Communities members.
As it is shown in the beginning of this document, at point 4, “in parallel with the activity
of harmonizing through directives and without encumbering the use of this method which is the
only one capable to lead to reaching the objective truth of the European integration, the
Commission considers that it can recommend, in a document which covers a series of problems
with securities transactions, upon which the member states will respect ground principles”.
The purpose, from a judicial point of view, of this Recommendation, as it was presented
at point 6, was to assure the respect of the Conduct Codes principles by all the persons
involved in activities connected to the capital market in member states.
In the same time, the essential objectives of the Conduct Code were establishing ground
principles for capital markets, in the European integration context, determining ethic standards
of behavior in the European Community and promoting an effective operation of the capital
markets.
The Conduct Code contains two principle categories: general principles and additional
principles, created in order to assure the respect of the first type of principles.
From the point of view of the capital market manipulation actions, there are interesting
the following principles in the Conduct Code:
a) The first general principle regards the Code interpretation, the application of this
principle being completed not only by letter, but also by spirit, with the purpose of
strengthening and, if there is the case, of adding, of the statements from the
national legislations regarding to the optimal movement of the capital markets.
Every transaction with securities, even if the situation is not covered by additional
principles must be made with respecting the general principles;
b) Second general principle regards the correctness, integrity, adequateness,
promptness and accuracy of information disseminated on the capital market. The
information transmitted to the public must be disseminated in a way which will
assure that its significance and sense is easily understood.
In the text of the Recommendation, by analyzing this principle, it is indicated the fact
that “lack of information (knowledge) represents the source of market imperfection”.
If the information is not transmitted or understood or is interpreted in a wrong way by
the person which are suppose to receive it or is intentionally tendentious or distorted,
then the price quotation can become completely artificial, and the market can’t act its
part;
c) The third general principle refers to the treatment equality of all investors;
d) The fifth general principle refers to the conduct of persons which transact on
grounds regulated on the capital market. They must act with respecting the Codes
principles, avoiding putting in danger the efficiency and credibility of the market
by actions which tend to make a quick profit.
The additional principles with relevance in the market manipulation domain are:
e) The first additional principle stipulates that all persons which regularly transact on
the capital market have the duty of promoting the capital market and to assure the
investors of the transparency and correctness of the businesses on the capital

50
 market, by respecting the highest standards of moral probity and business
professionalism;
f) The second additional principle refers to the financial dealers 1 that have the
obligation to respect the fundamental objective and general principles stated in
this conduct code. Also, they are forbidden to imply in any manipulation action
which might disturb the normal movement of the capital market;
g) The third additional principle has a special relevance in the matter of market
manipulation, because introduces an interdiction to all market participants to
instigate, direct or through an intermediary, to break the general principles in the
conduct code, the national legal regulations in the capital market domain. In the
same time, it is forbidden to exert pressure in order to obtain information which is
not yet public and can not be divulged without breaking legal dispositions. It is
prohibited, also, to exert pressure in order to close transactions which violate the
legal regulations and are incorrect;
h) The seventh additional principle, regards, directly and implicitly, the capital market
manipulation. According to this principle, any attempt of manipulation made by
persons acting alone or with other persons, having as objective or result the
raising or lowering the price of securities by criminal methods is contrary to the
fundamental purpose of the Conduct Code. The criminal methods may by
publishing or spreading false information, exaggerated or tendentious or any other
instruments which have in sight to encumber the normal movement of the market.
It is recommended, in the same time, setting up the obligation of reporting
manipulation actions in the task of the financial intermediates, members of
supervision organisms, administrators and the issuer’s managers.
Even if it was situated at the level of a Recommendation, without having the strength of a
normative act in order to impose obligations in the member states, the Conduct Code regarding
the transactions with securities in 1977 exerted a kind of influence on the national legislations,
these starting with the 9th decade of the past century to contain specific regulations more
coherent and detailed with regards to the actions of market abuse 2 .

§2. The circumstances of adopting the European Directive regarding market abuse

In 1989, the Council of Economic European Communities adopted Directive no. 592
from 13th of November 1989 3 about the coordination of regulations regarding transactions on
the base of privilege information (insider dealing directive), normative act which was in force
until the adoption of Directive no. 6/2003 regarding the market abuse, being the only regulation
at a European level which described and foresee the implementation of sanctions for market
abuse actions.
Towards the end of the last decade of the past century, once with the development of
capital markets in the member states of the European Union and because, on one side, to the
extension of the globalization process of economies, and on the other side because of making

1
Financial dealers- the persons professionally implicated in transactions with securities, according to the
European Commissions Recommendation no. 534- “Definitions”.
2
Financial Services Act 1986 from Great Britain, Law 531 from 2nd of August 1989 from France etc.
3
Official Journal of European Communities no L 334 from 18.11.1989

51
substantial progresses in the process of integrating the economies of the member states, as a
follow up of the Maastricht Treaty from 1993 and Amsterdam in 1997, intervened the necessity
of deepening the legislation system in the Union by creating a norm system which would
protect the integrity and stability of capital markets from the disturbing factors which might
affect the credibility of these markets.
Among the causes which influenced the growth of the number of situations in which the
stability of capital markets, financial markets in general, was affected through actions which
can be included in the market abuse sphere, an essential role was played by the level of
invested amounts on these markets, especially by the institutional investors, companies or
multinational investment founds, having at their disposition financial resources enhanced by
the globalization of world’s economies. Because of these important amounts which entered the
market there were created the premises of forming the price of securities according to the will
of these institutional investors, by affecting the natural law of demand and supply. From this
came the necessity to define the notions of capital market manipulation and insider dealing in
the frame of new normative acts, obligatory for the states of the European Union.
The decisive reason which stood on the base of starting the process to legislate the
applicable rules on the capital markets in member states had in sight creating a unique Pan
European market. In this context was created the Euro next Stock Exchange destined to be “an
answer to the globalization of capital markets and to offer to investors enhanced liquidity and
small costs” 1 .

Starting with 1998, there are manifestations in the Commission of the European Union
about establishing a unique legislative frame, applicable to the member states that would
regulate the capital market domain. In the meeting of the European Unions Council in Cardiff
in June 1998 it was requested to the European Commission to start an action program to
“improve the unique market of financial services” 2 . In December 1998, in the meeting of the
Council in Vienna, it was settled that is imperious necessary to transpose the consensus on the
necessities of changes and opportunities which the financial markets of the European Union are
confronting in a work plan which will lead to the adoption of necessary measures for
implementing norms appropriated to the pursued objective 3 .
With this purpose, the European Committee formed on the 11th of May 1999 an Action
Plan 4 , in order to adopt the legal measures needed to create a unique market. In this program, it
is stated without ambiguity, the “acuteness” importance of creating “a protection system
against capital market manipulation” 5 . At the same time, inside the elaborated calendar for
introducing the judicial norms needed to the development of a unique European market, and

1
Euro next is the Pan European Stock Exchange created at 22nd of September 2000 through the merger of
the securities markets and derivative instruments in Paris, Amsterdam,
2
The communication to the European Commission Financial Services: Implementing the framework for
financial markets: Action Plan. COM (1999)232, 11.05.99, p. 3,
http://ec.europa.eu/internal_market/finances/docs/action-plan/index/action_en.pdf
3
Ibidem
4
Financial Services Action Plan, COM (1999) 232, 11.05.99
http://ec.europa.eu/internal_market/finances/docs/actionplan/index/action_en.pdf.
5
The communication to the European Commission Financial Services: Implementing the framework for
financial markets: Action Plan, COM (1999)232, 11.05.99, p.6.

52
the harmonization of legislation in the European Union, it is set up as an adoption term of the
Directive on the market manipulation the year 2003 1 .

The document of the European Committee of forming the work group to analyze the
aspects connected with the capital market manipulation 2 contains a series of thesis very
important in the vision of the European Committee in the field capital market manipulation.
In the mentioned document there are enumerated as market manipulation practices:
artificial transactions, providing false or deceiving information, price manipulation.
There are mentioned, on another hand, a series of categories of persons, named in the
press or in the previous norms of the European Union (the conduct code introduced through the
Recommendation 538/1977, the Directive of insider dealing- “Insider dealing directive” no.
592/1989) as having the power to influence the formation of securities price on the capital
market: administrators, managers of listed companies, brokers and dealers, annalists and
financial consultants, auditors, lawyer etc.
The proposal of the European Committee regarding the Directive of market abuse was
finalized in the middle on the year 2001, being transmitted to the Council of the European
Union at 1st of June 3 . On 17th January 2002 is formulated the consultative opinion of the
Economic and Social Committee, and on 14th March and 22nd of October there are voiced out
the opinions of the European Parliament on the first and, on the second reading 4 .
The Directive of market abuse 6/2003 is adopted on 28.01.2003 by the European
Parliament 5 . Its effective application will have to wait 22 months, until 12th October 2004 6 ,
because in this period of time there were adopted by the European Committee the normative
acts necessary for putting in execution the frame- Directive.

§3. Objectives of the European Union’s legislation in the matter of market abuse

Adopting the Directive on market abuse, the Parliament and the European Council
introduced in the judicial circuit of the Union’s member states a series of defining objectives to
the movement of capital markets in that area. The purposes mentioned in the market abuse
Directive contours the activity of the European Committee, competent to elaborate the
European norms of applying the Market Abuse Directive no. 6/2003.
In consideration of these desideratum there must be made interpretations which are given
to different actions which are susceptible of being considered as capital market manipulations.
The objectives considered by the Directive are mentioned in paragraph no. 43 from
“Considerations”:

1
Ibidem, p. 23
2
“Financial Services Action Plan
Forum group on market manipulation”
http://ec.europa.eu/internal_market/finances/docs/actionplan/forum-groups/manipulation1_en.pdf
3
Official Journal of European Communities no E 240 from 28.08.2001
4
http://www.europarl.europa.eu/oeil/FindByProcnum.do?lang=2&procnum=COD/2001/0118.
5
Official Journal of European Communities no L 96 from 12.04.2003
6
http://www.cesr-eu.org/index.php?page=groups&mac=0&id=51.

53
 the necessity to ensure the trust of investors in financial markets by promoting strict
norms in the matter of transparency of those markets;
the necessity of giving the investors a wide range of concurrent instruments, and also
a level of presentation of information and of protection adapted to each investors
situation;
the necessity to ensure that the independent regulatory authorities applied regulation
consequently, especially in regards to combating the economic criminality;
the necessity of a high level of transparency and consultation with all the participants
on the market, with the European Parliament and the Council;
the necessity to encourage innovation on financial markets to ensure its dynamicity
and efficiency;
the necessity to keep the markets integrity through a strict control and capable to react
according to the financial innovation;
the importance of capital costs reduction and making easy the access to the capital;
the balance on a long term of costs and benefits of market participants (including for
small and middle companies and small investors) in the context of applying
measures;

the necessity of promoting competitiveness on the international level of financial

markets of the European Union, without touching the need of international
cooperation;
the necessity of ensuring the equality conditions in the activity of all participants on
the market by setting up communitarian norms any time it is needed;
the necessity to respect the differences between national markets, in case these don’t
prejudice the coherence of the unique market;
the necessity to ensure coherence with other dispositions of the communitarian
legislation in this field, the lack of balance in the process of information and the
lack of transparency being able to compromise the good movement of the markets
and bringing prejudices to consumers and small investors.
It must be shown that the market abuse Directive stated for the first time on the level of
the legislation of European Union the methods in which the capital market manipulation can be
presented, as operational manipulation or manipulation based on market operations
(transactions and trading orders) and informative manipulation or manipulation based of
delusive information dissemination 1 .
In the same time, in paragraph no. 44 from “Considerations” it is indicated that the
Directive respects the fundamental human rights and “principles known especially by the
European Union Charter of fundamental rights 2 , in article 11 and in article 10 from the
European Convention on Human Rights”.
The two legal texts mentioned refer to the expression of freedom, setting up the principle
in which every person has the right to freedom of expression. This right includes the freedom

1
O. Tomezzoli, Market abuse e intermediari finanziari. Informazioni, tecniche negoziali e regole
organizzative:prime considerazioni, Rivista di diritto bancario, augusto 2005, p.9,
http://www.dirittobancario.it/public/Materiale_agosto_2005371319.pdf.
2
The Charter of fundamental rights of the European Union was signed at Nice on 7th December 2000,
being clamed on 12th December 2007 at Strasbourg, before signing the new Treaty of the European Union
in Lisbon; published in Official Journal of European Communities no. C 303 from 14.12.2007

54
of opinion and freedom to receive or transmit information or ideas without the intervention of
authorities and any boundaries.

Article 10 paragraph 2 from the European Convention on Human Rights indicates that
executing these freedoms which come with duties and responsibilities can be submitted to
formalities, conditions, restrains or sanctions stipulated by law, which constitutes necessary
measures, in a democratic society, for the national safety, territorial integrity or public safety,
law protection and crime prevention, health protection or moral protection, reputation
protection or its rights, to stop spreading confidential information or to guarantee authority and
the impartiality of the juridical power.

§4. Sphere of application of the European Union’s legislation in market abuse field

According to dispositions of article 9 from the Market Abuse Directive no. 6/2003, this
European normative act applies to any security admitted to transaction on a regulated market in
at least one member state or for which it was laid down a admittance demand in order to trade
on a regulated market, regardless if the transaction had place on that market or not.
Paragraph 35 from “Considerations” of the Market Abuse Directive shows that for the
derivative securities which are not admitted to transaction, but which do go under the incidence
of this directive, each member state must be able to sanction the actions committed on its
territory or abroad and which refer to financial subsidiary instruments admitted to transaction
on a regulated market situated or which work on its territory or for which it was laid down a
demand of admittance to transaction on this regulated market. Also, each member state must be
able to sanction the actions committed on its territory which refer to the financial subsidiary
instruments admitted to transaction on a regulated market in a member state or for which it was
laid down an admittance demand to transaction on this market.
According to article 10 from Directive no. 6/2003, member states apply interdictions and
obligations foreseen by the directive:
1. actions committed on their territory or outside of its territory with reference to the
securities admitted to transaction on a regulated market situated or that works on
their territory or for which it was laid down a demand of admittance to transaction
o a market;
2. actions committed on their territory regarding to the securities admitted to
transaction on a regulated market in a member state or for which it was laid down
a demand of admittance to transaction on that type of market.

The directive doesn’t apply – out of considerations which regard monetary policy,
currency or handling public debt- to trading made by another member state, by the European
System of Central Banks, by a national center bank, by any organism appointed officially or by
any person which acts on their account. Member states can extend this derogation also on their
federal states or local authorities similar in what regards handling public debt.
The prohibitions foreseen by the directive don’t apply to transactions with personal
stocks made within the “buy back” program and neither the measures of stabilizing a security.

55
 §5. System of European norms issued in the application of Market Abuse
Directive no. 6/2003 (level 2 and 3 of implementation of Market Abuse Directive)

Directive no. 6/2003 has a directive of a Lamfalussy type which includes four levels of
application and implementation of European norms 1 .

The technique of adopting and implementing juridical European norms through a

structured system on four levels was a preoccupation of the European legislator in the
beginning of the XXI century. On July 17th 2000, the Council instituted a Committee of the
wise men of regulating European markets of securities.
In his final report on February 15th 2001, the Committee of the wise men proposed the
introduction of new legislative techniques, based on a four level approach: frame principles,
application measures, cooperation and control of application. At level 1, the directive should
limit to announcing the big “frame” principles; at level 2, technical measures of application
should be adopted by the Commission, supported by a committee.
The European Council from Stockholm on 23 and 24 March 2001 subscribed to the final
report of the Committee of the wise men, especially to its approach proposal of the four levels,
for the process of elaborating the communitarian legislation in the field of securities to become
more efficient and more transparent.

5.1. The normative acts of the European Committee regarding the market abuse- level 2
of implementing the Market Abuse Directive no. 6/2003 2

The market abuse directive contains a number of 22 articles, the normative text being
extremely concentrated. It was felt the need to elaborate, in this context, a set of additional
dispositions which would make easier transposing into national legislations the dispositions of
market abuse Directive and effective application of these.
Level 2 of implementation of judicial communitarian norms in the matter of market abuse
is materialized through a set of regulations adopted on the level of the European Committee.

1
Level 1- Frame principles. Level 1 is represented by the traditional process of decision making at the level
of European Union, for example adopting directives or regulations proposed by the European Committee
and on which the European Parliament and European Council decide.
Level 2- Technical measures of implementation. This level refers to the technical measures of
implementation which sustain operationally the Level 1 principles, adopted, also, by European legislation.
These measures are adopted, adapted and actualized by the European Commission after they were
transmitted to the European Council of Securities and the European Parliament to make their own opinions.
The European Committee of Securities Regulators (ECMVR) assist the European Commission in regards to
the technical details of implementation that will be includes in the Level 2 legislation. The implementation
measures from Level 2 don’t change the principles agreed to Level 1.
Level 3- Guides and standards. To facilitate the coherent implementation and uniform application of
European Unions legislation by the Member States, the European Committee of Securities Regulators can
adopt guides and standards that refer to the uncovered aspects by the communitarian legislation. These
standards must be compatible with the legislation promulgated at Level 1 and Level 2.
Level 4- Supervision of the implementation stage of the legislation. This stage refers to the supervision of
implementation of European Unions legislation in the national legislation by the European Committee ,
and in case of not respecting it, the launch of sanction procedures, www.cnvmr.ro
2
The competence of the European Committee is settled in the article 211 from the Amsterdam Treaty, the
power to issue normative acts (directives and regulations) being set in article 249 in that Treaty.

56
 On December 22nd 2003 there were adopted two directives and an application regulation
of Directive no. 6/2003:
Directive no. 124/22 December 2003 of the European Commission of implementation
of Directive 6/2003 of Parliament and the European Unions Council, referring to
definition and dissemination by the public of privilege information, and market
manipulation definition 1 ;
Directive no. 125/22 December 2003 of European Committee of implementation of
Directive 6/2003 of Parliament and the European Union’s Council, referring to
the equitable presentation of investment recommendations and mentioning
interest conflicts 2 ;
Rule (CE) no. 2273/2003 of the European Commission, of setting up the application
norms of Directive 2003/6/CE of European Parliament and the Council regarding
derogation foreseen for the buy back program and stabilization of securities 3 .
In 2004, the European Commission adopts Directive 2004/72/CE from April 29th 2004
regarding the application norms of Directive 2003/6/CE of European Parliament and the
Council in regards to commercial practices which are admitted, definitions of confidential
information for the derivative securities in the base products, establishing the lists of persons
which have access to confidential information, declaring operations made by the persons which
execute the leadership responsibilities and notification of the suspicious operations.

5.2 Documents of the Committee European Securities Regulators (CESR) 4 regarding

level 3 of implementation of the market abuse Directive

Level 3 of implementation of market abuse Directive has the most significant relevance
from a practical point of view, because on this branch there are expressed the orientations of
capital market authorities from the member states of the European Union with regards to the
interpretation of regulations from level 1 and 2 of the European legislation in the matter of
market abuse.
The first guide of the Committee European Securities Regulators regarding the standards
of implementation of European Unions legislation in the field of market abuse was adopted at
May 11th 2005 5 and referred to accepted market practices, notions introduced by the article 1
paragraph 5 from the abuse Market Abuse Directive no. 6/2003 and types of practices
considered by the European Committee of Securities Regulators to represent capital market
manipulation.
The first guide of the Committee European Securities Regulators centers on three market
problems which, in the opinion of Committee European Securities Regulators members, are
considered to be a priority: market accepted practices in regards to market manipulation,
indications in regards to what members of the Committee European Securities Regulators

1
Official Journal of European Communities no L 339 from 22.12.2003
2
Official Journal of European Communities no L 339 from 24.12.2003
3
Official Journal of European Communities no L 336 from 23.12.2003
4
The Committee European Securities Regulators (CESR) was established on the grounds of the European
Commission Decision no. 2001/527/EC (Official Journal of European Communities no L 191 from
13.07.2001) According to the dispositions of article 1 and 2 from the Decision, Committee European
Securities Regulators is a consultative group in the securities field of the European Commission.
5
http://www.cesr-eu.org/index.php.

57
considers to be market manipulation, and the indications and a general format of report for
notification of the suspicious transactions.
The second guide of the European Committee of Securities Regulators, regarding the
implementation standards of European Unions legislation in the market abuse field was
adopted on 12.07.2007 1 and has in sight the regime applicable to privilege information.
The second guide deals with the aspects connected with elements which constitutes
privilege information according to the market abuse directives, legitimate motives for
postponing the publication of privilege information, when a information that refers to the
expectation orders of a client constitutes privilege information and the list of persons which
have access to privilege information.
In the course of this paper we will analyze in detail the opinions of Committee European
Securities Regulators stated in the two guides (especially in the first one) previously
mentioned, adopted in the application of European directives contained in the normative acts
from the first two levels of implementation of the incident norms in the matter of market abuse.
In 2006, near the European Commission it was established a European group of experts
in the securities markets (European Securities Markets Expert Group- ESME) which would
give juridical and economical consultancy regarding the application of European Union’s
directives referring to securities, through Decision no. 2006/288/CE 2 . This group of experts has
two main missions:
- gives consultancy to the Commission for the analysis made by the
Commission regarding the juridical coherence of the legislative frame
of European Union and, for applying the national law;
- gives technical consultancy when the Commission requires regarding
aspects of actual interest about securities markets in the European
Union, and rating agencies and financial annalists.

1
Ibidem
2
Official Journal no L 106 from 19.04.2006

58
 Chapter III
Securities markets
Characteristics and methods of trading on different market
segments

We don’t want to make an exhaustive presentation of all types of securities markets and
all market segments used on the entire globe. This is not the purpose of this paper.
With all that, a discussion about the essential elements of transactions suspicious of being
illicit can’t have place without taking in consideration the existent types of markets, their
characteristics and methods of transaction on those markets.
The existence of a manipulative character of transactions or trading orders can be
analyzed only by knowing with precision the characteristics of the market where certain
transaction with securities take place.
According to regulations in force, participants or potential participants to the market,
investors, potential investors and dealers, must be informed immediately in regards to the
volume and price of transactions made on all the market segments.
The diversity of the investment process generated the creation of complex trading
systems that will correspond to the needs of business environment, in order to stimulate the
desire to invest. The electronic trading system is designed in a way that facilitates this process
of information. Sometimes, the absence of knowledge on market segments characteristics and
the methods to transact in those market segments can lead to wrong appreciations from the
market participants with regards to the price or volume of securities and even to a fundamental
wrong decision making.
It is useful to considers, when there is analyzed or investigated a certain behavior of
investors in securities, the legal norms applicable to every market segment on which there
were made transactions, and the legal applicable frame of alternative trading systems
(multifunctional) or out of the stock exchange.
In Romania, there are still a few types of securities that effectively are transacted 1 ; the
markets and market segments on which they work on are, at present time, under the incidence
of norms and principles announced by the European Directive no. 39/2004.

1
According to the article 2, paragraph (1), line 11 from the Law no. 297/2004, securities that can be
transacted legally in Romania are:
a) Securities;
b) Titles of participation to bodies of collective placement;
c) Instruments of the monetary market, including state titles with a due date less than a year and
deposit certificates;
d) Future financial contracts, including similar contracts with final clearance in founds;
e) Forward contracts on interest rate, named FRA;
f) Swaps on interest rate, on exchange course and on stocks;
g) Options on any security named in lines a)-d), including similar contracts with final clearance in
founds; this category includes also options on exchange course and on interest rate;
h) Derivative securities on commodities;

59
 In the doctrine 1 there were discovered a series of factors which influence the financial
modern markets at the moment. Out of these factors, the use of technology of communicating
the information is considered to be a constant and universal factor, while a series of another six
factors are seen as variable elements which can affect the markets in question: structure and
microstructure of the market; actors present on the market; factors which exert a short term
influence, like the course trend and performances of issuers; factors which exert a long term
influence, like macroeconomic development, national and global economic growth or the
monetary policies; legal frame; investors attitude, influenced by external factors, like
government changes, optimism of the press etc.

Section 1

Rating securities markets

§1. Depending on the moment of listing trading securities

Depending on the moment of listing trading securities there are primary markets and
secondary markets.
Primary markets are the markets for recently issued securities and admitted to transaction.
On the primary markets securities are purchased directly from the issuer, generally through
social capital accretion.
In the primary markets, securities are sold only through the public offerings 2 .
The public offerings by which the issuer transfers the property right on his securities to
investors, can be, primary initial public offerings or primary proper public offerings.
According to article 2, paragraph 1, line d) from the European Unions Directive
2003/71/EC 3 “public offer of securities” is a communication addressed under any form and by
any mean to persons which has enough information on offers conditions and on the titles that
will be given, that it will put the investor in the position to decide the purchase or the
subscription to these securities: this definition applies, also, to securities investments through
financial dealers.
The initial public offering (IPO 4 ) represents an offer which has as objective securities
which are offered for the first time to the public.
According to article 2.2, line m) from the Communitarian Guide of supporting the
member states to promote capital investments with risk in small and middle companies 5 the
initial public offering is the launch process of the sale or distribution of companies stocks to the
public for the first time.

i) Any other instrument admitted at transaction on a regulated market in a member state or for which
it was laid down an admittance application to transaction on that market.
1
E. Avgouleas, The Mechanics and Regulation of Market Abuse, Oxford University Press, 2005, p. 11
2
Gh. Piperea, Commercial associations, capital market, communitarian acquis, All Beck Publishing,
Bucharest, 2005, p. 335
3
Official Journal no L 345 from 31.12.2003
4
“Initial public offerings” The acronym IPO is the term known all over the world that signifies an initial
public offering.
5
Official Journal of European Communities no C 194 from 18.08.2006

60
 The primary proper public offering is the public offering which has as objective securities
proposed by the issuer that has issued before, the same type of securities admitted to
transaction, in order to be subscribed on the issuing date.
A public offering for sale realized by the issuer that has issued before securities
transacted on a capital market, has the characteristics of a proper sale offering, which didn’t
accomplish the conditions of the initial public offering. This type of offer is realized, also, on a
primary market, when speaking about recent issued stocks.
On the primary market there is only one seller, the issuer, and many buyers, investors that
decide to purchase his titles in the public offering. It has been shown 1 that the primary market
is an issuers market, because financial flows are working from the investors to the issuers.
On the primary market transactions are being realized at the prices in the prospect or offer
document.
The secondary markets are the markets on which there are transacted securities which
have already been issued. On the secondary markets the securities are traded between investors
through authorized dealers, brokerage houses or banks. On these markets, in certain cases and
in certain law systems, there can be done direct transactions between investors. On the
secondary markets are taking place the majority of capital market transactions.
The secondary market is an investors market, because financial flows are working from
an investor to another investor 2 .
On the secondary market transactions are made at prices established after the application
of the demand and supply law.

§2. Depending on the level of regulation and issuers obligations

Depending on the level of regulation and the issuers obligations there are regulated
markets and other unregulated markets or systems of trading (multilateral, alternative)3 .
Regulated market, defined in the European legislation 4 , is that market where incident
rules and norms are established by a state body (Parliament, government authority etc.).
Unregulated market (alternative trading system) is that market which is not submitted to
any norms issued by a governmental body, but by the markets operator. The unregulated
market is submitted to demands of admission to transaction, transparence and protection of the
investors a little less severe that those on the regulated market.
The unregulated market can consist in a multilateral system or a bilateral system of
trading.

§3. Depending on the type of trading orders

1
Gh. Piperea, cited paper, p. 336.
2
Ibidem, p. 336-337.
3
As we will detail in the next session the main characteristics of markets and transaction systems form the
norm of European Union we will resume on at highlighting the essential differences between the two
market types.
4
We will present also the definition analysis of regulated market according to dispositions of Directive
no.39/2004 in section 2, §1 of this chapter, p. 83-88.

61
 Depending on the type of trading orders introduced in the trading system are the auction
markets order driven type, firm quotations markets, quoten driven type and markets with
informative quotations.
The order driven market is an auction market where the price is set after orders of sale
and purchase are published, through the competition between the demand and supply of a
certain security. The investors that intent to transact a certain security introduce, through the
broker, orders of sale or purchase in a central trading system. In these orders are mentioned the
price, quantity and execution method (all or nothing, stop loss, fill or kill etc.). The sellers and
buyers, actually their brokerage houses don’t know the identity of the other party, this market
being impersonal 1 .
The transactions are closed at the highest price from the bid (the price offered for that
security by the buyer) or at the smallest price from ask (the price asked by the seller). In case
that an investor wants to buy a security that has no quotation in ask the transaction will be
impossible, no matter the price, because this means that there is not on sale a security of that
type. Also, the absence of any quotation in bid blocks the sale of that security.
For example, New York Stock Exchange is an order driven market.
The market of firm quotations is an electronic trading system where the prices are formed
on the base of the quotations introduced by the market makers and of the persons that close
transactions on their own account- dealers 2 . The advantage of this market is that it improves
liquidity, meaning that at least a package of securities can be traded, at the price posted by the
market maker or by dealer 3 .
It has been shown 4 that to realize a transaction on the quote driven market in between the
two parties it must exist a double “date”: the price and the moment to coincide.
Among the most important quote driven type markets there is NASDAQ Stock Market.
The informative quotations market is a negotiation market, where there are closed, in
general, transactions with securities packages of a certain size. The negotiations are realized
through brokers or dealers.

The informative quotation represents the intent, but not the obligation, to buy or sell a
number of securities at a certain price. The informative quotation is posted in the trading
system of a market with the purpose to inform the other market participants about the intent to
transact a certain security, in a certain volume.
On the market of informative quotations there are closed deal transactions. In general,
informative quotations are posted on a special market segment, attached to a main order driven
market.

§4. Depending on the type of trading systems

Depending on the type of trading systems there are markets based on multilateral systems
of trading and markets which work through bilateral systems of trading.

1
Gh. Piperea, cited paper, p. 337.
2
http://www.investopedia.com/terms/q/quotedriven/asp.
3
http://moneyterms.co.uk/quote-driven.
4
R.A. Schwartz, R. Francioni, Equity Markets in Action: The Fundamentals of Liquidity, Market Structure
and Trading, Publisher: John Wiley and Sons, 2004, p. 71.

62
 The multilateral system (multifunctional) of trading is that system in which the prices are
formed through the auctioning system, based on the sell and purchase orders introduced by
market participants. The regulations on which the multifunctional systems work are issued by a
state body, in the case of regulated markets or a system operator with auto regulation
attributions, authorized by a state authority, beginning from the principles subscribed in the
normative acts adopted by the Parliament or the authority of regulation of the capital market.
The bilateral system of trading is that system in which a dealer (investment firm) posts
selling and purchasing quotations for certain titles. Transactions are closed between investors
and dealer, at courses negotiated between dealers.
The bilateral systems justify their existence and efficiency in the case of small size
companies, that don’t meet the listing criteria on a regulated market and neither the liquidity
conditions (and maybe the admittance criteria) in order to be transacted in a multilateral system
of transaction, but for which it is needed the setting up of a market price for the issued titles.
The OTC market (over the counter) is a trading system that has a bilateral character,
inside being transacted securities that don’t meet the admittance conditions on the stock
exchange organized markets and are transacted through a dealer’s network. The securities
transacted in the Over the Counter system are unlisted. In the situation in which an investor
wants to acquire them they must address themselves to a broker/dealer which offers quotations
for these securities. The price is, in general, formed through negotiation between brokers, in the
electronic or telephonic system 1 .
The Over the Counter Market from the United States works on regulations elaborated by
the National Associations of Securities Dealers (NASD).
A bilateral system of trading is offered also by the systematic internalizer, investment
company which offers its clients the possibility of closing transactions outside the regulated
market or a multilateral system of trading, foreseen by the European Unions legislation.

Section 2

Markets and stock exchange systems according to the Parliament

Directive and of the European Council 2004/39/CE- MIFID 2

The European Directive no. 39/2004 regulates securities markets in the conditions of
globalization and decision to integrate trading systems from member states.
The purpose of this directive, as it is outlined in paragraph 5 of the Preamble is “setting a
global regulation frame which will regulate trading securities, no matter what the trading
methods are used in this purpose, to guarantee a high quality of execution of the investors
operations and to keep the global integrity and efficiency of the financial system”.
Markets in Financial Instruments Directive identifies two main types of markets or
trading systems, defining them in article 4, paragraph 1, line 14 and 15: regulated market and
multifunctional trading system- Multilateral Trade Facilities (MTF) 3 . To these there are added
the trading system operated by a systematic internalizer through which there are executed
transactions by a bilateral trading system.
1
www.investopedia.com.
2
Markets in Financial Instruments Directive
3
This system is named also MTS- Multilateral Trade System.

63
 The OTC (over the counter) system through which there are made transactions, also, on
bilateral bases are not included in the regulation sphere of Markets in Financial Instruments
Directive, because of the occasional character of transactions executed on these markets, but
also the fact that the Over the Counter system supposes making transactions outside a stock
exchange market.

§1. Regulated market

1.1 The notion of regulated market. The main norms which apply to regulated markets.

In the Market Abuse Directive 2003/6/CE it is mentioned in article 1, paragraph 4 that the
notion of regulated market means the market defined in article 1, and paragraph 13 from the
Directive 93/22/CE.
According to this directive, abrogated by Directive 2004/39/CE, regulated market is a
market for securities named in section B from the Directive’s annex1 which:
- appeared on the list of regulated markets, made out by every member state that
had the quality as a original member state;
- functioned regularly;
- was characterized by the fact that regulations issued or approved by competent
authorities defined the functioning conditions of the market, conditions
regarding the market access and, in the case that the Directive 79/279/CEE
was applied, conditions which needed to be fulfilled by these securities before
being transacted effectively on the market;
- imposed the respect of all dispositions in regards to the report and
transparence in the directive.
The abrogation of Directive no. 93/22/CEE by the Directive no. 2004/39/CE- Markets in
Financial Instruments Directive (normative act of the European Union adopted later than the
Market Abuse Directive 2003/6/CE leads to the modification of legal norms regarding
regulated markets, considered by the market abuse directive, so, now, the regulated market to
which the legal dispositions refer in the matter of market abuse is the one defined by the
Markets in Financial Instruments Directive.
According to the dispositions of article 4, paragraph 1, line 14 from the Directive
2004/39/CE, regulated market is a multilateral system, exploited and administrated by an
operator, that assures or facilitates the confrontation- even inside the system and according to
non-discretionary norms- of multiple selling and buying interests expressed by third parties for
securities, in a way that leads to closing contracts regarding securities admitted to transaction
in its norms and in the system’s norms, that is authorized and functions regularly.
The Romanian capital market law mentioned the following characteristics of a regulated
market in article 125:
a) it is a trading system which works regularly;
b) it is characterized by the fact that issued and submitted regulations to the National
Securities Commission approval define the functioning conditions, access on the
market, conditions of admission in the trading process of a security;

1
In section B of the annex there are mentioned the securities.

64
 c) respects the requests of report and transparence regarding assuring the protection
of investors established by the present law, and also the regulations issued by the
National Securities Commission, according to the communitarian legislation.
In Romania the regulated markets are organized and administrated by a juridical person,
in the form of a company on stocks that issues normative stocks, according to Law no.
31/1990, authorized and supervised by the National Securities, Commission named from now
on, market operator. In article 36 from Directive 39/2004 it is stipulated that the state authority
must have the right to authorize function of regulated markets.
In article 36, point 1, paragraph 4 from the Markets in Financial Instruments Directive,
the operator of the regulated market gives information, including an activity program that
represents especially the operation titles considered and the organizational structure needed to
permit the competent authority to assure that the regulated market instituted, with the occasion
of initial authorization, all the facilities needed to respect the obligations asked by the law.
The state authorities must act so the operator has the responsibility to watch as the
regulated market which is administrating respects all the requests foreseen by the present title.
Also, the Directive 39/2004 indicates without any doubt that it has to be assured the frame in
which the operator is skilled to exert rights of the regulated market which is administrating.
From the point of view of the situations in which the market abuse intervenes, article 36,
point 4 from the Markets in Financial Instruments Directive shows that the public right which
regulates trading in the systems of regulated markets is the public right of the member states of
origin of that regulated market, but with showing respect to regulations of the Market Abuse
Directive no. 6/2003.
The movement of the regulated markets in member states of the European Union has to
submit to imperative requests, pronounced at a principle level in article no. 39 from the
Markets in Financial Instruments Directive. So, the regulated markets from within the Union
are obligated to:
a) adopt dispositions to clearly detect and administrate the harmful potential effects,
to their functioning or to the participants, of any interest conflict that would
appear between the requests of proper functioning and their own interests or the
ones of the owners or the operators, especially in the case where this type of
conflict risks to compromise the execution of a function that was delegated to
them by the competent authority;
b) to be equipped properly to administrate the risks to which they are exposed, to
institute facilities and proper systems which will allow them to identity all the
significant risks that may compromise their good execution and to apply effective
measures of lowering the risks;
c) to institute facilities that will guarantee a good administration of the technical
operations of the systems, mainly those emergency procedures efficient to cope
with the improper function situations of trading systems;
d) to adopt transparent and non discretionary norms and procedures that will ensure
an equitable and orderly transaction and that will set the objective criteria in the
efficient execution of orders;
e) to instate mechanisms in order to make easier the efficient and on time
finalization of transactions made in their systems;
f) to dispose, at the moment of authorization and later at any time, of financial
resources enough to facilitate their orderly movement, taking into account the

65
 nature and grandeur of closed transaction on the market, and of the range and
level of risks to which they are exposed.
In regards to the admission at transaction of the securities on regulated markets, there
must be respected the requests mentioned by article 40 of the Markets in Financial Instruments
Directive. According to this legal text, the regulated markets are imposed to adopt norms
which:
- will guarantee that any security admitted to transaction on a regulated market
can made the object of a equitable, orderly and efficient transaction and in the
case of securities, it can be transacted freely;
- in regards to the derivative securities, these norms assure, especially, that the
particularities of the derivative contract permits an orderly quotation and an
efficient regularization.
Regulated markets need, on the other hand, to institute and maintain efficient facilities
that would allow verifying if the issuers of securities which are admitted to trade on a regulated
market respect the dispositions of the communitarian law in regards to obligations in the matter
of initial, periodical and specific information.
Regulated markets must institute facilities which allow the access of members or their
participants to the process of information made public on the grounds of the communitarian
law.
According to dispositions of article 47 in the Directive no. 39/2004, European
Commission publishes a list with all the regulated markets in the Official Journal of the
European Union and the list is brought up to date once a year. Also, publishes and updates the
list on the internet website every time a member state notifies a modification of its own list.

1.2 Obligations of the market operator regarding combating market abuse

All these regulations with general character have as objective creating a prevention
system of the markets dysfunctional elements and maintaining an ordered and efficient market,
by encumbering market abuse actions which would affect the markets credibility and send
away investors.
In this sense there are also the dispositions of article 43 from Directive no. 39/2004,
according to which “regulated markets supervise transactions made by members or participants
in their system, in order to identify any violation of those norms, of any transaction condition
of nature to disturb the markets stability or any conduct that might suggest market abuse”.
Operators on the regulated markets have to signal to the competent authorities of the regulated
market any significant violence of the norms or any trading condition of nature to disturb the
stability’s market and can engage a market abuse.
The operators of regulated markets must give without delay valid information to
competent authorities in the matter of investigation and pursuit in justice about the market
abuses on the regulated market and support the authority in order to investigate and pursue in
justice the market abuses committed in the systems of regulated markets or by these.
In regards to the respect of the transparence principle, a mandatory request to prevent
market abuse, article 44, point 1 from the Markets in Financial Instruments Directive stipulates
that regulated markets, need to make public the purchase and sell prices, and the importance of
trading positions expressed on these prices, posted by their systems for stocks admitted to
transaction. The state authorities need to impose that these information have to be made known

66
by the public in reasonable commercial conditions and continuously, in the normal trading
program. The competent authorities may exonerate regulated markets from the obligation to
make public the previous mentioned information by the type of market or by the type and size
of orders. These competent authorities have the right to give up this obligation in regards to the
transactions which size is unusual large reported to the normal size of the market for the stocks
or stocks categories which are traded.
Post- trading, regulated market operators must make public the price, volume and
moment of executed transactions in regards to the stocks admitted to transaction. The details of
all of these transactions must be made public in reasonable commercial conditions and, as
much as possible, in real time.

§2. The multilateral trade system (MTF)

2.1 The main juridical norms applicable to the Multilateral Trade System

The multilateral trade system is defined in article 4, paragraph 1, and line 15 in Directive
2004/39 /CE as a multilateral system, exploited by an investment company or a market
operator, that assures the meeting- even inside the system and according to non-discretionary
norms- of multiple selling and purchasing interests expressed by third parties for securities, in a
way that leads to closing contracts 1 .
The necessity of defining and creating a legal frame for a multifunctional (alternative)
system of trading was mentioned in “Considerations” of the Markets in Financial Instruments
Directive, in paragraph 5, stipulating that “it is needed to recognize the appearance, in parallel
with regulated markets, of a new generation of organized trading systems, which have to be
submitted to certain obligations in regards to maintaining the efficient and orderly movement
of financial markets”.
The regulated market and Multilateral Trade System have as common characteristic that
they both represent multilateral trade systems where an investment company intervenes, for
each transaction on its own and not as intermediary, without taking risks, between the buyer
and the seller. Regulated markets and Multilateral Trading System are not forced to
administrate a “technical” system for comparing orders.
Article 5, line 2 from Markets in Financial Instruments Directive gives the right to state
authorities in the member states of the European Union to permit all the operators on the
regulated market to exploit a Multilateral Trade System, with the condition to verify in advance
that these operators respect the dispositions of authorization for the regulated market.
Article 14, line 1 from Directive no. 39/2004 states that investment firms or operators
which exploit a Multilateral Trade System must set up norms and procedures which are
transparent and non- discretionary in order to guarantee a transaction process equitable and
orderly and to set up objective criteria for an efficient execution of orders.

1
In the Romanian legislation this system was called “alternative transaction system” being defined
according to article 2 paragraph (1) line 26 from Law no. 297/2004 as “a system that combines more parties
that buy and sell securities, in a way that leads to closing contracts, called also a multilateral transaction
system”.

67
 An extremely important precaution about admitting into transaction in the frame of a
multilateral system is contained in article 14, line 6 in the Markets in Financial Instruments
Directive:
“In case a securities admitted to transaction on a regulated market is transacted in the
same time on a Multilateral Trade System without the issuers consent, he can not be submitted
to any obligation of initial financial information, periodical or specific in regards to this
Multilateral Trade System” 1 .
In the Romanian law of capital market, in article 139, paragraph (2) it is shown that
securities which do not accomplish the conditions in order to be admitted to transaction on a
regulated market can be transacted in an alternative trade system. This alternative system can
be operated by a system operator, which can be an authorized dealer or a market operator.
The main conditions that an alternative system must accomplish, in the vision of the
Romanian legislator are:
a) to ensure an orderly and correct movement of operations;
b) to ensure the access of dealers in a non-discriminatory way to the alternative trade
system and an equal treatment of participants;
c) to guarantee that procedures applicable to the system have the power to assure the
possibility to obtain the best price, at a certain moment;
d) to ensure enough information in regards to the given orders and closed
transactions, according to the minimal transparency standards;
e) to respect the National Securities Commission requests about prevention and
determination of market abuses, prevention of money laundry and financing
terrorism acts.

2.2. The obligations of investment companies and operators which administrate a

Multilateral Trade System in regards to prevention and combating market abuse

The investment companies or the operators which manage a Multilateral Trade System
need to give, when the case, enough information to the public or to ensure access to this
information to allow users to form an opinion about investments, keeping into account in the
same time the nature of the users and the type of securities that are traded.
The investment companies or operators which exploit a Multilateral Trade System must
inform clearly the users about their responsibilities regarding the regularization of transactions
executed on that Multilateral Trade System. In the same time, investment companies or
operators that exploit a Multilateral Trade System are obligated to adopt the necessary
dispositions to favorites the efficient regularization of transactions made through systems in the
Multilateral Trade System.
According to the dispositions of article 71, point 5 from the Markets in Financial
Instruments Directive, any existent system which fits into the definition of a Multilateral Trade

1
This norm is questionable from the point of view of respecting the principle of investor’s protection, as
long as in the directive there isn’t defined the notion of “issuers consent”. It must be shown that a norm
with a similar content and sense is mentioned in article 40, point 5 in Markets in Financial Instruments
Directive, applicable to the case of regulated markets. The absence of expressing consent from the
organism with the power to representation and decision on behalf of the issuer may lead to a masked
delisting. This problem is placed mainly in the case of the former communism states, like Romania, where
setting up a capital market had special difficulties, a part of the most important issuers being listed based on
economic policy decisions of the state organisms, in the privatization process.

68
System exploited by an operator of a regulated market is authorized as Multilateral Trade
System on the request of the operator on the regulated market, with the condition that he
respects the norms equivalent to the ones imposed by the present directive for the authorization
and exploitation of Multilateral Trade System and the condition for the demand to be presented
before 30 October 2007.

§3. The systematic internalizer

Transactions with securities admitted to transaction on a regulated market or a

multifunctional (alternative) system of trading can be made, in certain conditions, by the
systematic internalizer. In the Markets in Financial Instruments Directive considerations it is
stipulated on point 49 that closed transaction by members or participants on regulated markets
or of the Multilateral Trade System must not considerate all as made within the frame of a
regulated market or of a Multilateral Trade System. Transactions closed by members or
participants in a bilateral way and which do not fulfill all the obligations settled for a regulated
market or a Multilateral Trade System on the ground of the present directive should be
considered as closed transactions outside a regulated market or a Multilateral Trade System.
According to the Markets in Financial Instruments Directive, article 4, paragraph 1, point
7, systematic internalizer means an investment company (firm) 1 which, in an organized,
frequent and systematic way, trades on its own account, executing orders of clients outside a
regulated market or a Multilateral Trade System. The systematic internalizers in stocks must
publish a firm price in regards to the stocks admitted to transaction on a regulated market for
which there are the systematic internalizers and for which there is a liquid market. For the
stocks which there aren’t a liquid market, the systematic internalizers communicate the prices
to their customers on request, according to article 27 from Directive no. 39/2004.
The systematic internalizers can decide the size or the sizes of transactions for which they
set up a price. For a certain stock, each quotation has one or more firm prices of selling and
buying, for the size or sizes that might reach the normal market size for the category of stock
that the stock belongs to. The price or prices reflect, also, the market conditions which are
predominant for this stock.
The stocks are grouped in categories on the base of arithmetic average of the orders value
which are executed on the market for that stock. The normal market size for each category of
stocks is a representative size of the arithmetic average of the orders value executed on the
market for stocks which are part of each category of stocks.
For each stock, the market is made of all the orders executed in the European Union for
that stock, with the exception of the ones which refer to a large size in report with the normal
market size for that stock.
The systematic internalizers make public their prices regularly and continuously in
normal hours of transaction. They have the right to actualize their price at any moment. Also,

1
“Investment company” means any juridical person whose occupation or normal activity is giving one or
more services of investments to third parties and executing one or more than one activities of investment
with professional title, according to MIFID article 4, point 1, paragraph 1. From the definition of
“Investment Company”, in the Governments Emergency Order no 99/2006, approved with modifications
by Law no. 227/2007, result that in Romania by Investment Company it is understood an association of
financial investment services, in the meaning of Law no. 297/2004 regarding the capital market.

69
they are authorized, in exceptional market situations, to rethink them. The price is made public
so it is accessible to other participants on the market in reasonable commercial conditions. In
the case where an investment company is a systematic internalizer in stock and in other
securities, the obligation to post the price should only apply to the stock.
According to article 27, point 4 from the Markets in Financial Instruments Directive, the
competent authorities (in case of Romania, National Securities Commission) verifies:
a) the regular updating by the investment companies of selling and buying prices
published and maintaining prices that would correspond to the predominant
conditions on the market;
b) investment companies must respect the conditions mentioned in line (3) of the
fourth paragraph about giving the best price.
The systematic internalizers are authorized to select, by their commercial policy,
objectively and non-discriminatory, the investors to whom they allow access to their prices.
They have, in this purpose, clear norms which regulate the access to their prices. The
systematic internalizers can refuse forming a commercial relation or can stop this relation with
the investors on the base of commercial considerations, like the investor’s solvency, the
counterparty risk and the final regularization of the trade.

In these conditions, we can speak about the existence of a certain type of market,
operated by the systematic internalizers, that can give certain indications about the liquidity
and price of securities, but the executed transactions through these internalizers can not be
treated like the transactions made on a regulated market or even in a multilateral trade system.
In Romania, the institution of the systematic internalizer doesn’t work; no investment
company is authorized in this sense by the National Securities Commission. So, the National
Securities Commission needs to adopt regulations of the secondary legislation in order to
implement Markets in Financial Instruments Directive.
The Directive 2004/39/CE doesn’t apply to the trading systems outside the stock
exchange over the counter (OTC), because, as it is shown in paragraph no. 53 of
“Considerations”, they ensure the frame for the transactions which “by nature, are occasional
and don’t have a regular character, is made with wholesale counterparties and are part of a
commercial relation that characterizes by transaction which exceed the normal market size and
it is made outside the systems used on a normal basis by the certain company to develop the
activity as a systematic internalizer”.

§4. Main rules regarding trading securities in the system created by the Markets in
Financial Instruments Directive

The European Commissions Regulation no. 1287/2006 1 , of applying Directive

2004/39/CE of the European Parliament and the Council regarding the obligations of
investment firms to keep track and register, to report transactions, transparence of the market,
admitting securities to transactions and defining the term in the sense of the Directive, sets up
the conditions of securities transactions on financial markets of the European Union.

1
Official Journal of European Communities no L 241 from 02.09.2006

70
 An investment firm or a market operator which manages a regulated market or a
multifunctional (alternative) system of trade must publish a series of information about the
transaction activity. Thereby, it must be published, on the course of the normal trading program
the total number of orders and stock which those orders represent on each level of price, for the
best five offers and the best five demands.
In the case of a trading system based on quotations, the entity which administrates the
trading system publishes, continuously, for each stock, on the course of the normal trading
schedule, the best five offers and the best five demands of each market shaper for that specific
stock, along with the values that correspond to those prices. The published quotations are the
ones that represent firm engagements of buying and selling stocks that indicate the price and
volume of stock on which the registered market shapers are willing to buy or to sell. In
exceptional market conditions, the indicative or unilateral prices are permitted only for a
limitative period of time. In case an investment firm or a market operator manages a trading
system with a periodical auction, then that public entity publishes continuously, for every
stock, on the course of normal trading schedule, the price that would correspond the best to the
trading algorithm system and the value that might be realized at that price by the participants in
that system.
According to the article 18, line 1 dispositions in the Regulation, the competent
authorities can give derogations to the systems administrated by the Multilateral Trade System
or a regulated market, in case which the systems respect one of the following criteria:
a) must have a trading methodology where the price is set according to the reference
price generated by another system, and that reference price is published on a high
scale and it’s considered, in general, by the market participants as being a reliable
reference price;
b) registers the negotiated transactions, each of this respecting the next criteria:
i. transaction is made at the current value which is balanced or in the limits of this value,
as it results from register orders or from the value of quotations of market makers of a
regulated market or of the Multilateral Trade System which manages that system or, in
the case where the stock is not transacted continuously, in the limits of percentage of an
adequate price of reference, this percentage and this price being set up previously by the
system’s operator;
ii. transaction makes the object of other conditions than the current market price of the
stock .
A negotiated transaction is, according to article 19, a transaction which implies members
or participants of a regulated market or of a Multilateral Trade System which is negotiated
privately, but is executed in the regulated market or in the Multilateral Trade System and in
case in which the member or participant in cause assumes one of this tasks:
a) transacts on his own account with another member or participant which acts on the
account of a client;
b) transacts with another member or participant, both executing orders on their own
account;
c) acts on the account of the buyer and on the account of the seller;
d) acts on the account of the buyer, while another member or participant acts on the
account of the seller;
e) trades on his own account from the order of a client.

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 According to article 29, paragraph 2 from Directive no 39/2004 (Markets in Financial
Instruments Directive), competent authorities have the prerogative to exonerate investment
companies or operators which exploit an Multilateral Trade System of the obligation to make
public the current prices of purchase and sale and the depth of the market at those prices, in the
case in which the transactions refer to a large size in report to the normal market size for the
stocks or category of stocks 1 .
According to the dispositions of article 27, paragraph 2 from the Directive no. 39/2004
(Markets in Financial Instruments Directive), for each stock, the competent authority of the
most relevant aspect of the market, the liquidity, sets up, at least annually, on the base of the
arithmetic average of order values executed on the market of that stock, the category of stocks
which it belongs to. This information is made available to all participants on the market. It is
considered that an admitted stock on transaction on a regulated market has a liquid market, in
the cases in which that stock is traded daily, with a free float equally or larger than 500 MEUR
and respects one of these conditions:
a) the daily average number of transaction with that stock is no less that 500;
b) the daily average value of transactions for that stock is no lower than 2 MEUR.
A member state can specify the minimum number of liquid stocks for that state. The
minimum number of liquid stocks is not more than five. Each competent authority assures the
elaboration and publishing of a list of all liquid stocks for which they represent the relevant
competent authority (article 22 from Regulation no. 1287/2006). The calculation of the free
float of a stock excludes the holdings that exceed 5% from the total of vote rights of the issuer
except the case in which that holding is of an organism of collective placement or a pension
fund.
In the case of a limit order of a customer regarding stocks admitted to transaction on a
regulated market, which is not immediately executed in market’s conditions, the investment
companies are forced to adopt measures which would facilitate high speed execution of this
order, making it public instantly, under an accessible form to other market participants, except
the cases in which the client gives a contrary instruction. Member states have the freedom to
decide that the investment companies will respect this obligation, transferring the limit order to
a client of a regulated market or a Multilateral Trade System. The competent authorities from
the member states of the European Union have the possibility not to apply this obligation in the
case of limit orders of an unusual large size.
According to article 31 from the Regulation no. 1287/2006, it is considered that a
investment firm publishes the orders with a price limit of their clients, which don’t have to be
executed on the spot, in case that firm sends the order to a regulated market or an Multilateral
Trade System which manages a trading system as a order book or assures the publication and
the execution of the order as easy as possible once the market condition permit this.
An important element in the analysis of the presence and implications of some market
manipulation actions is the obligation of competent authorities relevant for a certain stock
which is admitted to transaction on a regulated market, to ensure the effectuation of following
calculations about that stock, as soon as the year closes:

1
According to the article 20 in the European Commission Regulation no. 1287/2006, an order is considered
to have a large size compared to the normal market size, in the case where it is equally or larger as size in
report to the minimal size of the order set in the Annex 2 Table 2 in the Regulation no. 1287/2006. As
example, a minimal value of an order considered large sized, in the case where the daily average value of
transactions is less than 500.000 Euro, is of 50.000 Euro.

72
 a) the daily average value of transactions;
b) the daily average number of transactions;
c) in the case of liquid stocks, the free variation at 31 December;
d) in the case of a liquid stock, the average value of the executed orders.

Section 3 Types of markets on which stock exchange transactions are closed

in Romania

In Romania, the movement of the regulated markets and multifunctional systems (called
also alternative) of transaction is realized according to the National Securities Commission
Regulation no. 2/2006 1 regarding the regulated markets and alternative trading systems. This
regulation sets norms regarding authorization, organization and movement of market operators,
system operators, regulated markets and alternative trading systems, according to dispositions
of Law no. 297/2004 regarding capital market.

§1. Market segments regulated on site 2

1.1 Enumeration of market segments and specification of general applicable rules of

trading on a regulated spot market in Romania

In Romania, the main market operator, Bucharest Stock Exchange, operates on many
market segments. We will use the term market segment to define the execution place of
transactions which can be included in a trading system, extensively described by the Markets in
Financial Instruments Directive and the Law of capital market in Romania, as representing
either a regulated market, either an alternative system (multifunctional of trading). The
terminology of regulations of the market operator Bucharest Stock Exchange speaks of “market
types” to describe all segments which are included in the category of regulated market from the
point of view of primary legislation.
In present, according to article 162 in Chapter VIII- “Stocks trades” of Title III in the
Bucharest Stock Exchange Code- market operator3 - “Trading and supervision”, stocks are

1
Approved by President Order of the National Securities Commission no 15/09/02.2006 (Official Journal
no. 228, from 14.03.2006)
2
Spot market is a market of commodities or securities that are paid and delivered immediately after sale.
The contracts sold or bought on this market produce their effects immediately. It is also called cash market
or physical market; because the prices are set on sight at markets course
http://www.investopedia.com/terms/s/spormarket.asp.
3
The Bucharest Stock Exchange Code- market operator, with later modifications was approved through
these decisions of the National Securities Commission:
- Decision no. 2602/14.10.2006 regarding Book I- Regulated on spot market;
- Decision no. 3390/13.11.2006 regarding modifications to Title III from Book I- Regulated on spot
market;
- Decision no. 720/17.05.2007 regarding modifications to Title III from Book I- Regulated on sport
market;
- Decision no. 926/14.06.2007 regarding Book II- Regulated on spot market;

73
transacted at the Bucharest Stock Exchange on the next market segments: The Regular Market,
Deal Market, Odd Lot Market, Buy-In Market and Sell-out Market. Adding to these, there is
also Market of Special Operations.
According to article 165, Bucharest Stock Exchange establishes at the level of Regular
Markets, Odd Lot and Deal the application of general parameters with regards to stock
exchange orders and stock exchange transactions to maintain an orderly and transparent
market, and avoiding eventual errors made by the stock exchange agents at the moment of
introducing orders in the system.
In order to maintain an orderly and equitable market and assuring the protection of
investors against significant variations of price, Bucharest Stock Exchange established the
following rules (parameters of protection) regarding trading orders:
a) any order which quantity (volume) doesn’t respect the condition imposed for
minimal quantity (volume) admitted is rejected by the system;
b) if the price of an order introduced by a stock exchange agent doesn’t fit in the
maximum admitted variation, then that order is rejected by the system;
c) by the markets conditions, the General Manager of Bucharest Stock Exchange can
set for a certain symbol, in the Odd Lot market, a maximum variation of orders
price different from the one foreseen for the Odd Lot market;
d) transactions closed on the auxiliary markets of the Regular market are not taken
into consideration in the statistics in regards to price, calculated on the Stock
Exchange level (for example: the opening price, the closing price, average price,
price of the last transaction, maximum or minimum price).

The signification of dispositions in the Bucharest Stock Exchange Code- market operator
in the matter of capital market manipulation is given by the influence which certain
transactions can have, carried on main markets or on auxiliary markets, on the investor’s
perception susceptible of being mislead the price and volume of demand and supply of certain
securities.
To understand the meaning of operations made on auxiliary markets and differences,
sometimes significant, of price and volume towards the main market, situation sometimes
confusing for certain uninformed investors, it is important to point out the role which markets
have in the movement mechanism of the capital market.

1.2 Regular market

- Decision no. 1171/12.07.2007 regarding modifications on Title I, V and VI from Book I-

Regulated on spot market;
- Decision no. 1219/17.07.2007 regarding modifications on Chapter XIII, Title III from Book I-
Regulated on spot market;
- Decision no. 2098/31.10.2007 regarding modifications on Preliminary Title, Title II- Chapter II,
Title III-Chapter IV and Chapter IX from Book I- Regulated on spot market;
- Decision no. 2606/17.12.2007 regarding modifications on Title II and Title III- Book I- Regulated
on spot market;
- Decision no. 168/31.01.2008 regarding modifications on General Dispositions, Preliminary Title,
Title I, Title III- Book I- Regulated on spot market;
- Decision no. 505/13.03.2008 regarding modifications on Book I- Regulated on spot market,
Preliminary Title and Title III.

74
 Regular market is the main market of the stock exchange, an “order driven” 1 market,
where stocks are transacted on transaction blocks which determine their reference price.
In order to determinate the effects of a transaction on price or volume of securities which
is traded it has to be taken into account also the maximum price variation admitted in a trading
session on different market segments.
On the Bucharest Stock Exchange market segments, the maximum price variation
admitted in a trading session is set in Annex no. 7 of the Bucharest Stock Exchange Code.
According to this, on the Regular Market (Main Market), the maximum price variation of a
security in a trading session is +/- 15% from the reference price of the current session. For a
certain symbol, the general manager of the Bucharest Stock Exchange can set a different
maximum variation admitted.
The size of the standard trading block, according to Annex no. 7 from the Bucharest
Stock Exchange Code- market operator, is of 100 securities, for the Regular Market.
Regular Market has four important stages: pre-opening, opening, pre-closing and closing.

For the Regular Market a special importance, from the theme of this paper, has the
method of closing transactions by orders introduced in the system.
In the stage of pre-opening, orders are introduced in the trading system, but transactions
aren’t closed.
The opening price is determined on the base of an algorithm, called fixing algorithm.
The application of fixing algorithm means determining the opening price based on the
prices of existing limit orders for the specific security, on that main market, and on the base of
one of the following prices:
a) the reference price of the current trading session, in case that there weren’t closed
transactions for that security on the main market in the current trading session;
b) the price of the last registered transaction in the current trading session for that
security on the main market, in case there were closed transactions for that
symbol on main market.
The opening price is determined keeping into account the following characteristics, in a
decreasing order of importance:
a) maximum volume which needs to be traded;
b) minimizing the lack of balance in the volume of securities 2 - in case it can be
transacted the same maximum volume at multiple potential opening prices;
c) the minimum percentage variation of potential opening price towards the
reference price of the last trading session- in case it is possible trading on multiple
price levels of the same maximum volume of securities which has the same
minimum lack of balance of securities towards the:
1. reference price of the current trading session, in case there were not
registered transactions for that security on the main market in the current
trading session, no matter the stage in which there is the symbol entity- the
market;

1
The order driven market is an auction market where the price is determined by posting sale or purchase
orders, according to http://www.investopedia.com/terms/o/orderdriven.asp.
2
By lack of balance in the volume of securities it is understood the number of securities that remain
unexecuted in the frame of a price level, after the closing of all the possible transactions according to that
price level.

75
 2. the price of the last registered transaction in the current trading session for
that security on the main market, in case there were registered transactions
for that symbol on the main market.
d) the maximum price- in case it is possible the transaction on multiple price levels
of the same maximum volume of securities that has the same minimum lack of balance of
securities and the same minimum percentage variation.
In the opening stage, the execution priority of orders upon opening is identical to the
posting priority, for categories of orders which are possible on the market, being, in a
decreasing order, the following ones:
a) market orders (MKT);
b) limit orders with better price than the opening price;
c) limit orders with the same price as the opening price.
In the calculation of opening price and volume, market orders will be taken into account
as participating in the execution on each level of price.
In the opening stage of the market, transactions are closed when there are introduced in
the system two transaction orders of opposite sense, having as objective the same security.
Orders are posted and executed, in a decreasing order of importance, by the next criteria
[article 64, paragraph (1) Title II of Book I of the Bucharest Stock Exchange Code- market
operator]:
a) order price;
b) on the same price level- by the type of account, in a decreasing order of priority,
as Client account, Institution account, Own account (House), relevant persons
account (Staff), Insider account, combined account (Mixed);
c) on the same price level and type of account- by the time of introduction of order
in the system or proper time to the last modification which determines changing
of priority, according to the precedence principle (FIFO 1 : first come first served).
Mechanisms of demand and supply determine closing the transaction, on this auction
market, when a market participant , is either a seller, either a buyer, accepts the introduced
price in a previously introduced order in the trading system and introduces a contrary sense
order at that price. The operation is made, of course, by the authorized intermediary who acts
on the clients account or the brokerage firm that he represents.
The orders which are introduced in the market and are executed at the moment of
introduction will be executed with those orders in the system which has the biggest priority of
execution, according to article 74, paragraph (2) in Title II of the Bucharest Stock Exchange
Code.
In the pre-closing stage, in the Bucharest Stock Exchange system there are applied the
same rules as in the pre-opening stage.
In March 2008 it was introduced in the Bucharest Stock Exchange Code- market operator
Book I a new market stage- “Closing”, regulation applicable from 23.04.2008, which gives,
according to article 75 in Title III of the Bucharest Stock Exchange Code, to the general
manager of the stock exchange the possibility to establish the use of fixing algorithm for a
market or for a symbol entity on the market. In this situation, closing price will be determined
on the base of fixing algorithm applied based on the criteria taken into consideration at the
application of the algorithm in the “Opening” stage of the market.

1
FIFO - first in first out.

76
 The closing price, determined according to fixing algorithm is set based on the prices of
existing limit orders for the security in question on the main market, and based on one of these
prices:
a) the reference price of the current trading session, in case there were not registered
transactions for that security on the main market in the current trading session;
b) the price of the last transaction registered in the current trading session for that
security on the main market, in case there were registered transaction for that
symbol on the main market.
It must be shown that the expression used by the Bucharest Stock Exchange Code is not
the most appropriate, because it doesn’t indicate clearly the method to set up the closing price.
In reality, the legal norm analyzed must be interpreted as:
- the closing price is determined based on the price of existent limit orders for
that security;
- in case there are not introduced in the pre-closing stage limit orders having as
object a certain security, the closing price is determined based on the price of
the last transaction from that session or based on the reference price, if they
were not transacted in the session from the day in question.
According to article 31 from Title III of Book I of Bucharest Stock Exchange Code-
market operator, in the “Closing” stage it is calculated, based on fixing algorithm, the price and
quantity (volume) of closing, there are identified possible transactions, there are given quantity
(volume) of securities and transactions are closed, for the market for which that stage will be
applied.
This alteration of the Bucharest Stock Exchange Code has a special meaning in regards to
establishing the closing price and, as consequence, of reference price. Considering the effect
which is producing the reference price on the capital market operations, we must notice that
this alteration of the Bucharest Stock Exchange rules can have major consequences from also
the perspective of capital market manipulation through determination of an artificial reference
price.
In the closing stage the Bucharest Stock Exchange system doesn’t permits to his agents to
introduce, modify, rethought, suspend, resume or execute stock exchange orders, but only to
visualize information in regards to orders, informative quotations, firm quotations, deals,
transactions, reports, statistics.

1.3 Deal Market

Deal Market is an auxiliary market of the Regular market, of negotiation, for which the
Bucharest Stock Exchange sets a certain minimum value of trading, foreseen in Annex no.7 of
the Bucharest Stock Exchange Code. The maximum percentage variation is of +/- 15% and is
admitted on the Deal market also.
The maximum variation of price of stock exchange orders on the Deal Market reports to
the reference price in the main market (Regular market), while the price of transactions
executed on this auxiliary market doesn’t participate to establishing of reference price of
stocks.
The transaction block has the same size as the one on the Regular market – 100 securities.

77
 Deal Market is the negotiation market on which deal type transactions take place. Deal is,
according to article 1, paragraph (1), point 32 from the Preliminary Title of the Bucharest
Stock Exchange Code- market operator, a firm offer of purchasing or buying of a certain
number of securities, which is sent directly by a stock exchange agent, called initiator, to
another stock exchange agent, called counterparty. The identity of the two parts is not public
for other Participants (intermediaries).
On the Deal Market operates, according to Bucharest Stock Exchange Code- market
operator, the institution of the transaction block with the one of the minimum value of the
order, this being 700.000 RON. The maximum percentage variation admitted on the Deal
market reports to the price of reference set up on the main market.
On the Deal market there are made transactions on prices negotiated previously by
dealers for large packages of securities and at slightly different prices from the price of Regular
market, being included in the maximum variation admitted towards the reference price. The
absence of this possibility created by the Deal Market would block the transfer of large
packages of securities, because of rules operating in the formation of price on the auction order
driven market. Deal market serves in practice, for example, for the sale of a significant package
of securities of a listed company, price being negotiated prior to the transaction closed on the
market, respective prior to the introduction of sale and purchase orders.
The closing mechanism of transactions on Deal market is, in the Opening Stage, the
negotiation of selling a package of stocks by two stock exchange agents connected to the
trading system of the Bucharest Stock Exchange. The stock exchange agent, called initiator,
introduces in the system an offer (deal) for purchasing or selling. The counterparty, the stock
exchange agent which receives the deal order from the initiator, confirms the received offer or
continues the negotiation by transmitting to the initiator a counter offer. The negotiation
process closes when the deal is confirmed, moment which coincides with registration in the
system of the deal transaction.
It is important to apprehend that, in the Bucharest Stock Exchange system, the
counterparty has the option to refuse the deal offer received, and the initiator has the possibility
to cancel the deal offer transmitted. In the Deal Market it is forbidden to use group accounts.

1.4 Odd Lot market

Odd Lot market is the auxiliary market of the Regular market, order driven type, on
which securities are transacted in smaller quantities than a transaction block.
On the Odd Lot Market the maximum percentage value admitted for a session is +/- 25%.
Maximum price variation of the stock exchange orders in the Odd Lot market reports to
the reference price from the main market (Regular market), while the price of the executed
transactions on this auxiliary market doesn’t participate to the establishing of stock reference
price.
On the Odd Lot market the rule of the transaction block doesn’t work.
Odd Lot market offers the possibility of transaction of smaller packages of stocks than
the standard size of the block (100 stocks). It is a market on which you can see what it is
offered and you can introduce purchase orders. The seller has a passive role- he posts the
quantity and price and waits for the buyer 1 .

1
http://www.kmarket.ro/documentare/arhiva/bvb2.html.

78
 1.5 Buy-in and Sell- out market

Buy- In and Sell- Out markets are auxiliary to the Regular Market, order driven type,
initiated by the Bucharest Stock Exchange in the procedures to correct the mistakes or at the
request to the Central Depositary, in conformity with dispositions of the contract closed
between the Bucharest Stock Exchange and the Central Depositary.
Buy – In and Sell – Out markets have the exclusive role to serve to the correction of
mistakes which appeared in trading process. According to article 149, paragraph (1) from Title
III, Transaction and monitoring, of the Bucharest Stock Exchange Code- market operator,
Bucharest Stock Exchange correct errors through special buy-in transactions and through the
procedure of imposed purchase (buy- in) on the request of the Central Depositary, according to
dispositions of the contract closed between the Bucharest Stock Exchange and Central
Depositary.
Article 150, paragraph (3) notes the procedure of execution of these buy-in transactions
with a special character: Bucharest Stock Exchange transmits a message in the system to all the
Participants 1 , announcing the beginning of the procedure of imposed purchase (buy-in).
Bucharest Stock Exchange will introduce in the system, in the Buy-In market, in the name of
the Participant initial seller and on the account indicated by him, a purchase order for the
quantity and clearance term mentioned in the solicitation received from the Central Depositary,
at the maximum piece admitted for that session. To the participant in cause is not allowed to
alter this order.
That order will remain in the trading system until it will be fully executed. If the order is
not executed in the session in which was introduced for the first time, at the beginning of the
next sessions Bucharest Stock Exchange will modify the order’s price so it will represent the
maximum admitted price for each of those sessions.
In a similar way, in the Sell-Out market the specialty department of the Bucharest Stock
Exchange introduces one selling limit order, called initiation order, whose price is the
minimum admitted price for that symbol in the Regular Market from the previous session.
There can be in the same time multiple trading sessions in the Buy-In and Sell-Out
markets for different Symbol-Market entities that are administrated in an independent way and
that can have different time durations. The participants (dealers) are announced through the
trading system of the Bucharest Stock Exchange in regards to the opening and closing of the
trading sessions in these auxiliary markets.

1.6 The market of special operations and public offers

A special category of the market administrated by a market operator, including by the

Bucharest Stock Exchange, is the market segments that refer to the public offerings and special
operations.
On this market categories (market segments) there are made transactions only in the
public offerings or special operations frame. For that, the specific regulations of these
operations are different from the ones which belong to regular markets. The creation of these
market segments was necessary in order to make easier the execution of transactions with

1
According to article 1, paragraph (1) from Title I of the Code, participants are the intermediaries that
perform financial investment services in Romania, are enrolled in the Public Registry held by the National
Securities Commission and in the Participants Registry held by the Bucharest Stock Exchange.

79
special character, operation impossible in the conditions imposed by the parameters of regular
market, on which it is determined a reference price of securities and on which there are
restrictions regarding the maximum fluctuation of price admitted in a stock exchange session.

It must be mentioned that these order driven markets, the transaction block is a security,
and the introduced orders open orders 1 .
Market segments of the public offers are, according to article 222, paragraph (1) of Title
III of the Bucharest Stock Exchange Code- market operator: the market of public offerings of
primary sale, the market of public offers of secondary sale, the market of public offerings of
secondary purchase.
In each of these markets, operations are developed according to rules applicable to the
type of security, dispositions of the offer prospectus/offer document or type of offer. There will
be a price value at which the transactions are developed, foreseen in the prospectus or offer
document which will be considerably different than the reference price of a security, set on the
Regular market, in case we speak about secondary offers.
According to dispositions of article 227 from the same title of the Bucharest Stock
Exchange Code, there is at the level of the Bucharest Stock Exchange a distinct market, called
“Special operations market”, of a POFSV type, on which there are executed special order sales.
This “special order sale” method is used for selling securities packages of the same type and
class of a Issuer, with a larger volume or equally to 5% or having a value of at least 500.000
Euro, calculated at the exchange rate set by the National Bank of Romania, valid for the day of
closing the formal agreement on the sale of that package between the intermediary and the sale
person (article 226 from the Bucharest Stock Exchange Code- market operator).
The special order sale is a procedure used, usually, in the case of forced execution on
securities of an issuer admitted to transaction on a regulated market and which are held by a
debtor.
On the POFSV market are allowed only limit orders, and the percentage limit of the price
of these orders doesn’t apply, according to article 227, paragraph (2) and (3).

According to article 231, before the date of introduction of the sale order in the system,
Bucharest Stock Exchange will attach to the symbol afferent of a special order sale the POFSV
market then will give to all the intermediaries the access right to that symbol.
The sale intermediary will introduce on the POFSV market, on the first working day after
the reception by the Bucharest Stock Exchange of the notification regarding the development
of the operation (first day of development of the operation), the sale order for the whole
quantity having the price equally to the offer price set by offerer. The buyers introduce the
purchase orders on the market, on the 3 working days of development of operation, starting
with the date of the introduction of the order sale in the system. The purchase orders will have
the characteristics of quantity and price indicated by the buyers, respecting the specifications of
the offerer in the ad regarding to the special order sale.
This market type works on the auction system, the best price offered by the buyers being
the price at which the transaction will be made. If the set up price of the offerer is not offered

1
Open order- order which is valid until the execution of withdrawal, in the limit of 62 calendar days from
the date of the last actualization of the order, according to article 50, paragraph (1) line b) from Title III of
the Bucharest Stock Exchange Code- market operator.

80
and introduced in the trading system on the first day of development of the operation, no
transaction will be closed.
In the third day of operation development, after the POFSV market is closed, the
Bucharest Stock Exchange will assure the technical conditions for the execution of transaction
on the symbol afferent to the special order sale on the POFSV market. The price of transactions
is unique and calculated according to the opening algorithm 1 .

Of course, transactions closed on the POFSV market doesn’t contribute to the

establishing of reference price.

1.7 Rights market

We will sketch defining elements of the regulated market of the security called “rights”,
as they are specified in the Bucharest Stock Exchange Code- market operator.
It must be shown that, now there can be transacted two types of rights at the Bucharest
Stock Exchange: preference rights and allocation rights.
Preference right is, according to article 2, paragraph (2) in the National Securities
Commission Regulation no. 1/2006 2 regarding issuers and market operators, a negotiable
security, which incorporates the right of his holder to subscribe with priority stocks in case of a
social capital increase, proportionally with the number of rights held at the date of subscription,
in a determined period of time. The preference rights are given to all shareholders enrolled at
the date of registration in the issuer’s book, regardless of their participation to the General
Extraordinary Meeting of the Shareholder or the expressed vote regarding the increase of social
capital. Seen as a securities, the preference right was considered “a movable right that separates
from stock, but is, in the same time, a complement of the right ascertained by stock”3 .
According to article 130, paragraph (6) from the National Securities Commission
Regulation no. 1/2006, the General Extraordinary Meeting of Shareholders Decision of
increasing social capital names also the number of preference rights necessary to acquire new
stocks, price of subscription of new stocks based on the preference rights and the time period in
which it will take place the subscription, price at which there are publicly offered new shares
after subscription based on preference rights, if there is the case. The number or preference

1
According to article 70, paragraph (3) in Title III of Book I of Bucharest Stock Exchange Code- market
operator: Opening price is determined keeping into account the following criteria, in a decreasing order of
importance:
a) maximum volume that can be traded at opening;
b) minimizing the lack of balance in the volume of securities- in case it can be traded the same
maximum volume at multiple opening prices;
c) minimum percentage variation of the potential opening price towards the reference price of the last
transaction session- in case where it is possible the transaction on multiple price levels of the same
maximum volume of securities which havs the same minimum lack of balance of securities;
d) maximum price- in case it is possible to trade on multiple levels of price of the same maximum
volume of securities which have the same minimum lack of balance of securities and the same
minimum percentage variation.
2
Approved by Presidents Order of the National Securities Commission no. 23 from 9.03.2006 (Official
Journal no. 312 from 06.04.2006)
3
St. D. Cărpenaru, C. Predoiu, S. David, Gh. Piperea, Commercial Associations. Regulation, doctrine,
jurisprudence, All Beck Publishing, Bucharest, 2002, p. 476

81
 rights are the same with the number of registered stocks in the issuer’s book at the date of
registration.

If in regards to the preference rights we deal with a legal definition, adopted with the
respect of imperative normative texts, in the National Securities Commission Regulation no.
1/2006, in the case of allocation rights 1 , a definition, adopted by law, doesn’t exist 2 . The
National Securities Commission issued the Notice no. 53 from 30.10.2007 3 , individual
administrative act, as it is showed in its content, in which it was included a definition and
presentation of defining elements of securities called “allocation right”.
According to article 1, paragraph (1) from this Notice, allocation rights are negotiable
securities, issued on short term which certifies the right of its holder to receive a stock which
will be given to him at the moment they register to the SC Central Depositary SA Bucharest of
the increase of social capital. The individual administrative act shows that “allocation rights
can be issued in the case of primary initial public offerings of sale with the purpose of
admitting stocks on a regulated market and in the conditions in which these stocks were not
traded on any other market”.
In case the prospectus of primary initial public offering of sale must be included
information regarding financial status of the issuer, and information regarding allocation rights,
, rights and obligations of investors which own securities and risks afferent to transaction of
allocation rights.
Allocation rights are issued as attachments to stocks and come back, after closing the
period of development of the primary initial public sale offerings, to the persons which
subscribed and paid fully for the stocks in the period of executing the preference right, and in the
case of the public sale offering.
The number of allocation rights is equally to the number of new issued stocks, subscribed
and paid fully in the period of execution of the preference right and in the sale public offering.
The allocation report will be of 1 stock to 1 allocation right.
Transaction of rights is realized, according to article 183 from Title III of the Bucharest
Stock Exchange Code- market operator, in an order driven market, with firm quotations. In the
case of the allocation rights, the date of their maturity (the expiration of their validity) will be 2
working days after receiving by the Bucharest Stock Exchange the notification from the Central
Depositary about receiving from the issuer the complete documentation regarding operation of
increasing social capital. Bucharest Stock Exchange will communicate the date of maturity by its
own system with at least 1 working day in advance.
For trading preference rights there are not imposed price variation limits and minimum
values for stock exchange orders.

1
Transacted for the first time in Romania with the occasion of initial public offering developed for
distribution towards the public of 10% from the social capital of TRANSGAZ SA in an operation of
increasing social capital
2
On the date of going to print of this paper, on the National Securities Commission website was published
a regulation project having as objective the modification of National Securities Commission Regulation
no.1/2006. This normative modification proposition had in sight the introduction in article 2, paragraph (2)
of line e) this formulation: allocation right- negotiable securities which certifies the right of its holder to
receive a stock which will be given to him at the moment of registering in the SC Central Depositary SA
Bucharest of the increase of social capital.
3
Published in the Bulletin of National Securities Commission no 44/2007

82
 In the case of allocation rights there will be applied the disposition of Annex no.7 of the
Bucharest Stock Exchange Code- market operator, regarding the price variation limit. With this
normative disposition and article 3 in the National Securities Commission of Notice no. 53/2007,
results that allocation rights, being transacted only on a regulated market over driven type, are
submitted to the same rules like any other securities traded on the main market of Bucharest
Stock Exchange, with the exception of the possibility of being the object of a deal transaction,
because Deal market is a negotiation market and not a order driven one. So, the maximum
variation daily admitted for the allocation rights is =/- 15%.
The transaction block for the rights is one unit.

1.8 Bonds market

The bonds market doesn’t have in our country a special importance; only the institutional
investors express their interest for this type of securities.
Because of the fact that there are few players on this market, and the ones that are
present, are mainly qualified investors 1 which have departments of professionals on the capital
market investments 2 , the chances of manipulation on the Romanian bonds market are reduced.
With all these, the raising value of bond transactions on the Romanian capital market, and
numerous situations of manipulation on the bonds market is the greatest markets of the world,
justifies a presentation of essential characteristics of trading with these securities.

1
According to article 2, paragraph (1), line 15 from Law no. 297/2004, qualified investor is:
a) authorized entities to operate on financial markets, as credit institutions, financial investment
services associations, other financial institutions authorized and regulated, insurance associations,
collective placement bodies, investment administration associations, pension funds, and other
entities which are not authorized or regulated and whose only object of activity is investing in
securities;
b) authorities of public central and local administration, central credit institutions, international and
regional bodies, like: International Monetary Found, European Central Bank, Investment European
Bank or other similar bodies;
c) legal entities that fulfill two out of the next three criteria:
1. average number of employees in the period of a financial exercise major than 250;
2. total actives valued at more than the equivalent of 43.000.000 Euro;
3. annual business figure gross major than the equivalent of 50.000.000 Euro;
d) certain physical persons, subject of mutual recognition. National Securities Commission can
decide to authorize resident natural persons in Romania, which request to be considered qualified
investors, if these persons fulfill at least two of these criteria:
1. the investor has made transactions of significant size on a regulated market with a frequency
of at least 10 transactions on a trimester in the last four calendar trimesters;
2. the value of portfolio of securities of an investor exceeds 500.000 Euro;
3. investor has worked or works in the financial sector for at least a year, having a position that
requires knowledge about investment in securities;
e) certain small and middle associations, subject of mutual recognition. National Securities
Commission can decide to authorize small and middle associations in Romania, which request to be
considered qualified investors. In the present law, small and middle associations are those commercial
associations that, in conformity with the latest reported financial situations, don’t fulfill two of the three
criteria mentioned on point c).
2
Bonds emission of the European Investment Bank, of total value of 300 million lei was subscribed in
2007 as following: Banks subscribed 64% of the total of emissions, 29% was subscribed to the insurance
associations, 5% to corporations and almost 1.5% to investment founds.

83
 For understanding the evolution of bonds price on the capital market and mechanism of
closing the transactions is necessary to establish the sense of the important righteous institutions
linked to this security.
So:
- Coupon- amount of money corresponding to calculated interest for the coupon
period, owed periodically by the Issuer (The Ministry of Economy and
Finances, in the case of state titles) to the holders of bonds or state titles and
the payment of which he engaged through the document or prospectus of
emission;
- Current Coupon- coupon which coupon period didn’t closed on the date of
transaction clearance and whose obligation of payment becomes demandable
at the closest coupon date established in the document or prospectus of
emission;
- Precedent coupon- the most recent paid coupon, by reporting to the date of
transaction clearance;
- Coupon Date is the day when it becomes demandable the Issuers obligation to
make the payment of that coupon and/or a part of the principal (or the nominal
value, in case of state titles) towards the bonds holders or towards the holders
of state titles, on the reference date set for that coupon;
- Emission date- the date on which it begins to accumulate the interest for the
first coupon for a bond or state title (the date on which it was issued the state
title);
- Date of reference (for bonds)- date which serves for the identification of bond
holders which have the right to receive the coupon and /or a part of the
principal or the whole value or remained value of the principal, according with
the emission document, or other rights set by law. There are set reference dates
for every coupon period. Reference date for the bonds transacted on the
regulated spot market administrated by the Bucharest Stock Exchange is a
working day, prior to the coupon date or due date, with a number of working
days equally to the clearance term of bond transactions;
- Ex-coupon date- date of clearance of transactions closed through the
Bucharest Stock Exchange system, date on which buyers of a bond don’t
beneficiate of current coupon payment and/or a part of the principal. The ex-
coupon date is the working day next of the reference date and marks the
beginning of the ex-coupon period. There are set ex-coupon dates for each
coupon period, with the exception of the period of the last coupon;
- Gross price- of a bond or state title with interest, issued with a due date bigger
or equally with 365 days, represents the price which includes accumulated
interest, mentioned in firm or informative quotation, deal or order introduced
in the Bucharest Stock Exchange system. It is expressed as a percentage from
the value of a bond principal or from the nominal value of a state title;
- Net price- of a bond or a state title with interest, issued with a due date bigger
or equally to 365 days, represents the price which doesn’t include accumulated
interest, mentioned in a firm or informative quotation, deal or order introduced
in the Bucharest Stock Exchange system. It is expressed as a percentage from
the value of a bond’s principal or from the nominal value of a state title;

84
 - Cum-coupon period- time frame expressed in days, between the emission date
and precedent coupon date, inclusive and reference date, inclusive.

Practically, bonds market in the period of payment of the issued coupon is influenced by
the same factors which affect transactions of stocks in the payment period of dividends.
The bonds with fixed interest rate and floating interest rate pre-determined are transacted
based on net price. Bonds with floating post-determined interest rate are traded based on gross
price, according to article 187 in Title III of the Bucharest Stock Exchange Code- market
operator.
Cumulated interest of the cum-coupon transactions is positive, and the cumulated interest
of the ex-coupon transactions is negative. By a cum-coupon transaction, the bond buyer
beneficiates from the payment of the current coupon and pays the seller the positive
accumulated interest. Through an ex-coupon transaction, the seller of a bond beneficiates from
the payment of the current coupon and pays the negative accumulated interest.
The value of a bonds transaction based on net price is determined on the base of a
calculus formula differentiated, as it is about cum-coupon transaction or ex-coupon transaction.
Bonds trading are made implicit on the base of net price. In case where there are not
fulfilled the conditions to trade bonds based on net price, their transactions will be made based
on gross price. In case where a series of bonds are transacted based on the gross price, there
can be introduced in the system only orders and deals with Day availability term.
There are two market segments for bonds: main market which works through the order
driven system based on the principle of automatically execution of introduced orders and Deal
market, of negotiation, like in the case of stocks, where there can be used also informative
quotations.

1.9 Market of state titles

Trading state titles has multiples resemblances with transactions of bonds, their juridical
nature being the same. Like in the case of bonds, the most part of the transactions with state
titles is closed by institutional investors.
State titles with discount issued with the due date of 365 days are transacted on annual
efficiency expressed by percentage.

In the case of state titles, Bucharest Stock Exchange Code- market operator speaks about
the institutions of the market maker that can be an authorized intermediary (Participant at the
Bucharest Stock Exchange trading system). A market maker can develop operations with state
titles on every market. In the execution of obligations that come from being a market maker for
a certain series of state titles, a Participant develops on the main market, in his name and on his
own account, the following operations with state titles from that emission:
a) Introducing and posting firm quotations;
b) Closing transactions based on posted firm quotations.
According to article 201 from Title III of the Bucharest Stock Exchange Code- market
operator, state titles with fixed interest rate and with floating pre-determined interest rate with a
due date bigger or equally to 365 days are transacted on the net price introduced in the system
by the stock exchange agent. The system automatically calculates the cumulated interest, the
gross price and the value of the transaction.

85
 State titles with floating post-determined interest rate are transacted on gross price
determined and introduced in the system by the stock exchange agent.
Like in the case of bonds, state titles can be transacted on two markets: on the main
market, order driven and on deal market, of negotiation, based on informative quotations.
In the period in which for a certain series of state titles there isn’t any market maker, the
transactions with state title from that series are closed only on the deal market.
Closing transactions is made by the automatically execution of an order with the part of
purchase or sale of a firm quotation, which has at a certain moment the efficiency or the best
price in the registry of firm quotations. An order transmitted to the market maker is
automatically executed with the part of purchase or sale of its firm quotation, if the order terms
correspond to the quotation terms in what regards the series of emission, efficiency or net/gross
price, number of state titles and clearance term.
In case where specified number of titles in an order is smaller or equally to the number of
titles from the purchase or sale side of the firm quotation, this will be automatically executed if
all the other terms correspond.
According to article 107 from the Bucharest Stock Exchange Code- market operator, the
firm quotations for a certain series of State Titles are introduced only by the market makers
registered for that series and only in their name and on their own account.
A market maker introduces only one firm quotation for the series of state titles for which
he was registered.
The selling price in a quotation must be higher than the purchasing price.

1.10 Market of participation titles

According to the dispositions of article 219 from Title III of the Bucharest Stock
Exchange Code- market operator, transaction of participation titles on the collective placement
organisms is realized in a similar way with the transaction of stocks.

§2. RASDAQ Market 1

As it is known, RASDAQ Market is operated also by the system of the Bucharest Stock
Exchange, being a part of this system.
The vision of the National Securities Commission at present time is to consider the
RASDAQ Market as an alternative system of trading, to which is applicable the dispositions of
Chapter II- Alternative systems of trading in Title IV- Regulated markets of securities and
central depositary of Law no. 297/2004. Until now, it hasn’t been authorized any alternative

1
The presentation of market segments will be made according to the regulations which are in force at the
time this paper is drafted. It must be said that SC Stock Exchange Bucharest SA registered to the National
Securities Commission in order to be authorized the modification project of the Bucharest Stock Exchange
Code- market operator, through which the regulated market is extended with the category RASDAQ-
STAR, in which are the associations transacted at the moment on the RASDAQ Market, but which fulfill
the legal criteria of the Bucharest Stock Exchange Code- market operator too, in order to be admitted to
transaction on the regulated market. In the same time, it was laid down in the National Securities
Commission the project of the Bucharest Stock Exchange Code as a system operator where there will be
kept listed the other transacted associations at the moment on the RASDAQ Market, that do not fulfill the
legal and regulatory criteria in order to be listed on a regulated market.

86
trading system operator in Romania, because the Bucharest Stock Exchange Code- system
operator didn’t receive the National Securities Commission’s approval.
Legally, having in consideration dispositions of article 155, paragraph (1), line b) from
the National Securities Commission Regulation no. 1/2006, until the authorization of the
alternative trading system by the National Securities Commission, the stocks listed on the
RASDAQ Market are traded according to rules in forced on the date of the adoption of
Regulation no. 1/2006, the dispositions of Regulation of the National Securities Commission
no. 2/2002 1 , modified by a series of later regulations, the Regulation no. 2/2004 2 , Regulation
no. 4/2005 3 and Regulation no. 19/2005 4 . This thesis is held also by the dispositions of
Disposal of Measures of the National Securities Commission no. 7/2005 regarding the
regulation of the normative frame applicable to the RASDAQ Market as a follow up of the
merge of Bucharest Stock Exchange and the RASDAQ Electronic Stock Exchange.
On the RASDAQ Market, according to the dispositions of the Disposal of Measures no.
17/2005, still in force, issued by the National Securities Commission (modification of
Regulation no. 2/2002 regarding the integrity and transparency of the RASDAQ Market 5 ), the
daily maximum variation for quotations/orders and transactions on the RASDAQ Market is
situated on a unique level, of 25%, but only for issuers that carry out certain criteria of
liquidity, as: have registered at least one transaction a week in the last trimester and the
transacted volume in the last 12 months has been at least 1% from the social capital of the
issuer.
For all the other issuers transacted at present on the RASDAQ Market, according to this
Disposal of Measures of the National Securities Commission, there isn’t applied a limitation of
the daily maximum variation of prices.
In article 21, paragraph (2) from Regulation of National Securities Commission
no.2/2002, as it was modified by Regulation of National Securities Commission no.19/2005 on
the RASDAQ Market is applied the next main rules in what regards transaction:
a) Purchasing quotation must be smaller with at least a quotation step than the
reference price plus 25%, so there is possible also posting selling quotations in the
interval of daily admitted variation;

1
Approved by President Order of the National Securities Commission no 90/26.08.2002 (Official Monitor
no.712 from 1 October 2002)
2
Approved by President Order of the National Securities Commission no 7/22.03.2004 (Official Monitor
no. 290 from 1 April 2004)
3
Approved by President Order of the National Securities Commission no 27/02.06.2005 (Official Monitor
no. 496 from 13 June 2005)
4
Approved by President Order of the National Securities Commission no 78/21.12.2005 (Official Monitor
no. 32 from 13 January 2006)
5
It should have been abrogated on 31 December 2005, based on article no. 95 from the Regulation
no.14/2004 that, also, was abrogated by Regulation no.2/2006 regarding regulated markets and alternative
transaction systems until 14 March 2006. Non authorization of neither alternative transaction system by the
National Securities Commission, as was showed by the dispositions of article 89, paragraph (3) from
Regulation no.14/2004, extended automatically the applicability of juridical norms from this regulation. A
contrary interpretation leads to the conclusion that, now, RASDAQ Market is not submitted to regulation.
This situation is unacceptable because neither the presumptive operator, the Bucharest Stock Exchange,
didn’t issued regulations for the market, but also unreal, because, in practice Regulation no.2/2002, with his
later modifications finds its applicability.

87
 b) Selling quotation must be bigger with at least a quotation step than the reference
price minus 25%, so there is possible also posting buying quotations in the
interval of daily admitted variation;
c) Not to produce situations of crossed or closed market (crossed market is the
situation in which the price of a demand exceeds the price of an offer posted for
the same security; closed market is the situation in which the price of a demand
equals the price of an offer posted for the same stock).
Limitation in report with the reference price of the quotations introduced or updated in
the system and the price of transactions for a stock doesn’t apply in these situations:
a) In the first day of stock transactions of a issuer;
b) In the first day of transaction after operating, legally, a modification of the
nominal value of a stock and after distribution of stocks with free title;
c) In other strong motivated cases, with the previous approval of the National
Securities Commission.
Inside RASDAQ market there are many market segments, transactions made within this
market are submitted to different rules.
RASDAQ market is divided, first of all, in two main sections, stocks and rights (in
general, preference rights, but also allocation rights).
Section “stocks” is divided in three categories, according to article 3-8 from National
Securities Commission Regulation no.2/2002, regarding the transparency and integrity of the
RASDAQ market. This segment of the RASDAQ market has similar characteristics with the
one in the Regular Market.
According to article 13, paragraph (2) from the Disposal of Measures of the National
Securities Commission no.7/2005, the Deal transaction, according to the Bucharest Stock
Exchange regulations, will be enrolled on a different market segment dedicated to the
RASDAQ market and will be reflected in the RASDAQ Market reports, as a special
transaction. For the associations listed on the RASDAQ Market there is also an odd lot
segment, called ODBS, on which there are executed transactions with stocks in smaller
volumes than in a transaction block.
A special and important segment of the RASDAQ Market is the XMBS Market which
functions according to dispositions of Bucharest Stock Exchange Regulation no.17/2005
regarding the development of operations with securities traded through mechanism of
negotiation out of the stock exchange market 1 .
Initially, the XMBS Market was called also the Deal market of negotiation, was built on
informative quotations – deal orders- and was working on the principle of direct negotiation
between participants. The out of the stock exchange market of negotiation is considered the
main market for securities transacted on this segment, according to article 2, line a) from the
National Securities Commission Regulation no.17/2005.
The XMBS Market was created in the context of the merger between the Bucharest Stock
Exchange and the RASDAQ Electronic Market and represented in the vision of the Bucharest
Stock Exchange management a technical solution for issuer’s transactions with low liquidity.
Dealers could introduce in the trading system simple informative quotations which,
according to article 1, point 21 in the Preliminary Title of the Bucharest Stock Exchange Code-
market operator, represents the intent, not the obligation, to buy or sell a number of securities
at a certain price. The informative quotation is introduced outside the stock exchange market of
1
Approved by Decision of the National Securities Commission no.2485/22.08.2005

88
negotiation by a participant (dealer), without engaging in any way his responsibility. The
identity of the Participant (intermediary) which posts the informative quotation is visualized by
all the Participants.
According to article 4, paragraph (7) from the previously mentioned Regulation, a
participant (dealer) which posts an informative quotation is not obligated to confirm the deal
orders that he received, which have the same characteristics with the ones of the informative
quotation which was introduced.
These special regulations, applicable to associations, which, after the merger between the
Bucharest Stock Exchange and the RASDAQ Electronic Stock Exchange, didn’t fulfill certain
liquidity criteria, created confusion among investors, but also among dealers and issuers.
The insertion of orders in the system without the real intention of closing transactions,
and the withdrawal of these orders at any moment, without the obligation of closing
transactions when a contrary sense order appears, is, according to all the regulations in force, a
sign of intent of market manipulation, if not even the action of manipulation. From this
perspective, the content of the Bucharest Stock Exchange Regulation no. 17/2005 is contrary to
the spirit and sometimes the letter of the Law of capital market in the domain of manipulation.
The absence of responsibility of the dealers which insert informative quotations statute by the
Bucharest Stock Exchange regulation no.17/2005 are in contradiction with the dispositions of
article 248 reported to article 244, paragraph (5) line a) from Law no.297/2004. It is necessary
that this act exists, with an internal regulatory character for the operated market by the
Bucharest Stock Exchange, at least one reference to the applicability of juridical norms which
define and sanction market abuse and towards the operations with securities transacted through
mechanism of negotiation outside the stock exchange market.
Investors and brokers have reacted towards these regulations which didn’t bring a plus of
value to the capital market in Romania. The growth of the attractiveness and of the liquidity of
the transacted issuers in the XMBS system generated the birth of some enhanced requests of
transparency, safety and correctness in the execution of transactions.
From a practical and technical point of view the Bucharest Stock Exchange changed the
regulations incident to the XMBS Market, so, at the moment, this market has different
characteristics to those in the Bucharest Stock Exchange Regulation no.17/2005.
Thereby, starting with 21.06.2007 the market of informative quotations became an order
driven market, based on firm quotations. The reference price is the average ponder able price
from the XMBS market in the last session where transactions were registered, and the
transaction block is a security. Deal transactions made with issuer’s titles traded on the XMBS
Market are reported in a different section of the market- XDEAL.
Unfortunately, these modifications haven’t found until now a juridical appropriated coat,
so, formally, there must be applied completely at present time the regulations of Bucharest
Stock Exchange Regulation no.17/2005. There is no National Securities Commission decision
in which there are approved the modifications brought to this Regulation, according to article
134 from Law no. 297/2004. More over, the Bucharest Stock Exchange didn’t make public a
regulation which would modify the text norms of Regulation no.17/2005.
The only document disseminated by public is a “Press Release” of the Bucharest Stock
Exchange from 13 June 2007, signed by the department of public relations and marketing,
which refers to rules that will be applied starting with 21.06.2007 for the XMBS market, but do
not engage from a juridical point of view the issuer, the Bucharest Stock Exchange and can not
produce juridical effect for participants at transactions operated by Bucharest Stock Exchange.

89
As such, we consider at this present time, although there are extremely good for the capital
market in Romania that the rules applied to the XMBS Market are outside the law.
Another market that works in the system of operation of the Bucharest Stock Exchange
is the Unlisted Market, of securities with no quotations. Unlisted Market was defined in
Regulation no.4 of BSE as the main market of securities that are not enrolled to the stock
exchange quotation. At the moment, because of the abrogation of Regulation no.4 by the
Bucharest Stock Exchange SA Code- market operator 1 -, Unlisted Market is no submitted to
any legal regulation. The juridical regime applicable to associations transacted on this market
not being mentioned by special norms, it stands out that the only righteous norms incident in
regards to those associations are the ones of common law, stipulated in the Law of commercial
associations no.31/1990.
On the Unlisted market are transacted the stocks of those associations that were listed on
the regulated market or the RASDAQ Market and were degraded, either by demand, either
because of the failure to execute some criteria of transparency, liquidity etc.

§3. Derivatives market 2

3.1 Derivatives. Types of derivatives and applicable juridical frame

The name of derivative securities comes from the fact that its value is derived from the
value of another security that constitutes the active support.
According to dispositions of article 2, paragraph (1), point 12 reported to the ones at point
11 of the same article and line from Law no.297/2004, derivative securities are:
- financial future contracts, including contracts similar to the final clearance in
founds;
- options on any security seen at line a)-d) from point 11 of article 2, paragraph
(1) 3 , including contracts similar to final clearance of founds; this category
includes also options on the exchange rate and interest rate;
- derivative securities on commodities.
By Law no. 227/2007 of approval of Governments Emergency Order no.99/2006,
regarding credit institutions and ad equating of capital, there were introduced in the Romanian
legislation new derivatives, mentioned in Directive no.39/2004-Markets in Financial
Instruments Directive, in Annex I Section C.
These are:

1
Approved by decision of the National Securities Commission no 3390/2006 and by decision of the
National Securities Commission no. 720/2007
2
The market of derivatives is that financial market on which there are transacted standard derivatives
contracts. The members of the market (market participants) initiate sale or purchase positions in these
contracts, and the stock exchange market (the market on which there is transacted derivatives) acts as a
central counterparty, http://en.wikipedia.org/wiki/Derivatives_market.
a) 3 securities;
b) Titles of participation to the collective placement organisms;
c) Instruments of the monetary market, including state titles with a due date under a year and deposit
certificates;
d) Financial future contracts, including contracts similar to final clearance of founds.

90
 - Option contracts, term contracts, swap contracts, term contracts on interest rate
and any other derivative contracts regarding prime matter that need to be
regulated in cash or can be regulated in cash at the demand of one of the
parties (in another case then in the case of violation of obligations or any other
incident that leads to resolution);
- Option contracts, term contracts, swap contracts, fixed term contracts
(forwards) and any other derivative contracts that regards prime matter that
can be regulated by physical delivery, that were not mentioned in other way
and didn’t have commercial purposes, that present characteristics of other
derivative securities keeping into account if, especially, are compensated and
regulated by renown compensation organisms or make the object of some
regulated margin calls;
- Derivatives which serve to the transfer of credit risk;
- Financial contracts for differences;
- Option contracts, term contracts, swap contracts, tem contracts on interest rate
and any other derivative contracts regarding the clime variable, freight taxes,
issuing authorizations or inflation rates or other economical official statistics
that need to be regulated in cash or can be regulated in cash at the demand of
one of the parties (in another case than in the case of violation of obligations
or another incident that might lead to resolution), as any other derivative
contracts regarding actives, rights, obligations, indexes and measures that were
not mentioned in another way in Section C, that present the characteristics of
other derivative securities, keeping into account if, especially, are transacted
on a regulated market or Multilateral Trade System, are compensated and
regulated by renown compensation organisms or make the object of regulated
margin calls.
At the moment, in Romania are transacted derivative securities at the Financial Monetary
and Commodities Stock Exchange from Sibiu, futures contracts, having as active support
different stocks with bigger liquidity, listed on the spot market operated by Bucharest Stock
Exchange, and options having as active support futures contracts transacted at the Financial
Monetary and Commodities Stock Exchange Sibiu. Starting with September 2007 there are
transacted future contracts on indexes BET 1 (BET Index Futures) and BET-FI 2 , called BET-FI
Index Futures at the Bucharest Stock Exchange.
The main characteristics of transactions on the main market of derivatives securities, the
one operated by the Financial Monetary and Commodities Stock Exchange SA Sibiu, are

1
BET, the first index developed by BSE, represents the reference index of the capital market. BET is an
Price index ponders able with the capitalization of the free float of the most liquid 10 listed companies on
the regulated market of BSE. The methodology that it has permits it to be an active support for the
derivative securities and structures products,
http://www.bvb.ro/IndicesAndIndicators/indices.aspx?t=0&m=BSE&i=bet&o=&d=1/15/2008.
2
BET-FI, is the first sector index of the BSE and reflects the ensemble tendency of prices of the financial
investment founds (SIF) transacted on the regulated market of BSE. Ponder ability of companies in index is
made with the capitalization of their free float. BET-FI methodology permits the use of this as an active
support for derivatives and structured products,
http://www.bvb.ro/IndicesAndIndicators/indices.aspx?t=0&m=BSE&i=betfi&o=&d=1/15/2008.

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contained by the Regulation no.4 of the Financial Monetary and Commodities Stock Exchange
Sibiu 1 .

At the Bucharest Stock Exchange derivatives are traded according to dispositions of

Book II of the Bucharest Stock Exchange Code- market operator 2 .

3.2 Futures contracts

Futures contracts are, according to article 5 from Regulation no.4 of the Financial
Monetary and Commodities Stock Exchange Sibiu, standard contracts which create for the
both sides the obligation to buy and to sell a certain active support on the due date and at a
price established at the moment of closing the transaction. A similar definition is given also by
article 1, paragraph (1), and point 14 from Book II of the Bucharest Stock Exchange Code-
market operator.
In the case of futures contracts, the buyer has long positions, meaning he is assuming the
obligation to buy at a certain term the contracts active support, in the amount mentioned in the
contract, at a price determined at the moment of purchasing the futures contract. In this case,
the investor stakes on the growth of value of the active support until the due date on the market
on which is transacted.
Practically, the holder of a long position buys the securities without paying the whole
amount of money, but only a part of this amount called a margin. The borrower in the relation
with the investor which initiated a long position is the brokerage house which allowed him the
margin transaction.
The gain of the holder of a long position will be represented by the appreciation of the
course of active support (stock) on the market on which is transacted, in the time frame from
the moment of the initiation of buying position and the due date or the moment of selling the
contract.
In case of a sale position or short, it is obliged, on the due date, to sell a certain active
support, at the price set at the moment of initiating the position. In this situation, he will stake
on lowering the price of the active support on the market on which is transacted, because he
will have to sell the active support only at the due date, a decrease of price meaning that the
investor will have to pay less money to acquire securities which are the active support in order
to deliver at the due date.
Futures contracts that include a short position represent a sale by absence, the holder of
this contract is assuming the obligation that will sell, at the price from the due date, the active
support that he doesn’t have at the moment of initiating the position, but he will acquire on the
course of the existence of the contract.
Thereby, the initiator of the short position sells the borrowed securities, assuming the
obligation to buy these securities at the due date. The borrower in the relation with the investor
is the brokerage firm which allows him transaction in margin.

1
Approved by decisions of the National Securities Commission no 358.31.01.2006, no 1189/24.05.2006,
no 3457/22.11.2006, no 752/22.05.2007 (being modified in time, the regulation needed later approvals, of
his new content, from CNVM)
1 Approved by Decision of the National Securities Commission no 926/14 June 2007 regarding Book II-
On term regulated market.

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 The holder of the futures contract, in which he has a certain position, as short- seller or
long- buyer, can wait for the due date, situation in which the existence of the contract will stop
or he can close his position on the course of the development of the contract by initiating a
contrary sense position, with the same characteristics, meaning for the same active support, in
the same volume and with the same due date 1 . In this way the investor will cumulate the
position of seller with the one of buyer.
Futures contracts can be with physical delivery or without physical delivery. At the
Financial Monetary and Commodities Stock Exchange Sibiu are transacted futures contracts
without physical delivery. At the due date of futures contracts without physical delivery, the
liquidation of opened positions will be made only by payment of price differences, according
to the specifications of each contract.
Closing open positions of the intermediary associations, which have the quality of
participants in the transaction system and in the compensation-clearance, on its own –House,
and on each client, are made by the Romanian House of Compensation, according to their own
regulations.
In a practical way, the counterparty of each investor on the derivatives market is the
Compensation House, because this entity will pay the positive differences, which represent the
gains of the investors and cash in their loses. This conclusion finds it support in the
dispositions of article 157, paragraph (5) from Law no.297/2004, in which it is indicated
without any doubt the role of the compensation house on derivatives market, this acting as a
central counterparty. The central counterparty is an entity that comes between the system
intermediaries and acts as an exclusive counterparty of these, in what regards their transfer
orders.
The quotation price of a future contract in the session of transaction is represented by the
price of the last transaction on that type of contract and due date. The quotation price at closing
the trading session will be the price of transaction of the last transaction.
The daily variation limits are set for each derivative and for each due date and will be
modified on each case by the compensation house, in order to reflect the changes of the
markets conditions.

3.3 Options

Options contracts are the standard contracts which, instead of paying a bonus, create for
the buyer the right, but not the obligation to buy or sell a certain active support at a preset
price, called exertion price, until or at date of expiration.
There are two types of options:

1
According to article 11 from Title IV- Futures Market of the Bucharest Stock Exchange Code- market
operator, Participants on the Derivatives Market and clients are held responsible in regards to the obligation
that come from having a open position Long or Short until the time the positions are closed by one of this
methods:
a) Before the due date:
1. are closed by the participant on the Derivatives Market by closing on the market of a
contrary sense transaction;
2. are lowered or forced closed by the Compensation House.
b) At the due date, are closed by the Compensation House, by making the process of final clearance
of founds or physical delivery.

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 a) CALL- is the standard contract which gives the buyer of the option the right, until
the due date of the contract, to buy the active support at the exertion price, instead
of the bonus paid to the seller when the transaction is closed, the seller of the
“call” option will have the obligation to sell the active support if the option is
exercised;
b) PUT- is the standard contract which gives the right to the buyer of the option,
until the due date of the contract, to sell the active support at the exertion price,
instead of the bonus paid to the seller at closing the transaction, and the seller of
the “put” option, the obligation to buy the active support if the option is exercised.
According to article 62 from Regulation of the Financial Monetary and Commodities
Stock Exchange Sibiu no.4, exertion prices for the contracts with options are listed on the
electronic platform of transaction only after a transaction was executed on the support futures
contract. The bonus of options has no daily variation limits.
It must be shown that the number of option transactions is very low on the regulated
market in Romania. At the Financial Monetary and Commodities Stock Exchange Sibiu are
transacted options that have as support futures contracts. At the Bucharest Stock Exchange are
not, at the moment, transacted options.
In article 4, paragraph (2) from this regulation is set a fundamental principle which
governs closed transactions on the derivatives market operated by the Financial Monetary and
Commodities Stock Exchange Sibiu, the principle in which transactions executed on this
regulated market represent commerce actions which result valid obligations and to which can
not be opposed the game exception.
For transactions with derivatives executed on the Stock Exchange Sibiu, the maximum
variation of contracts price is set by the Romanian House of Compensation Sibiu (for futures
contracts, because the options bonuses have no daily variation limits).

3.4 Margin transactions. The effects of margin transactions

On this market there are closed margin transactions with derivatives, the investor is
forced to maintain the minimum value of the margin on the period of time of which he has
open positions having as object those securities.
According to article 190, paragraph (2) from Regulation of National Securities
Commission no.32/2006 1 , the margin represents the minimum level which the client (investor
on the capital market, must maintain in the margin account opened in Association of Financial
Investment Services in order to guaranty the margin transaction. The margin can be in cash, in
securities, and in state titles with a due date lower than 12 months. According to article 196
from Regulation of National Securities Commission no.32/2006, at the opening of the margin
account, the client is obligated to lay down a guarantee representing the equivalent of at least
50% of the markets value of the securities which he is about to acquire by margin transactions,
under the form of cash or securities, the dealer can solicit the deposit of a amount higher then
the 50% level. On the course enrollment of purchasing in margin with securities, in the margin
account of the clients, there must be kept securities or money representing at least 25% from
the current value on the market of the purchased securities on the base of the given credit or
borrowed in order to discount missing sales, interests and commissions (article 198 from
Regulation of National Securities Commission no.32/2006). Also, according to article 208
1
Official Monitor, no. 103 from 12 February 2007.

94
from this regulation, the brokerage firm will ensure a guarantee for the natural person or
juridical, in case of securities that were borrowed on their account. The value of the guarantee
will be set by common agreement by both sides in the closed contract.
The authorized intermediary will not execute any order for the clients that didn’t make
the initial margin. The dealer can not maintain open positions of buying and selling on the
same derivative and the same due date. In his reports with the compensation house or with the
compensator member, depending on the case, the dealer is responsible for the existence of
necessary amounts in the account for transactions with derivatives executed in the accounts of
his clients.
Margin transaction is the essence of derivatives market, because the investors in this
market decide to initiate sell or purchase positions, in the case of options, PUT or CALL
positions, in consideration of the fact that they are not obligated to pay at the moment of
initiating the position in the contract the full price of the transaction, but only the necessary
margin to cover the risk.
According to article 23, paragraph (1) from Regulation of Financial Monetary and
Commodities Stock Exchange Sibiu no.4, regarding transaction on a regulated market of
derivatives administrated by the SC Financial-Monetary and Commodities Stock Exchange
SA Sibiu, the margin accounts are constituted on every level of operation on the market of
futures contracts and options and in those there are outlined the securities, amounts, values or
commodities necessary to the guarantee of open positions, and the gained rights or assumed
obligations.
In the relation with the derivatives market, the investor interactions only through an
authorized intermediary (bank or Association of Financial Investment Services). In order to
operate by the system of margin accounts, authorized dealers, participants on the trading
system of the derivatives market, open margin accounts, with the role of guarantying the
obligations assumed by both sides in the course of transaction of futures contracts and options.
From this, from the perspective of the operator on the derivatives market and his compensation
house, the margin represents the minimum level of availabilities which a compensation
member must maintain in the compensation house, in his own account or on the account of his
clients, for an open position. The amounts necessary to cover the margins are deposed in the
account of the compensation house agreed by the market operator in the initiation of a position
in the futures market, no matter if the position is of sale or purchase and in the initiation of a
sale position of options contracts no matter if they are CALL or PUT options.
The margin for each contract will be updated by the compensation house in term of the
value of the contract, the daily evolution of price of the active support and limits of maximum
fluctuation of price.
In the situation in which the price of a type of contract, under the influence of evolution
of the active support’s course on the spot market, fluctuates as the level of accessibility (the
amount in the account) drops under the margins necessary level, the compensation house
launches the margin call to the intermediaries, in order to cover the necessary margin,
respectively, the calculated risk.
According to article 37 from Regulation of the Compensation House Sibiu, the margin
call is the amount that needs to be deposited by the intermediaries (compensation members) to
complete the amount in the account on to the level of the calculated risk for all opened
positions. In the relation with clients, if the value of the margin sets under the minimum limit,
because of changes of the current value on the market of securities, S.S.I.F. will issue a margin

95
call and will inform the client on the date to which it was noticed the margin deficit, asking to
cover the deficit (article 199 from Regulation the National Securities Commission no.32/2006).
In the situation in which the client doesn’t answer to the margin call and the deficit is not
eliminated in the period of time foreseen in the intermediation contract, that can not exceed two
working days, the intermediary is authorized to sell the securities in the clients account until
covering the deficit.
In relation to the compensation house of the markets operator of derivatives, the
intermediary has two possibilities, either to complete the amount in the account until covering
the margin, either to close a number of positions that will ensure the lowering of the risk and
cover the margin for the position that remained opened.
In Romania, it is prohibited to make transactions with derivatives outside the regulated
market, article 213 from Regulation of the National Securities Commission no.32/2006
prohibiting to the Association of Financial Investment Services to register in the margin
account of the clients other transactions other then the ones closed on the regulated market.

§4. The importance of the interdependence between transactions closed on the

derivatives market and the spot market in the analysis of market manipulation
actions

Considering the legal texts which regulate the movement of derivatives market, it is
important to remember that the transaction risk on this market is considerably higher for
investors than the one present on the spot market.
A negative evolution, reported on the position adopted by the investor, of the course of
securities which is active support (for example, in the case of futures contracts, a decrease of
the course for which the investor has a long position- of purchasing, and a raising of the course,
for which the investor has a short position- of selling) determines the decrease of the
disposable under the value of the margin and forces the investor in cause to deposit
supplementary amounts to cover the margin or to close the positions at lost. Even if it doesn’t
mark the loss by closing the positions on the course of the contract, if on the due date the
course of the securities is situated on a negative level in report with the one which exists at the
moment of initiating the position, the investor will mark the loss automatically. On the “spot”
market, if there are transactions without margin, there is the possibility of avoiding the loss by
maintaining in the portfolio the securities which have a negative evolution until the moment in
which the course will be situated at superior levels towards the moment of purchase.
The interest of an investor which adopts a short position (sale in absence) on the
derivatives market is inevitably contrary to the one of the investor which takes a long position
(purchasing) regarding the same security. The holder of the short position will have the interest
of the depreciation of the value of that security, and his transactions on the spot market (on
sight) will have to be analyzed from this perspective.
To avoid any risk of manipulating the market, the safest measure will appear as the
institution of a transaction interdiction on the spot market for those investors which have
positions opened on the derivatives market. Such measure would be, first of all, against the
spirit of the capital market which promotes equality of treatment of investors and the absence
of any discrimination. Then, they would have discouraging effects for investors on the markets

96
under a jurisdiction which institutes these types of restrictive dispositions, being able to make
the decision to close their investments on these markets.
The natural solution is, given the institution of these juridical norms, to stop the trading
process or to launch orders with a manipulative character. These norms must be applied by
specialists in the authority of market supervision (National Securities Commission in case of
Romania) that would appreciate with balance, objectivity and professionalism the situations in
which there are price manipulation signs, differentiating those in which an investor closes
willingly transactions with the same security also on spot market as on term market.
A restrictive character interpretation and discriminative of the juridical norms has the
nature to create abuses against the investors good- faith and to produce unwanted effects on the
credibility of that capital market.
On the other hand, as it is shown in paragraph II of “Considerations” of the European
Directive of the Market Abuse no.6/2003, “market abuse harms the financial markets integrity
and undermines the publics trust in the securities and derivatives”.
In these conditions, it is justified to introduce a set of accepted market practices,
elaborated after the professional examination of previous experience on developed capital
markets. The first Committee of European Securities Regulators guide regarding the
implementation of market abuse directive on the third level tried to described a series of
actions on the capital market that can be considered as manipulation signs, indicating also
those operations which are considered as market manipulation actions. Also, this Committee of
European Securities Regulators guide sets the principles that the national authorities should
have in sight to implement accepted market practices in the trading systems regulated and
supervised by these.
Considering the tight connection between the spot market and derivatives market, and the
contrary interests of some participants on the derivatives market from the ones of other
participants on this market, with contrary positions, or the ones of the investors on the spot
capital market is absolutely necessary the emergency introduction also in the Romanian
legislation of accepted market practices, accordingly to the principles announced by the
Committee of European Securities Regulators. Only this way it will be realized a draining of
the Romanian markets, a clearing of the applicable juridical norms, situation which will
support the increase of trust of investors in the Romanian market.
For example, hedging practices are accepted in all important jurisdictions, as strategies of
risk diminution, of minimizing the exposure on a certain market and on a certain security. The
adoption of short positions by certain investors on derivative markets, when it is manifested a
clear trend of market lowering is a measure of protection against the risks of accelerate
depreciation of securities held in portfolio and transacted on spot market.
Also, arbitrage is considered a legal practice which means obtaining a gain from the price
differences between two or several markets. These markets can be represented by one or
several spot markets and one or several term markets.
To prohibit such practices, directly or indirectly, would be a total act of hostility to the
development of a capital market, even if the risk of a market manipulation action resists in the
absence of total prohibition.
From this perspective, maintaining a ambiguous vision with regards to the method of
interpretation of European norms, materialized by curious approaches from the capital market
authority in Romania of the legal texts in the matter of market abuse can only affect the trust of

97
the investors in the Romanian market, including the institutional ones, which, by the invested
amounts, influence in a decisive way the evolution of local stock exchange.

Section 4

Sanction applied to market manipulation actions through operations with

securities which are not admitted trading on a regulated market

§1. The problem of applying the market abuse Directive and issued legislation in
its application to operations with securities which are not admitted at trading on a
regulated market

The Market Abuse Directive no.6/2003 mentions explicitly its applicability only in the
case of operations with securities admitted to transaction on a regulated market. It is true that it
doesn’t contain any reference to transactions closed in an alternative trading system.
According with the dispositions of article 9 from the Market Abuse Directive 2003/6/CE,
the directive applies to any security admitted to transaction on a regulated market in at least a
member state or for which it was laid down a admission application to transaction on this type
of market, no matter if the transaction had place on that market or not. The same legal text
foresees the applicability of the directive in trading situations based on confidential
information, of any security that is not admitted to transaction on a regulated market in a
member state, but which value depends on a security admitted to transaction on a regulated
market.
In paragraph 4 of article 1 in the Directive no.6/2003 it is mentioned that the regulated
market “is the market defined in article 1 paragraph (13) from Directive 93/22/CEE” 1 , while
this article 1, regarding the “terms definition” doesn’t have any reference to the multifunctional
trading system- Multilateral Trade System.
In the same time, Directive of European Commission no.124/2003, issued in the
application of the Market Abuse Directive, speaks about in article 4, “manipulations meaning
giving false or delusive indications or setting courses on an abnormal or artificial level”, only
in transactions closed on a regulated market.
All these regulations lead to the conclusion, hard to combat, in the sense that the
ensemble of norms in the Market Abuse Directive and in the elaborated legislations in order to
apply it has in consideration only the operations with securities admitted at trading on a
regulated market.

§2. Sanctions applied to market manipulation actions through operations with

securities which are not admitted at trading on a regulated market

At present time there is no juridical norm on the level of the European Union that would
be incident to the actions of market abuse which take place in a multifunctional trading system.
1
Text substituted by the one of article 4, paragraph 1, point 14 from Directive 2004/39/CE.

98
 This question is left implicitly to the opinion of the member states which have the
possibility, in their national legislations, to impose norms that would sanction the illicit actions
that take place in the transaction of securities by multifunctional systems (alternative) of
trading.
In an allocution sustained in Edinburgh, in a conference organized in March 2007 by the
European Federation of Market Operators (FESE 1 ), the president of the operative group of
application of Markets in Financial Instruments Directive, Ludovic Aigrot, showed without any
doubt that in the case of multilateral systems is applicable the national juridical regime, with
respecting the principles of Markets in Financial Instruments Directive 2 .
In article 26 paragraph 1 from Markets in Financial Instruments Directive is stipulated the
principle according to which the member states must ask to companies of investments and the
operators which exploit a Multilateral Trade System to institute and maintain dispositions and
efficient procedures, in what regards a Multilateral Trade System, in order to control regularly
that the users of this system are respecting its norms. Investment companies and operators
which exploit an Multilateral Trade System must control the transactions made by their users in
the system to identify violations of norms, any transaction condition which might disturb the
markets stability or any behavior which might suggest market abuse.
In these conditions, the member states of the European Union must introduce in the
national legislations, on a primary level, by normative acts approved by the Parliament
juridical norms that without any doubt will set, at least in principle, rules regarding transactions
in the multifunctional systems, but also in the bilateral trading systems, like systematic
internalizer, thus to be forbidden and sanctioned the action on the market abuse sphere.
It is true that in the documents elaborated by the European Securities Committee
Regulations- Committee of European Securities Regulators speaks about the necessity of
application of the market abuse regime also for the Over the Counter markets. For example, the
first guide Committee of European Securities Regulators of implementation of Market Abuse
Directive indicates that the factors of which the regulation authorities in the member states
must take count when declaring a market practice as being accepted is applied on the regulated
markets and on the Over the Counter markets. With all this, the absence of a legal prohibitory
regime of the market abuse actions which intervened in the alternative trading system, outside
regulated markets, makes impossible sanctioning these illicit actions and affects dramatically
the trust of investors on that unregulated market.

§3. Sanctions applied in Romania to market abuse actions committed through

operations with securities traded outside the regulated market

In Romania, in Regulation no.32/2006, regarding the financial investment services,

although the first part of article 164 is about the obligation of the system operator that, in the
examination of orders and transactions, has in sight a series of signals which might indicate
manipulation operations (it is about the reproduction of article 4 and 5 from Directive

1
Federation of European Securities Exchange (FESE) represents the European operators of the regulated
markets and other market segments, http://www.fese.be/en/?inc=cat&id=3.
2
http://www.fese.be/_mdb/speech/MiFID%20Edinburgh%20290306.ppt.

99
no.124/2003), in the frame of counting possible signs, the majority of these contain exclusive
references to the orders and transactions made with securities listed on the regulated market.
It is true that article 244, paragraph (5), which defines the action of capital market
manipulations does not contain an express reference to the “regulated market”, but paragraph
(6) of article 244 stipulates without any doubt a situation of exception from the application of
the legal text regarding manipulation by false signals, misleading or maintaining an artificial
price, and proving that there are respected the market accepted practices on that regulated
market.
If we would interpret systematically the incident legal norms in the matter of market
manipulation and keeping into account that the text of Romanian law resumed ad litteram
dispositions from the Market Abuse Directive no.6/2003, normative European applicable act,
as we have seen, on regulated markets, we can not get to another conclusion than the one
according to text of article no.244 paragraph (5) from Law no. 297/2004, regarding the capital
market manipulation, referring only to the operations with securities admitted to transaction on
a regulated market.
This conclusion is reinforced by the text of the article 253 paragraph (1) from Law
no.297/2004, which stipulates that the dispositions of title referring to market abuse “will be
applied to any security admitted to transaction on a regulated market in Romania or in another
member state or for which it was registered a demand of admission at transactions, no matter if
the transaction had place or not on that regulated market”.
We must keep into count the aspect, very important, that in the Romanian legislation in
the capital market field there is no reference to the applicability of norms of defining and
sanctioning the market abuse incident for the regulated markets and in the case of the securities
traded in the multifunctional (alternative) systems of trading.
The law of capital market no.297/2004 mentions in article 140, paragraph (1) , line e) that
the alternative trading system must be structured in order to respect the National Securities
Commission requests in regards to the prevention and detection of market abuses, prevention
of money laundry and financing acts of terrorism. This is the only reference regarding
combating market abuse in an alternative trading system.
Plus, it must be showed that the text of article 140, paragraph (1), line e) from Law
297/2004, previously mentioned, references to the National Securities Commission regulations
in the matter of market abuse. These regulations are sort of summarily and refer especially to
the obligations of system operators and the intermediaries to report to the National Securities
Commission suspicious operations.
It must be outlined that there is neither on the level of secondary legislation, issued by the
National Securities Commission, a definition of the market manipulation acts committed in an
alternative trading system.
After a logical interpretation of the existent legal norms results that the obligation of the
system operator to notice possible market manipulation actions is a duty of all the participants
and market entities. These legal dispositions can not be explained so extensively that can be
drown the conclusion that they have as effect the incrimination of market abuse in the
alternative systems of transaction in Romania. This aspect has a special gravity, because it
attracts the conclusion that, at the moment, in the actual stage of the Romanian legislation, we
can not speak about the illicit of some manipulation actions made outside the regulated market,
in an alternative trading system. Thus, at present time in Romania the manipulation of the
market of transacted securities in an alternative trading system is legal.

100
 Until now it wasn’t authorized any operator of alternative trading system, which it would
theoretically spare of practice consequences the absence of the legal incrimination of
manipulation actions which would take place in an alternative trading system.
A special case is the RASDAQ market, because the vision of the National Securities
Commission at the moment excludes this market from the category of regulated markets.
According to article 154 from National Securities Commission Regulation no.1/2006, all
issuers of which stocks are transacted on the RASDAQ market will be transferred on the
alternative trading system administrated by the Bucharest Stock Exchange, on the date of the
approval of its founding. As long as this normative text is in force, the only way on which the
RASDAQ market can develop is the one of the alternative trading system.

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 Chapter IV
Subjects of capital manipulation action

An analysis of aspects regarding the capital market manipulation can not take place
without explicit determination of the quality of persons involved in the actions subscribed to
the stock exchange illicit. The author of the manipulation action has to be established without
any doubt, in any measure which regards investigation of suspicious actions, as it is imposed
the clear determination of the passive subject, the person who suffers damages or might be
injured by the illegal conduct of the active subject.
We will use in this chapter and in most parts of this paper a terminology which is
common for the penal law only out of reasons that regard the clarity of expression. Any referral
to certain terms characteristic to the penal law in this chapter must be seen as applicable also in
the hypothesis of the contravention illicit.

Section 1

Active subject

§1. General considerations regarding the active subject

The active subject of the capital market manipulation action is the author of the illicit
action forbidden by the incident legal dispositions.
In general, in the case of capital market manipulation we deal with many natural and
juridical persons that have the role of active subject of this illicit action. Many of the forms of
the capital market manipulation can be realized only by the conjugated action of several
participants on the market or a lot of persons which transmit information about the securities
admitted to trading. For example, it is clear that the manipulative procedure “painting the
tape”, meaning initiating actions on the market through which there are realized visible trades
in the trading system only to create the impression of an activity or a price modification in
regards to a security, can be accomplished only by multiple persons.
In what regards the definition of the person that is culpable of capital market
manipulation there were expressed many opinions and there are still doubts about the clarity of
the dispositions of incident legislation and the measure in which it gives security to the capital
market participants about the market abuse problem. Especially, the matters most talked about
refer to the features of the behavior which might be considered market abuse.
In Great Britain, there were controversies regarding the applicability of the market abuse
legislation from the perspective of the Human Right Act 1998 (Law regarding the Human
Rights from 1998) which stipulates: “no person will be considered guilty of executing a penal
act by action or omission, only unless that act was incriminated by the national or international
law at the time of its execution.” This disposition expresses the principle to which any action
which prejudices a juridical norm must be clearly defined by law, so any person can foresee the

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juridical consequences of their actions. That is why the absence of an explicit incrimination of
the capital market manipulation acts by a normative act with legal power attracts the impunity
of the presumptive author.
In Romania, capital market manipulation made with intention is a criminal offence,
according to article 278 from Law no. 297/2004 regarding the capital market, and from this
point of view we are in the presence of legality incrimination, stipulated in article 2 from the
Romanian Penal Code.

§2. Defining elements of the active subject of capital market manipulation action

In the doctrine, it was outlined that the markets dominated by a few big players, investors
with highly superior financial resources to the other participants to trading, will be predisposed
to be the place of manipulation actions 1 . This doesn’t mean that can not appear manipulation
actions on homogenous markets, in which exist many competitors with substantial financial
resources. The game of demand and supply finds its wider space of manifestation where it is
hard to make anti competitive deals between main actors.
From a strict legal point of view, it is important to understand which are the
characteristics essential of the persons, “the players” which manipulate the capital market.
2.1 The natural person and the juridical person active subjects of the capital market
manipulation action

In principle, any person, even without being an investor on the capital market, can have
the quality of active subject of the manipulation action on the active market.
The author of the manipulation action will be a natural person and a juridical person,
because the quality of righteous subject can belong either to the natural persons, either to the
juridical persons.
In the case of a juridical person, the execution of the action will remain in his background
in the hypothesis in which the manipulative action was made on a decision of the
representation and leadership organisms, transmitted also verbally. In the case where the trades
or incriminated orders were issued in the account of the juridical person, but without the
knowing and agreement of the leadership and/or representation competent organisms, it will
not be able to make responsible the juridical person for the market manipulation, but only the
person that had the initiative of trading or issuing orders which mislead, given false signals and
maintained an artificial price or were executed using fictitious methods.
In the Romanian legislation, in Decree no. 31/1954 regarding the natural persons and
juridical persons, in article 35 is stipulated without any doubt that the juridical person exerts his
rights and fulfills his obligations through his organisms. From this consideration, the juridical
actions made by the organisms of the juridical person, in the limitations of the powers that
were given to them, are the actions of the juridical person himself.
The illegal actions made by organisms of the juridical person have obligations for the
juridical person, if they were made with the occasion of exercising their function.
It is true that the illegal actions come with the personal responsibility of the persons
which committed them, towards the juridical person, and towards third parties, because
1
R.E. Litan, M. Pomerleano, V. Sundararajan, The Future of Domestic Capital Markets in Developing
Countries, Brookings Institution Press, 2003, p. 107

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sanctioning a juridical person for capital market manipulation as a result of a leadership
organism’s decision will give the right to that juridical person to go against the natural
person/persons which are responsible.

2.2 Legal conditions for the existence of the active subject

According to the Romanian law, for a person to have the quality of active subject of the
market manipulation action that person must carry out a series of general conditions, asked for
any type of criminal offence or contravention. These conditions, in the case of the natural
person, are: minimum age of the action’s author, responsibility and freedom of will and action.
In the situation in which a juridical person is incriminated of committing a capital market
manipulation action, the necessary conditions to become an active subject are: committing the
action in order to realize the object of activity or in the interest or in the account of the juridical
person, the presence of the capacity or exercise and committing the action by a person which
acts either individually, either as a part of an organism of the juridical person, which has a
leadership position.

2.2.1 The legal conditions for the natural person to have the position as an active subject

The minimum age is asked by legal dispositions to make responsible a natural person,
because it is necessary for that person to “have the bio-psychical capacity to understand and
assume the behavior obligations foreseen by the righteous norms, and the capacity to master
and lead consciously his conduct acts in report to these exigencies” 1 .
The penal and contravention right norms realize a distinction between the different stages
of the individual’s evolution, keeping into account that each period has certain particularities in
regard to the ability to understand and represent the consequences of the actions which he
committed. The most relevant aspect of this process of separating the juridical consequences of
the committed actions by the author’s age represents setting up the moment from which a
person is responsible from a penal and contraventional point of view.
At present time, considering the development of the internet, and the children’s and
teenager’s appetite for this mean of communication, the possibility to commit penal and
contraventional actions by these categories of persons through electronic communication
methods is situated at high rates. The capital market manipulation actions, made by minor
persons through the internet are frequently present on the financial markets. The advantage for
a minor is that through the internet he can trade and spread information under the protection of
anonymity, by building false identities and attributing a fictitious age. Another advantage for
the manipulator is the fact that it doesn’t have to be present physically at the signing of the
contract with the brokerage firm.
All these aspects point out strongly the risk of committing criminal offences or
contraventions on the capital market by minors through the internet, situation which gives a
special weight to the matter of the age on which minors start to be responsible from a penal
point of view.
On the other hand, considering the penal incapacity under a certain age, many times,
minors are used by adult persons to execute penal actions. In these situations, the consequences
1
C. Bulai, Penal Law Manual. General part, All Educational Publishing, 1997, p. 205

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of the illegal actions, if the instigation committed by a person capable to answer penal, will not
be demonstrated, there will not be supported by anyone.
In Romania, a natural person can get the position as active subject of a juridical penal law
or contravention report starting with the age of 14 years old. Minors under 14 years old do not
respond from a penal point of view [article 99, paragraph (1) Penal Code 1 ] and neither
contraventional [article 11 paragraph (2) from the Government Order no 2/2001 regarding the
juridical regime of contraventions 2 , approved by Law no. 180/2002 3 ]. We are dealing with a
penal responsibility of a minor, because, in many legislations, including in Romania, a person
is considered a minor until that person is 18 years old. The reason of setting up this minimum
age under which an individual doesn’t answer in a penal and contraventional way resides in the
fact that this category of minors is not developed enough from a biophysical point of view in
order to understand the antisocial character of their conduct 4 . These dispositions present in the
penal law or contraventional field collaborate with the ones in the civil law, according to which
a person doesn’t have the exercise capacity until that person is 14 years old [article 1 paragraph
(1) line a) from the Decree no. 31/1954 regarding to natural persons and juridical persons 5 ]. In
these conditions, it concludes that the minor under 14 years old can not be an active subject of
the capital market manipulation action.
It has to be mentioned that, in Romania, it is instituted a second age limit, starting to
which a person has the fully penal capacity. This limit is given by of age 16 years old. Between
14 and 16 years old a minor responds in a penal way only if it is proven that the action was
made with judgment, according to article 99, paragraph (2) from the Penal Code. In the
situation of committing a contravention, the minor that is 14 years old has complete capacity,
existing only one limitation, given by article 11, paragraph (4) from the Government
Emergency Order no. 2/2001, according to which the minor that is not 16 years old can not be
sanctioned with executing a community service activity, but he can receive other
contraventional sanctions.
The condition of the presence of judgment on minors between 14 and 16 years old in
order to attract their penal responsibility is, in essence, a relative presumption of penal
incapacity for this category of persons 6 . In these conditions, this presumption must be knocked
down, by proving the fact that the minor in cause acted with good judgment, manipulating the
capital market. The presence of the good judgment will have to be reported on the given case
and will not be appreciated in general on that person’s capacity to represent the character of the
committed action.
In the penal matter, after turning 16 years old, a person is presumed to have the penal
capacity, according to article 99, paragraph (3) from the Penal Code, and to have also the
position of an active subject. In the contraventional matter, in the absence of any specification
in the frame law regarding the contraventions regime, the Government Order no.2/2001, a
person has the position of an active subject after turning 14 years old.
Responsibility of the person that committed a penal action or a contraventional one is
“the mental-physical state of a person which has the capacity to understand the character of his

1
Official Bulletin no 79 bis from 21 June 1968 and modified many times.
2
Official Monitor no 410 from 25 July 2001
3
Official Monitor no 268 from 22 April 2002
4
C. Bulai, cited paper, p. 206
5
Official Bulletin no. 8 from 30 January 1954
6
C. Bulai, cited paper, p. 208

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actions, in order to account the value and its consequences, and the capacity to determine and
lead naturally his will in report with his own actions”. 1 The state of responsibility is the normal
state of the mature person, and the irresponsibility is the exception, from this cause the penal
law doesn’t have special dispositions regarding the responsibility of the persons that turned 16
years old, supposing that, normally, this person “has the mental-physical features of
responsibility”. 2 The presumption is relative, it can be knocked down by contrary evidence, in
the sense that the person in cause didn’t acknowledge his actions or non-actions or couldn’t
contain them. 3
In the doctrine 4 , it was outlined the fact that the responsibility wasn’t mistaken with the
penal responsibility, because the first institution is a psychological category that is “a premise
of the criminal offence, and in its absence there is no guilt”, and the second one, a juridical
category which represents a consequence of committing the criminal offence.
In consequence, the irresponsibility is a cause which removes the penal character of the
action, according to article 48 Penal Code and the contravention character, according to article
11, paragraph (1) from Government Order no.2/2001.

The freedom of will and action is the third necessary condition for a natural person to
have the position of an active subject in an illegal action. The freedom of will and action is the
possibility of a person to decide freely on committing the action or the non-action forbidden by
law 5 .
In case a person doesn’t have this freedom at the moment of adopting the illegal conduct
and on the course of manifestation of it, because of threat, physical or psychical restraining,
that action will not be imposed to that person.
The physical restraining and the moral restraining are causes of removing the penal
character of the action, according to article 46 from the Penal Code, and the contraventional
character, according to article 11, paragraph (1) from the Government Order no.2/2001.

2.2.2 The legal conditions for the juridical person to have the position of an active subject

In the majority of states from European Union, but also in the United States and Canada
there is the institution of penal responsibility of the juridical person.
In Romania, the juridical person answers from the penal point of view on the grounds of
article 19 from the Penal Code, and from the contraventional point of view, according to the
dispositions of article 3, paragraph (2) from the Government Order no.2/2001.
According to article 19 from the Penal Code, penal responsibility of the juridical person
is involved when criminal offences are committed in order to realize the object of activity or in
the interest or account of the juridical person, in the conditions when the action was committed
with the form of guilt foreseen by the penal law. In the contraventional matter, in article 3,
paragraph (2) from Government Order no.2/2001, it is mentioned that the juridical person

1
Ibidem, p. 208-209.
2
Ibidem, p. 209
3
C. Bulai, A. Filipaş, C-tin. Mitrache, Romanian Penal Law, Press Mihaela Publishing, Bucharest, 1997, p.
18
4
C. Bulai, cited paper, p. 210
5
Ibidem

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responds in a contraventional way in the cases and in the conditions foreseen by the normative
acts through which there are set and sanctioned the contraventions.
On the level of the European Union, many normative acts elaborated by the Council of
the European Union in the field of Justice and Internal Affairs, set the conditions of penal
responsibility of the juridical person in different areas: combating terrorism, forging the
methods of payment, combating sexual exploitation of minors and child pornography etc. For
example, in the Decision-frame 2001/413/Justice and Internal Affairs of the European Council
of combating fraud and forging payment methods 1 , others than cash, it is stipulated in article 7,
paragraph (1) the conditions of engaging the responsibility of the juridical persons, establishing
that the juridical persons respond for the criminal offences made in their use by any person
which acts either individual, either as part of an organism of the juridical person, that has a
leadership position in the organism of that juridical person, on the base of:
- a representation power of the juridical person or
- a authority of making decisions in the account of the juridical person or
- a authority to exert the control in the organism of that juridical person,
as for the implication as accomplices or instigators at committing such criminal offences.
Continuing, article 7, paragraph (2) from the normative act previously mentioned foresees
that a juridical person can be made responsible also when the lack of supervision or control
from the person mentioned at paragraph (1) makes possible committing the criminal offences
which make the object of the Decision-frame, in the use of that juridical person, by a person
under her authority.
Of course that these normative elements from other fields of the law have an orienting
character in what regards the position of the European legislator about the conditions in which
a juridical person can receive the quality as an active subject of penal law.
Synthesizing, the conditions that need to be fulfilled in order for a juridical person to
receive the quality as an active subject of the manipulation action are:
- the existence of the juridical capacity of use and exercise of the juridical person;
- the action to be made in realization of the activity or interest or in the account of
the juridical person;
- the action to be made by a person that has a leadership position, of representation
or control in the organism of that juridical person.
The juridical capacity of use of the juridical person is the capability of that person to have
rights and assume obligations 2 . In Romania, the juridical capacity of use of the juridical person
begins, according to article 33 from the Decree no.31/1954 regarding the natural persons and
the juridical persons, from the moment of their registration, when they are submitted to this
formality. The other juridical persons, according to article 33, paragraph (2) from the Decree
no.31/1954, have the capacity of having rights and obligations, from the date of the disposition
act that founds them, from the date of recognition, or the authorization of their founding or
from the date of completing any other requests, foreseen by law.
In the case of the juridical persons-commercial companies, according to article 41,
paragraph (1) from the Law of commercial companies, no. 31/1990, the commercial company
is a juridical person from the date of registration in the registry of commerce. From that
moment a commercial company will have also the juridical capacity of use. From the date of
signing the contract by the company/constitutive act a Romanian commercial company has a

1
Official Journal L 149 from 02.06.2001
2
Gh. Beleiu, cited paper, p. 374

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limited capacity of use, in what regards the rights made in its favor and the obligations which
need to be fulfilled in the procedures preliminary to the constitution of the company, because
the imperative requests of the law impose the execution of some formalities for the juridical
person to be valid established 1 .
From these aspects concludes that a juridical person will not be sanctioned from a penal
or contraventional point of view for a capital market manipulation action prior to its
registration, actually before having the full capacity of use.
In regard to the commercial companies, in the time frame between closing the society
contract, moment of manifestation of the intent of the associates to collaborate in order to
develop a commercial activity (affectio societatis) and registering the company to the national
trade register of commerce, the capacity of use is restricted strictly to the completion of the
legal formalities in order to receive the juridical personality. Thereby, there is not legally
possible for a commercial companies which wasn’t registered to trade or to issue orders on the
capital market, first of all because that company in the course of constitution will not be able to
close a valid brokerage contract from a legal point of view with an authorized intermediary and
will not be able to open a bank account in order to make payments to third parties.
The juridical capacity of exercise of the juridical person consists in the capacity of that
collective righteous subject to receive and exercise subjective rights and to assume and execute
obligations, by closing juridical acts, by its leadership organisms 2 . According to article 35 from
the Decree no.31/1954, the juridical persons exercise their rights and execute their obligations
through its organisms. In Romania, the beginning of the juridical capacity of exercise starts at
the moment of its constitution, with executing all the legal formalities. So, getting the exercise
capacity is realized at the moment of receiving the full capacity of use. It has to be mentioned
that the juridical person, in his quality as a righteous different subject, is the holder of the
juridical capacity of exercise, but “valuing this capacity is made by the leadership organisms of
the juridical person” 3 .
An extremely important element which needs to be outlined is applying the juridical
capacity of exercise which can not be realized until there are not named, according to the legal
dispositions or of the constitutive act, of the founding disposition etc., the leadership organisms
of the juridical person. Only these organisms will engage juristically, in a valid way, the new
juridical person 4 .
In these conditions, it results that a juridical person, even after getting the juridical
personality and the capacity of exercise, will not be able to be an active subject of the
manipulation action before its leadership organisms are appointed.
Committing the action in order to realize the object of activity or in the interest or in the
account of the juridical person is a necessary condition which can not be removed, for a
juridical person to receive the quality as an active subject of the capital market manipulation
action. It must be mentioned that it is not mandatory that in the object of activity to be
mentioned the investment made in securities in order for the juridical person to be able to close
transactions of his own account on a capital market.
Mandatory, the action consisting in closing transactions, issuing orders or disseminating
false information must be realized in the interest or in the account of that juridical person.

1
St. D. Cărpenaru, Romanian Commercial Law, All Publishing, Bucharest, 1996, p. 189
2
Gh. Beleiu, cited paper, p. 384
3
Ibidem, p. 393
4
Ibidem, p. 394

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 In what regards the action of capital market manipulation executed in the account or the
interest of a juridical person, it must be shown that the shape of the material element consisting
in disseminating false information is more difficult to identify in practice. The formulation
from the text of the market abuse Directive lets to be understood that the European legislator
had in sight, in principle, the natural persons when he incriminated this type of capital market
manipulation. It can not be conceived the fact that the member of a leadership organisms acts
and manifestoes his will to act exclusively in the quality that he has when it is realized the
operation of false information dissemination regarding the securities transacted on a regulated
market.
Generally, from a legal point of view, no matter the interest which motivates the action of
a member of the leadership organism, representation or control of a juridical person, the act of
disseminating false information is a criminal offence or a contravention which author’s is the
natural person which acted that way. The juridical person will be incriminated without a doubt
when there will be issued in his account, by the organisms of leadership, control and
representation, official statements, announces or declarations which mislead the investors or
send out false signals on price, demand or supply of securities.
Committing an action by a person that has a leadership, representation or a control
position in an organism of the juridical person is, also, a necessary condition for a juridical
person to become an active subject of the capital manipulation action. It is obvious that not any
person, not any employee of a juridical person can, by his actions, to engage the juridical
responsibility of that person. For a juridical person to become an active subject of an illegal
action it is necessary that the natural person which acts in his account to be able to represent
her in a valid way. This power of representation is given either by law, either by the
constitutive or founding act, either by any other internal act of organization of the juridical
person, either by a decision of a leadership organism that names one or more attributions to
another person, so this person can close juridical acts which legally engages that juridical
person.
Regarding the control organisms it must be shown that it is about the persons from the
departments which exert the internal control in the case of that juridical person. Expressing an
opinion by an auditor or even a censor that is not in work relations or another type of
subordination with the juridical person will not attract the responsibility of the juridical person
herself, but will attract the responsibility of the natural person which issued the information or
of the juridical person (the auditing firm etc.) in the account of which there were disseminated
those information.
In the case of the control organisms, it can intervene a manipulation action made by the
juridical person only in the hypothesis in which a member of this control organism will
disseminate false or deceiving information, because there is not in the attribution of these
departments to adopt the decision to transact securities on a capital market.
It must be shown that these conditions can be applied also in the matter of engaging the
contraventional responsibility.

2.3 The conduct of the active subject of the capital market manipulation action

Starting from the text of the Directive no.6/2003 [taken in the article 244, paragraph (5)
from Law no.297/2004], the active subject, the author of the manipulation action, is the person
that:

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 a. trades or issues trading orders:
1. which give or might give false signals or that mislead
regarding the demand, supply or price of securities;
2. which maintain, by the action of one or several acting
together, the price of one or several securities at an
abnormal or artificial level;
b. trades or issues trading orders that presume fictitious methods or any other form of
deceit;
c. disseminates information through the media, including the internet or any other
method of communication, which gives or might give false or misleading signals
on the securities, including disseminating rumors or false news or that mislead, in
the conditions in which the person that disseminated the information knew or
should have known that the information is false or misleading.
Considering the concrete examples of conduct considered by the market abuse Directive
as capital market manipulation, text resumed in article 244, paragraph (7) from Law
no.297/2004, it needs to be mentioned the fact that the active subject will be the person that:
a. acts in order to ensure a dominant position over the demand of securities,
having as effect fixating, directly or indirect,y the price of sale or purchase or
creating other incorrect conditions of trading;
b. sells or buys securities at the closing moment of the market, with the purpose
to mislead investors which act on the base of closing prices;
c. beneficiates from regular or occasional access to the media, electronic or
traditional methods, by expressing an opinion about the security or indirect,
in connection with the issuer of that security, in the conditions in which the
security was already owned and took advantage afterwards from the impact
of the expressed opinions regarding that security, without being made public
that conflict of interest, in a correct and efficient type of manner.
We want to make the specification that this list of actions, considered by the market
abuse legislation as having a manipulative character, is not exhaustive. In Chapter V, we will
analyze the multiple forms under which it can be presented the manipulation action, so the
conduct of a person that will have one of the analyzed forms will attract, without any doubt, if
there are meat the other legal conditions, the quality of an active subject in a juridical report
penal or contraventional for that person.

§3. Qualified active subject

In some situations, certain forms of capital market manipulation can be made only by
persons who exert a certain profession or have a certain position or function.
Legal texts indicate sometimes in an expressed way the quality that a person must have
on order to realize the juridical framing in a certain form of market manipulation. In other
situations, the jurisprudence has identified, defined and sanctioned capital market manipulation
actions made by persons that have a function or a special position, either exert a certain
profession.

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 The qualified active subject must have the quality asked by law at the moment of
committing the illegal action 1 .
Exemplifying, it needs to be mentioned that:
a. Manipulation by actions directed in the period of time previous to the Initial
Public Offering can be made only by dealers, generally investment banks,
which subscribed an initial public offering and distributes shares obtained by
the investors;
b. Market manipulation by creating a minimum price ceiling that can be made
only by an issuer or an entity which controls an issuer;
c. Manipulation by creating an excessive percentage deviation between the
demand and supply can be made only by a dealer who has the specialist
quality on the market or is authorized as a market maker because only these
entities have the right and even the legal obligation to post quotations for sale
and for purchase;
d. Manipulation by opening a position followed by closing it after it was made
public can be made only by a portfolio administrator with a wide reputation
or by another important investor, whose investment decisions have the
potential to influence other market participants.
Owning a certain quality is asked only for the author of the manipulation action, not for
the accomplices or for other persons that have made direct, in their own turn, manipulation
actions acting together with the qualified active subject.

Section 2

Passive subject

§1. General considerations

The passive subject is, in the penal law, the prejudiced person, natural or juridical, the
holder of the social value against which the criminal offence has been pointed to 2 . From a
contraventional point of view, we will understand by passive subject the person who suffers the
contravention consequences, of the illegal action of capital market manipulation.
In the capital market field, an illegal manipulation action, framed in the market abuse
sphere, is affecting all the participants on the securities market which represent the object of
manipulation. These either close transactions on artificial prices, either are restrained from
closing any transactions because of maintaining of abnormal prices, which are not created by
the free game of demand and supply. Thereby, the quality of a passive subject of the
manipulation of the illegal action is owned by all the persons with good- faith that have
participated on the market of securities closing transactions at artificial prices or could not
participate on this market, because of maintaining prices with an abnormal character.

1
C. Bulai, cited paper, p. 211
2
Ibidem, p. 212

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 From this considerations, it is necessary to be identified certain criteria on which there
can be set the conditions which need to be fulfilled, from the point of view of the market
participants, for the actions of a person to be considered manipulative, and the investors on the
market of a security to receive the quality of passive subject of the illegal action on the market
abuse sphere. The outlining of elements with an objective character needs to be imposed from
which there can be realized the subjective action of limitation between a legal conduct on the
capital market and the illegal one.
In these conditions, by these elements will there be determined the situations in which the
market participants were mislead by a certain conduct on the capital market and transacted at
artificial prices or were restrained to transact.
In the law system of the Great Britain was introduced the notion of “regular user” in term
of which there is appreciated by the authorities the conduct of the suspicious persons that
would have made market manipulation actions. In the absence of some legal criteria on the
normative level of the European Union or in the righteous law system in Romania and
appreciating the correctness and clarity of the regulation in the law system in Great Britain, we
will present and analyze this genuine law institution of the regular user. We note that the
dispositions in the British legislation can be an orienting model for the authorities, without
these being needed to offer a similar interpretation of some situations which present common
elements with the ones considerate by the British legislator.
It must be mentioned that the philosophy of the European Union in the matter of market
abuse is a tad different from the one of the British legislator. If in the British system, the
manipulation action exists only in the hypothesis in which a regular user would consider a
certain conduct as illegal, being introduced in Code of Market Conduct the so called “regular
user test”, in the European legislation, grounded on the market abuse Directive no.6/2003,
there is no such criterion, being replaced by the one of the accepted market practices. Anyway,
in the investigation that follows the identification of the passive subject of the manipulation
illegal action, the elements offered by the British legislator by outlining the institution of the
regular investor are extremely precious.
The syntagma “a normal and rational person” is used also by the market abuse Directive
no.6/2003 in order to define the market participant’s “personality” that is a bench mark in the
analysis of the illegal actions on the stock exchange market.

§2. Defining elements of the regular user

2.1 The notion of regular user

The regular user is a hypothetical, rational person whose judgment and behavior is
objective, impartial. This person is familiarized with that market and understands which the
conducts in the market vary.
According to the dispositions of Section 118, paragraph 10 from the Financial Services
and Markets Act from 2000 (FSMA 2000), the regular user is seen, in report to a certain
financial market, as that reasonable person which closes regularly trades with those securities.
In these conditions, from the view of the British legislator, from the formulation of the legal
text, are drawn two essential conditions:

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 - the criterion of the “regular user” must be applied for the market of each security;
for example, this criterion will not be possible to apply in a general way for a
whole financial market, without keeping into account the particularities of trades
of each security;
- the manipulation action could not be kept in account in the conditions in which a
regular investor would not consider the conduct of the presumed manipulator as
being illegal.
Essentially, the institution of the “regular user”, outlined by a set of standards, whose
respect is reasonably awaited, offers the bench mark by which it is seen the conduct of any
investor on the capital market, in the analysis of the legal or the illegal character.

2.2 The report between the institution of the “regular user” and the authority of
supervision of the market

In the Code of Market Conduct it is outlined that the regular user can not be considered of
owning the same level of training and knowledge with the professional clerks of the authority
of supervision of the financial markets FSA (Financial Services Authority). From this
consideration, as from the legal incident norms results that the regulation and supervision
authority can not self title a regular user.
Also, this authority can not ask the regular user to act in a certain way, to take in
consideration a certain factor or to consider important a certain factor. The supervision
authority of the market can, still, offer certain orientations in regards to the behavior that the
regular user should have into consideration when he is analyzing the market abuse, as in
regards to the standards which he can take into consideration in his analysis 1 . With all this, in
last instance, the interpretation of the obligatory conditions that there must be accomplished by
the abstract person of the “regular user” is realized by the judge called to give solutions to the
litigations in the market abuse field 2 .

2.3 Expected standards by the “regular user”

A conduct on the financial market will be considered as a market abuse only in the
situation in which the conduct is set under the standards expected by the regular user that will
see that conduct as a violation of minimum requests which needs to be respected on that market
(M.A.R. 1.2.1.).
In the process of determination a situation if the certain conduct is set under the minimum
accepted standards, the regular user test is taking into consideration the following aspects:
- the characteristics of the market in question, of the transacted securities and of the
investors present on that market;
- legal and regularly dispositions of that market, and any disposition with a legal
character incident in a direct way;
- the mechanisms of the market, practices and codes of conduct applicable on that
market;
- position and quality of the person suspected of committing an action in the market
abuse sphere at the moment of manifestation of conduct suspected of being

1
Code of Market Conduct, General comments, 5.3
2
Code of Market Conduct, Executive summary, 1.5

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 illegal, in the light of the level of experience, knowledge and understanding;
MAR 1.2.3 paragraph 5 offers as example the situation of a small investor which
is clearly different from the one of an professional institutional investor.
In principle, in order to meet the conditions of the market abuse is not necessary for the
followed purpose by the suspected person to be market manipulation. With all that, in certain
circumstances, the “regular user” might consider that the followed purpose by the suspected
person is committing a market abuse, situation in which results the illegal conduct.
The expected standard conducts by a “regular user” are different in the same market, by
the markets characteristics in question and by the security in cause. For example, standards and
obligations of report are different for a stock exchange of commodities towards a stock
exchange of values.
An error is probable to lead to the contour of a conduct that will be situated under the
expected standards, in the conditions in which the person in question took every safety
measures in order to prevent and detect the errors.
In the analysis of fulfilling the conduct standards is important to take in consideration if
the actions of the suspected person are respecting or not other legal incident demands. Even if
respecting these demands doesn’t lead to the conclusion that it wasn’t committed a market
abuse, because the content of these norms doesn’t have in sight the illegal actions in the sphere
of market manipulation or transacting based on privilege information, still complying with
these righteous norms can be a bench mark in the analysis of character of the investigated
actions.
In the situation in which a conduct suspected of being illegal intervenes on another
market, but has an impact on the market where the actions are investigated, there must be
considered the particularities of that market, the legal regulations which governs that market
and the standards accepted by the investors on that market. An illegal conduct on a market can
be seen as illegal on another market to which that market is connected.
In essence, the appreciation over a conduct will be made regarding standards that,
objectively, in general, are expected to be fulfilled by the investors on that market.
In the process of identifying the passive subject of an illegal action of market
manipulation is necessary to set the practices which are accepted on the regulated market in
question, because only by those practices will the conduct of the presumed passive subject of
the action be judged. The central objective that the investors with good-will have in sight is
obtaining a profit after trading on a capital market that works correctly and efficient. Any “fall”
under these standards of correctness and efficiency might be determined by the presence of a
behavior that can be assigned to the market abuse sphere, but there can exist, of course, other
causes, for example regulation deficiencies, incompetence or incorrectness of the market
authorities etc.
On the other hand, it is clear that the good-will investor may consider at a certain time
that he was mislead by a practice that can issue false signals, but he will not get the quality of a
passive subject in the situation in which that practice is not forbidden in an express or indirect
way on that market and it is not seen by the regular users on the market in question as a market
abuse.

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 Chapter V
Analysis of manipulation actions

We will be analyzing in this chapter the capital market manipulation actions, as they are
presented in article 244, paragraph (5) from the Law of the capital market no.297/2004, text
which resumes dispositions of article 1, and paragraph (2) from the European Directive no.
6/2003 regarding market abuse.
It is important to show that the market type on which trades are executed or orders are
issued suspected of having a manipulative character is determinative in appreciating the
existence or nonexistence of the illicit. For example, a series of trading actions executed in
order to correct some errors on the maximum admitted price of the stock exchange session can
not be treated as having a delusive character, even if the market trend is lower for that security.
Trading with an important volume of securities, on the Deal Market, doesn’t have to be
considered misleading for market participants regarding liquidity of that security, even if the
traded volume on the Regular Market is considered inferior.
The description of market manipulation action, as it is realized in the market abuse
Directive no.6/2003 has an extremely wide sphere of suspicious actions to be included in the
market abuse field.
The definition in article 1, paragraph (2) from the Directive, resumed in the Romanian
legislation in article 244, paragraph (5) from Law no. 297/2004, tries to cover all the possible
forms of market manipulation, although, unfortunately, doesn’t offer enough elements to
determine exactly the meaning of some terms. As example, there are presented in the European
Directive no.124/2003 certain situations which need to be considered in the analysis of the licit
or illicit character of actions presumed to represent capital market manipulation. With all that,
the European norms leave on to the national legislations the completion of the legal frame
necessary for the implementation and application in an uniform, non different and equitable
way of the European directive text, even the ones in the level 2 frame of regulation (according
to the Lamfalussy system).
Nevertheless, application of the market abuse Directive is realized under the subsidiary
principle, foreseen in article 5 from the Ground Treaty of the European Union “given that the
object of the suggested action, meaning prevention of market abuses under the form of insider
dealing and market manipulation, can not be realized accordingly by member states and, given
the dimension and effects of the action, it can be better realized on a communitarian level”,
according to paragraph 41 from the “Considerations” of market abuse Directive. In this sense,
the European Community can adopt measures in order to realize the purpose of preventing the
market abuse which will be applied obligatory in member states.
In this chapter we will outline essential aspects of the capital market manipulation action,
different types of conduct, actions, methods, mentioned in the European directives and the
internal legislations which can indicate the existence of manipulation actions, and certain
concrete forms that the manipulation actions might have, as they were ascertained and
sanctioned in the international jurisprudence.
We will analyze market practices considered to be manipulation by the first guide of the
Committee of European Securities Regulators (CESR) of implementation of the market abuse
Directive no.2003/6/CE, keeping into account that we are not dealing with a limitative

115
enumeration in the mentioned document and neither with imperative norms which need to be
applied obligatory by the member states of the European Union. This essential aspect is
outlined in Section IV of the guide, line 4.3:
Market manipulation can be avoided in many situations by implementing appropriate
measures regarding the microstructure of the market through explicit regulations which would
prohibit certain behaviors or some preventive measures implemented by market participants.
As a follow up, a series of practices considered unacceptable in the guide and examples which
follow that can not be applie in the case of all European markets, and, so don’t need to be
considered as universally applicable.
Also, in the guide of the Committee of European Securities Regulators is made
highlighted that examples of practices presented in this material are described deliberately in a
non-juridical language and, also, is outlined that presented aspects don not have to prejudice in
any way the interpretation of directives and regulations regarding market abuse.
The capital market manipulation by closing fictitious trades was question marked in the
doctrine, showing that you can speak about manipulation only in the hypothesis in which there
is disseminated information with a delusive character 1 . The cited author considers that
effective trades can enter in the equation of manipulation only when they represent a signal
with a false character given to market participants.
The European legislator pronounced in a contrary way, and the orientations of the
Committee of European Securities Regulators (CESR) are obviously in the sense of
sanctioning a conduct which affects the price formation based on the natural law of demand
and supply, even if this is materialized in closing trades. Only this way it can be interpreted the
legal text that incriminates maintaining the course at an artificial level, situation in which we
can not always state that the investors are mislead by the trading activity of the manipulator.
More than that, the markets mechanisms, no matter how many preventative measures are
implemented, they can not face complex manipulative techniques based on trades made by the
investors which assign significant amounts of money for those operations. Waiting for the
market to resolve, the lack of balance created by closing manipulative trades without the
implication of a competent authority, would mean putting in serious danger the function of that
stock exchange. Using manipulative practices as cornering or abusive squeeze might cause
certain and non dismissible prejudices for some participants on the market, even if they were
not mislead and haven’t accepted false signals from the trading activity unrolled on the capital
market.

Paradoxically, manipulation based on trading (closing effective trades) has a lot more
chances of success the operation benefits from an enhanced transparency 2 . In the situation of a
high transparency, a large number of participants on the market take into account the
manipulator’s operations, creating the premises for a big part of these participants to be
influenced to trade in the sense desired by the manipulator.

1
D.C. Donald, Applying Germany’s Market Manipulation Rules to Disruptive Trades on the Eurex and
MTS Platforms, German Law Journal, vol. 6, no.3, 01.03.2005, p. 664
2
Tyrone Callahan and Chris Parsons, On the Strategy and Profits of Trade-Based Market Manipulation,
2007, p. 5 http://www.cob.fsu.edu/fin/CallahanParsons1_08_07.pdf

116
 Section 1

Trading or trading orders which send or might send false signals or

mislead in regards to the demand, supply or price of securities

The first juridical norm formulated by the European legislator when defining capital
market manipulation is pointed in two directions.
Is considered manipulation the conduct which refers to trading or issuing trading orders
that mislead and the situation in which executing those operations (trading or just issuing
trading orders) “sends or might send false signals”.
In this way, the juridical norm covers the subjective situation in which investors are
mislead by the conduct of the manipulator, and the objective situation on which, although the
market participants that were mislead can not be identified, still the trading or the trading
orders that were posted have the potential of giving false signals regarding the price, demand
and supply of one or several securities. The second option that the legal text has in sight refers
to the “ability” which the trades or issued trading orders have in order to mislead. This
operations “send or might send false signals” for the market participants, which means in a last
instance creating a “risk of misleading”, of deceiving the investors by the manipulator,
disturbing this way the integrity of the market of securities.

It must be shown that, before adopting by the European Parliament the market abuse
Directive, the European Union’s Economic and Social Committee expressed an opinion 1 in the
sense that manipulation based on trades which send false signals should be incriminated only in
the hypothesis in which the manipulator acts “with knowledge”, meaning in a justified way.
The justification of such amendment proposal consisted in to be made responsible for market
manipulation the persons that traded giving delusive signals must act fully conscious over the
actions with an illicit character.
This approach pointing out expressly the presence of the illicit character of trading or
issued trading orders, only in the hypothesis in which the person in cause acts with the intent of
issuing false signals wasn’t introduced in the final form of the market abuse Directive.
In the same document, the Economic and Social Committee proposed the elimination of
the collocation” trading orders”, considering that placing orders is a “application of the desire
to trade of a third party”, without the intermediary to know the clients intents or what effect
will those trades have 2 . Neither this proposal was included in the market abuse Directive.
An understanding of the spirit and sense of this text which incriminates capital market
manipulation by issuing trading orders can not take place without an analysis of the component
elements of this form under which is presented the action of capital market manipulation.
We will make the specification that we chose to treat separately the matter of trading
which misleads from the one of issuing trading orders which have this result, because the
situation and the methods of deceive and sometimes, even the concrete results obtained are
different in the case of effective trading towards the situation of issuing only parts of trading

1
Point 4.1.1.1 and 4.1.1.2 paragraph 1 from the Opinion of the Economic and Social Committee regarding
“trading on the base of privilege information and capital market manipulation (Official Journal no. C 80
from 3.4.2002, http://europa.eu.int/eur-lex/lex/Notice
2
Point 4.1.1.1 and 4.1.1.2 paragraph 2 from the Opinion of the Economic and Social Committee regarding
“trading based on insider information and capital market manipulation”

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orders. This approach justifies its use also in the case in which the manipulation action relies
on a combination of artificial trades and fictitious orders.

§1. Trades which send or might send false signals or mislead regarding demand,
supply or price of securities

1.1 General features of manipulation by trading which sends false signals or misleads

Treating as illicit in the legislations of states with a developed market economy and solid
capital markets of trades or orders that mislead other participants to the trading activity is, as
we have seen in Chapter II, relatively recent. Until introducing the American legislation in the
field of stock exchange and securities in the 30’s, there were considered capital market
manipulation actions or price manipulation only those actions which consisted in spreading
news, information and data false, unreal or wrong regarding a certain issuer or certain events
that might influence the course of securities.
Practical activity proved that investors on the capital market can be mislead also by
closing effective trades which send delusive signals regarding certain characteristics of the
market, on the demand, supply or price of securities. The big crisis in the period 1929-1933
was eloquent in this sense.
In 1934, in Securities Exchange Act was stated for the first time without any doubt that
there are outside the law trades that do not lead to the effective change of the ownership or
introducing sale or purchase orders knowing that there are going to be introduced in the same
time on the market orders with a contrary sense of approximate size and price. Also, in the
same normative act it was incriminated trading which creates a false impression on the demand
and supply of some securities, leaving the impression of a false active trading of those
securities.
The shortcoming of formulation in Securities Exchange Act was the indication that
manipulation has as objective “persuading other participants on the market to trade” 1 , not
considering other form of manipulation, presented under the aspect of trades or issued orders
with other purposes, for example in order to maintain the price of securities at an artificial
level. Formulating a limitative purpose in the definition of manipulation based on actual
trading, may lead to establishing contradictory results. On one side, is clear that the purpose
and intent of every honest participant on the trading activity on the capital market is the one of
the existence of an enhanced liquidity on that market. On another side, it must not be neglected
that establishing this unique precise purpose in order to realize framing the manipulator’s
activity in the legal sanction norm might have as consequences leaving outside the prohibited
sphere some manipulation actions which seriously can prejudice the good movement of that
market. In the American doctrine it was pointed out this omission in the Securities Exchange
Act 1934 2 .

1
Section 9 line a) paragraph 2 from Securities Exchange Act: executing by a person, alone or together with
other persons of a series of trades with a security to create a real or apparent trade activity for that security
or in order to increase or decrease the price of that security with the purpose of convincing other persons to
sell of buy this security.
2
L. Loss, J. Seligman, Fundamentals of securities regulation (5th edition 2004), Aspen publishers, p. 1125

118
 It must be noticed that this version of the manipulation action has the most subjective
character from all the aspects foreseen by the European legislation in the matter of capital
market manipulation. From this cause, the market abuse Directive stepped aside from expressly
stipulating that certain capital market operations are the manipulation action by trades or orders
which mislead, although in the other two cases, meaning manipulation maintaining an artificial
price and manipulation by fictitious methods, statutes that certain actions of a person are
considered to represent the manipulation action. Creating a false impression on price or
liquidity is at present time one of the most used methods of market manipulation. It is natural
to be like this, because in the conditions of spreading information at high speed at the moment
is more difficult for a manipulator to mislead investors by spreading news or false rumors,
which can be easily dismountable.
Realizing a hierarchy of the means to mislead the investors on the capital market, making
delusive trades seems to be the most efficient method.
It is possible that delusive signals transmitted by the person which intents to obtain
profits on the capital market from misleading other market participants to succeed is
considerably enhanced in the conditions in which trades are effectively closed at certain prices
and in certain volumes. The reality appearance is without a doubt a lot more powerful in case
the securities and funds transfer is realized, in what presumes mobilizing some resources, than
in the hypothesis of launching simple trading orders, which are later on withdrawn or in the
situation of disseminating false information.
The role of this effective trade is to create credibility for the measure taken by the
manipulator. Beyond any precautions of the market participants, price evolution on the ground
of trading made on the market has the capacity to generate the impression of an active trade
and of a natural move of the price towards to levels desired by the manipulator.
On the other hand, the purpose of this delusive trade is to alter the price of securities and
bring it to levels on which the manipulator’s action is a success. Price evolution can follow
trades closed with good-faith by investors manipulated by false rumors or fictitious trading
orders, but the manipulator’s actions has more chances to succeed in the hypothesis in which
also these delusive trades exist, which sometimes don’t imply a real change of ownership of
securities.

Delusive trades, having the role to impose a gradual evolution of price towards the area
desired by the manipulator encumber trading securities on natural criteria on which the
manipulation action is exerted.
It is true that manipulation based on closing trades is harder to eradicate 1 , because, to
manipulate the price, a person must buy as expensive as possible and must sell as cheaper, as
possible which is in a complete opposition to a person’s behavior that wants to make a profit. It
was shown 2 that manipulation based on effective trading does not rely on false or fiction
elements, but is a trade which generates false signals for the other market participants.
It is very difficult to identify the manipulative trades closed on the capital market, in the
American economical literature 3 it was shown that it is absolutely impossible to read a persons
thoughts in order to asses if her intentions were to manipulate the price by trading or just to

1
D. Gale, F. Allen, Stock Price Manipulation, Review of Financial Studies no.5/1992, p. 506
2
D.C. Donald, Applying Germany’s Market Manipulation Rules to Disruptive Trades on the EUREX and
MTS Platforms, German Law Journal, vol. VI, no.3/2005, p. 655
3
D.R. Fischel, D.J. Ross, cited paper, p. 519

119
close legal operations on the capital market, according to her beliefs at that moment. The
conclusion of that study was to not to incriminate the alleged manipulation based on effective
trading. This opinion was contradicted by the majority of the economical and juridical doctrine
in the capital market field, grounded on the fact that the effects of capital market manipulation
by closing artificial trades, which have a criminal purpose, are as harmful as the ones made by
manipulation based on spreading false, incomplete or wrong information.
Analyzing this material evidence of the manipulation action, stipulated by the first
hypothesis of article 244, paragraph (5), line a), it needs to be mentioned that this element is
different from the one mentioned in article 244, paragraph (5), line a) point 2 from Law no.
297/2004, and article 1, paragraph (2), line a) second bullet, from European Union Directive
no.6/2003 (“trades which maintain, by the action of one or several persons acting together, the
price of one or several securities, at an abnormal or artificial level”), by referring to the
situation in which the manipulator, by his delusive trades, misleads the other market
participants with regards to the demand, supply or price of some securities. These “innocent”
investors, that were mislead, either choose to trade at artificial prices, either don’t trade
because of the alteration of price or volume of the demand and supply made by the
manipulator.
In the second case, we are dealing with trades or trading orders, that maintain the price at
an abnormal or artificial level, even if mislead investors do not exist. In this situation,
participants to the market of the manipulated security will have to trade at artificial prices,
although they are familiar with the abnormal character of the price or will be restrained from
trading, only because of maintaining the price at artificial levels.

1.2 Delusive character of trading

Trading that mislead regarding the demand, supply or price of the securities are delusive
trades which are not closed by the normal encounter between demand and supply.
These trades need to have the capacity to produce effectively results about price, demand
and supply. Closing certain trades in the natural conditions of the market, even if they are
closed at different prices than the price of the last trade closed before the alleged manipulator
intervened on the market, there can not be treated as market abuse elements if that price level
would have been reached, given the natural trend of the market. More than that, closing trades
at a certain level of price, very different from the one reached by past trades, can not be enough
in order to establish that we are in the presence of a manipulation action.
If the volume of trades sets under the normal parameters of that security market and the
premises of a sensitive influence on the demand and supply doesn’t exist or it wasn’t created,
we can not speak about artificial trades with a manipulative character.
As illicit, will have to be treated those trades which, as it is shown in the Securities
Exchange Act, do not lead to the real change of the ownership.
In these situations, the manipulator wants to trade securities at certain levels of price. For
this, he closes trades with intermediary persons in order to reach the level of price he had in
mind.
These trades are false, because they don’t have as result the effective change of the holder
of property right, only the change of market price of that security. Of course, in practice is
about several persons that, acting together, realize fictitious trades of securities packages in

120
order to lead their market price in the desired direction, but especially to mislead the other
market participants about the price and/or liquidity of the “manipulated” securities.
These trades have as result misleading the other investors on that market, the effect is
multiply produced “in waves” 1 , trading at certain prices attracts closing other trades, more and
more numerous, in the sense of the trend set by the delusive trades. This fact is likely more
possible on the extremely sensitive markets, which easily react to rumors or information that
was not checked properly and on which is a lot less easy to set a certain trend for a security,
either from the lack of liquidities, either from the absence of a real transparency, and either
from other possible causes.
From these considerations, manipulation by delusive trades is combined in some
situations with the one materialized in spreading wrong or false information, with the purpose
of enhancing credibility of the step initiated by the manipulator.
In the same time, the delusive character of trades can also have the shape of an operation
that has as objective creating a false liquidity, even if, apparently, it comes to changing the
ownership of the securities (change that has place between persons which act together).
Securities Exchange Act, using the expression “creating a real or apparent impression of active
trading”, incriminates, from this point of view, a lot more explicit than the text of market abuse
Directive, this behavior (Section IX, line a, paragraph 2). This form of manipulation by
creating the impression of a false liquidity, by trades with artificial, delusive character, is
possible and takes place in the case of those securities that are traded, regularly, in small or
insignificant volumes.
This “false liquidity” can not be created only by issuing orders; trades need to be
effectively closed.

1.3 The number of trades which determine the illicit conduct

A very special and important aspect refers to the number of trades that need to be
executed in order to indicate an illicit conduct.
The legal text from article 244, paragraph (5), line a), point 1 from Law no. 297/2004 (or
from article 1, paragraph 2, line a from Directive no.6/2003) uses pluralized terms. In the same
time, in the text of the capital market law, there is no mentioning that the use of pluralized
terms implies the incidence of that norm also for the case in which it is about singular terms.
In these conditions, using the grammar interpretation system of the law 2 , we can
appreciate that the letter of the law coincides with its spirit in the sense that it can not detain the
existence of the manipulation action, at least from the perspective of the material evidence in
the form foreseen by article 244, paragraph (5), line a), point 1 from Law no.297/2004 (trades
which send or might send false signals or misleading regarding the demand, supply or price of
securities), as long as it was closed only one suspicious trade, on the parameters that might
have the potential of misleading regarding the price or volume of traded securities.

1
M. Tomasi, Vers un renouveau de la lutes contre les manipulations de cours: l’apport de la directive sur
les abus de marche, Mélanges AED BF France (Association Européenne de Droit Bancaire et Financier-
FRANCE), 2004, p. 448
2
Gh. Beleiu, cited paper, p. 55

121
 In the doctrine 1 , it was shown that number and importance of closed trades have a
decisive role in the appreciations made by investors with regards to the securities on which
there are exerted manipulation actions.
The border between market abuse and natural trading, without following an illicit
purpose, is extremely thin in the case of making only one trade. A restrictive interpretation
from the market authorities might lead to blocking certain markets. For example, a deal trade,
realized at a price that, apparently, is unnatural for the regular market, finds its explanation
from an economical and operational point of view for the participants on that trade in the
hypothesis regarding the transfer of a significant package of securities. This transfer would not
be possible in the conditions and according to rules of the regular market, keeping into account
the steps of price, but also the legal requests regarding executing orders at the best prices that
were posted.

1.4 False or misleading signals

In the Romanian legislation there are not stipulated criteria on which there will be
established categories of trades suspected of giving false or misleading signals.
Starting from a text in the British legislation 2 , we consider trades which send false signals
or mislead those operations that can not be normally considered of having a legitimate
explanation from a commercial point of view.
The British regulations, Code of Market Conduct- MAR 1.5.10, speak about a “proper
way” of trading. This “proper way” is considered to be respected when keeping into account
the necessities of correct and efficient movement of the market. It is foreseen that it will not be
considered a “proper way” of trading, the situation in which their purpose is to mislead a
regular investor on the capital market.
Issuing false signals on the demand, supply or price of securities is realized under the
cover of delusive trades or fictitious orders, that don’t correspond to the real intention of their
author 3 . Investors, trusting the market on which these trades are executed, consider that the
price established on the course of these trades reflects the confrontation between the demand
and supply.
The objective of these trades that “send false signals” is to mislead the other market
participants regarding the decision of trading at certain levels of price.
These signals with false character must be appreciated from case to case, on one hand by
the market’s particularities on which the security is traded, suspected of having manipulation
actions, and on the other hand keeping into account the objective character of the regular
investor on the capital market, that “regular user” from the British legislation, Section 118 from
Financial Securities and Markets Act 2000 4 .
In order to decide that certain trades send false signals or mislead competent authorities
must take into consideration also the fact that investments on the capital market are realized,
usually, through brokers, professionals, on which it is presumed to have the capacity to
interpret the significations of certain evolutions of price, demand or supply. In general, in the
intermediary (brokerage) contracts it is mentioned as a service given by the authorized

1
S. Loyrette, cited paper, p. 261
2
Code of Market Conduct MAR 1.5.9
3
S. Loyrette, cited paper, p. 260
4
To see Chapter I, section 2, point 3.3, p. 14-15

122
intermediary meaning the consultancy service. In the hypothesis in which the investors trade
without a dealer on the capital market, they can appeal to the services of a specialized financial
consultant that would analyze and indicate the significations of some evolutions of the
securities.
Given these considerations, is imposed that application of the legal analyzed text has to
be realized taking into consideration that participants on the capital market are absolutely non
advice persons, without any knowledge in the stock exchange field, so it is considered that any
series of trades which don’t fit the markets trend has the nature to mislead.

§2. Trading orders which send or might send false signals or mislead regarding
demand, supply or price of delusive securities

2.1 General specifications

As it was presented in the first chapter of this paper 1 , it is necessary for the fictive orders,
that send delusive indications on the course of stocks or on the natural volume of demand and
supply, to influence effectively the market participants, so they will close trades at incorrect,
artificial prices or, on the contrary, restrain themselves from closing trades with the titles on
which the manipulation action is exerted.
Having into account the objective criterion of the regular investor, announced in Chapter
IV and resumed from the British legislation, concludes that a stock order, in order to be treated
as illicit, must have the capacity to deceive a person that tradess regularly on the capital
market, with a middle level knowledge about this field. It would be excessive the interpretation
in the sense that any order introduced in the trading system has the nature to mislead the
participants on the market, if it doesn’t fit within the characteristics of previous orders.
Manipulating the market by introducing fictive orders is a procedure that implies
financial efforts considerably lower than trading artificially, but the chances of success of the
manipulator’s action are lowered, if his actions are based only on introducing these orders in
the trading system of the securities in cause.

2.2 Withdrawal of the order

Introducing an order in the trading system doesn’t mean that this order is irrevocable. It
can be withdrawn at any time before trading in which it can be implicated, can be modified or
suspended. These operations are not indications of capital market manipulation. Withdrawal of
an order, connected with other elements, for example, modification of the best price of sale or
purchase of a security, can be an element that indicates the existence of a manipulation
operation. In this hypothesis of the modification of the best price, we are dealing with
misleading other participants and altering the formation on natural criteria of the market price.
It must not be realized an excessive interpretation of the legal text, in the sense of treating
as illicit all actions of withdrawal of orders that had an impact on modifying the best posted
price on the market. The reasons that generated the withdrawal actions of orders need to be

1
To see Chapter I, section 2, line 5, p.18-20

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investigated by the market’s authority, in the idea that these dismissal operations of orders had
an effect on the evolution of that security on the market.
It must be pointed out that, according to regulations in the Bucharest Stock Exchange
Code- market operator, withdrawal of orders is realized by a certain procedure, existing the risk
that, before it was finalized the operation of withdrawal of the order, this order will be executed
by the trading system, because of fulfilling the conditions of closing trades, by issuing a
contrary sense order for a part or for the whole quantity of securities that the order whose
withdrawal was announced has specified 1 . This way, the withdrawal of the order doesn’t take
place and the attempt of market manipulation by issuing fictive orders, either doesn’t succeed,
either it is continued by combining the method of artificial trading with the one of introducing
delusive orders.

2.3 Trading orders which issue false signals or are misleading

Manipulation by introducing trading orders that issue false signals has as objective
determination of the other market participants to close trades at certain artificial prices, set with
violating the natural law of demand and supply.
In the hypothesis of a successful manipulation, aimed towards the fictive trading orders,
the brokers, usually, or, depending on the case, the investors too, are mislead about the
demand, supply or price of securities and close trades at distorted prices towards a normal
market.
Issuing trading orders which send false signals is followed by the withdrawal of these
orders off the market, by the absence of effectively closing trades with them. The manipulator
tries to reach his goal only by “direction” the price to certain levels, but based on trades made
by the other participants on the market. Of course that, in many cases, manipulation by
launching fictive orders is combined with the activity of misleading by proper trading.
Introducing these orders that induce false signals and are withdrawn before execution is,
as we have shown, an indication of a manipulative intent. It was stated that this behavior must
be differentiated from the legitimate market practices that are accepted. In the hypothesis in
which, verifying the order book of the broker and the client’s securities account and results that
the practical possibility to execute the order doesn’t exist, then we can speak about the
existence of manipulation premises 2 .
In many situations, by placing trading orders which send false signals, the manipulator
has as objective to create the impression of an active trading of that security. This practice is
known as “matched orders” and will be analyzed next, with the other manipulative practices.

2.4 Situation of the markets on which there are introduced orders which contain
informative quotations

In this discussion was mentioned only the situation present on the “order driven” markets,
based on auctions which lead to closing trades by the encounter of the demand and supply.

1
According to article 57, paragraph (3) from Title III of the Bucharest Stock Exchange Code- market
operator, between the moment of taking a stock order, for the modification operation, and the moment of
initiating the command, the order can be executed by the system, if that order is not suspended and the
execution conditions are fulfilled.
2
S. Loyrette, cited paper, p. 261

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 A specific situation, from the point of view of the analysis of manipulation actions, is
manifested in the case of those markets that do not function in the “order driven” system, but
on the base of informative quotations. This type of market was until the middle of 2007 the
XMBS market, operated by the Bucharest Stock Exchange, negotiation market, on which there
were posted informative quotations and deal trades could be closed.
Considering that deal trading has no role in establishing the reference price of a security
and the purpose for which the Deal Market was organized was to ensure transfer of large
securities packages, at prices negotiated in advance by brokers or dealers, it must be outlined
that the analysis of manipulation actions will have to take into account these characteristics
until it will be taken into discussion certain operations closed on this type of market.
Thereby, introducing trading orders (quotations) and withdrawing them without being
executed will not represent necessarily an indication of manipulation, even if the counterparty
for executing that order exists. This conclusion is imposed because of the informative character
of the quotations which are introduced on this type of market, element that doesn’t have the
obligation to sell or buy a certain security.
Also, closing deal trades at a price a lot more different then the price of the regular
market will not be seen as a manipulation sign, because, as we have shown, on this type of
market the price is formed according to other mechanisms, being negotiated by two
participants to the trading system, in the name of their clients.
Trading an important package of securities requires, without a doubt, the existence of a
negotiation. It is hard to assume that a package that has significant percentages from the social
capital of the issuer or from the value of issued securities (bonds, state titles) can find its buyer
on the market price, formed from trading with smaller volumes.
The economical reality determines the previous identification of a potential buyer for the
significant package in question, negotiating a price, that needs to be frame in the parameters of
price variation foreseen for a trading session and traded on the capital market, respecting the
execution rules of trading on the Deal Market, and the rules applicable to cross trading, in case
the same intermediary acts in the same time for the seller and for the buyer.
In these conditions, even if the price of a deal trading can represent an important bench
mark for the participants on the Regular Market, state authorities, when they analyze an alleged
manipulation action that took place on the Deal Market, have to take into consideration all
these mentioned aspects connected with the negotiation market and not to interpret the legal
dispositions excessively, in the sense of discouraging any other trades closed on this market.

§3. Signals of capital market manipulation though misleading or issuing false

signals

In the matter of the illicit actions in the stock exchange regime, the British legislator has
chosen the path of a subjective approach of the market abuse phenomenon, based on the
conduct of market participant’s analysis, while the European Union’s legislator tried to set
certain objective criteria of censuring activities on the capital market.
In the Code of Market Conduct, applicable to the capital markets in Great Britain, MAR
1.5.5, there are included a series of factors that can be taken into consideration in the conduct
analysis of an investor suspected of trading or issuing orders that mislead or send false signals

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to the other market participants. According to the supervision authority from Great Britain
those factors would be:
- experience and knowledge of the participants to the security market;
- structure of the market, including reports, notifications, required transparency
criteria;
- market practices admitted according to legal norms and regulations;
- identity and position of the person suspected of market manipulation (if there are
known);
- situation and nature of transparency of the activity developed by the person in
question.
European Commission Directive no. 124/2003 contains in article 4 a series of situations
that are presented as possible indications of the presence of a manipulation action by effective
trading or emission of orders that send false or delusive signals in regards to the supply,
demand or course of securities.
Some of these situations represent also clues of a manipulation by maintaining an
artificial course.
According to article 4 from Directive no. 124/2003, text resumed in article 164 from
Regulation of National Securities Commission no. 32/2006, the competent authorities and the
market participants must take into consideration these signals in the analysis of situations
suspected of representing market manipulation actions.
It is important also the specification according to which the indications presented in the
directive text, are not an exhaustive list and they don’t have to be considered as market
manipulation.

3.1 The measure in which issued orders or closed operations are an important proportion
in the daily volume of operations made on the regulated market of the security in question

The elements of this possible indication a market manipulation action are:

- Orders or trades executed are an important proportion of the daily volume of
operations realized on that security’s market;
- Issued orders and closed trades determined a sensible variation of the course.
It is extremely important the specification that this sign is applicable, as the entire issued
legislation in the normative system created by the market abuse Directive, only to regulated
markets. These markets presume the existence of high requests of liquidity and capitalization
for the issuers admitted to trading, as on these markets it is imposed also the existence of a
certain degree of spreading titles to the investors.

3.1.1 Orders and trades are an important proportion from the daily volume of operations
realized on that security’s market

In the case of titles with a low liquidity, if they are traded on a regulated market, this
analysis criterion of the presence of possible manipulation actions shouldn’t find its
application.
It can happen for the securities of a certain issuer, admitted to trading on a regulated
market, not to have a special liquidity in a period of time. The recovery of trading those titles,
because of outside, objective events, can not represent an indication of the presence of market

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manipulation actions, even if the signal of raising the liquidity is sent by trades carried out by a
certain investor.
This criterion can not be applied to persons authorized as market maker for the market of
that specific security. The essential character of this institution is offering sale and purchase
quotations to investors interested in trading titles for which that entity has obtained the quality
as a market maker. Trades closed by a market maker will represent an overwhelming
proportion from the daily volume of trading.
In the case of the existence of a satisfactory liquidity of the market of the traded title on a
regulated market, the fact that trades made by a certain investor or by the persons he acts with
is an important proportion from the daily volume, shows giving some material resources in a
certain quantum that are not accessible to any person.
It will be possible to speak about a market manipulation indication, when a large part of
the volume traded by a certain investor in a stock exchange session is an unusual action for that
investor, situation that needs to be linked with other elements that would show the
manipulation intent. For example, an investor which by that time traded under a certain level of
value suddenly issues “on market” purchase orders, without a price limit, for a significant
volume of securities. This order is executed at prices that are always on the rise. The other
market participants are mislead by the sizes of the demand, but also by the price, having the
false impression that a natural evolution of the price is happening, resulted from the natural
game of demand and supply.
Issuing trading orders in considerable volumes, reported to the size of demand and supply
from that stock session, may be a manipulation clue. In order for the manipulation action to
exist, this action will have to be linked with the absence of intent to close effective trades on
the price levels mentioned in trading orders. Issuing orders at certain price levels and not
trading at those levels may have as cause the absence on the market of counterparty willing to
trade at the prices included in those orders. This fact can not be considered as market
manipulation.
This criterion can not be applied, in principle, neither to the trades closed on the Deal
Market, considering the destination of that market. Transferring an important package of
securities, negotiated between dealers in advance, can be an overwhelming proportion from the
daily trading volume. The price of this transfer is, in most cases, different from the one
registered on the Regular Market, even if it takes into account the parameters of daily variation
course (+/- 15% on the main market of the Bucharest Stock Exchange).

3.1.2 Issuing orders and trading determined a sensitive variation of course

“A sensitive variation of course” needs to be appreciated in a wider context. In order to

speak about a clear indication of manipulation, it is imposed that these orders and/or effective
trading realized in a stock exchange session with a large volume of securities represent the only
reason for the major change of price or, at least, to be the decisive reason.
Intervention of an outside event, such as announcing financial results or a merger, can
have a decisive role on the course variation. Issuing massive orders of purchasing by an
investor, after announcing these positive events, should not be a signal of manipulation, even
though, reported to the daily volume traded by that time, would represent a significant
proportion, and those orders would lead to a sensitive course modification.

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 The interest of the investor (regular or institutional, qualified) for those titles is
determining him to purchasing of a large number of securities, even on a price in an
accelerated ascension. The existence of some estimation about continuous, lasting estimation
of price determines that investor to buy as many titles as possible, even if by those orders he
sets a significant increasing variation of the course.
To treat as manipulation this type of conduct would mean to deny the principle of free
negotiation of traded titles on the capital market, as the trading intent of that investor is
legitimate. This intent is generated by the exterior factor that is also generated by the positive
news which appeared about the issuing company.
In the same way it must be judged also issuing massive sale orders on the ground of
negative information which appeared regarding the issuer of the titles. The sudden decrease of
the security price, even if it was determined by the issued orders and trading by a certain
investor, can not be considered as market manipulation if it has on base an exterior cause that
gives legitimacy to that investor’s conduct. This exterior element may not be necessarily linked
with the issuing company, but can be, for example, the investor’s need for liquidity, fact which
determines him to liquidate all his positions, even though this operation is realized on prices in
an accelerated decrease. The recent crises of sub primes in the United States was, in some
situations, this type of cause that determined certain institutional investors to liquidate their
positions, event which generated a descending course for the securities traded in Europe and
Asia, even if some of the issuers, whose stock exchange capitalization was dramatically
affected, enjoyed a special financial health.

3.2 Executed operations do not determinate the change of ownership of a security

admitted to negotiation on a regulated market

In this case, we are in the presence of a clear indication of capital market manipulation.
As we will see, the Guide of the Committee of European Securities Regulators regarding the
application of the market abuse Directive treats this type of conduct as a manipulative practice,
called “wash trades”.
For these considerations, we will analyze in the matter of manipulation techniques by
misleading or issuing delusive signals, the elements of this behavior.
Noticeable, is that in this situation, manipulation takes place by actual trading, and only
by introducing trading orders could not produce the material evidence. The central element of
this capital market manipulation clue is the absence of proper translation effects of trading
suspected of entering the market abuse sphere. We are dealing with contracts of sale-purchase
of securities in which the sale person is the same with the purchase person or in which one of
the parties is a person or an entity under the control of the other part or the person that controls
the other part.
It must be noticed although also the fact that certain trades that do not lead to “the change
of ownership of the security” have a legitimate justification. For example, it can not be
forbidden the transfer of some securities between two entities that are under a common
control 1 .

1
According to article 4, line 31 from Directive 2004/39/CE- Market in Financial Instrument Directive,
reported to article 1 from The Seventh Directive of the Council, Directive 83/349/EEC, control is the
situation in which an company (person)
a) has the majority of shareholders voting rights of the associates at another company (branch) or

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 This type of trading can be considered as an indication of a manipulation action only in
the hypothesis in which the potential of misleading the other market participants, regarding the
volume of the demand, supply or price of a security.
This transfer of securities between two or several entities under the same control can take
place from fiscal reasons or might be generated by a strategy of exercising the shareholder’s
rights in an issuing company. A single trade or a reduced number of trades between two or
several entities under common control can not represent an indication of a manipulation action.
It is different when a series of trades, made even between dealers that are different for the
seller and for the buyer, do not lead to the actual change of ownership of those securities,
situation linked with proving that their only purpose is misleading the other market
participants.

3.3 The measure in which issued orders or executed operations translate in short term
position turnovers and represent an important proportion from the daily volume of
operations made on the regulated market of the security in question and might be

b) has the right to appoint or revoke majority of members of the administrative organisms, of
leadership or supervision of another company (branch) and is simultaneously a shareholder or an
associate to the company in cause or
c) has the right to exert a certain dominant influence on a company (branch) whose shareholder or
associate is, on the ground of a contract closed with that company or of a clause from the
constitution act or status of the company in question, if the legislation under the incidence which
that branch allows for it to have these types of contracts or clauses. Member states can not impose
that the mother- company to be shareholder or associate of the branch. Member states that don’t
have in their legislation this types of contracts or clauses are not obligated to apply this disposition
or
d) is a shareholder or associate of a company and:
(aa) either the majority of members of the administrative organisms, leadership or
supervision of the company (branch) that has had these positions in the course
of financial exercise in cause, in the course of previous exercise and until the
moment of elaborating the consolidated accounts were appointed only by
exerting their voting rights;
(bb) either controls itself, on the ground of an agreement closed with the other
shareholders or associates of the company in question (branch), the majority
of the shareholders voting rights or the associates of the company in question.
Member states can adopt more detailed dispositions regarding the form and
content of these agreements.
Member states impose at least the regulations from point (bb).
Member states can impose for the application of point (aa) the condition for the participation
to be at least 20% from the voting rights of shareholders or associates.
With all that, point (aa) doesn’t apply unless another company has the rights mentioned at line
a), b) or c) in what regards the branch.
2. Other then the cases mentioned in line (1) and until a later coordination, member states can
impose to any company that goes in under the incidence of their internal law to have
consolidated accounts and an consolidated annual report, if the company in cause (mother-
company) has a participation as it is stated in article 17 from Directive 78/660/CEE to another
company (branch) and:
a. exert effectively a dominant influence over the branch or
b. the mother- company and the branch have an unique leadership.

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 associated with sensitive variations of the course of a security admitted to trading on a
regulated market

This signal of market manipulation has similar characteristics with the first signal,
analyzed in point 3.1.
This conduct may represent a signal of capital market manipulation by misleading the
other participants and by creating and maintaining an artificial or abnormal course.
The defining elements of this situation revealed by the dispositions of article 4, line d)
from Directive no. 124/2004 are:
- Trading orders and trades have as result short term position changes;
- Trading orders and trades are an important proportion in the daily volume of
realized operations;
- Trading orders and trades might be associated with sensitive variations of the
course of a security admitted to trading on a regulated market.

All these three elements are conditions which need to be fulfilled in a cumulative way in
order to speak about an indication of market manipulation.

3.3.1 Short term position turnovers

The sense of this collocation regards first of all reversing the position adopted by the
investor regarding a certain security, as from buyer (long) to seller (short) or vice versa.
The notion of “short term” is about a small period of time on the course of a stock
exchange session. This period of time starts from a few seconds to maximum a few minutes
from the daily duration of the stock exchange session. If this period of trading is passed we will
be able to speak about a moment trend and not about “short term position turnovers”. Practice
demonstrated so many times that there can be numerous trend changes on the course of the
same stock exchange session, without being suspected of having manipulation actions.
From the drafting type of this legal text results that, after a certain short period, the
presumed manipulator investor goes back to the position that he had before starting the
suspicious action of market abuse.
It is possible that this conduct of an investor, opening a position towards a certain
security on a short term, to have from the start the intent to realize an arbitrage, taking
advantage from the price evolution on a certain market and trying to obtain profit from the
price difference (“spread”) between the security prices an two or several markets.
Also, it is possible that this type of action is generated by the intention of covering risks
by hedging method.
In these two situations is not possible to speak about manipulation. The competent
authorities that are investigating the market abuse actions must set exactly the investor’s intent
in these situations, in order to separate the legal hedging practices and arbitrage from the illicit
practice of capital market manipulation.

3.3.2 Important proportion from the daily volume of closed operations

There is no legal criterion in order to establish the level of trading which is “an important
proportion from the daily volume”.

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 This proportion has to be reported to the average liquidity of the security on a certain
period of time. There can be situations, as it was have shown, in which certain securities are
not traded on a period of time or are traded in small volumes. The absence of the liquidity of
that security on the market would generate suspicions of market manipulation for any trade,
even the ones reduced by value that might be made with that title.
In the interpretation of the conduct of investors on the capital market the authorities are
forced to keep into consideration also these aspects and combine this potential signal of the
position turnover from a title, on the ground of a more intense trade until that time with other
aspects of nature to indicate a delusive intent of that investor.
In the hypothesis in which there is manifested a certain liquidity on the market of that
security it might be considered that as representing an important proportion from the daily
volume of trading which has as objective a number of titles with a level of 33% from the daily
volume.

3.3.3 Sensitive variations of the security’s course

In this case also there is not a legal criterion that would indicate the minimum level of
price modification of a security which draws the suspicion of market manipulation, on the
ground of changing an investor’s position towards that security and trading in an important
proportion towards the daily volume.
A percentage variation of the larger price then the daily usual modifications might be a
signal, but it will have to be connected with the other elements that outline this signal of the
presence of a manipulation action.
It has to be noticed in this sense which is the reason to determinate the percentage
variation, because it is imposed that between the trades of the alleged manipulator and the
course variation should exist a causal connection. The existence of other objective factors that
influence the price of those securities, even if it takes place a change position of a person on a
short term regarding those securities, indicates a natural evolution of the market.
In the analysis of the notion of “significant variation” must be taken into consideration
the maximum admitted variation for a stock exchange session on that regulated market, but
also the liquidity of the security in question. A title with a lower liquidity, in order to be
acquired or sold in a specific quantity, will have to be submitted to a percentage price variation
more important than a title with a good liquidity.
From these considerations, if for a security with a liquid market a modification of price
with 4-5% can be an important change of course in one stock exchange session, for an non
liquid title it can be granted the grade of “sensitive variation” only when it oversteps a superior
level of 8-10%. Again, this modification must be looked at in a context with other factors, with
other possible signals of the stock exchange illicit, because the price variation alone can not
represent an indication of manipulation. It is possible that a lowered price modification that
takes place following a person’s action that changes the position towards a certain security for
a short period of time to be a manipulation action, if the other market participants are mislead
with regards to the demand, supply or price of a security.

3.4 Issued orders or executed operation which are concentrated in a short period of time
on the course of the negotiation session and determine a course variation which is afterwards
reversed

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 This possible manipulation signal has in sight misleading the other participants on the
market about the real price of some securities. This type of conduct can also lead to
maintaining, on a short period of time, the price of some securities at an artificial level.
We are dealing with, in this case too, concentrating on orders and trades on a short period
of time in the stock exchange session. Also, for this activity to be an indication of a capital
market manipulation it is necessary to take place a course variation in a certain sense, and after
that changing the trend.

3.4.1 Orders and trades concentrated in a short period of time

In order for the suspicions about the trades and orders to exist is necessary to have a
certain degree of concentration of them in time, on a period of maximum several minutes. The
other participants on the market are mislead in this position, by a surprising evolution of the
price, generated by the orders and trades of the alleged manipulator. Because of the
concentration in a short period of time the price has quick changes, unnatural, artificial, and the
law of demand and supply can not counterbalance the effect created by the actions of the
alleged manipulator.
In this context, it is necessary the existence of a certain number of trades and/or orders of
trading that would be concentrated in a short period of time in order to raise suspicions about
the behavior of that investor. It is clear that is needed the presence of more than one trade or
one order. In the same time, closing two or three trades is hard to be considered a manipulative
action by concentrating them in a short period of time. A large number of orders and trades on
prices which are evolving in a certain sense, along the change of price, induce also the
appearance of an enhanced interest of investors in order to close trades at prices that are
changing according to that specific trend.
In this analysis of the potential indication of the stock exchange illicit it needs to be taken
in sight also the volume of these trades or orders, but also the difference of price that they have
towards the market price established prior to the intervention of the alleged manipulator.

3.4.3 Orders and suspicious trading determines a course variation which is later reversed

No matter the market trend, suspicious actions, materialized in trading orders and/or
actual trades, determine a variation of securities price.
The European directive test doesn’t use in this case the epithet “significant” or
“important” to be linked to the noun “variation”. It would result that any price variation
following the intervention on the market of the alleged manipulator, by orders and trades
concentrated in a short period of time, is a sign of manipulation, if the trend is later changed.
This kind of interpretation is correct, but it needs to be outlined very carefully, because
from this there can result many abusive interpretations.
Most trades closed on the capital market take place at a different price from the previous
trade. A price variation exists always on the capital market, being the essence of the movement
of every stock exchange.
Starting from the presumed situation, the existence of a market price of a certain security
that is modified after executing orders and/or trades by the investor, it has to be analyzed, first
of all, the real impact made by the operations of that market participant on the course. As the

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previous situation, it is necessary to be established the causal link between trades and issued
orders and price variation. If there are exterior factors to the action of the alleged manipulator
that determines the price changes, then the application of this clue in the analysis of the
manipulation action will be seen with a lot more reticence.
When the action of the alleged manipulator stops, the trend is changing. Also in this case
the trend change will have to be in a causal link with the completion of the alleged suspect’s
operations. In other words, the trend change must represent an effect of the comeback of
incidence of the natural law of demand and supply on the market of that security.
If the trend change is caused by an exterior event, for example an important
announcement of the issuer that would have in any conditions a significant impact on the price,
the existence of a clue of market manipulation won’t be outlined.
For the action to be suspicious, trend reversal must be made immediately. Trading that
security at another value then the one registered in the last trade of the alleged manipulator,
after a long time, even in other stock exchange sessions doesn’t complete the conditions
required by the legal dispositions to contour the existence of the manipulation action. The
change of trend must take place, in the same stock exchange session, at a short time after the
last trade carried out by the alleged manipulator.

3.5 Trading orders given and withdrawn before being executed lead to modification of
the best purchase or sale price of a security admitted to trading on a regulated market or to
modification of registrations in the order registry available to the market participants

Introducing orders in the trading system without the intent of executing them is a practice
that is considered capital market manipulation.
Proving the intent of the order issuer is an extremely difficult process. That is why, the
European legislator considered as an indication of a possible manipulation action the
withdrawal of orders that already have altered the best posted price on purchase or sale for a
certain security. To outline the presence of an illicit action will also be necessary, along this
indication that has an objective character, to prove the subjective element, the intent of the
author of orders (the investor in which account the orders were issued).
A preliminary specification is necessary in the matter of the priority of posting and
executing orders, on the main capital market in Romania. At the Bucharest Stock Exchange,
orders are posted and executed, in the decreasing order of importance, depending on these next
criteria:
a) order price;
b) in the same level of price- after the account type, in a decreasing order of priority,
Client account, Institution account, own account (House), relevant person account (Staff),
Insider account, combined account (Mixed);

c) in the same level of price and account type- after the moment of introducing the order
in the system or the proper time of the last modification that determines the change of priority,
according to the precedence principle (FIFO: first come first served).
The constitutive elements of this possible market manipulation indication are analyzed
next.

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 3.5.1 The premise situation- issuing trading orders which modify the best posted prices of
demand or supply or registrations in the order registry

The order registry includes the total amount of stock exchange orders from a market
[article 52, paragraph (3) from Title III of the Bucharest Stock Exchange Code-market
operator].
A stock order introduced in the system, but suspended, is not taken into consideration
when the best purchase or sale price is established. A suspended order is eliminated from the
Order Registry.
The best selling price is the smallest posted asked price for the sale of a security (the
smallest price in ask). The best purchase price is the biggest posted offered price for the
purchase of a security (the biggest price in bid).
To present the premise situation of a possible market manipulation indication, issued
orders must modify the best sale or purchase prices from the moment of introduction in the
trading system, posting them in order to be seen by the other participants at trading.
It can not be an indication of market manipulation if these orders get to send the best
prices, not just right after their introduction, but after other orders that contain similar
characteristics more favorable about the price are executed or withdrawn. The collocation
“modifies” is, in the best case, unambiguous. We consider that this legal text can not be
interpreted extensively. Placing a trading order, even in a large volume, at a less favorable
price then other posted orders can not be a manipulation indication of the previous mentioned
market.

It will not be a indication of the manipulation action an order that is situated on the same
price level with another previously posted order, even if this new orders contains superior
characteristics regarding the volume.

3.5.2 The withdrawal of the order before being executed

From the text formulation of article 4, line f) from Directive no.124/2003, results that the
simple withdrawal before execution of an order that has the previous mentioned characteristics
is a sign of capital market manipulation.
The withdrawal of the order can be legitimate, justified only by objective considerations,
like, for example, modifying the conditions of that security’s market, the admission of more
favorable investment opportunities, admission of an urgent need of liquidities etc.
On the other hand, later intervention of some orders, placed by other persons that modify
the best prices on sale or purchase contained by the orders suspected of being market
manipulation is a situation that eliminates from the possible signals of stock illicit those orders.
For the activity of one person to be a manipulation indication, according to the text from
the European directive, it is necessary for the orders to be effectively withdrawn and not just
suspended. With all this, in some circumstances, also the unjustified suspension of some stock
orders can lead to the misleading of other participants on the market, because these orders were
previously posted in the market, were visualized and they were able to produce possible
delusive effects.

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 Finally, it can be talked about a market manipulation indication only in the situation in
which the withdrawal of the order is the decision of the investor of his broker and not to be
influenced by a technical error.

§4. Practices of capital market manipulation through issuing false signals or

misleading investors

The first Guide of the Committee of European Securities Regulators regarding the
implementation of the market abuse Directive no. 6/2003 stipulated a series of practices
examples that, in the opinion of members of the Committee of European Securities Regulators,
contravene the interdiction regarding market manipulation according the definition in the
directive, although, it is shown in this guide, “it can be accepted the fact that, in certain cases,
practices can have legitimate purposes”.
This set of practices, as they are enumerated in the guide of the Committee of European
Securities Regulators do not have a restrictive character, but an exemplifying one, being
expressly according to market manipulation situations defined in the Directive. It is accepted
the fact that some practices, considered as having a manipulative character, can be included in
many more categories, depending on the way they are applied.

4.1 Wash trades

Wash trades- Trading that has in sight acquisition or sale of a security in the conditions in
which modifications do not appear relatively in the case of the beneficiary or market risk or
trades in which the risk transfer or the profit is realized between parties that act together in an
openly or hidden way.
When we enumerated the activities considered by the Directive no. 124/2003 as possible
signals of a manipulation action 1 , we have showed that trades that do not lead to a change of
ownership have this potential to represent an indication of a possible manipulation action.
In the case of the manipulative practice “wash trades” we are dealing in reality with
carrying out fictive trades that don’t have as objective the ownership transfer and risks over the
securities that make the object of these trades.

4.1.1 Premise situation

Applying the manipulative method of “wash trades” supposes the presence in the
manipulator’s portfolio and/or of his accomplices, at the beginning of the manipulation action,
of titles that will make the object of the illicit actions.
In the same time, also in the frame of the premise situation is included the absence of
liquidity of the title considered by this manipulative practice. An intense traded security usually
can not be “manipulated”, for the false impression of liquidity to be created. In the case of a
security with a liquid market, the law of demand and supply works as an superior force, that
takes the effects out of exercising “wash trades” actions.

1
To see point 3.2, p. 184- 186

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 4.1.2 The active subject of the action

These types of trades usually have the character of some pre arranged trades between two
or several participants on the trading activity, in complicity.
A different reading of this manipulative technique (called also “wash sales”) is the one
where a single person actually controls the both parties involved in the trade 1 . Generally, this
type of capital market manipulation takes place by the actions of a manipulator and at least of
one accomplice, because the supervision systems of the market prevents from closing a trade
by cumulating on the same account the position of seller and the one of buyer.
This manipulative practice can be applied by trades made by one person or several
persons acting together. One person can make purchase and sale trades with the same security
by the same brokerage house, situation that might have the broker’s complicity, or by different
brokerage houses.
In article 241, line g) from Title III of the Bucharest Stock Exchange Code- market
operator, it is forbidden to the brokerage companies, participant to the trading system operated
by the Bucharest Stock Exchange, to execute a trade with the same client for purchase and for
sale.
On the other hand, the market operator, by the monitoring systems of the trading activity,
must identify those trades, made by different brokerage firms, in which the seller and the buyer
are the same person. In general, this situation is noticed by analyzing the account numbers
implicated in the trade, each investor having at the stock exchange a unique account number,
even when trade is made by a custodian. A bigger challenge appears in the case of nominee
accounts 2 , in which are not identified the custodian’s clients for which the trade is made, the
assignment being done by the custodian after the trade is closed.
To differentiate this method from other manipulative methods, it is important that the
“wash trades” technique is characterized by the absence of ownership change or the real
beneficiary of the traded securities, after trading on the capital market. The action of carrying
out fictive trades and actually changing the ownership of the trades can not be included in the
“wash trades” sphere.

4.1.3 The purpose of the “wash trades” practice

In this hypothesis of manipulating through the method of “wash trades” the purpose of
the parties involved in trades is to lead the price towards certain artificial levels or to create the
impression of a false liquidity.
The two possible objectives are usually combined by the persons involved in the
manipulation activity.
It was outlined in the doctrine 3 the fact that, in isolated situations, there are economical
reasons for which traders (investors) appeal to the “wash trades” practice, like continuing in
time the initiated positions, by avoiding the settlement of accounts moment which is inevitable
when reaching the due date of a futures contract. Then, the investor resorts to two trades: a

1
E.F. Greene, E.J. Rosen, L.N. Silverman, D.A. Braverman, S.R. Sperber, U.S. Regulation of the
International Securities and Derivatives Markets, Aspen Publishers, 2005, vol. I, p. 15-67
2
Nominee accounts are the accounts of securities opened by an custodian or a brokerage firm, the identity
of the real beneficiary, the owner of securities, being undisclosed.
3
R.W. Kolb, J.A. Overdahl, Understanding Futures Markets, Blackwell Publishing, 2006, p. 43

136
trade with an opposite sense from the held positions and a trade with the position with the same
sense (if a short position is opened, of sale, he will make a purchase trade mandatory in closing
the opened position, but also a short position, for maintaining the same position).

4.1.4 The result of applying the “wash trades” method

In general, increasing the trading activity of a security or a product (in the case of
commodities stock exchange), connected with an ascending evolution of course, draws the
attention of investors on that security or product. It was ascertained 1 that in the time period in
which manipulation actions are exerted (including through the wash trades method), traded
volumes increase with about 20% from the periods of time in which manipulative actions don’t
take place.
Also, it needs to be said that for this activity of purchase and sale of the same security to
have an illicit character it’s necessary for the other market participants to be mislead regarding
the price, demand or supply of that specific security or to able to consider objectively that those
trades issue false signals towards the market. Not completing these conditions sets the sale and
purchase trades carried out in the same time by a person in the sphere of legality.
It is obvious that certain trades that do not lead to changing the owner don’t have a
manipulative character. As we have emphasized, the absence of delusive character of these
operations is enough for these trades to be considered legal.
There is no legal interdiction in the European or American legislations about making
opposite sense trades in short periods of time, with the same security. In the conditions in
which the essential stipulation of the existence of a manipulation action, meaning misleading
the other investors or issuing false signals by the executed operations, that would have the
potential to mislead a regular user, is not accomplished, it can not be stated the legal text’s
applicability that incriminates capital market manipulation.

4.1.5 Incriminating the manipulative practice of “wash trades” in the United States and
Great Britain

In Great Britain and United States description and sanction of these capital markets
manipulation techniques intervened first of all on a praetorian way, without a legal regulation.
In the XX century, along with a codified law, and these states in which the common law is the
essence of the legislative system, there were adopted legal texts inside which it was included
this illicit practice.
In the United States this type of practice is incriminated by virtue of Section 9 (a) (1) (A)
from the Securities Exchange Acts 1934 and Regulation 10b-5 issued by the Securities
Exchange Commission in application of the Securities Exchange Act 1934, because it was
considerer that is creating a false or delusive impression regarding the active trading of a
security. In the United States is considered as illicit also a practice represented by the sale and
purchase of the same security in a short time period 2 , not just in the same time.

1
R.K. Aggarwal, G. Wu, Stock Market Manipulation –Theory and Evidence, p. 22,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=474582
2
http://www.sec.gov/answers/wash.htm

137
 Interesting is the fact that a practice that aims to the resell of securities owned for a short
period of time, without being illicit, has consequences also in the fiscal field. Thereby, in the
United States is not recognized the deductibility of loses generated by sale “wash sales” 1
trades, in conditions in which, inside a 30 days period prior or after the previously mentioned
sale:
- a person buys approximately the same quantity of securities;
- a person acquires approximately the same quantity of securities by a taxable trade;
- acquires a contract with purchasing options for the approximately the same
number of securities;
In the Code of Market Conduct, applicable, as we have shown, to the main British capital
markets, in the MAR 1.5.8., is considered as manipulative the action of those persons that are
implicated in artificial trades, whose main effect is raising, maintaining or lowering the
demand, supply or price of securities, in order to send a false or delusive impression to a
regular user on the market, with the condition that the implicated persons in these trades know
or are able to reasonably know that this type of effect may be produced after closing these
trades.

Describing the manipulation action by fictive trades from the Code of Market Conduct
covers a wider spectrum than the one aimed by the manipulative practice of “wash trades”.
Important is the accent laid on the subjective side of the action, on representation which the
implicated persons in trading process have on the delusive character of developed operations.

4.1.6 Manipulation cases by the “wash trades” procedure

The most famous manipulative action of “wash trades” happened, in relatively recent
history, in the Enron case 2 , later described in this paper.
The case of John G. Broumas 3 gave the Securities Exchange Commission the opportunity
to have a confrontation with a prolong market manipulation activity of a traded title on the
American Stock Exchange Market (“AMEX”).
Broumas was the president of Madison National Bank of Virginia and manager of the
listed company James Madison, Limited (JML). On different capital markets in the United
States he acted through 14 house of brokerage and 25 margin accounts. Between January 1989
and June 1990 he initiated a series of trades. Finding himself in a financial difficulty, not being
able to obtain credits, he started to make “wash trades” with JML stocks. Broumas instructed
some brokers with whom he operated to contact the other brokerage houses where he had
opened accounts to find his counterparty and to trade with these stocks at certain prices and in
certain quantities that he specified. Because there were not liquid titles, Broumas cumulated
easily the position of buyer and the one of seller. Because Broumas traded in margin, he could
obtain the necessary cash following trading, postponing, on the other hand, the payment for the
purchase trades until the due date of the settlement, meaning at least a week.
The purpose of these manipulative operations was increasing the price of JML stocks
linked with determination of other participants to the market to buy those titles at superior
levels of price.

1
http://irs.gov/pub/irs-pdf/p550.pdf
2
Analyzed in Chapter X of this paper
3
http://www.sec.gov/litigation/opinions/3440726

138
 Between 1 January 1989 and 30 June 1990 there were made on the Broumas’s accounts
203 “sets” of “wash trades” operations, implicating 420 trades. Those trades represented 44%
from the total volume of trading executed and reported in that period of time, but the largest
part of trades closed on the Broumas accounts was not reported. Securities Exchange
Commission considered that there was no need to prove the manipulation and criminal intent of
the market participants of this investor, being enough the fact that his operation had a criminal
and delusive character for the market of JML titles 1 .
In that time, Broumas made manipulative trades on his accounts, using also the procedure
“marking the close”, meaning making operations when the market was closing in order to
establish the reference price for that security and misleading this way the other market
participants.
Broumas admitted his culpability in this case in which there were implicated and
sanctioned by Securities Exchange Commission numerous brokers.
An interesting situation in which there were made accusations of practicing the “wash
trades” manipulation technique happened in the United States on the market of futures
contracts on commodities. In 2004 the giant mineral oil British Petroleum (BP) paid a 100.000
USD fine applied by the US Commodity Futures Trading Commission (CFTC), for a series of
“wash trades” operations developed in the time frame April-June 2000 2 , after which in 2003
New York Mercantile Exchange had given a fine of 2.5 million USD for manipulative actions,
including the wash trades technique, against British Petroleum 3 . Incriminated trades were
prearranged by phone by one of the BP traders, regarding sale and purchase operations having
as objective approximately the same quantity of commodity and being closed approximately to
identical prices.
In the case of Mawod, Airsman, Strand, O’Quinn 4 , Securities Exchange Commission
made accusations of “wash trades” operations against Strand and O’Quinn that made in the
time frame May-September 1973 a number of 34 “wash sales” operations, by nominee
accounts, with titles of Epoch Company. Mawod was a stockholder of a majority of stocks at
the brokerage firm Edward Mawod & Company, whose sales director was Airsman. These
trades were made in order to create the appearance of an enhanced liquidity of Epoch titles and
to make profits on the account of investors that were mislead by this delusive impression.
Practically, there were made “wash trades” operations at high prices, in nominee accounts,
until other investors become interested in Epoch titles, introducing purchase orders. The
manipulators would sell these titles on the market prices from that moment. The persons that
would buy at these high prices they would not find later on a liquid market for those stocks,
being bound to resell them at lost. Mawod and Airsman were accomplices with the two other
manipulators in the “wash trades” operations.

4.2 Painting the tape

1
http://www.sec.gov/litigation/opinions/3440719.txt
2
http://www.energyrisk.com/public/showPage.html?page=197187
3
http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article2234718.ece
4
http://www.sec.gov/litigation/aljdec/1976/id19760412rht.pdf

139
 Painting the tape- initiating actions by which there are made visible trades in the trading
system only to create the impression of an activity or a price modification in regards to a
security.
The name of this manipulative practice is connected with the use of telegraph technology
on the capital market, in order to announce the public, the persons that were not in the stock
ring, in a very short time, of the evolution of course of some securities. Using the telegraph,
brokers and investors didn’t have to wait for the evening newspapers to see the executed trades
and didn’t have to be present in the stock exchange place. “Painting the tape” means “painting
the telegraph tape” that announces the course of securities. The more the “drawing” is more
intense, the more the activity of trading with a security is more enhanced.
The “painting the tape” method is based on the market manipulation by actual trading
(even if they are artificial) on which they have to participate a large number of persons.
In a description from the doctrine 1 of this practice with a manipulative character it was
outlined that “the manipulator is creating an impression of a trading activity connected by a
security or the evolution of its price, without an apparent economical justification”.
This manipulative practice has its effects first of all on the impression that the market
manipulators have regarding the liquidity of a security, element that has an influence over the
interest of the investors about the title in cause. An active trading of a security is a premise for
future ascending variations of the course of that security.
It was shown 2 that this method makes the trading activity to look so good, that anyone
would be attracted to “get into action” and to trade that security.
The “painting the tape” method combines in the majority of cases with the “wash trades”
technique. In comparison with the “wash trades”, in the case of “painting the tape” technique
we are dealing with a change of ownership of securities traded in a fictitious way. From here, it
results that applying the method of “painting the tape” needs on the market two or several
manipulators.
The premise situation of the method “painting the tape” is having by the manipulator and
his accomplice’s titles with a low liquidity, usually stocks of small size companies. An
intelligent manipulator will initiate this type of action with titles that have a random potential
of increase.
Significant for the purpose followed by the manipulator that uses this method is
“reporting false trading”, that are misleading the market participants regarding the trading
activity of a security. The manipulator considers important to draw attention on the security,
object of manipulation, in order for it to be traded at ascending prices.
“Painting the tape method” can be combined with other manipulation methods, as
spreading false or delusive information about a certain issuer or writing reports and analysis,
by persons that have initiated prior to this moment a position regarding that security.

Because of the similarities with the “wash trades” method we will resume the
presentation of the defining elements of this technique.
The person that initiates this practice and the persons that he works with start increasing
the course of a security by trades in which packages are transferred between these persons. At a
certain moment, this intense trading activity, connected also with the estimation of the

1
S. Loyrette, cited paper, p. 263
2
R. Insana, Traders’ Tales: A Chronicle of Wall Street Myths, Legends, and Outright Lies, Publisher: John
Wiley and Sons, 1997, p. 24

140
security’s course, draws attention of other investors that are stimulated by the hope of sure
profits, obtained from trades with titles that rapidly became liquid start to acquire this securities
at prices in full ascension. At this moment of appearance of a “exit” (the possibility of sale,
abandonment of the position of holder of those securities), the manipulator and the persons
acting together start the operation of “unloading”, the operation of selling those securities, on
the market price, on the level that it is because of the interest created for the security in cause.
In the time which the manipulator and persons that he acts with liquidate their positions,
naturally the purchase pressure that would make the price raise stops, because the “ask”
volumes are developing fast with the titles that the manipulator is putting up for sale.
The sale action of the titled held by the manipulator is done very carefully, because the
appearance of massive sale volumes on the market has negative effects on the course. Usually,
the sale action is started by the manipulator when there is a sufficient asking volume, on those
price levels that have the capacity to satisfy sale orders that will be issues next by the
manipulator.
Applying “painting the tape” is linked with creating groups of persons that act together,
the so called “pools”. These “pools” have worked successfully in the 20’s in the United States,
in the period of the “bull market” that was prolonged, as, no matter the moment in which an
investors joins the market, because of general trust in the continuous raise of value of
securities, a gain always intervened. The crash in 1929 discouraged the application of this
method, of course on the base of the introduction of the legislation in the capital market field in
the program of “New Deal”. At present time, the application of this method is made easy by
the appearance of internet, through which anyone can asses in real time the evolution of the
securities course on different market of the world, the asking volume, the supply volume, the
market’s “depth” etc.
In the economic literature there were analyzed the implications of closing conventions
between many investors in order to trade on common grounds and to gain profits from this
activity.
Closing “pools” agreements is not illicit. In the `30, the Senate Commission that
investigated the event on the American market that generated the crash in 1929 assessed that
the main goal of these “pools” was manipulating the market. Closing “pools” agreements has
as result the growth of the traded volume, which is an element of special attraction for
investors. Increasing the volume of traded securities has as result also the increase of the price,
which is exactly the purpose of the operation developed by the “pools” members1 . It was stated
that, in the same order of ideas, liquidity of traded titles by the “pools” is bigger than the one of
trades that is not the object of this type of agreement 2 . The cited authors realized a model of
securities price evolution manipulated by the trades made by “pools” members and showed
that, in general, in the case of these types of manipulation, “abnormality” signs are starting to
appear in volume and in price with approximately 5 days (trading session) before reaching the
price peak 3 . The accumulation period of manipulators may last even after the price peak in
reached, sales operations being developed, in general, on a longer period, in order not to
collapse the market.

1
G.L. Leffler, L. C. Farwell, The Stock Market, 3rd edition, Ronald Press Co., New York, 1963, p. 459
2
G. Jiang, P.G. Mahoney, J. Mei, Market Manipulation: A Comprehensive Study of Stock Pools. Journal
of Financial Economics, vol. 77, Issue 1, July 2005, p. 157 and in the online edition
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=596606
3
Ibidem, p. 157- 158

141
 As an outcome, applying the “painting the tape” technique has enhanced effects in an
ascending market, in which there is a “febrile energy” of trading, no matter the price1 and it
will be even harder to apply it on a market in a longer decreasing period, in which the
investor’s trust in the market is generally remissive.
This manipulation method can have as objective also the support of the securities course
whose market in increasing (“bear market”). Intensifying the trade of a security, connected
with closing trades at increasing prices, changing this way the market trend of a title, can
generate enthusiasm between investors, that attributes the new increasing course to
unannounced events, but imminent. In this situation, price will increase until manipulators will
start the sale operations and the appearance of “ask” substantial volumes, connected with
delaying the event expected by the good-faith investors, will generate a trend reversion and a
comeback at a “bear market”.

4.2.1 Manipulation cases by “painting the tape” method

Illustrative for this method of manipulation are the operations enrolled with titles
Competitive Technologies, Inc. (“CTT”) on the period of 1998-2001 2 on the market of
American Stock Exchange (AMEX).
Competitive Technologies, Inc. was a company of small sizes in the technology field,
based in Connecticut. The general manager of Competitive Technologies, Inc., Frank McPike
Jr. along with six brokers from four different brokerage companies “orchestrated” a scheme in
the previously mention period in order to raise the market value of Competitive Technologies,
Inc. stocks. In this scheme, there were made many series of trades between the involved
brokerage houses, with the purpose to create the impression of active trading of titles in
question. To increase the price there were used other manipulative techniques, like trades made
when the market was closing in order to set an artificial reference price (“marking the close”),
trades without actually changing ownership (“wash trades”) etc. In these operations there were
placed hundreds of purchase Competitive Technologies, Inc. titles, in small volumes, in the
accounts of the brokerage houses and its clients 3 . In approximately 90% of the trading sessions
from that period of time the price of Competitive Technologies, Inc. titles has increased, over
their real value, according to the complaint formulated by the Securities Exchange
Commission 4 .
The investors were misled by this trading activity connected with the price increase of
Competitive Technologies, Inc. stocks, buying in this situation these titles with 20 USD/ stock,
at the highest reached course. After the manipulation action stopped, it began a descending
course, the price of Competitive Technologies, Inc. stocks dropping until 3 USD/ stock.
The complaint of the Securities Exchange Commission against the guilty persons was
deposited at the District Court in the Connecticut State in August 2004, and in October 2007
Competitive Technologies, Inc. announced that they reached an agreement with the Securities
Exchange Commission regarding closing the case and the law suit 5 .

1
R. Bensignor, New Thinking in Technical Analysis: Trading Models from the Masters, Bloomberg Press,
2000, p. 48
2
http://www.sec.gov/litigation/complaints/comp18827.pdf
3
http://www.sec.gov/litigation/litreleases/lr18827.htm
4
Ibidem
5
http://www.competitivetech.net/news/071012.html

142
 4.3 Improper match orders

The Committee of European Securities Regulators Guide regarding implementation of

the market abuse Directive shows that this technique of capital market manipulation is trading
for which the purchase and the sale orders are introduced in the approximately the same
moment, at the same price and quantity by different parties, but act together, with the except of
the case in which those trades are developed according to the rules of the trading system (cross
trading).
In this manipulative practice, sale and purchase orders are introduced this way in the
accounts of different persons that act together.
It is about a manipulation method by issuing orders and making similar trades with the
“painting the tape” technique. The difference between these two methods is that, in the
hypothesis of adopting the “improper match orders” practice, the orders of the persons that act
together are introduced in the system in the same time and refer to almost identical quantities
of securities.
The purpose of this manipulative practice is, like in the case of “painting the tape” and
“wash sales”, creating a false impression of active trading of securities. Also, the persons
involved in the manipulation have as final objective “pushing” the course to certain artificial
levels, on which the “unloading” action of manipulated titles will begin.
This manipulative technique is materialized by the absence of the ownership transfer on
the securities traded at the end of the manipulation action 1 , presenting clear resemblances with
the “wash trades” method from this point of view.
The manipulative practice “improper match orders” is put into application by the action
of several persons that have the quality of an active subject of the action. If the trades are made
in the accounts of the same person, opened even at different dealers, we are dealing with the
“wash trades” method and not with “improper match orders”.
This manipulative method, like the other two methods, is executed with the purpose of
increasing artificially the course of securities, although can be applied also in order to lower the
course. Trading at lowered courses, based on orders introduced in the same time, for identical
quantities, can have as result an accentuated depreciation of manipulative securities prices,
action that will cause panic on the market of that title.
In general, applying the improper match orders method has as main reason restraining the
other market participants to interfere in the evolution of course of the manipulated security. If it
is about a completely non-liquid market, in which there aren’t any investors interested in
trading a certain security, is not necessary for the persons involved in course manipulation to
introduce orders in the same time in the trading system. If there is a random trading activity
outside the group of manipulators, situation that might intervene on the course of the illicit
action of manipulation, only because the appearance of an interest from the investor’s part,
caused by the sudden drop of a security’s liquidity, then, keeping an artificial ascending or
descending trend imposes the execution of fast trading. This type of trading can be made only
by simultaneously introduction in the trading system of contrary sense orders with an
approximately identical quantity of securities.
We will not resume certain considerations expressed in the case of manipulative practices
as “wash trades” and “painting the tape”. There must be underlined although a few aspects
1
D.N. Chorafas, The Management of Equity Investments, Butterworth-Heinemann, 2005, p. 108

143
regarding the exception situation from the applications of the market abuse juridical regime in
the case of simultaneously introduction in the trading system of orders with similar
characteristics, the situation of cross trading.
Cross trading is the trade on which a dealer is representing the buyer and the seller, in
general the trades has as object a large quantity of securities 1 .
According to the dispositions of article 127, paragraph (2) from Chapter III of Book I of
the Bucharest Stock Exchange Code- market operator, a cross trading results from these
situations:
a) from automat execution in the trading system of two different orders of
opposite sense, one of purchase, one of sale, with similar characteristics, that
are introduced and administrated by the same dealer;
b) following closing the negotiation process of a deal trading, through the same
stock agent or different stock agents, that are trading in the name of the sale
dealer.
For the on term market, operated by BMFM- Sibiu, article 60 from Regulation no. 4 of
this market operator shows that “cross” trading is the one executed between the clients of a
dealer, this way: in the situation in which a dealer has sale and purchase orders from his clients
on the same derivative security with the same due date, which he can not execute on the market
because of the lack of quotations or the large difference between the sale and purchase
quotations, it is allowed executing those orders between clients (cross) on the market, with
respecting strictly the clients interests.
In the case of cross trading is natural that they are executed by introducing almost in the
same time in the trading system a sale order and a purchase order, by the sale dealer, having as
object a similar quantity of securities.
At the Bucharest Stock Exchange, cross trading, according to article 129 from Title III of
Book I of the Bucharest Stock Exchange Code- market operator, they must respect the
following conditions:
a) not to influence significantly the volume of the security;
b) not to influence significantly the price of the security;
c) not to affect the formation of reference price;
d) not to be the result of a previous agreement between clients and/or between the
clients and the Participant (dealer).
We want to emphasize that these requests are completely absurd, evidently that they can’t
be practically applied.
It is essential for a cross trading to have as object a large volume, that can be considered
always significant, of securities. The significant participations are transferred, in general, on
the capital market by cross trading.
Then, considering the economic role of cross trading is obvious that the trade price has
substantial chances to be different significantly from the market price of a security at that
moment. The transfer of a larger package of stocks or other securities is made, in general, on
Deal Market by cross trading (situation permitted by article 127 from Title III of the Bucharest
Stock Exchange Code), at a negotiated price between parties, that needs to fit in the interval of
daily maximum admitted variation, of +/- 15% for the spot market operated by the Bucharest
Stock Exchange.

1
http://www.merriam-webster.com/dictionary/cross

144
 The interdiction from the article 129, line c) for the price of a cross trading to affect the
reference price comes in a clear contradiction with the text of article 1, paragraph (1), point 62
from Preliminary Title of the Bucharest Stock Exchange Code, regarding the reference price,
where it is specified without a doubt the fact that, in case where the last trade is a cross trading,
it will be mentioned expressly that fact that the reference price is the price resulted from the
cross trading. This way, the text of article 129, line c) has no practical finality, from the
moment that the price of reference can be made as following of a cross trading, the only
additional condition being mentioning this aspect. We need to apprehend that only a cross
trading closed on the Regular Market may lead to the establishing of the reference price,
because the trades closed on Deal Market do not lead to the determination of that price.
Finally, neither the last request from article 129, previously mentioned, has not practical
finality, being, more over, against the reason of being of the trades closed on Deal Market,
market on which, repeating, can be closed cross trading. In practice, the price of a significant
trade is negotiated by the parties and not by the dealers, because they only intermediate the
deal and are not patrimonial involved in it, with the exception of the situation in which one of
the parties is the brokerage association or the authorized bank as an intermediary on the capital
market.
Surely that the cross trading can be a risk for the clients of a brokerage association, in
conditions in which it is possible for a client to be favorites in order to escape from the non-
liquid titles, with an expected negative evolution. The rules that govern the emission of orders
and execution of trades on the capital market offer, although, in the normative system of the
European Union, introduced also in the Romanian legislation, enough warranties to avoid this
type of situation. Even in the situation of the existence of an account administrated by an
authorized dealer on discretionary bases, regulations in force restrain, in general, the abuses
made by the intermediary association. Therefore, in the situation of administrating of a
discretionary account, the counterparty in trades can not be the account owned by the
intermediary, the account of relevant persons or another account of an intermediary’s client,
unless it is assured a better price then the one offered by the market.

Regarding the capital market manipulation by cross trading, things are not different from
the situation in which there are involved several dealers. In the case of cross trading, there is,
inevitably, an enhanced suspicion by the fact that the same dealer knows and can influence the
volume of demand and supply on a certain security. This type of argument finds its stronger
justification in the case of non-liquid titles that start at a certain moment to be intense traded by
the clients of the same intermediary. Doctrine has emphasized that cross trading needs to be
regulated in a way that will discourage market manipulation 1 .

4.3.1 Cases of manipulation by “improper match orders” method

In 1979, Securities Exchange Commission sanctioned 2 several authorized brokers as

market makers on the options market, Steven S. Mitchell, Clyde Reynolds Mahnke, Lawrence
Dennis Dogherty and so on and also two brokerage firms Rainbow Options and Ethan Aldridge
Co., Inc., for applying a manipulative scheme by creating a false and delusive impression of

1
J. Hasbrouck, Empirical Market Microstructure: The institutions, Economics, and Econometrics of
Securities Trading, Oxford University Press, USA, 2006, p.21
2
http://www.sec.gov/litigation/aljdec/1979/id19790328is.pdf

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active trading of options on titles Houston Oil and Minerals Corp. on the Pacific Stock
Exchange (PSE).
The Securities Exchange Commission accused these brokers that on 22 November 1976
they have traded with Houston options without having at the end of the trade a real change of
the real beneficiary of titles (“wash trades”), as for the fact that they did not introduce orders in
the trading system knowing that in the same time are introduced in the system orders of similar
volume, at similar prices. The purposed followed by the accused persons were, Securities
Exchange Commission showed, creating the impression of an active trading and, on the way of
consequence, determination of the other market participants to trade Houston options.

4.4 Placing orders without the intent of executing them 1

This method consist in introducing orders of trading with a higher or lower value towards
the previous introduced orders, with the intent to create a false impression about the demand
and supply for a certain security, followed by their withdrawal before execution.
A version of this type of manipulation is placing orders on small volumes of securities,
with the intent to change the offer’s quotations (the level from bid) and executing them
effectively, in case they can not be redrawn on time.
Another version of this manipulative practice is called spoofing and means introducing
some limit orders in the trading system followed by their immediate withdrawal 2 .
This method has an effect especially at present time, in which the majority of stock
exchange operates trades by an electronic computerized system, all the market participants
being able to see the immediately orders introduced by the other participants.
The constitutive elements of this version of capital market manipulation action are:
- introduction of orders in the trading system;
- the lack of intent of closing effective trades;
- withdrawal of orders before executing them.

4.4.1 Introducing orders in the trading system

By the action of introducing orders in the trading system, the alleged manipulator is
creating a false impression to the other participants on the market that he is willing to contract,
meaning to close trades, at a certain price per unity and for a certain quantity from that
security.
Introducing orders in the trading system must be effective, has to be visualized by all the
participants on the system, in order to exist the premises of a manipulation action. Not
fulfilling by certain orders the parameters set by the market operator for every market has as
result the rejection of orders by the electronic trading system, which restrains their
visualization by the other market participants.
The main protection parameters on the spot market operated by the Bucharest Stock
Exchange are:
a) any order whose quantity (volume) doesn’t respect the condition imposed for the
minimum admitted quantity (volume) is rejected by the system;

1
In the American practice this method is called “unbundling”, http://www.market-abuse.com/spoofing.html
2
http://www.market-abuse.com/spoofing.html

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 b) if the price of a order introduced by a stock agent doesn’t fit in the maximum
admitted variation, then that order is rejected by the system.
To be able to speak about suspicions regarding market manipulation it is necessary for
these orders that are introduced in the trading system to modify the quotations posted before.
Misleading the other participants has place in the hypothesis in which it is created a false
impression on the demand, supply or price of a security. From this it is necessary for the title
that will be later withdrawn before execution to produce effects on the best quotations on sale
and or purchase posted in the trading system.
Placing orders on quotations that are inferior to the best posted quotations, without a real
chance to execute trades on the price included in those orders, can not be seen as an element of
a manipulation action, only in the hypothesis in which, in exceptional occasions, has as result
misleading the investors with regards to the demand or supply of a security. In this situation,
market participant, deceived by the unusual large volume of this order, will close trades at
prices oriented to the level of price mentioned in that order; the course will evolve in an
ascending or descending way, depending on the position of the order in question towards the
market price at the moment of its introduction. In consequence, the mislead investors will
lower or raise the price of that security to the level of price of the order, defending this way the
imminence of its execution. In order to speak about a manipulation action by placing orders
without the intent of executing them it must intervene, in this time of the imminence of
execution, the withdrawal of the order in question from the trading system.

4.4.2 Withdrawal of the order before execution

The withdrawal of orders introduced in the trading system is an allowed procedure,

grounded on the principle of contractual freedom. In principle, no investor can be forced to
close a certain trade, no matter the possible considerations that might justify this type of
obligation. It is therefore an absolute right of each investor on the capital market to withdraw a
trading order.
The withdrawal of a trading order has the juridical nature of the withdrawal of the offer to
contract. It must be emphasized that it is about an offer that reached the person that it is
addressed to, because, as we showed previously, the introduction of a stock exchange order in
the trading system is visualized by all the participants on the system.
The withdrawal of an offer to contract can lead to obligations of de-impairment from the
part of the bidder towards the accepters of the offer. In the case of withdrawal of a stock
exchange order introduced in the trading system, we can not speak about the acceptors of the
offer to contract, because the acceptance, in the case of operations closed on the capital market,
it is equally to closing the trade.
A different situation may be in the case of negotiation markets that do not function on the
principle of firm quotations, but on the informative quotations 1 . In these cases, the withdrawal
of an offer to contract, of trading orders, doesn’t lead, usually, to any obligation in the task of
the bidder, this person not being responsible for not closing the trade.
The withdrawal of trading orders introduced on a market that functions based on firm
quotations or on an order driven market has a special meaning. This type of procedure is, as we

1
To see Chapter III, Section 1, (3), p. 79-81

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have seen, an indications of capital market manipulation 1 , stipulated in article 4 from Directive
of European Commission no. 124/2004.

Therefore, the withdrawal of the offer to contract, materialized through a stock exchange
order introduced in the system, doesn’t attract the responsibility of the initiator of the order
offered towards the other market participants, than in the hypothesis in which it is proven that
this withdrawal is a manipulation of the capital market, causing prejudices for the mislead
investors.

4.4.3 The intent not to execute the introduced orders

In the case of this manipulative technique it is essential the intent of the initiator of
trading orders.
In this case it is presented a subjective element that is certain and needs to be proven by
the authority that is investigating the action from the market abuse sphere.
The easiest probation device is verifying the account of securities and/or money of the
investor for whom there were issued the suspicious orders. Investigating these accounts permits
establishing the quantity of securities that are available, in case it is about a sale order or the
amount of money that is available, when it is about a purchase order. In principle, the analysis
is similar to the one in the case of margin trading, with the specification that, when it id
regarding operations without physical delivery, the client (investor) is forced to maintain only
the money availability to cover the minimum margin.
The situation is relatively simple when in the account of the investor for whom there were
issued the trading orders that were later withdrawn there were not enough securities, in the case
of a sale on the spot market or the amount of money in the account was not enough, in the case
of purchasing trades on the spot market, or any types of trades on the derivatives market. In the
case of markets where it is permitted the sale in absence on the spot market, it must be verified
the existence of an agreement of loan for the securities sold in absence, on a contrary case we
are dealing with a “naked short sales” 2 .
In the situation in which there are sufficient securities in the account of the issuer investor
of the sale order or sufficient money in the case of the purchase order (or of trade on
derivatives in margin market), the proof of absence of the intent to trade on the base of orders
introduced in the system will be difficult to achieve. Considering the rule of settlement
accounts of trades on the capital market in Romania (also on the American one) is to transfer
the securities and their value in a three days term from the date of the trade (rule T+3), the
money will have to get in the seller’s account on the date of the settlement, which means that
the seller investor can transfer those amounts in the account of the brokerage association
through which he traded, in order to be transferred later on in the account of the brokerage firm
of the seller and after the moment of trade.
In this situation, in which it is proved the existence of securities and amounts of money
necessary to the trade settlement, will have to be considered a series of circumstantial elements
which would prove that the investor did not had the intention to trade on the base of suspicious
orders, introduced in the system and withdrawn prior to the execution. The proof of a negative

1
To see point 3.5, p. 194-196
2
To see Section 3, (5), point 5.4.2, p. 338-314

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action is impossible to make, especially when this action is a pure subjective, internal attitude
of the alleged manipulator.
Certain circumstantial elements can be considered in the analysis of the investor’s
conduct suspected of market manipulation. Without being a proof of manipulation and
necessitating, in a mandatory way, connecting with other factors in order to indicate an illicit
behavior, we will enumerate as elements that might represent signs of a possible manipulation
action: the absence of a trading history with that investor of some effective trades having the
sizes (volume, total amount of money) similar with the ones of the suspected order; the
repeated character of introducing and withdrawing of trading orders, of nature to influence
positive or negative the market price of the security in cause; trading that security on another
market, either as a base active, either as an support active, connected with obtaining profits on
that market, directly influenced by the price evolution of that security on the market where
there were issued and withdrawn before execution the trading orders in question etc.

4.4.4 Cases of manipulation by introduction of orders followed by their withdrawal,

without the intent of being executed

The Financial Markets Authority in France- AMF sanctioned in 2005 an investor, Jean-
Louis Espirac, because it was proven, after an investigation was enrolled, that he issued a large
quantity of trading orders that referred to the title of Intercall association, that didn’t reflect his
intent to trade effectively, but to increase their price. In 16-23 May 2003, the course of these
actions increased with 70%. In 47 sessions of trading, in 1 April- 18 June 2003, Espirac issued
555 trading orders, more than 75% being annulled a while after their introduction. The
investigation commission established that by issuing those orders was restrained the formation
of the course of Intercall titles on the base of free action of demand and supply, being in the
same time misleading for investors regarding the liquidity of these securities 1 .

Section 2

Trades or trading orders which maintain, through the action of one or

several persons acting together, the price of one or several securities, at
an abnormal or artificial level

We will be referring during this section to the second hypothesis considered by the legal
text which incriminates capital market manipulation, by closing trades or introducing trading
orders that have the objective of altering the normal and orderly movement of the market.
This type of manipulation is different from the one before, analyzed previously, first of
all by the fact that it is not about misleading of market participants with regards to the volume
of demand and supply.

The manipulative practice presented in this section has in sight also the hypothesis in
which participants to the market are not mislead regarding the characteristics of the market of a

1
Dec. Sanction AMF, Commission de sanction, 1er sanction, 16 juin 2005, in S. Loyrette, cited paper, p.
261- 262.

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security, but they are restrained to trade at correct prices, established naturally, by the illicit
actions of the manipulator.
The Code of Market Conduct, M.A.R 1.6.3, stipulates that the activity of an investor
doesn’t have to affect the optimum manifestation of the market’s forces and, as a consequence,
not to harm the natural game of the demand and supply, distorting this way the price.
In practice, the most important challenge resides in the extremely difficult appreciation of
the correct price, set naturally, in the hypothesis in which the action of the alleged manipulator
wouldn’t have intervened. Certain actions can be easily incriminated, especially when they
consist in effective trades, but it is almost impossible to determine, scientifically, the correct
price of a security, because they can not be taken into consideration, in a possible expertise, all
the factors, including the psychological ones, that influence de investment decision of the
market participants. In other words, it is extremely hard, if not impossible to create a perfect
“model” that would mark out the evolution of the course of the security in the absence of the
disturbing factors, introduced by the suspected person that would have manipulated the capital
market.
This conclusion has formed the base formulation in the European Union of the institution
of “accepted market practices”. The regulators body of securities markets in Europe- the
Committee of European Securities Regulators, abstained, in their guide elaborated in order to
implement the level III of the market abuse directive, from formulating in terminis “the
accepted market practices”, making only principle recommendations and leaving in the
exclusive competence of the national legislators the elaboration of these practices. More over,
the Guide of the Committee of European Securities Regulators points out the practices
considered to have a manipulative character from the perspective of the market abuse Directive
and the Directive no. 124/2004 by which it was defined the insider information and capital
market manipulation, enumerating a series of factors that need to be considered by the
authorities of capital markets in the analysis of actions suspected of being market manipulation.

In these conditions, it is necessary that the national legislations would create the optimum
juridical frame for enclosing certain operations in the illicit sphere, because of their
manipulative character, even if there will not be possible to determine exactly the artificial
character of price formed as a result of the manipulator’s action.
That is way, considering the difficulty de plano of tracing the manipulation actions and
determining the correct price of the market and keeping into account the natural interest of
maintaining and orderly and believable market, authorities of regulation and supervision must
apply the norms from the primary legislation and from the secondary legislation with balance,
without discouraging the investor by an excessively punishable and/or discriminatory attitude.
In this context, investors must have the same treatment form the authorities of the capital
market, and the suspected actions of maintaining an artificial price to be analyzed and
investigated using the same criteria of appreciation and framing in the illicit sphere or of the
licit, depending on the case.

§1. Trades which maintain the price of one or several securities, at an abnormal or
artificial level

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 1.1 Defining elements of manipulation by trades which maintain an abnormal or artificial
price

Manipulation by maintaining an artificial price is:

a) trading at prices that evolve in a different sense than the normal one, that
would have been generated in the absence of manipulation actions;
b) obtaining a profit by the persons/entities that are involved in the manipulation
actions at a different level of price then the one that would have been
established naturally.
The profit is obtained by selling securities at a higher price then the real price of those
securities, either by buying securities at a lower price than the one naturally created.
In reality, generally it is about a combination of the two methods of manipulation
considered by article 1, paragraph 2, line a) from market abuse Directive [respectively article
244, paragraph (5) line a) from Law of the capital market no. 297/2004].
In order to explain, manipulation through price can be made by the artificial increase of
price of stocks, by successive trades, manipulator and his accomplices afterwards buying those
stocks at higher and higher prices. At the moment of reaching a certain price level, the
manipulator launches a sale order, in a volume large enough that would create profit for the
manipulator in the detriment of the other investors, that were mislead. From this moment on,
the price is in an ascending curve, reaching a “natural” level, established freely based on the
demand and supply.
Price manipulation can take place also by operations that have in sight lowering the price
of securities, by successive trades, made by the manipulator and his accomplices, until it
reaches an artificial level, lowered, because of sale operations made by the manipulator, at
smaller and smaller prices. At an artificial price level, inferior to the real price, the manipulator
buys a considerable quantity of securities (in a larger volume than the one sold for lowering the
price). In the next step, the manipulator is waiting for the comeback of price, naturally, at the
level established freely, on the base of untouched demand and supply, after that he will sell
those securities and make profit for the stocks purchased at an artificial level, that was lowered.
In consequence, on the ground of this legal text, in order for the market manipulation
action to exist, there must be fulfilled two essential conditions, as:
- an objective condition- trading and issuing orders at abnormal price levels
towards the correct price of the stock; the juridical norm is referring to the price
manipulation at an abnormal or artificial level, which means that trades are made,
at incorrect prices, different from the price that would be established naturally;
- an subjective condition- misleading other investors, that, taking into
considerations the orders and trades made/issued by the manipulator with a
manipulative character, decide to close themselves trades at abnormal or artificial
prices.

There is also the option of the absence of subjective conditions, meaning that investors on
the securities market that was manipulated are not misled. They will decide to close trades at
artificial prices, being “forced” by the need of liquidity or by the imminence of a settlement
term on which they have to deliver the sold securities, even if it represents that the price of
securities was not set naturally.

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 This type of situation is mentioned by the text of article 244, paragraph 5, line a), point 2
of Law 297/2004, because this juridical norm does not speak about “misleading” the investors.
In this last hypothesis although, the manipulator stakes on either the need of liquidities of
the other market participants, either on the approaching settlement term, because otherwise, in
the absence of closed trades by them at artificial prices, the followed purpose is not reached,
meaning the purpose of buying at abnormal lowered prices.

1.2 Situations of market manipulation by maintaining an artificial or abnormal price

1.2.1 Maintaining an abnormal large price

It is noticed that, in the version of the absence of misleading investors regarding the price
of securities, the hypothesis of obtaining profit by the manipulator at artificial, abnormal large
prices, can not last, but only in the case of markets on which there are admitted sale operations
in absence, either because is about markets of proper securities, either is about markets with
derivatives securities, on which there are made trades in margin. In this situation, investors that
have short positions (sale by absence) will have to buy borrowed securities and sold in absence
or to close their positions in the contracts with derivatives at loss, because the diminution on
which they counted didn’t take place, because of manipulation that had as result the abnormal
growth of price of securities that makes the active support. Thereby, these investors that have
short positions will have to close their positions by initiating a purchase position at a high
price, increased and maintained artificially.

In the case of sale by absence on spot market, at the settlement date, in the T+3 term, the
shorter will deliver the borrowed securities, usually from the brokerage house by which the
trades. On the due date of the term mentioned in the loan contract, the shorter will have to give
back to the person that he borrowed the securities that made the object of the agreement that he
will acquire from the market at large values, suffering a loss.
In the case that the due date is reached, the derivative contract will be finished, his
closing price, artificially maintained at a high level, will generate losses for the investors with
shot positions, initiated at lower prices. These investors will have no possibility to avoid these
losses, because the due date will determine them to pay the difference between the lowered
price, on which they initiated the short position, of sale by absence and the higher price of
closing the contract at the due date.

1.2.2 Maintaining an abnormal small price

The other hypothesis, the one of lowering the price of securities by manipulation acts and
maintaining a low course, is accomplished when the manipulator, by trades and trading orders
in enough large volumes in order to block a ascending evolution of the price, “restrains” the
course of the manipulated security at a low level, counting on the need of liquidity of the other
participants on the market.
This manipulation version can happen on the spot market and on the on term derivatives
market.
Trading at lowered prices, in order to maintain this course, is connected with the
introducing of sale orders in large enough quantities in order to stop the price increase.

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 In order to asses the existence of the manipulation action is necessary that these trades be
executed at abnormal prices, against the market’s trend. This trend must be analyzed on a long
period of time to decide if the intervention of the alleged manipulator generated a significant
change of sense evolution of the security’s course that was manipulated or his trades were
framed in the natural evolution of price that would have happened even if that suspected
investor would have not traded.

In this case there must be kept into account the positions initiated by the participants on
the market, short or long, and of the existent interdependence between the spot market and the
term market. Lowering the price of securities on the spot market has positive consequences for
those investors that have initiated short positions- of sale in absence, on the spot market (if it is
allowed the sale in absence) or on the term market.
Trading at a low course of securities on the spot market will be analyzed, for example,
with a lot more severity by the authority of the market the context in which that investor has
opened short positions on the derivatives market.

1.3 Number of trades necessary in order to qualify as illicit the conduct of maintaining a
price on an artificial level. Volume of suspicious trades.

Having in consideration the specifications previously mentioned 1 , we appreciate that an

abnormal or artificial price can not be maintained by making only one trade at a certain price.
The material evidence of the market manipulation action is maintaining the price at an
artificial level and not closing a single trade at a price different from the one established on the
market.
Thereby, in order to carry out the material evidence of the manipulation action, it is
necessary that, by many successive trades, the price of stock be maintained at an abnormal
level.
From the grammatical interpretation of the legal text from article 244, paragraph 5, line
a), point 2, “trades or orders that maintain…”, it clearly results that the legislator considered
that it is not enough a single trade in order to reach the manipulative, illicit, purpose, of
maintaining the price of stocks at an artificial level.
It is considered in other legislations as illicit also the executions of a single trade in order
to make the “price positioning” at artificial levels. So, in the Code of Market Conduct,
elaborated by the authority of the capital market in Great Britain- Financial Services Authority,
considers that, in article 1.6.9 (M.A.R. 1.6.9.) even a single trade made with the purpose of
price positioning is a behavior that can be framed in the market abuse sphere. In this
hypothesis, the authority that is making the investigation has to determine if the purpose of that
trade was price positioning at a certain artificial level or it was framed in a natural activity of
trading.
A reduced number of trades even made at different prices then the ones registered
previously or later on the market can not be classified as manipulation actions, without
analyzing other factors. One of the most important elements that need to taken into
consideration is the volume of traded securities by the alleged manipulator. A trade or several
trades closed with insignificant volumes of securities can not be treated as market abuse, in the
1
Section 1, point 1.3, p. 174-175

153
conditions in which the existent demand and supply at that time on the market of a security
determines closing trades in question at those prices. For example, an insignificant offer of
securities (a reduced volume posted in ask) determines a raise of course, even by trades closed
with small volumes of securities.
In what regards the volume level of the trades made by an investor on a capital market, it
is natural any course evolution following trades that have a certain volume, significant for that
specific security. The legal regulations can not encumber trading securities in large volumes,
with a special impact on the price. Code of Market Conduct denotes as legitimate the situation
in which initiating a position on a stock index implies trading a large volume of securities
(MAR 1.6.10.). The illicit character of operations is given by maintaining an artificial course,
by violating the natural law of demand and supply and not by the volume of a trading order that
has, inevitably, the effect of changing the course of that security.
In the same time, it is necessary that trading having a high volume of securities to be
executed respecting the legal dispositions, including the ones in the field of reporting those
operations, in the field of making “cross” trading etc.

§2. Trading orders which maintain the price of one or several securities at an
abnormal or artificial level

The detailed analysis regarding the manipulation situations by maintaining an artificial

price, made in the previous point of this paper, won’t be resumed. In practice, making a
manipulation action is owed, usually, as we have shown, to the combination of actions with
proper trading with the one of introducing orders in the trading system, without the intent of
trading at those prices.
In reality, capital market manipulation can not be made only by issuing orders in large
volumes, with out keeping in account of the prices on which they are issued.
A type of manipulation by launching orders that maintain an abnormal or artificial level
of price is creating “price barriers” by the manipulator, in order to block the closure of trades at
levels of price set on the ground of the natural law of demand and supply. These price barriers
are formed by introducing into the system of orders that have a significant volume of demand
or supply for the “manipulated” security.
Because of the barrier, trades will be closed only to the level set by the manipulator, even
if the natural trend of the market might to a price evolution beyond the level imposed by the
manipulation actions.
On another hand, it is obvious that the artificial price is created as a follow up of some
trades. These can be made by the manipulator along with his accomplices until reaching the
artificial level wanted by the manipulator, or, on the contrary, the counterparties of the
manipulator can be strangers that were mislead, by rumors or fictive orders. If no trade is made
on the artificial levels of price imposed by the manipulator, the market will self regulate by the
mechanism of demand and supply that characterizes a natural level.
No matter how many funds or securities the manipulator would allocate to the success of
his action, his measure will remain only an attempt if he doesn’t find his counterparty (him or
the third parties for which he is acting) to close trades at artificial prices. A contrary

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interpretation would be extremely dangerous, because it might cause abuses and would
discourage trading on that market.
A hypothesis about maintaining an artificial price only by introducing fictive orders in the
trading system might be the one in which the course of securities should increase, on the
ground of news, positive results, but is maintained artificially lowered because of the price
barrier imposed by the manipulator.
Another practical situation, in which the manipulator maintains artificially the price on
low levels, without having a role in its depreciation, is the interference of an external factor- a
decision of a administrative or juridical authority, a natural disaster etc.- that negatively
influenced the course of those titles. The end effect of that external cause should have as result
an increase of price of securities, but the manipulator, introducing sale orders in large volumes,
blocks this increase.
“Price barriers” by issuing orders can be introduced in the other sense, of blocking a
natural decrease of the securities course, on the base of events that would justify the price
depreciation.
It must be shown that it’s very hard to differentiate the border between the illicit action of
market manipulation from the legal one of normal trading, in the case of the existence of
considerably large volumes, so it is restrained the accentuated evolution in a certain sense of
the course of securities.

§3. Signals of capital market manipulation by orders or trades which maintain the
price of one or several securities, at an abnormal or artificial level
.
These indications of possible market manipulation actions are included in article 4 from
Directive no. 124/2003. Some indications pointed out by this legal text can indicate an eventual
manipulation by issuing false signals or by misleading the other market participants or to
indicate the presence of manipulation actions by maintaining the price at an abnormal or
artificial level.
This signals with a common character, analyzed in Section 1, part 3 in this chapter and
will not be resumed, are:
- issued orders or executed operations are an important proportion from the daily
volume of operations executed on the regulated market of the security in question,
especially in the case in which these activities lead to a sensitive variation of the
course of this security- article 4, line a) from the Directive no. 124/2003;
- issued orders or executed operations are translated by position turnover on a short
term and represents an important proportion from the daily volume of operations
realized on the regulated market of the security in question and might be
associated with sensitive variations of the course of the security admitted to
trading on a regulated market- article 4, line d) from Directive no.124/2003;
- issued orders or executed operations are concentrated in a short period of time on
the course of the negotiation session and determines a course variation that is later
reversed- article 4, line e) from Directive no.124/2003 1 .

1
This indication of manipulation was analyzed at point 3.4.; therefore we will not resume the
considerations already expressed.

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 All these suspicious activities can have as result misleading the other market participants,
with the purpose of closing trades at artificial prices, but they can also indicate the attempt of
maintaining the course at an abnormal level, that breaks the natural law of demand and supply.
Similar with the analysis of manipulation by issuing false signals and in the case of this
type of manipulation, these indications of possible illicit actions on the stock exchange regime
must be linked with other elements that have the nature to show the criminal intent of the
investigated person. A conduct materialized by operations of which the European directive
mentions that might represent indications of capital market manipulation, can have a legitimate
ground or it can be generated by an error of that person.
It must be outlined that, also in the case of activities that might indicate the presence of a
manipulation by maintaining an artificial price, the list of these possible indications is not
exhaustive. Also, the mentioned activities do not represent basic actions of capital market
manipulation.

3.1 Issued orders or operations executed by the persons which have an important position
of a seller or a buyer

Issued orders or operations made by persons that have an important position of seller or
buyer for a security lead to a sensitive variation of course of that security or of the proper
derivative security, admitted to negotiation on a regulated market.
These activities are an indication for a series of operations considered to be practices of
manipulation by the Committee of European Security Regulators in the first guide of
implementing the market abuse Directive no.6/2003 1 :
- abusive squeeze;
- an excessive percentage deviation of demand- supply.
The defining elements of this sign of manipulation by maintaining an artificial course are:

3.1.1 Premise situation- one or several person that act together have an important position
for a security

An important position on the demand and supply of a security is the possibility to sell,
respectively to buy a significant quantity from that security.
An important seller position is materialized in holding in the portfolio of a significant
volume of securities, reported to the total number of those securities that exist on the market,
free to be traded.
It can be considered, for example, that all the significant shareholders 2 of an issuer have
an important position as sellers. In case there is a high level of dissipation of the social capital
of the issuer or of spreading towards the investors of a certain type of securities (bonds, state
titles, etc.) of course that the meaning of the term “important position” will be different, the
crossover by which it can be analyzed that position being lower.

1
Analyzed in point 4 from the present section, p. 242-264
2
Natural person, juridical person or the group of persons that act together and detains directly or indirectly
a participation of at least 10% from the social capital of a commercial association or from the voting rights
either a participation that allows exerting a significant influence on the decision making in the general
meeting of the administrative council, depending on the case.

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 An important buyer position is the intention to purchase certain securities, in the
conditions in which there is the effective financial possibility in order accomplish this
desideratum.
The important position of seller or buyer of a certain security must be analyzed in a wider
context, because is not possible the limitation of only one stock exchange session.
It is possible that, in a certain session, an investor which has a minimum participation to
the social capital of an issuer admitted to trading on a regulated market to dominate the offer or
securities, from the desire to cancel that position and cash his profit. To suspect a certain
conduct as being a market manipulation action would be absolutely excessive and would
discourage trading on that capital market. Still in the same way, in a certain stock exchange
session a investor can decide to purchase a certain title, either from speculation reasons, either
from the desire to initiate a long lasting position, counting on a eventual increase in time of the
business of that company. Issuing purchasing orders in large volumes can assure him, for that
stock exchange session, a dominant purchase position.
An important factor in the analysis of the notion of “important position” is the liquidity of
that security. Trading non-liquid titles needs to be analyzed separately from the operations
closed with securities for which there is a liquid market. The absence of sellers and buyers on
the market of a title has as result that any trade made with that security has an important impact
on price and on the traded volume in a stock exchange session (there can be situations in which
a trade with securities valued at a few euro represents 100% from the daily traded volume). In
these situations, the market price is set by trading very small volumes by investors that
inevitably receive, by the force of circumstances, an important position on sale or purchase.
Another element that needs to be considered in the analysis of this possible signal of a
manipulation action, linked very closely with the one of liquidity, is the size of the free-float 1 .
A reduced free-float means the existence of small volumes at trading and, as a consequence,
the market price formation by trades closed at reduced values. The presence of the free-float,
connected with the small value of stock exchange capitalization, generates a low liquidity. The
interest of the investors will be reduced for these titles, because the value of trades that can be
made with those titles is small, and the possible profits will have also reduces sizes.
The market price will form after closing several trades, being able to fluctuate in large
intervals.
A different discussion must be made also in the specific case of small size companies,
with a reduced stock exchange capitalization and without the titles being submitted to an
intense trading activity. In the United States this type of companies, described with a reduced
value of stock on the market, fewer than five dollars are called “penny stock companies”. In
general, these titles are traded on the bilateral markets like Over the Counter, based on
quotations offered by the brokers. Securities Exchange Commission sets special rules
regarding trading stocks of these companies, considered to be submitted to a speculative high
risk. Among these requests there is also the necessity of a written agreement from the
brokerage client’s part, from which will result that the decision of purchasing these titles
belongs to him. Securities Exchange Commission shows expressly that “investors in penny
stocks must be prepared for the possibility to loose their entire investment” 2 .

1
In an official definition of the Bucharest Stock Exchange, Free Float is an estimation of the stocks
proportion that are not held by significant shareholders,
http://www.bvb.ro/ListedCompanies/SocietatiMain.aspx?t=1&m=bse
2
http://www.sec.gov/answers/penny.htm

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 To prevent a total blockage of trades with titles of non-liquid companies, on the market
where there are traded it is eliminated the condition of the maximum variation admitted in a
trading session. For example, on the RASDAQ Market is not applied the maximum variation
rule admitted for a stock exchange session for the titles of issuers that did not register at least
one trade a week in the last trimester and the traded volume in the last 12 months represented
lower then 1% from the social capital of the issuer 1 .
In other situations, in which there are involved large size companies, a reduced free-float
doesn’t mean a reduced liquidity 2 .
The notion of “important position” on purchase or sale will have to be reported to the
values that are relatively constant: free-float and liquidity.

3.1.2 Orders or trades of persons with an important position for a security lead to a
sensitive variation of the course of that security or of the proper derivative security, admitted to
negotiation on a regulated market

In all these cases, in which there is a reduced liquidity, if it was applied without any
variation the criterion analyzed here would result that any trade closed with those titles is a
trade made by a person that has an important position of a seller or a buyer. In the conditions in
which the trade in question would lead to a sensitive variation of price, extremely probable
considering the lack of liquidity, we would be obviously, according to the analyzed legal text,
in front of an indication of capital market manipulation, even if the value of the trade is of a
few euros.
In is clear that this type of interpretation would be wrong. The notion of “important
position” must be seen in collaboration with other factors that have an influence on the trades
closed with that title, but also with the proportion that the traded titles have in the social capital
of the issuer of from the total value of the emission. When regarding several trades with
securities of one person, and the prices of the trades evolve progressive or regressive towards a
certain level, the activity of that person will have to be supervised. There may be a
manipulation activity with small volumes of securities, even if the market allows. In this
context, closing one trade with a security, even if it’s made at a different price from the price
registered by the previously trade it doesn’t have to be seen as a signal of market manipulation.
It is important to point out another aspect. In the case of a reduced liquidity, handling the
price towards certain levels by a series of trades generated or influenced by a certain person or
other persons that act together can be in a relative way easily made. There are two elements
that are important for the market of that security: if there are mislead investors that are trading
at artificial prices and if the price is maintained artificially in a certain level by trades or
fictitious orders. As long as there are not deceived the interests of investors, by blocking the
movement of the market of a security on the base of law of demand and supply, we can not
speak about capital market manipulation.

1
To see Chapter III, Section 3, point 2, p. 118-124
2
For example, SN PETROM SA, on 04.02.2008, had a market capitalization of 6.120.294.293 Euro, in
conditions of a free-float of about 8%, which meant that the value of this free-float was about 500 million
Euros. To have an important position on sale or purchase on the SNP stock it was necessary the allocation
of very important amounts of money. For example, on 04.02.2008 there were traded 2.566.800 SNP stocks,
valued at 983.501,50 LEI.

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 The main reason is simple: any trade closed on the capital market has an influence on the
price of securities. There are a few cases in which the price variation is zero. On a non-liquid
market, the desire to acquire or sell a certain volume of securities determines, usually, an
important percentage impact on the price. As long as there are made effective trades at price in
ascending or descending evolution it must be active the assumption of good-faith of the parts
involved in these trade. This assumption might be turned over when proving the illicit intent of
that investor, by collaborating with other factors, that are circumstantial, that have the potential
to indicate the subjective attitude of the investor.
To think differently has the consequence of treating as capital market manipulation any
trade that modifies the previous posted price, which would be an aberration. A rigid
interpretation of the legal norms would lead to the discouragement of the investors on that
market and the withdrawal of the invested amounts in an unfavorable environment.
Essential in judging operations made by persons that have an important position on
purchase or sale is, it must not be forgotten, the artificial or natural character of the established
price on the market following the trades or orders issued by these persons. This type of
character must be analyzed in a wider context, depending on many elements, like the price
trend of the security in question, the general trend of the market, price evolution in the absence
of the action of the alleged manipulator etc.

3.2 Orders are issued or operations are executed at the precise moment of calculating the
reference courses, the settlement courses (“settlement price”) and of the evaluations or almost
close to this moment and leading to variations of courses therefore affecting the courses and
the evaluations

This signal of the presence of a possible capital market manipulation action is on the base
of the manipulative practice called “marking the close” 1 .
Orders or trades executed at the moment of calculating the reference price, of settlement
or making estimations, can lead to fixating the artificial levels of the these prices, situation
which will bring damages to the good-faith investors, that either take the investment decision
depending on the prices and estimations, either they are forced to mark a loss or a reduced
profit, because of settlement prices established at abnormal levels, by manipulative practices.
As in the case of the other possible signals of a manipulation action, it must be marked
out that the simple trade at the moment of settling the closing prices, even if it determines
important variations of the course, that have an effect on the reference or settlement price, is
not a capital market manipulation action.
According to article 1, paragraph (1), point 62 from the Preliminary Title of the
Bucharest Stock Exchange Code – market operator of the symbol in a trade session, represents
the price towards which it calculated the price variation of the symbol in the course of a trade
session, valid in all the markets in which a certain symbol is traded. It is the closing price
registered in the Main Market of the symbol in the previous trade session. Closing price is the
price on which it is executed the last trade for a certain security on a certain market, in the
course of a trade session or the price set on the base of the application of the fixing algorithm
in the state of market “Closure” 2 .

1
Analyzed at point 4 in the present section, p. 242- 262
2
To see Chapter III, section 3, point 1, 1.2, p. 101-104

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 The notion of “settlement price” describes the closing price of a trading session, used to
calculate the gains and loses, the margins, the price that needs to be paid at the moment of
compensation- settlement in the futures contracts 1 . It is also called a liquidation price, being
the daily price on which the compensation house balances out the trades between the members
accounts for every month until due date 2 .
Regulation of the National Securities Commission no.13/2005 3 uses the notion of
quotation price, meaning the price on which it is marked the present level of the market
according to the regulations set by the house of compensation/ central counterparty, the
updating, during and on closing the trading session, the accounts in margin, with the
favorable/unfavorable differences resulted from the reevaluation on the current price level of
the market of opened positions.
For the activity of an investor to be considered a sign of manipulation, the text of article
4, line g) from Directive no.124/2003 [took over from article 164, line g) of Regulation of the
National Securities Commission no.32/2006] needs to fulfill cumulative two conditions:
- orders and/or trades of an investor to be executed at the moment of calculating the
reference course, of compensation- settlement or of some estimations or in an
approaching moment;
- orders and/or trades lead to the modifications of price with an effect over the
estimations and reference or settlement prices.

3.2.1 Orders and/or trades of an investor are executed at the moment of calculating the
reference course, settlement or of estimations or in an approaching moment

In order to complete this first condition is important that the trades or orders in question
are executed at the moment of calculating these prices or in an approaching moment. Trades
executed in another stock exchange session than the last before establishing the reference price
can not be suspected of having manipulative effects, although it can be decisive in order to set
the reference or the liquidity (compensation) price.

3.2.2 Orders and/or those trades lead to price altering with an effect on the estimations
and prices of reference or settlement

Any closed trades on the capital market leads to the alteration of the “market” price of a
security. This is, thereby, also the essential role of the capital market. The price of a security is
changing continuously as a follow up to the evolution of demand and supply of securities. On a
regulated market, this modification of price of securities has a full transparence condition,
meaning that all the participants on the trade knows at every moment the market price of the
traded securities on that capital market.
Any trade closed at the moment of establishing a reference price leads to the modification
of the market price having effects on the reference price. In these conditions, any trade closed
at the moment of setting up the reference price might be suspected of representing a capital
market manipulation action. If that was true, any price variation might be considered a result of
a practice of market abuse.

1
http://www.investorwords.com/4516/settlement_price.html
2
http://www.eafacere.ro/dictionar.asp?fid=1776
3
Approved by the Order no. 60/24.10.2005 (Official Monitor no.983 from 4 November 2005)

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 The reference price of some securities can be set in the last seconds of the trading session,
an hour before closing the session or in the first seconds of the trading session, if after this
moment there are no longer made trades with those titles.
The trend of a security is a special important factor in establishing the licit or illicit
character of activities on the capital market, being able to indicate the normal or artificial
nature of the price of a security. We consider that is important to have in consideration a trend
on a medium period of time, because the price evolution of a security in only one stock
exchange session can not be relevant in the appreciation of the artificial or natural character of
the price of that security.
In case in which trades made with the titles in cause were closed at prices that subscribe
to the general trend at that time it won’t be possible to sustain the applicability of the legal text
that refers to the presence of a manipulation indication, even if operations in question had an
decisive role in establishing the reference or settlement price or in making estimations. In the
same time, in the hypothesis in which suspected trades were closed at medium prices in report
to the minimum and maximum daily price registered for those titles in the session in which it
was set the reference price, will be hard to support that there are indications of capital market
manipulation.
On the other hand, investors that close trades around the time of settling the reference
price will be inevitably influenced by this element of the imminent establishing of the price of
reference or settlement/liquidation.

In general, the majority of the stock markets have adopted the principle according to
which the closing price, meaning the price of the last executed trade in a stock exchange
session, will be the reference price.
An optimum solution in order to avoid suspicions about market manipulation around the
settling of the prices of reference or settlement might be determination of these outside the
proper stock session, in a special trade session, in which all the participants on the trade’s
process are completely informed on the purpose of this special session: establishing the
reference price.
The last alteration of the Bucharest Stock Exchange Code- market operator has in sight
the exact situation of settling the closing price, and as a consequence of the closing price, based
on a fixing algorithm, but only if the general manager of the Bucharest Stock Exchange adopts
a decision in this sense for a market or for an entity of symbol-market 1 . In this situation, the
reference price will no longer be the price of the last trade from the previous stock exchange
session, but the price established on an algorithm that will have in sight the prices of the
existent limit orders for that security on the main market and the price of the last registered
trade, even if there were no trades registered in that session, the reference price.
In what regards the settlement price, this is determined, usually, as an average value of
prices registered in the period of time between closing (due date) of the futures contracts. At
the BMFM Sibiu, the settlement price on the due date for the contracts having as an active
support stocks it is set as being the average balanced price of the stock communicated by the
Bucharest Stock Exchange in the last day of availability of the contract.
According to Book II of the Bucharest Stock Exchange Code- market operator, article 17,
the settlement price of the futures contracts traded on the Bucharest Stock Exchange is set by
the stock exchange after closing the last trade session, on the due date. For example, in the case
1
To see Chapter III, section 3, 1, point 1.2, p. 101-104

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that the active support contains stocks, the settlement price is set depending on one of the
following prices:
1. the average balanced price of the active support- the average balanced price
with the traded volume on the market of the active support, according to a
certain period of time from the trade session from the last day of trading for
the series that expires;
2. the closing price of the active support- the price of the last trade closed on
the market of the active support in the last day of trading for the series that
expires;
3. the auction price of the active support- the price of the active support
determined on the base of an fixing algorithm.
In the case of futures contracts that have as an active support a stock exchange/currency
index, traded at the Bucharest Stock Exchange, the settlement price is calculated depending on:
- the average values of the active support- the average of values calculated for the
active support for a certain period of time in the last day of trading for the series
that expire;
- the closing value of the active support- the last value calculated for the active
support on the last day of trading for the series that expire, in the case of futures
contracts that have as an active support a stock exchange/currency index etc.
Choosing a method of calculating the final settlement price (settlement price on the due
date of the contract) that would not consist in setting up this price depending on the closing
price would reduce, in our opinion, the risks of a manipulative action developed around the
establishing of settlement prices. It is, without any discussions, harder to exert actions of
influence of the value of the average price in a certain period of time then to make operations
that would affect the closing price of a certain active support.

3.3 Situations which might be considered possible actions of capital market manipulation

In the legislations of other states there were identified other situations that can be
considered indications of capital market manipulation actions.
Code of Market Conduct, that inspired in an determinant way the European legislation
regarding the market abuse, includes a series of circumstances that can be considered by the
authorities and the entities of the capital market in the analysis of the illicit of a conduct on the
capital market that it is suspected of leading to fixing the price at an artificial level.

Thereby, the next elements presented here can be taken into consideration:
- situation in which a person has a direct or indirect interest in the price or value of
the security or product;
- volume or size of trade of a person reported to the reasonable expectations
regarding depth and liquidity of market at that time;
- situation in which price volatility, rate or option fluctuates and if this volatility is
outside the daily, weekly or monthly parameters of normal fluctuation;
- if a person has increased or decreased successively and systematically the
demand, supply or price paid for a security or a product.
We consider that all these factors, even if they are not mentioned properly in the
European norms or in the Romanian legislation, are necessary to be considered in the analysis

162
of the conduct of an investor on the capital market, in the case there are suspicions of market
manipulation by fixating the price at an artificial level.

§4. Situations considered by the Directive of market abuse no.6/2003 as capital

market manipulation by maintaining an artificial price through trade or trading
orders

The Directive of market abuse mentions in article 1, paragraph 2 that certain conducts on
the capital market need to be considered for sure as capital market manipulations by creating
and maintaining an artificial price. This directive text was resumed also by article 244,
paragraph 7 in the Romanian Law of capital market no. 297/2004.

4.1 Action of a person or persons, that act together to assure a dominant position on the
demand and supply of securities, having as effect fixation, directly or indirectly, the price of
sale or purchase or creating other incorrect conditions of trading

The origins of this market manipulation technique are found far away, in history, being
probably one of the oldest methods to alter the normal report from demand and supply.

The consecrated naming for the most known version of this manipulative technique is
“cornering” or “corner the market”.
This manipulation method was used in the oldest times, and on the capital market had an
important consecration in the XIX century and the beginning of XX century, enjoying the lack
of regulation in the field, which was equated with the lack of a prohibition of applying the
“cornering”.
In our opinion, the formulation of this text from the Directive of market abuse, contained
by the article 1, alignment 2, paragraph 2 from the first thesis and resumed in article 244,
paragraph (7), line a) of the Romanian Law of capital market no. 297//2004, is not the most
appropriated. In order to speak about the existence of a manipulation action it is necessary to
have in consideration fixating an artificial price, which is not determined on the natural law of
demand and supply, but on the illegitimate actions of a person or a group of persons.
An action of assuring a dominant position on the demand and supply of a security can not
be considered illegitimate. It is the right of every person to invest as much as he wants in a
security or to liquidate his positions over a security. In the same time, any stock exchange order
that has a certain volume, reported also on that market’s liquidity, can have a strong impact
over the price of a security. It would be absolutely excessive to consider that any trade order
that exceeds a certain percentage from the total traded volume in that session and influents
inevitably the price is a capital market manipulation. In this type of interpretation, that would
lead to the sanctioning of any trade that exceeds a certain level, the trading activity on that
market would be completely discouraged.
An appropriate formulation would have to also consider these aspects and to accentuate
the artificial character of the price set by the action of investors that have a dominant position
over the demand and supply of a security traded on a regulated market.
In the situation of this manipulation practice there are present two defining elements:

163
 - having a dominant position over the demand and supply on the market of a
security;
- fixating, directly or indirectly, the sale or purchase price or creating other
incorrect conditions of trading.

4.1.1 The notion of dominant position

It is about a notion that was borrowed from the law of competition.

In the Amsterdam Treaty of modification of the Treaty of the European Union, signed in
1997, mentions in article 82 an interdiction of using a dominant position held on a common
market or on a significant part of the market, offering also a series of examples of abusive
practices, in the acceptation of the states that signed the treaty 1 . Among these practices there is
also imposing, directly or indirectly, the prices of sale and purchase or other non-equitable
conditions of trading.
The dominant position was defined by the European Commission in 1966 as an economic
power of exerting a notable influence and, in principle, predictable over the market. The
European Commission considered that the dominant position gives to the association that has
the possibility of influencing the economical decisions of the other associations on that
market 2 .
In the situation of the capital market, this definition finds its complete application, in the
sense of the influencing capacity by the entity that has a dominant position on the market of the
security on which that position is held.

4.1.2 Obtaining a dominant position on the market of a security 3

In general, the confrontation of contrary interests of investors on the market of a security

leads to the formation of a price of market on a natural way, based on the law of demand and
supply. Any intervention of an investor to the market of a title is “neutralized” by the trading
activity of the other market participants.
In case an investor obtains a dominant position over the demand and supply of a security,
the rules of the game of demand and supply are submitted to the risk of being modified.
In the existing situation on a certain market of an investor that has a dominant position
over the demand and supply of a security, he will be able to impose the price he wishes,
without taking into consideration the interests of the other participants on the market, that
won’t be able to play a role in the course formation on the base of the demand an supply
natural law. This natural game between the demand and supply can be affected, and the price
of the market of that security will be influenced only by the interests of the holder of the
dominant position.
Obtaining a dominant position over the demand and supply is materialized by issuing
purchase orders with a large value, for an important quantity of securities. Obtaining a

1
When Romania was accepted in the European Union this treaty became mandatory for the internal law.
2
The Memorandum of the Commission of European Economic Communities regarding the concentration
on a common market, in S. Loyrette, cited paper, p. 266
3
We have analyzed in this section, point 3.1, the meaning of notions “important position of seller” and
“important position of buyer”, so we will not resume this.

164
dominant position over the supply of securities is materialized by issuing sale orders in
appreciable volumes for a certain security.
It is important to underline that obtaining certain positions regarding issuers imposes the
obligation of that investor to initiate a public offering. Thereby, according to article 203 from
Law no.297/2004, text grounded on the dispositions of article 5 from the Directive of
Parliament and European Council no.25/2004 1 , “a person, following acquisitions or of the
persons acting together, has more than 33% of the voting rights over a commercial association
is obligated to launch a public offering addressed to all holders of securities and having as
object all their possessions as soon as possible, but no later then 2 months from the moment of
reaching that holding”.
In this context, the obligation to make a public offering of purchase, along with the
exceeding of the 33% crossover, connected with the obligation to report holding a significant
position in the social capital of an issuer, are normative factors that are contributing to the
protection of investors, including by restraining the exertion of the holder of a dominant
position of an abnormal influence on the market of that security.
On the other hand, obtaining a control position over an issuer is realized, in general, by
trades on the Deal Market, at prices negotiated in advance, which are not included in the
natural game of demand and supply encountered on the order driven auction markets, but it
doesn’t influence directly the price on these markets (reminding that the registered price in
trades on Deal Market does not contribute to the setting up of the reference price of a security).

4.1.3 Fixating, directly or indirectly, the sale or purchase price either creating other
incorrect trading conditions

The price included in the orders of large volumes introduced in the trading system
influence inevitably the market price of a security. As we have shown previously, in order to
treat a conduct as manipulative is necessary that this influence is illegitimate; meaning that
there result of the influence is setting up an artificial price.
The behavior of the investor that purchases a certain quantity of securities only with the
purpose of exerting a decisive influence on the price of these securities will be considered as
illegitimate.
In that case too we are dealing with a subjective side that has a decisive character in
setting up the illicit of a behavior. From this essential consideration, is imposed the analysis of
multiple factors by the authorities that are investigating that situation, in order to establish
exactly the completion of subjective conditions that attract the illicit conduct.

4.1.4 Dominant position abuse

The doctrine has revealed that holding a dominant position on a market is not an abuse; it
only represents a dangerous position 2 , from the point of view of the orderly movement of a
financial market. As we have shown, not all trades that have a volume which exceeds a certain
threshold can be sanctioned, because this would cause the complete destabilization of the
capital market on which this situation is presented, through the total lack of protection of the

1
S. Loyrette, cited paper, p. 266
2
S. Loyrette, cited paper, p. 267

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good-faith investors in front of the authorities, having serious effects also on the economy in
general 1 .
Abusive exertion of rights that come from holding a significant percentage from an
issuer’s titles has the juridical nature of the abuse of right.
Abuse of right is exerting a subjective right with violating the principles of its exertion 2 .
Exerting a right by disregarding the economic and social purpose for which he was created,
with disregarding the law and morals, with bad-faith and exceeding its limits is the same with
abusive exertion of that right 3 .
Essentially, in order to establish that a right is exerted in an abusive way we have to turn
aside the application of right from its intrinsic reason for which it was recognized4 . In the case
of exerting the ownership property on the securities on the capital market, in order to speak
about a dominant position abuse is necessary to identify a violation of principles that forms the
base of exerting the rights of investors on a regulated market. Between these principles there is
also the one of protection of investors, and the application of this principle in the situation
analyzed means protecting the interest of all participants on the market when faced with the
alteration of orderly market movement, based on the natural law of demand and supply. This
type of prejudice of the orderly movement can be setting up artificial prices by the abusive
action of an investor that has a dominant position of the demand and supply of a security.

Proving the dominant position abuse must take into consideration, as we have highlighted
before, demonstrating the fulfillment of the subjective side of the action.
In practice, this operation will be extremely difficult to realize, because the alleged
manipulator can evoke in his favor his good-faith. In the task of the authority that is
investigating the actions included in the market abuse sphere, will be also the obligation to turn
over the assumption of the good-faith. It is clear that the simple holding of a dominant position
over the demand and supply of a security is not an element that would turn over the assumption
of good-faith.

4.1.5 Cornering

Corner is defined usually as the action that assures the control on a security, so the market
manipulation can intervene 5 .
In a definition from the middle of XIX century6 , cornering was considered a term given
to a system of purchasing all the existent stocks on the market at a certain time, and then
purchasing in time a larger and large quantity of those stocks. This way, as it was shown in that
paper, the persons who would assume the obligation to deliver on term certain stocks could not
get them from the market and respect their contract, were forced to accept the price imposed by
that buyer.
The steps of applying this manipulative practice are well determined:

1
Ibidem
2
Gh. Beleiu, Romania Civil Law. Introduction in the study of civil law .Subjects of civil law, House of
Publishing and Press “Sansa” SRL, 1992, p. 78
3
Ibidem
4
I. Deleanu, Subjective rights and abuse of right, Dacia Publishing, Cluj-Napoca, 1988, p.50
5
http://financial-dictionary.thefreedictionary.com/corner
6
J. Gregory Martin, Twenty-one Years in Boston Stock Market, Redding and Co, 1856, p. 58, in digital
edition on http://books.google.com

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 - in the first phase, the manipulator tries to obtain control on the larger part of the
securities from a certain emission (the majority of stocks of a company, the
majority of bonds of a certain type of an issuer, the most part of a certain currency
etc.) that are on the market;
- in the second phase of the manipulation operation, he will impose a high price on
those securities, because he will dominate the offer and block practically the
execution of any trade, in volumes that exceed a certain threshold, given by the
volume of securities he doesn’t own, under the price he wants to impose.
Sometimes, cornering operation starts with a massive sale of securities in order for the
price of these securities to decrease and their re-purchasing at prices considerably small and in
larger quantities.
It was shown 1 that, this manipulative practice will increase the volatility2 of securities,
but does generate a negative impact of the price on other elements.
In executing cornering operations are involved in many cases the derivative securities.
In history, on the markets where the short sales (by absence) were permitted on the spot
market too, in the conditions of settlement of a trade in a certain period of time (usually 3 days
from the trade date), have intervened situations in which, the lack of control and an
appropriated evidence, there was a larger quantity of securities held by an investor (adding also
the short sales) then the total quantity of securities on the market 3 .
At present time, the cornering method has a bigger efficiency on the term market, on
which there are trades in margin. Because of the due date of contracts and of the margin, the
gains on these markets can be a lot larger then on the spot market. The existence of a due date
and a minimum margin, calculated daily depending on the title’s settlement value, generates a
safety of obtaining profit in the situation in which an investor has a dominant position on the
market. The market participants that have initiated contrary positions to the manipulator are
forced to close trades, to close their positions before the due date, and this operation will be
made on the price of the manipulator that realizes the “corner”. This is the only solutions to
stop the losses. In case the investors that have contrary positions with the manipulator do not
close their positions on the course of the contract, they will have to transfer more and more
money in the account of the brokerage firm by which they are trading in order to cover the
mandatory percentage margin, affected by a negative evolution of course.
From these considerations, cornering makes the short sale operations to become very
dangerous, for investors and for the brokerage houses that are giving to the investors the right
to trade in margin 4 .
On the “spot” markets, if there won’t be developed short sales, the investors are not
obligated to trade because of the approaching due date and so cornering can have reduced
effects or even fail.

1
F. Allen, L. Litov, J.P. Mei, Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of
Market Corners, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=604302, 2004, p. 5
2
Volatility is a statistical factor that measures the value variation of a security or a stock exchange index,
http://www.investopedia.com/terms/v/volatility.asp
3
F. Allen, L. Litov, J.P. Mei, cited paper, p. 5. In 1864 there was a manipulation operation of stocks
belonging to Harlem Road company by the Commodore Vanderbilt, that together with the person that he
acted with, had a number of 137.000 of Harlem stocks, cumulating with stocks that they were about to
receive from the investors that have initiated short sales with these titles, but the total number of company’s
stocks was only 110.000.
4
Ibidem, p. 6

167
 From here there is drawn an essential conclusion regarding cornering: for the cornering to
justify and to function it is necessary to have a constraint from the other market participants to
buy the securities submitted to this manipulative method. In the absence of this constraint, the
manipulator can remain stuck on a period of time with the purchased securities in his portfolio,
because investors are not interested to acquire titles whose market is dominated by only one
person or by a group that acts together.
There is, without a doubt, success “corners” and failed “corners”. The ones who enjoyed
success means that the manipulator controlled almost all the traded securities of an issuer and,
because of a reduced market offer, the price increased substantially (short squeeze 1 ), which
meant that that manipulator dictated the price of that security. Failed “cornering” are the ones
where the manipulator failed in the attempt to obtain the control on the majority of securities of
an issuer, because on the market appeared new securities on the settlement date or because of
an action from the governmental authority 2 .
Only towards the end of XX century there were taken express measures in the American
legislation for prohibiting cornering operations. For example, until 1990 there was no limit of
having treasury bonds issued buy the United States Treasury, in that year being imposed a limit
of 35% of holding for an investor or a consortium of investors 3 . The absence of an express
regulation that would limit the holding was caused by the fact that there weren’t any cases in
which a firm would buy an entire emission of titles, but the increase of the financial power of
companies and investment funds from the end the `80 of the XX century generated the need to
impose a holding threshold.
An important effect of cornering is the discontinuity of price of the manipulated security,
in the approaching of executing the cornering the price suddenly evolves on an ascending
trend 4 . That is why this type of sudden price increase of a security can represent for the
investors an alarm sign that it is possible that a “corner” be realized soon.

4.1.6 Cases of manipulation by holding a dominant position or by cornering

In XIX century cornering operations were not forbidden. In 1863 and 1864 Commodore
Vanderbilt realized two successful cornering operations with the stocks of the railway company
Harlem Railway.

In the case of Hunt brothers 5 , that controlled a considerable fortune having actives and
businesses in different fields, but especially in the oil business, it was the manipulation of
silver market. In 1970 was not allowed to the American citizens to hold in property gold,
thereby silver was the first option of investments in precious metals. In 1970 and 1973 Bunker
and Herbert Hunt bought approximately 200.000 ounces of silver, the price increasing in this
period of time from 1.5 USD/ounce to 3 USD/ounce. At that time, already existed the premises
of an inflation in the United States, at which contributed also the war in Vietnam.
Nationalization in 1973 of fields and oil sounds of Hunt brothers owned in Lebanon by colonel
1
Short squeeze is a situation in which a reduced supply and a demand in excess for a traded security
determines the increase of price of that security, http://www.investopedia.com/terms/s/short-squeeze.asp
2
F. Allen, L. Litov, J.P. Mei, cited paper, p. 5
3
R.C. Smith, I. Walter, Street Smarts: Linking Professional Conduct With Shareholder Value in the
Securities Industry, Harvard Business School Press, 1997, p. 125
4
F. Allen, L. Litov, JP. Mei, cited paper, p. 6
5
After http://stockhouse.ca/bullboards/viewmessage.asp?no=17813725&tableid=0

168
Ghaddafi and the increasing inflation determined them to approach a business that would offer
a lot more safety.
Starting with 1973, Bunker Hunt starts to purchase massively silver, owning at the
beginning of 1974 approximately 55 million ounces, representing about 8% from the world’s
quantity of silver at that time. Rumors start to appear regarding a cornering attempt on the
silver market executed by the Hunt brothers. They transferred most part of the quantity of
silver that they owned in Switzerland. The price of silver increased in the spring of 1974 to 6
USD/ounce afterwards dropping to a value of 3- 4 USD/ounce. Hunt brothers sold almost
nothing from the silver quantity that they had, trying to buy a lot more.
Between 1974 and 1978 Hunt brothers tried to close more deals having as object the
silver, negotiating including with the shah of Iran, with the Filipino dictator Marcos and the
king of the Saudi Arabia. In 1976 Hunt brothers bought by a listed company that they
controlled another 20 million ounces of silver, and in the spring of 1977 they took over the
control package on the most important silver mines in the United States, Sunshine Mine. In
1978 Hunt brothers along with two Saudi sheiks set up in the Bermuda Islands a company,
called International Metal Investment.
The cornering operation started in the summer of 1979, when through the implication of
the International Metal Investment there were bought by on term contracts, on the markets
Chicago Board of Trade (CBOT) and New York Commodities Exchange (COMEX), 43
million ounces of silver, deliverable that fall. The two stock exchange houses panicked,
because they had in storage a cumulated quantity of 120 millions ounces of silver and were
completely traded only for October 1979. Hunt brothers transferred then 9 million ounces in
Europe. At the end of 1979 CBOT modified its regulations imposing a maximum holding of 3
million ounces of silver, raising also the trading margin. All the contracts that would exceed
this value needed to be liquidated until February 1980. Hunt brothers protested against this
measure, accusing the members of the administration board of the two stock exchange houses
that have financial interests on the silver market. Later investigations discovered that, indeed, a
large part of the administrators had “short” positions opened on the silver market.
Knowing that there are investors that had opened “short” positions, Bunker Hunt
continued to buy silver, in the last day of the year 1979 the price was 34,45 USD/ounce. In this
moment Hunt brothers had 40 million ounces in Switzerland, 90 million by International Metal
Investment, had opened contracts at COMEX on purchase positions (long) for another 90
million ounces, with the due date of March 1980, and the younger brother got in the game too
initiating a position valued at 300 million USD until the end of 1979.
In January 1980 COMEX changes too the trade rules, imposing a limit of contracts of 10
million ounces, all the contracts that would exceed this threshold had to be terminated until 18
February 1980. On 17 January 1980 the silver price reaches the maximum level of
50USD/ounce, but Bunker Hunt continues buying. On 21 January 1980 COMEX suspends the
silver trading and announces that will accept only the liquidity of the already opened contracts.
The price drops at 39 USD/ounce and stays there until the end of the month. Hunt brothers had
opened position for million of ounces, being forced to maintain a daily considerable margin.
Federal Reserve raised in that time the interest rate, which generated an appreciation of the
dollar. The price of silver continued to drop, at 21 USD/ounce at 14 March, then continued
decreasing. On 25 March 1980 Hunt brothers are left without any cash, can not cover the
margins and are forced to close their positions.

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 On 27 March 1980, on a day that remained under the name of “Silver Thursday”, the
silver market, supervised step by step by the President of the Commodity Futures Trading
Commission (CFTC) 1 , the Secretary of Treasury and the President of Federal Reserve, opens at
a price of 15,80 USD/ounce and closes at 10,80 USD/ounce. The financial disaster for the Hunt
brothers is imminent. Bankruptcy is hardly avoided, using the efforts of the whole family
(Bunker Hunt is called in justice for personal bankruptcy in 1988, but the procedure closes in
1989) 2 .
In 1991 until 1995, Sumitomo Corp, one of the oldest (founded in the XVII century),
respected and conservative Japanese company of copper exploitation, manipulated the cooper
market operated by the London Metal Exchange (LME) 3 . London Metal Exchange is the first
market in the world for trading futures contracts having as active support non-ferrous metals.
Practically, the price of cooper set on LME is the world’s price of this non-ferrous metal. The
manipulation operation was conducted by Yasuo Hamanaka, the chief of the department of
copper trading in the Sumitomo Corporation. In 1991 until 1995 Hamanaka, controlling an
important part of the traded copper quantity, managed to obtain substantial profits for
Sumitomo, counting on the continuous increase of price. The absence of regulations of the
London Metal Exchange that would prohibit a company to have this type of large quantity
from only one product made possible that this operation would last as long as it did. In 1995
Sumitomo owned over 80% of the deposit certificates having as object LME copper deposited
in the United States. Having a spread between the price of copper on the American market and
the London market, where it was a little but higher, it was possible to get substantial profits
from making an arbitrage between the two markets. Because of the obligations generated by
the necessity to ensure settlement on the LME, many investors closed their positions on the
New York market COMEX at a lower price in order to make payments on the LME at a higher
price. From here, it followed a price alteration on the COMEX market, which attracted the
intervention of US Commodity Futures Trading Commission. After a period of debates, LME
accepted to cooperate, supporting CFTC in the investigation of cooper market manipulation. In
1996, the price of copper started dropping and the actions of Hamanaka stopped.
In 1996 Sumitomo Corporation announced losses of 2, 6 billion USA dollars. Hamanaka
was convicted in 1998 at eight years of prison, being released in 2005.
At the end of 1922, Clarence Saunders, a contractor that had founded a chain of
butcheries, Piggly Wiggly, company listed at the New York Stock Exchange, initiated an
operation of purchasing the majority of stocks of this association with the support of Jesse
Livermore. The cause of starting this operation was the desire of revenge of Saunders
determined by the price decreases on Piggly Wiggly titles in November 1922. In this “bear
market” the price of titles had dropped from 50 dollars/stock to 40. The purchasing action was
started with precaution by Livermore the price was consistently raising, to 60 dollars/stock in
January 1923 and 75, 5 in March. When Saunders got to the point where he owned 198.872
Piggly Wiggly stocks from a total of 200.000, Livermore stopped the operation. On the ground
of these purchasing operations there were many investors that counted on the decrease of price

1
The authority of supervision of derivatives markets on commodities in the United States.
2
For a more detailed presentation and an analysis of the case of Hunt brothers, one of the most famous
attempts of manipulation in the history, to see J. Williams, Manipulation on Trial: Economic Analysis and
the Hunt Silver Case, Cambridge University Press, 1995.
3
Ch. L. Gilbert, Manipulation of Metals Futures: Lessons from Sumitomo,
http://grade.unitn.it/people/gilbert/file/Attachment_23.pdf

170
of those titles and made “short selling”. In order to honor their obligations resulted from these
trades the “shorter” were in the position of paying Saunders an enormous price. When
Saunders asked Livermore to continue the cornering operation and ask all the investors that
made short selling to honor their obligations, he refused, restless by the effects that could
happen on the market. Saunders requested himself in this situation the execution of settlements,
on 20 March 1923. The price of a Piggly Wiggly title increased up to 124 USD/stock. The
management of the stock exchange intervened at that time unexpectedly and suspended from
trading the Piggly Wiggly titles. Part of the board members seemed to have opened “short”
positions on those titles. Saunders protested showing that the suspension violated the stock
exchange regulations, but without any success. After a few days, the stock exchange
management decided to de-list the company, giving it a grace period on five days to the
“shorter” in order to honor their obligations and setting the fact that they can buy the stocks at
the nominal value. Saunders, the borrowed from bank huge amounts in order to buy Piggly
Wiggly stocks was ruined, because he counted on a even more substantial increase of titles, but
especially because of de-listing, action that put him in the unfortunate position of selling an
important part of the stocks.
After a few years from the failure of this corner, the stock exchange management
modified its internal regulations, meaning the possibility of postponing the settlement of trades
with securities by the decision of the stock exchange house 1 .
The Council of Stock Exchange Operations in France (COB) 2 sanctioned in 1994 the
Graslin Company for proceeding to the massive purchase of title of the issuer Sovamec. It was
considered that the price of Sovamec stock was not the result of the game of demand and
supply, but it was influenced by the intervention of Graslin association on the market of those
titles by their client’s accounts. This practice misleads the public on the exact value of stocks
and on the markets liquidity 3 .
The last vast manipulation by the method of cornering was finalized by an agreement
closed in 2007 between the oil titan British Petroleum and U.S Commodity Futures Trading
Commission (CFTC). BP was accused of manipulating the propane market in February 2004
by making a corner in order to dictate the price of this product. To close the procedure that
CFTC opened, BP agreed to pay 303 million USD with title of civil sanctions 4 .

4.2 Sale or purchase of securities at the moment of marking closing, with the purpose of
misleading the investors which act base on closing prices

We are in the presence, and in this case, like in the situation of cornering, of a technique
of capital market manipulation that is well-known on all the globe’s markets.
The name known by the investors and authorities is “marking the close”.
It was highlighted 5 that manipulation of closing prices is an activity that generates
substantial costs for the stock exchanges and for the participants to trading on these markets.

1
M. Klein, Rainbow’s End: The Crash of 1929, Oxford University Press US, 2003, p. 98-99
2
Substituted from 1.08.2003 by the Authority of Financial Markets (AMF), to see Chapter II, section 2, 1,
p. 40-43
3
Dec. sanction COB, 27 September 1994, in S. Loyrette, cited paper, p. 267
4
http://www.cftc.gov/newsroom/enforcementpressreleases/2007/pr5405-07.html
5
C. Comerton- Forde, T.J. Putnins, Measuring closing price manipulation, p.4,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1009001

171
 The fundamental elements of this practice with a manipulative character are the presence
of a objective side- selling or purchasing security when the market closes, but also the presence
of subjective side- the purpose followed by these trades is misleading investors that are acting
based on the closing prices.
This manipulative technique is on the border of market manipulation by misleading the
other market participants and manipulating by maintaining an artificial price. We are analyzing
this illicit practice here because the first guide of the Committee of European Securities
Regulators included the “marking the close” practice along with the ones that aim to maintain
an artificial price, but also because that the manipulative technique in question aims in essence
the character of price of manipulated securities and not the representation of investors over the
markets conditions.

Previously we have analyzed 1 the elements that can be considered a possible signal of
market manipulation by “marking the close” method, so we will not resume the specifications
already made.
It must be shown that “marking the close” technique is considered as expressly
manipulative also by the first guide of the Committee of European Securities Regulators
regarding implementation of the market abuse directive. In the case of this guide is made the
essential mentioning that this practice can take place in any day of trading, but it’s especially
associated with certain dates, like expiration dates of the derivative contracts, reference dates
regarding the quarterly /annual portfolios or indexes of reference/evaluation.
The guide of the Committee of European Securities Regulators mentions in addition to
the text of Directive no.6/2003 that there are meat the conditions of a manipulative practice
when the trade that was executed at the moment the market closed has as purpose of “alteration
of closing price”, resulting from this collocation that regards an illicit method of trading and
also, if there are no mislead investors, the market price of the security is altered by the
manipulator’s intervention.
The “marking the close” practice can refer both at securities traded properly on a market
and at derivative securities.

4.2.1 The objective side- trades made when the market is closing

Text of article 1, paragraph 2 from the Directive no. 6/2003, resumed by article 244,
paragraph 7, line b) in the Law of capital market no.297/2004 mentions the execution of
effective trades “at the moment of closing the market”.
There will have to be considered only the trades made before the market closes and not
all trades from that session of trading, even if the closing price was set on the base of
operations made in the first minutes of trading from that day.
“The moment of closing the market” is not defined in any legal text, but we can
appreciate the vision of the legislator when he referred to the last minutes of trading from that
session. Sometime, when the liquidity of the market permits the execution of trades at every
second, is necessary to have in sight, in the analysis of the manipulative character, the trades
closed in the last seconds.
The analyzed text must be considered strictly interpretational, so in discussion will only
enter the effective trades made when the market closes and not the sale or purchase orders
1
To see point 3.2 from the present section, p. 236-241

172
issued at that moment, although is possible that these orders have as result misleading the
investors, determining them to close trades at artificial prices, but without the manipulator to be
involved in these trades. This type of action will be treated as manipulation, but won’t be able
to include in the sphere of “marking the close” practice, regulated by article 244, paragraph 7,
line b) from Law no. 297/2004.
These trades executed when the market is closing can have the character of “wash
trades”, the counterparty of the manipulator being his account or an account of a person that
intervened, acting in his name.

4.2.2 The purpose of the trades executed when the market is closing: misleading the other
investors

The doctrine 1 identified many reasons that form the ground of manipulation of the
closing price of securities: intent to obtain profit on the derivative securities market where it
was initiated a substantial position having as active support the securities whose price of
closing is manipulated; the intent of brokers of achieving better results for their clients; the
intent of mutual funds managers to improve their net active, calculated on the base of closing
prices of securities that they have in the portfolio etc.
In the analysis of the subjective side of this manipulative practice is interesting the
immediate purpose (causa proxima) followed by the manipulator- misleading the other
participants to the market for them to close trades at artificial prices.

The subjective side is extremely hard to prove in this case because there has to be
demonstrated an internal resolution of the alleged manipulator.
First of all, is imposed the demonstration of the fact that these trades had characteristics
of nature to mislead effectively the other investors regarding the real price of a certain security.
If the price of those trades was submitted to a natural trend of the market we can not
speak about the completion of the subjective side, because we are not in the presence of an
artificial price and the investors are not mislead.
The purpose pursued by the alleged manipulator will be proved by analyzing some
circumstantial adjacent elements, like: volume and value of that trade, execution in the past by
the alleged manipulator of trades with these characteristics (traded volume and total value of
trade), type of issued orders with which there were made the suspected trades (market orders or
price limit orders), the market trend before and after the execution of suspected trades etc.
Obtaining profit by that person after making these trades, no matter if it is about a profit made
on that market or another market can not be an element which would be considered, because
the objective of closed trades on a capital market is obtaining material benefits.
It must be shown that any circumstantial element considered in establishing the
subjective side of this version of the manipulation action, will have to be linked with the entire
chain of factors that are in connection with the suspected trades.
Important to highlight is that the attitude of the alleged manipulator can be analyzed first
of all by investigating the characteristics of the issued stock exchange orders. A person that
intents to lead the price of a security towards a certain level will issue, in general, “market”
orders, which means a purchase or sale instruction at the market price, no matter the type. By
this type order, issued for a large enough volume to “move” the price in the desired sense, are
1
C. Comerton-Forde, T.J. Putnins, cited paper, p. 3

173
purchased all the securities that exist in the “ask”, no matter how high is the asked price and
are sold all the securities that exist in the “bid”, no matter how small is the offered price, until
the total execution of the order. By issuing a market order in a large volume, when the market
is closing, can be considered a sign of market manipulation by the “marking the close”
practice. In the same time, issuing an order with a price limit, if this limit is situated at a great
distance from the market price at the moment of introducing the order in the system, might be a
signal of an attempt of manipulation.
In both cases the analysis of the investors conduct on the market needs to be reported to
the general tendency of the market of that security, investigated for a period of at least a few
days. Only this way it can be noticed if the trades made by the suspected manipulator when the
market was closing have altered the price of the title in question or were natural operations at
prices established on the base of the natural law of demand and supply.
The volume of suspected trades must be reported to the liquidity of that security.
The sale at loss of some securities when the market is closing, if this operation has
determined an important variation of the course, can represent a circumstantial element in the
analysis of the manipulation action, but it is mandatory to link it with other factors. It can be
forbidden to an investor to limit his losses by closing positions that are causing prejudices.
Thereby, a sale at loss of some securities whose market is decreasing can not be considered a
manipulation sign even if it’s made when the closing of the market is approaching. There is the
risk for that investor that the depreciation of value of his titles be much more accentuated in the
next session, so this sale at loss is justified by legitimate reasons of lowering the prejudice
caused by the market’s fall.

4.2.3 The result of manipulation by “marking the close” method

Manipulation of a market’s security by the “marking the close” method intervenes in the
situation in which, through trades made by the manipulator at the end of a trading session
creates an artificial price, the good-faith investors being forced to close trades at this distorted
price or, in other words, being restrained in closing trades at a price established on a natural
way.
As we have mentioned before, if the trades made when the market is closing are included
in the natural trend of that security’s market, analyzed on a period of several days or weeks,
their result will not be distorting the price and the commission of the manipulation action will
not be apprehended.
A contrary interpretation would lead to the interpretation as illicit of all trades made at the
closing of the trade session.
On the contrary, when we are dealing with trend changes because of the action of the
alleged manipulator upon closing the trading session or with important variations of price,
situations that have the nature to generate “misleading” the other investors, if it’s proven that
the main purpose of operations made upon closing the market was deceiving the other
participants on the market or restraining them to trade at natural prices, in this situation we can
speak about the presence of a manipulation action.

4.2.4 Cases of manipulation by “marking the close” method

174
 Southern Union Company is a utilities company traded at the New York Stock Exchange
(SUG symbol). In June 1999 was closed an agreement for the merger by absorption between
the Southern Union and Pennsylvania Enterprises (“PNT”). The main details of the merger
were: Southern Union absorbed Pennsylvania Enterprises for a price expressed in cash and
SUG stocks, at an average price determined by the closing prices registered in 10 days of
successive trading, from 19 October until 1 November 1999. In these conditions, the more of
the SUG stock price got higher during this time, the more this company had to pay less money
to the PNT stockholders, following the merger. In the same time, if the average price of the
SUG stock in this period of time was smaller then 17, 3 USD/stock, PNT had the right to
cancel unilateral the merger operation.

Through two brokerage houses, Spear, Leeds and Kellog (SLK) and Baron Capital, there
were realized many series of trade of purchasing SUG stocks at the moment of closing the
trade sessions in the period of 19 October- 1 November 1999. At the start of the period, the
clients of Baron Capital owned over 10% from the total of SUG stocks. Purchasing trades were
executed by the SLK for Baron Capital at raising prices. The criminal agreement between the
two brokerage houses was proven mainly by registering their phone conversations.
Securities Exchange Commission considered that it was about a violation of the
dispositions of Section 15 (c) (1) from the Securities Exchange Act 1934 by those two
brokerage houses, sanctioning them with substantial fines 1 .
John P. Venners, consultant of the company KFX Inc, realized in the period of time
March 1997- June 1998 trades with KFX titles (traded on the American Stock Exchange-
AMEX) when the market was closing, in order to raise their course. Venners traded in margin
KFX stocks, having opened long positions. A decrease of their value in March 1997
determined him to transfer larger amounts of money in order to cover the mandatory margins.
Facing this situation, a started a “marking the close” operation. In order to conceal the purpose
he was following, Venners opened another account, to a different broker, by whom he started
to make purchasing operations of KFX titles, in general in the last 10 minutes of the trade
sessions. From April 1997 to June 1998 Venners made purchasing trades when the market was
closing by this new account on 72 occasions, the majority of these trades being made at a
higher price from the last price registered for the KFX stocks. From April 1997 to April 1998
the investor in cause received 43 calls of maintaining the mandatory margin.
Securities Exchange Commission and Venners made on the course of the process an
agreement, Venners agreeing to pay a civil fine for his actions 2 .

§5. Practices of market manipulation by maintaining an artificial price

The manipulation methods by which is created and maintained an artificial price are, in
many situations, connected with the ones which are issuing false signals on the market or are
misleading the investors in a certain security, analyzed in section 1, §4 or with the ones that are
using fictitious methods, analyzed in section 3, §5.

1
http://www.sec.gov/litigation/admin/34-48199.htm
2
http://classaction.findlaw.com/cases/securities/sec/sec1/files/2000/lr16613/html

175
 We will analyze the practices with a manipulative character that maintain an artificial
price, starting from the text of the first guide of the Committee of European Securities
Regulators regarding to the implementation of European Parliament Directive no.6/2003,
regarding market abuse.
It needs to be underlined also the fact that certain abusive practices, although are not
mentioned properly in the guide of the Committee of European Securities Regulators, are
coming from the practice activity, being possible to frame them in the text of Directive
no.6/2003 regarding market abuse. In this sense, although the guide of the Committee of
European Securities Regulators mentions only manipulation operations with the purpose of an
initial public offering, in the jurisprudence there were investigated and sanctioned manipulation
operations developed in connection with other types of public offerings.
The doctrine has pointed out the existence of manipulative actions consist in maintaining
an artificial course in the frame of an initial public offering, either because it is about the
increase of the social capital by a public offering, the emission of convertible bonds or public
offerings of sale on the secondary market1 .

5.1 Connected actions subsequent to an Initial Public Offering

A group of persons that are acting together subsequent to a primary emission of stocks
and to the start up of their trades with the purpose of leading to the artificial increase of price of
those stocks, moment in which those persons proceed to the sale of stocks 2 .

We are dealing, in the situation of an initial public offering, with a special case of
manipulation by creating and maintaining of an artificial price. It is about a special situation,
listing on the capital market of a new issuer, thereby the first trades with the titles of this issuer,
contain, inevitably, special characteristics.
First of these characteristics is that it didn’t exist until the moment of the initial public
offering a market price for the securities in question.
The second feature, which derives from the first one, is that price can fluctuate anytime
after listing until the natural law of demand and supply set it on a normal path.
The constitutive elements of this type of manipulation are:
- premise situation, making an initial public offering of stocks
- emission is subscribed by a limited group of entities, in general banks, listing
being possible by the method of guaranteed placement;
- the allocation of stocks is made discretionary by the subscriber of the emission;
- after the admission to trades of the issuer’s titles, the subscriber of the emission is
acting together in order to increase the price, making directly or indirectly trades
of purchase on the secondary market of the stocks in question.
It is important to make some specifications for the method of subscription of stocks on
which this manipulative technique is refers to.
Applying the illicit practice in question takes place in a different situation of initial public
offering, the one in which the entire emission is subscripted by a restricted group of investors,
that guarantee this way the success of the initial public offering.

1
S. Loyrette, cited paper, p. 262
2
In the American practice, this method is called “flipping”, http://www.market-abuse.com/flipping.html

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 5.1.1 Making an initial public offering by the method of a guaranteed placement

The guaranteed placement (bought deal) is a firm commitment of distributors (dealers) to

buy the entire emission from the issuer, guaranteeing this way the sale of the entire emission.
The subscribers to the emission are assuming the entire risk that derivates from the initial
public offering. They will try to resell the titles on the secondary market towards the investor
public at a higher price, negotiated with the issuer 1 . When a financial institution (bank,
investment found etc.) assumes the obligation to subscribe the entire emission is a signal of the
special trust of the subscriber in the success of the emission 2 .
A stock emission can be distributed also by the method of the standby commitment, in
which the distributors are agreeing to buy that part that remained unsubscribed from an
emission or by the method of the best execution.
The method of the best execution is that according to which the dealer are committing “to
make all the efforts” for the success of the Initial Public Offering. In this situation we are
dealing with a simple obligation of stage from the dealers of the public offering and no to one
of result. The method of the best execution was used on all the Initial Public Offerings enrolled
in Romania in the last years.
In the case we are dealing with an initial public offering addressed on the primary market
to an unlimited number of investors, that have, this way, the possibility to subscribe to as many
offer as they intent, we won’t be able to speak about the use of this type of manipulative
method. The chances of all the investors on the market to subscribe to the action on the price of
the initial public offering will be equal, so an eventual increase of price will be owed to a
manipulative technique only if there are applied other illicit techniques, “wash trades”,
“marketing close”, “painting the tape” etc.
In the case of the bought deal, banks and investment societies that subscribe the entire
emission are after, along the profit gaining by placing that emission, also the raise of reputation
in front of the investors 3 , because the distribution of the whole emission of titles whose value
increases on the secondary market is a success that will be considered in the future by the
subscriber’s clients.

5.1.2 Allocating the subscribes stocks

After the first moment of subscribing the entire emission, follows the second step where
it is realized the placement of securities subscribed on the secondary market.
In the countries where there is not implemented clear legal regime regarding the
allocation of stocks after their subscription in the initial public offering (United States for
example), it can be made by the subscriber in a discretionary way.
Allocation is realized outside the capital market and before starting the trading on the
secondary market of titles that made the object of the Initial Public Offering. In general,
allocation of stocks is made preferentially by the clients of the subscriber or towards the firms
with who he has strong business relations. Anyway, the allocation of stocks method needs to be
included in the emission prospect.

1
http://www.dictionar-online.ro/financiar.php?id=Plasament%20garantat.
2
http://www.investorwords.com/559/bought_deal.html
3
St.J. Choi, A.C. Pritchard, Should Issuers be on the Hook for Laddering? An Empirical Analysis of the
IPO Market Manipulation Litigation, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=527684, p.2

177
 It must be said that the price allocation is mentioned in the emission prospect, in general
being about a certain price interval and not about a fixed price.
In order to have access to a allocation at the price from the offer, in this case of the
subscription of the entire emission by only one entity or a group of entities, acting together in
an union, an investor must have opened an account to a broker that has access to the
distribution of these stocks. This means either that the brokerage firm is a division of a bank
that subscribed the emission, alone or as a member of banking union either the brokerage firm
closed a convention with one of the banks that subscribed the emission 1 .
In these conditions, access to this newly issued stocks at the price from the offer is very
difficult for regular investors, being preferred the institutional investors with which the
investment banks, that usually subscribe these types of initial public offerings, have substantial
business relations, existing major mutual economic interests 2 .

In the legislation of the European Union there aren’t special norms regarding allocation
of stocks following an Initial Public Offering, this matter being left to the national legislations.

5.1.3 Artificial increase of price on the secondary market following the subscriber’s
trades or of the persons with whom he acts together

Statistically, in the last 2 years, the emission price of any initial public offering was
considerably smaller then the price on which there are traded on the secondary market these
titles, in general the offer price of new listed stocks being the under evaluated in order to raise
interest to the investors and to create this way the liquidity on the market.
In the case of subscribing the entire emission by one or more financial entities, their
interest will be in the sense of increasing the price of securities that made the object of the
Initial Public Offering on the secondary market. A price reduction would have negative effects
on the subscriber, his clients, and the persons to whom he allocated those titles, registering
losses.
Thereby, the interest of the emission’s subscriber (or the group of subscribers) is,
obviously, to be registered on the secondary market a significant increase of the course after
entering in the trade process the titles that make the object of the Initial Public Offering. From
this essential consideration, creating a pressure on purchase will be in the advantage of the
subscriber.
By issuing purchase orders, in volume that are large enough to “raise” the price of new
issued stocks, the manipulator is leading the course to artificial levels. On a large enough level
of price the “unloading” action will start.
The manipulative action is developed in many cases by “dealers”. Investors that they
were promised allocation of stocks at the price in the offer are launching purchase orders on the
secondary market, in order to raise the course of those securities. In essence, it is about an
agreement between the subscriber and the investors that are preferred in the allocation
operation.
These agreements can take different shapes. For example, there are allocated to investors
issued stocks in the Initial Public Offering, in return of an additional commission and their

1
http://moneycentral.hoovers.com/business-information/--pageid_1961--/global-msn-index.xhtml
2
A. Jungqvist, W.J. Wilhelm jr., IPO Allocations: Discriminatory or Discretionary? Journal of Financial
Economics, 2002, vol. 65(2), p. 170

178
promise that they will purchase those titles at certain prices on the secondary market, along
with starting the trading. Another version is assuming the obligation by the subscriber that they
will allocate to certain investors stock in a future Initial Public Offering, if they will buy stocks
at increased prices in the process of trading titles that are just being listed in a previous Initial
Public Offering.
This trading scheme with a manipulative character is addressed usually to the institutional
investors.

5.1.4 The manipulator and the group he acts with are selling the stocks that they own at a
price artificially increased

The last step of this manipulative practice is “marking the profit” by selling the stocks
issued in the Initial Public Offering and held in the portfolio by the group that exerted the
manipulation operation.
It will be created, inevitably, a pressure upon sale, which will determine a decrease of
price of those titles, situation accentuated by the reduction in volume and price of the “bid”,
following the purchase exist of the manipulators.
In order for the course not to collapse suddenly, which would not be in the benefit of the
manipulators before finishing the “unloading” operation, they will try to maintain a balance
between “bid” and “ask”, making from time to time also purchasing operations, in order to give
confidence to other investors to come in on this type of position and to maintain the course.

5.1.5 Manipulation cases in the period prior to an Initial Public Offering

A series of accusations of manipulation connected with initial public offers were brought
in front of the courts of the United States starting with 2001. Many subscribers of stock
emissions that were an object of the Initial Public Offering in the period 1997-2000 were called
on trial and accused by some investors of capital market manipulation in the following period
of the Initial Public Offering development. Among the financial entities that were incriminated
there were 1 Credit Suisse First Boston Corp., The Goldman Sachs Group, Inc., Lehman
Brothers, Inc., Merrill Lynch, Pierce, Fenner and Smith, Inc., Morgan Stanley Dean Witter &
Co., BancBoston Robertson, Stephens, Inc., Salomon Smith Barney, Inc. It was about a
litigation in which there were hundreds of complaints that united their demands by the
procedure called “class action” 2 which it doesn’t exist in the Romanian law.
These Initial Public Offerings were part of what press and economic literature called
“internet bubble” or “dot com bubble”, the extraordinary explosion in the period 1995-2001 of
companies in the internet field. This increase without precedent was made in general on
speculative bases, and after 2001 it intervened a strong fall of the markets of these companies.

1
http://findarticles.com/p/articles/mi_pwwi/is_200106/ai_mark02027942
2
Class action- representative action in the interest of a group, according to C. Voiculescu, Juridical
Dictionary. English- Romanian. Romanian-English, Niculescu Press, 2006, p. 44. The “class action”
procedure is used mainly in litigations, originating in the business law, that are tied in a lot of situations
with the capital market. The purpose of connecting all these files is to make easier the justice decision,
supporting an efficient and legal solution to the cause. Class action intervenes when common interest of the
parties that are involved have a bigger relevance than the particular ones.
http://www.answers.com/topic/class-action?cat=biz-fin.

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 The lawsuit, referring to the trades made following an initial public offering, which
succeeded contained 309 individual actions (“class actions”) and had in sight over 300 Initial
Public Offerings enrolled from 1998 to 2000 1 .
One of the most important companies implicated was Credit Suisse First Boston
(CFSB).The manipulative scheme started, according to the introductory action 2 , as soon as the
auction for listing a company was won, by contacting all possible clients interested in
participating to that Initial Public Offering. In the same time it was drafted an allocation plan of
the stocks issued in the initial public offering. To set the allocation formula it was taken into
consideration maximizing the control over closed trade on the secondary market, after listing
that issuer. Before the allocation it was drafted a list with all the institutional investors that
wanted to buy stock in that Initial Public Offering, with details on the number of requested
stocks and, maybe, the price they would pay on a stock.
CFSB established this way a plan according to which the allocated stock in the Initial
Public Offering to his clients, in return to additional commissions, asking them “hidden
compensations” 3 . The commissions were a proportion from the potential profit of the clients to
which there were allocated stocks in the Initial Public Offering. To the clients they requested
huge commissions, exceeding even 50% from the profit, promising them that they will receive
stocks at the price from the offer to future Initial Public Offerings 4 .
In the same litigation, CFSB along with other major banks, previously mentioned, was
accused of closing deals with its clients, in order to raise artificially the price of new issues
stocks, by aggressive purchase trades on the secondary market, the so called “tie-in
arrangements”. For example, one of the CFSB clients, Kaufmann Fund, received an allocation
of 20.000 stocks VA Linux in the initial public offering, after he agreed to buy Linux stocks on
the secondary market at pre-determined prices 5 .
The CFSB employees started energy measures in order to determine the application of
agreements closed between the bank and his clients to which they have allocated stocks in the
Initial Public Offering, permanently contacting them on the phone to ask them to make the
purchase trades at pre-established prices. If a client didn’t respect his obligation, then he will
no longer received allocated stocks to the future Initial Public Offerings.
Credit Suisse First Boston, accused for violating Section 17 from the Securities Exchange
Act 1934 and the NASD regulations, agreed to pay 100 million dollars to close a deal with
Securities Exchange Commission (SEC) and National Association of Securities Dealers
(NASD) 6 .

In April 2006 J.P. Morgan agreed to close a deal with the complainers in regards to the
fraud accusations that this bank committed, paying to them an amount of 45 millions USD 7 .
In December 2006, the Appeal Federal Court for the second Circuit rejected the class
action, which meant that the investors had to introduce separately actions in justice in order to

1
http://www.bernlieb.com/IPO/ipopressrelease.html
2
Introductory action- Master allegations, p.5, http://www.bernlieb.com/IPO/master_attach.pdf
3
Ibidem, p. 11
4
According to the Securities Exchange Commission it was about commission between 33% and 65% from
profit, http://www.sec.gov/news/headlines/csfbipo.htm
5
Introductory action- Master allegations p. 15, http://www.bernlieb.com/IPO/master_attach.pdf
6
http://www.sec.gov/litigation/litreleases/lr17327.htm
7
“New York Times”, 6 December 2006, online edition,
http://www.nytimes.com/2006/12/06/technology/06wall.html?_r=1&oref=slogin

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prove their prejudice and obtain the obligation of banks called in justice to pay the damages
they caused 1 .
In these conditions, the litigations connected to the Initial Public Offerings enrolled from
1998 to 2000 are continuing at present time.
In the case of Villa-H.J. Meyers 2 it was about price manipulation accusations by a
subscriber of an emission in an initial public offering enrolled in 1996. H.J. Meyers was a
brokerage society that, on 24.06.1006 subscribed 2.3 million stocks in an Initial Public
Offering by Borealis Technology Corporation (Borealis). James A. Villa was the president of
this brokerage firm. From 24 June to 28 June 1996, H. J. Meyers made many purchase and sale
trades of Borealis stocks, raising the price from 5 USD/stock to approximately 8.49 USD/stock.
Among the methods he used in order to raise the price were: the refusal to execute sale trades
in the account of the clients and discouraging them to sell these titles in the period that
followed the Initial Public Offering, exerting a pressure on purchase, made easy by the large
volume of Borealis titles that were in the portfolio (at that time H.J. Meyers traded 77% from
the total volume of Borealis stocks), he reduced substantially the offer of Borealis stocks on the
secondary market by the control of a volume of approximately 75% from the entire free-float.
Securities Exchange Commission sanctioned in 2000 the society H.J. Meyers and its
president (to Villa forbid to trade operations on the capital market as a broker-dealer for three
years). H.J. Meyers went bankrupt in 1998 3 .

5.2 Abusive squeeze

The text of the first guide of the Committee of European Securities Regulators regarding
the implementation of the Directive of market abuse, mentions that this manipulation technique
regards one or several persons that are exploiting the dominant position which they have in
connection to the supply, demand or delivery mechanisms for a certain security and/or the
active support of a derivative with the purpose to distort the price on which other parties have
to deliver, to receive or to postpone the delivery of that security in order to satisfy
advantageously their own arrangements.
The correct interaction of the demand with the offer can lead to “agglomeration” of the
market, but this doesn’t have to be considered as being market manipulation. Also, neither
having a dominant position in connection with the offering, demand or delivery mechanisms
for a product/investment needs to be considered as market manipulation.
The guide text of the Committee of European Securities Regulators resumed almost
entirely the formulation from the Code of Market Conduct, MAR 1.6.13., elaborated by the
authority of supervision of capital markets from Great Britain- Financial Services Authority.
We are dealing also in this case, like in the situation of cornering, with the exploitation of
a dominant position over the market, with the aim to manipulate the course of securities.
The holders of this type of power on a market of a title have the real possibility to dictate
unilateral the conditions in which that title is traded in a certain period of time 4 . In this
manipulation case is not about a misleading to the other investors, participants on the market,
but of an obvious assessment of an artificial price.

1
Ibidem
2
http://www.sec.gov/litigation/admin/33-7918.htm
3
http://www.time.com/time/magazine/article/0,9171,44550-7,00.html
4
S. Loyrette, cited paper, p. 265

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 The Code of Market Conduct mentions expressly that the manipulative method “abusive
squeeze” is affecting the trust in the capital markets and in the delivery mechanisms of the
securities.
The essential conditions that need to be fulfilled to have this manipulative practice are:

- a person has to have a dominant position on the supply, demand or delivery

mechanisms of a security;
- creating an artificial price on which the market participants need to deliver, to
receive or to postpone the delivery of a security or of a derivative;
- distorting the market intervenes after an intentional action of the holder of a
dominant position.
We will not resume the considerations regarding the exposed dominant position along
with the analysis of manipulation by creating an artificial price cause by the holding of the
dominant position. Thereby, the manipulative technique called “abusive squeeze” is an
application of manipulation by fixating the price using the dominant position held on the
demand or supply.

5.2.1 Specifications on the meaning of terms

Considering that the official translation in the Romanian language of the text in the
Committee of European Securities Regulators Guide 1 does not always reflect accurately the
meaning of some terms in English, we consider necessary to make a few additional
specifications about the sense considered by Committee of European Securities Regulators in
the text formulation regarding this market practice considered to be abusive.
The term “squeeze” defines that situation in which the price of securities or the
commodities increases, and the investors that made short sales are forced to close their opened
positions in order to avoid losses. Also, the notion of “squeeze” is used when there is a period
of time when the loan is hard to realize 2 . In this case, the practice called “abusive squeeze”
means distorting the price, no matter if it is about an artificial increase or an artificial decrease.
“Market tightness” refers actually to that situation of the market when the offer is
lowered and expensive, and the demand has a large volume. In a time when the market has
these characteristics is easy to sell and to transform the actives in cash, but is difficult to
invest 3 .

5.2.2 The objective side- fixating the price of a security or of a derivative security on an
artificial level

It is about a price “on which the other parties have to deliver, to receive or to deliver that
security in order to satisfy advantageously their own arrangements”.
Fixating the price at an artificial level is establishing a different price from the price
reached by the proper interaction between the demand and supply (MAR 1.6.15.).

1
We have considered the official translation present from the National Commission of Securities website at
http://www.cnvmr.ro/pfd/normeeuropene/CESR-Ghid%20MAD%20romana.pdf
2
http://financial-dictionary.thefreedictionary.com/squeeze+cage
3
http://en.wikipedia.org/wiki/Market_tightness

182
 In most cases, this manipulative practice sets around the trading and settlement of
derivative securities (or the derivative commodities). The abusive squeeze method is forcing
investors that are occupying a contrary position from the one of the manipulator of closing his
positions, either his purchasing positions-“long”, either his sale positions- “short”, at artificial
price, fixated by the manipulator, that is abusing of his dominant position.
From the analysis of the term market of bonds, was stated 1 that applying this method
determines maintaining of an artificial price on a certain period of time, situation that might
wash out the positive role of the futures market of bonds by reducing the efficiency of the
futures contracts, especially in the field of the analysis of price evolution (price of the futures
contracts is an important factor on which it can be determined the price evolution of a security
or of a product in the next period) and of the hedging (risk cover).

5.2.3 Causal link

In order to prove the illicit conduct of the holder of a dominant position needs to be
proven also the causal link between his operations on the market of that security (or on the
market of the active support of a derivative security) and the price alteration. It is possible that
the price evolution of a security not to be influenced by the trades and orders of the holder of a
dominant position. The Guide of the Committee of European Securities Regulators, like in the
Code of Market Conduct, underlines that holding a dominant position on the demand or supply
of a security, by holding in property, loan or reservation of securities, it is not a manipulative
practice (MAR 1.6.14.).
The situation in which certain investors are forced to close certain positions “short” or
“long”, because of market conditions- “market tightness”, of the reduce and expensive offer of
securities, can not be considered a manipulative practice.

5.2.4 The purpose of the holder of the dominant position

Also in this case, we are dealing with a subjective side of the action, that needs to be
proven by the competent authorities according to law to investigate the illicit actions on the
juridical regime of the capital market. In this sense, it needs to be proven that the purpose for
which the holder of a dominant position is acting is to fixate the price at an artificial level.
The Code of Market Conduct, mentions that distorting the price doesn’t have to be the
only purpose, but it has to be a purpose that would motivate or incite a certain person to act
(MAR 1.6.13. connected with Annex C- “Definitions”).

5.2.5 Factors which can be taken into consideration in establishing the presence or
absence of the manipulative method of “abusive squeeze”

The Code of Market Conduct that influenced in an overwhelming manner the text of the
First Guide of The Committee of European Securities Regulator to implement the Directive of
the market abuse identifies a series of factors that can be taken into consideration in the
analysis of a suspicious conduct to represent the “abusive squeeze” market manipulation
technique.

1
J.J. Merrick, Jr., N.Y. Naik and P.K. Yadav, Market Quality and Trader Behavior in a Manipulated
Market: Anatomy of a Squeeze, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=302911, p. 4

183
 These factors are:

a) Situation in which a person is willing to attenuate his control or

another type of influence, with the purpose to maintain a orderly
market and the price on which he is willing to realize this;
b) Situation in which a person’s activity causes or has the chance to
cause a non-fulfillment of settlement obligations by the other
participants on the market on multilateral bases and not only by
unilateral bases. The higher the risk of non-fulfillment of settlement
obligations on multilateral bases is (by the participants on a
multilateral system of trade), the stronger are the indications of
market distortion.
c) Situation in which the prices set according to the delivery
mechanisms of the market are different from the delivery prices of the
securities or are equivalent (this situation aims especially the
hypothesis in which regards a physical delivery on the due date). The
higher is the difference between these, faraway from a reasonable
accepted limit, the stronger are the indications of market distortion.
d) Situation in which the spot market, comparative to the term market, is
unusually expensive or moderate or the situation in which the interest
rate is unusually moderate or expensive.

5.2.6 The effects of the “abusive squeeze” practice

Following the exertion of a dominant position abuse, the holders of petition contrary to
the one initiated by the manipulator are forced to buy at a high price the securities or
commodities in order to close the “short” position or to sell at a low price in order to close the
long position. In fact, these investors are forced to come out of the market (squeeze) at prices
that are equivalent to a financial loss.
The effects of an “abusive squeeze” manipulation can be influenced by the situation of
other market participants that have failed in protecting their own interests or accomplishing the
assumed obligations by the executed trades. A usual investor expects that the other market
participants to fulfill their obligations and no to get to the situation of trusting the holders of
long positions that they would borrow them securities, when they will no longer have the intent
to do the same thing and will no longer have this obligation (MAR 1.6.17.).
An example of “abusive squeeze” practice is contained in MAR 1.6.18 from the Code of
Market Conduct and refers to the situation of an holder of a long position in futures contracts
having as active support bonds which is buying or borrowing a large quantity of bonds at the
lowest price of delivery and then refuses to further trade them or he borrows them only to those
persons of which he thinks that won’t be trading them on the market. The purpose is to fixate
the price, in order for the investors that have opened short positions to be able to fulfill their
obligations only at a very high price, bringing this way a profit for the holder of the long
position.

5.2.7 Cases of manipulation by the “abusive squeeze” method

184
 The case of Vladlen Larry Vindman had in sight accusations regarding the enrollment of
manipulative actions regarding a small size company (“penny stock company”) by increasing
artificially the price 1 . These stocks called “penny stock” (stocks with the value lower than 5
USD) are considered extremely volatile, presenting risks of fraud and manipulation. The large
brokerage firms are not operating with this type of titles, as many institutional investors are not
purchasing these titles and the annalists are not studying their evolution. In case of the “penny
stocks”, practically any trade can have a special influence on the price, the difference between
the price from the “bid” and the one from “ask” being many times very substantial.
Vindman made operations in which he promoted these small size companies starting with
2000.
Securities Exchange Commission accused Vindman that, from August 2003 until
September 2003 he manipulated the stocks of Marx Toys & Entertainment Corp. (Marx). He
owned in June 2003 a number of 30.473.000 Marx stocks. Vindman’s trades, sale and/or
purchase, were made at prices between 2, 5 cents/stock and 36, 5 cents/stock.
In this manipulative action was involved also Steve Wise, the general manager (CEO) of
Marx Company and his only employee. When it was annulled, in the summer of 2003, the
main contract closed by the firm, the price of stocks knew a rapid decline.

Vindman, along with other persons, Massaro, Nader, Brantley and Bevins tried, by
purchasing trades, to maintain the price of stocks at a high level, in order to discourage the
investors that had initiated “short” positions. The purpose followed by Vindman and his group
was to increase the price of Marx stocks above the level of 40 cents/stock, to eliminate the
investors with short positions on the market, as Vindman showed in a conversation with on of
the group members.
This operation didn’t succeed; Vindman recorded a loss following the trades with Marx
stocks. Vindman and Wise were arrested by the FBI for capital market manipulation.

5.3 Creating a minimum price ceiling

The manipulative action is when an issuer or an entity that is controlling an issuer 2 trades
or is registering trading orders with the purpose to maintain the price of a stock above a certain
threshold and to avoid negative consequences for those stocks or credit rating.
Making exceptions are the legal trades of “buy back” or the one that are aiming to
stabilize the price.
The issuer, with the occasion of buying back his own stocks, can exert a major influence
on the market, influencing decisively the price and even manipulating it.
In this case we are dealing with the proper maintaining of an artificial price by a qualified
subject, the issuer of titles or the entity that is controlling the price.
By trading and issuing orders introduced in the trading system the manipulator creates
“price barriers” under which he doesn’t allow the price to decrease. It is necessary that these
orders and trades contain a certain volume of stocks in order to dominate the market of that
title. This way, the natural game of the demand and supply can lead the price under the level
followed by the manipulator.

1
http://www.sec.gov/litigation/aljdec/id285cff.htm
2
Notion of control, according to the Directive no.39/2004- MIFID was described in section 1, point 3.2.,
page 186- 188

185
 In general, the operation of supporting the course is made by introducing in the trade
system of purchase orders containing high level prices and having large enough volumes for
the market not to “absorb” them quickly. By maintaining a strong “bid”, the market value of
that security remains to a certain quote, situation that has an impact in the image of the issuing
company.
Also in this situation we are dealing with a subjective side.
In the analysis of completing the conditions asked by law for outlining the market
manipulation action is necessary to prove that the only purpose of trades and orders introduced
in the system is the intent of the issuer or another entity that is controlling him to maintain the
price above a certain level. There are imposed at this time a few specifications.
Any operation made on the capital market by an investor that has in his portfolio a certain
security, being either the issuer or the entity that is controlling him, has as purpose an
ascending evolution of the course of that security, or, at least, maintaining the course above a
certain level, beyond which the investment becomes non-profitable. It is natural from this
perspective that a person’s/entity’s trades to be influenced by this objective. The fluctuation of
price of a security needs to be made by the natural game of demand and supply; no investor has
the right to affect the natural formation of the price. As such, an issuer or the entity that is
controlling him does not have the right to abuse from the dominant position that he has on the
offer of securities and to block the natural evolution of their course.
Causa remota 1 , the immediate purpose of operation to maintain the price above a certain
threshold developed by the issuer or the entity that is controlling him, is avoiding eventual
negative consequences for those securities or credit rating that might appear if the price would
decrease under that level.
For this conduct of the issuer or the entity that is controlling him to have an illicit
character is not necessary that the followed purpose, meaning maintaining the course of a
security above a certain level, to be touched. It is enough for the market of that security to be
altered, distorted, by the operations- trades and trading orders- made by the entity in cause.
Trading in the account of the issuer has a series of special characteristics.
First of all, purchase operations of own stocks, either is realized, either is not realized in
the “buy back” programs 2 , needs to respect the dispositions of the Directive of European
Economic Commission no. 77/91/EEC 3 , as they were modified by Directive 2006/68/EC of
The European Parliament and Council in the field of purchasing own stocks by a issuing
company.
Thereby, according to article 19, paragraph 1 from the Directive, is mentioned that
“without prejudicing the principle of equal treatment of all shareholders that are in the same
situation and Directive 2003/6/CE of the European Parliament and Council from 28 January
2003 regarding the insider dealing and market manipulation (market abuse), member states can
allow a company to purchase its own stocks, on its own account, or by persons that act in their
own name but in the account of that company. In the measure in which these acquisitions are
allowed, member states will submit them to the following conditions:
a) the acquisition authorization is given by the general meeting, that will set up
the conditions of acquisitions that are considered and, especially, the

1
Causa remota is the purpose of the juridical act that is the determined reason of closing a juridical act, Gh.
Beleiu, cited paper, p. 143.
2
We will analyze the characteristics of buy back programs of own stocks in Chapter VI, p. 376- 443.
3
Official Journal L 26 from 31.01.1977

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 maximum number of stocks, the period of time for which the authorization is
given, the maximum duration being established by the internal legislation,
not without exceeding 5 years and, in the case of acquisition with an
honorary title, the maximum and minimum counter value. The members of
the administrative and leadership bodies make sure that, at the moment of
making any authorized acquisition, are respected the conditions mentioned at
points b) and c);
b) acquisition, including the stocks that the company has previously acquired
and holds in the portfolio, as for the stocks acquired by a person that acts on
her own account, can not have as effect reducing the net active under the
quantum level mentioned in article 15, paragraph (1), line b) and c) 1 ;
c) only the stocks completely deposited can be included in the trade”.
In article 103 from the Law of commercial associations no.31/1990, as it was modified by
Law no.441/2006, there were included these dispositions adopted on the level of the European
Union. In addition, in the Romanian law there are mentioned also certain additional conditions
that need to be completed in the case of purchasing by the issuer of his own stocks. These legal
dispositions, that find their ground in article 19, paragraph 1 thesis II from the Directive
77/91/CEE, as it was modified by Directive 2006/68/EC, are:
- the nominal value of own stocks purchased by the company, including the ones
already in its portfolio, can not exceed 10% from the social subscribed capital;
- the payment of the stocks purchased this way is made only from the distributable
profit or form the available reserves of the company, enrolled in the last annual
financial situation that was approved, with the exception of the legal reserves.
In certain exception cases, according to the Romanian law, these conditions of purchasing
own company’s stocks are not applicable. It needs to be mentioned that in these special
conditions, the transfer of property rights on the stocks admitted to trades is realized by special
trades, that don’t influence the course of those titles on the market 2 .

1
Article 15, paragraph 1 from Directive 77/91/CEE: a) With the exception of the cases of reducing the
subscribed capital, it can not be distributed to the shareholders if, at the closing date of the last financial
exercise, the net active resulted from the annual accounts of the company is, or after this distribution, would
drop under the quantum of the subscribed capital adding the deposits that can not be distributed according
to the law or state; b) if the part that wasn’t deposited of the subscribed capital if not included in the active
from the balance sheet, this amount is deducted from the quantum of the subscribed capital mentioned in
line a); c) the distribution quantum to the shareholders can not exceed the quantum of profits from the end
of the last financial exercise adding the eventual reported profits and amount retired from the available
reserves for this purpose, minus and reported losses and amount deposited in the reserves according to the
law or state.
2
According to article 104 from Law 31/1990, modified by Law no.441/2006 and the Government
Emergency Order no. 82/2007, the Restrictions foreseen in article 103 are not applied:
a) the stocks obtained in accordance to article 207, paragraph (1), line c), following a decision made
by the general meeting of reducing the social capital;
b) to the stocks obtained following a transfer with an universal title;
c) to the complete liberated stocks, obtained by the effect of a juridical decision, in a forced
execution procedure against a shareholder, debtor of the company;
d) to the complete liberated stocks, obtained with a free title.
Restrictions mentioned in article 1031, with the exception of the one mentioned in article 1031,
paragraph 1, line d), are not applied to the stocks obtained in accordance to article 134 [in the case of
withdrawal of shareholders from the company following: a) the change of the principal object of

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 Sale trades made by an issuer or by the person that is controlling him are not submitted to
a special juridical regime and they don’t have to be suspected a priori that they have a
manipulative character.
Considering the restrictive legal conditions regarding the obtaining by the issuer company
of its own stocks, is presumable that an eventual activity of fixating the course of some titles
above a certain threshold will be developed by the entities or persons that are controlling the
issuer or have a major interest in keeping a positive image, for crediting reasons, for keeping a
satisfying level of the credit rating, and because other economic interests.

5.4 An excessive deviation of demand-supply

A dealer that has a dominant position on a market is acting in a way that he is changing
the difference between the sale and purchase price or to maintain this difference at an artificial
level different from his real value, committing an abuse by his position of the market or the
absence of competitors.

We are dealing also in this situation with a qualified active subject of the manipulation
action: the author of this situation must have the quality of a dealer.
In the text of the first guide of the Committee of European Securities Regulators
regarding implementing the market abuse Directive, in English, is mentioned, as an example,
that these intermediaries/dealers can be “specialists or market makers who are acting together,
abusing from the dominant position that they hold on that market”.

5.4.1 Premise situation- the existence of intermediaries (specialists, market makers) that
have a dominant position on a certain market

These intermediaries are dominating, usually, the demand and supply for a certain
security, usual investors being forced to close trades on the quotations posted by these
intermediaries, for the demand and for the supply.
In case we are dealing with market makers, they have the legal obligation to post
quotations for sale and for purchase, these quotations needing to fulfill certain conditions 1 .
The central idea in this case of capital market manipulation is the absence of competitors
on the market of a certain security. The action of the intermediary that has a dominant position
(for example, the market maker) on the market of a security is not “leveled” by the law of
demand and supply because on the market there are not present investors that can sustain a
substantial demand or supply, that would represent a counter weight to the quotations posted
by that intermediary.

5.4.2 Intermediaries which have a dominant position are acting in the sense of creating or
maintaining an artificial difference (spread) between the posted sale quotation and the purchase
quotation

activity; b) moving the company’s residence abroad; c) changing the form of the company; d) merger
of dividing the company].
1
We will analyze in chapter VI the institution of the market maker, in the frame of the elements regarding
the exceptions of application of legal texts regarding capital market manipulation.

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 An intermediary authorized as a market maker obtains profit from the difference between
the sale and the purchase price. These trades will be made in his own account (house), so the
market maker will be interested in the highest degree to maintain a large difference between
the two quotations.
The dominant position gives the intermediary the possibility to create and maintain a
significant and artificial difference between the sale quotation and the purchase quotation for a
certain security. Investors that don not have the possibility to trade a certain security only if
they accept the quotations offered by these intermediaries can be prejudiced by the distorted
prices offered by the intermediaries in question.
In general, market operators, in order to avoid a discretionary activity of the authorized
dealers as market makers set a series of mandatory conditions that the operations they close
have to complete on the course of the period in which they have this quality for a certain
security. An essential condition refers to the maximum difference (spread) between the
purchase prices and the sale prices posted by the Market Maker. The spread limitation is
obviously a measure meant to prevent the market manipulation.
For example, in the case of Erste Bank, traded also on the platform operated by the
Bucharest Stock Exchange, the maximum spread between the prices of sale and purchase
posted by a market maker on those titles is of 1%. Also, it is imposed the obligation of
updating the firm quotations at an interval of maximum 5 minutes.
In the case in which there are many market makers for a security, the manipulation action
can intervene only in the hypothesis in which there is an agreement between them, in the sense
of establishing an artificial deviance between demand and supply. In this case, we will deal
with establishing prices of “cartel”, artificially.

5.4.3 Cases of manipulation by setting an excessive deviance of demand- supply

Securities Exchange Commission investigated for several years, in the course of the ’90,
the trade activity of some brokerage firms, authorized as “market makers” on the NASDAQ
market 1 . Investigation discovered a series of abusive practices on the capital market regime
enrolled by these brokerage firms which had as result misleading the other participants on the
market and an influence on artificial bases the course of traded securities on the NASDAQ
market.
The conduct of these brokerage firms was considered by the Securities Exchange
Commission as anticompetitive. The conclusion was based in principal on the phone call
registers.
In principal, accusations aimed to: fixating the quotations on artificial bases, following
the agreements between the “market makers”, not reporting these types of anticompetitive
agreements, violating the regulations that foresee the principal of the best execution of client’s
orders, on purpose delay of transmitting the mandatory reports, delaying the execution of
client’s orders etc. There were used also “painting the tape” practices, in the sense that
brokerage associations, authorized as market makers for certain securities, closed several deals
between them with the purpose of fixating artificial quotations, by violating the natural law of
demand and supply.
All the brokerage houses that were accused of market manipulation agreed to close an
agreement with Securities Exchange Commission.
1
http://www.sec.gov/litigation/admin/34-40900.txt

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 5.5 Trading on a certain market in order to influence improperly the price of a security on
an another market

The text of the first guide of the Committee of European Securities Regulators regarding
the implementation of the market abuse directive foresees that making trades on a market with
a certain security with the purpose of influencing the trade of the same security or of another
one connected with this one, on another market, is a manipulation practice by fixating an
artificial price. In the guide is given as example the trading of a stock with the purpose of
manipulating the price of a derivative security on another market or trading an active support
with the purpose of influencing the price of the derivative contract.
In the same time, the guide stipulates that trading in order to beneficiate from the price
difference between securities or support actives traded in different locations are not
manipulation. This last situation describes the market practice called arbitrage.
In the American practice, this manipulation method is called “capping and pegging”. 1
The existence of this manipulation action is linked with completing the following
essential conditions:
- the existence of two or several financial markets which are interdependent, in the
sense that the price of traded securities on one of the markets has an impact on the
price of the same securities or of connected securities, derivative, from another
market;
- trading by an investor on two interdependent markets;
- the trade of that investor on one of the markets have the purpose of illicitly
influencing the price of the same security or of a derivative security on another
market.

5.5.1 The existence of two or more interdependent financial markets

The premise situation is that price of the securities registered on a market has effects on
the price of the same securities or of derivative securities traded on another market.
The most common situation is the one of the interdependence between the spot market
and the on term market of some securities. On the on term market there are traded derivative
securities, having as active support securities traded on the spot market.

5.5.2 Trading on two interdependent markets

In principal, there is no interdiction of trading on the “spot” market of the same securities
for which there are open positions on the on term market.
Also, it is not forbidden trading the same security on two or more different markets 2 .
The possibility of trading on two markets that are in connection is an accepted market
practice in the majority of the world’s states. This illicit method offers investors the possibility

1
http://www.market-abuse.com/capping.html
2
For example, the Erste Bank stocks are traded on three different markets: Stock Exchange in Vienna,
Stock Exchange of Prague and from 14 February 2008, the Bucharest Stock Exchange.

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to realize an “arbitrage” between the prices of the same security on different markets, obtaining
this way a profit from speculating the price differences 1 .

5.5.3 Trading on one of the markets which has a manipulative character, influencing
illicitly the price on another market

The proof of the manipulative character of trades closed on a market with the purpose of
influencing the price on another market is difficult to realize by the competent authorities to
investigate the market abuse.
It is necessary in this case too, to prove the intent of the investor that is making
operations on the two markets, in the sense of proving the causa remota, of the immediate
purpose of these trades.
Initiating a position over a derivative security whose active support is traded on another
market is a frequent practice for the investors. Especially, it intervenes, either following the
intent to realize an arbitrage between the two markets, either having as purpose realizing a
hedging operation, in order to cover the risks that can be caused by a negative evolution of the
titles held in the portfolio (on which was opened a long position) 2 .
It is true that trades closed around setting reference or settlement prices, in conditions in
which they had an influence on these prices, is an indication of a possible capital market
manipulation 3 , according to the Directive of European Commission no.124/2003. A solution to
forbid trading on a certain market around setting up reference or settlement courses by the
investors that have opened positions on a derivatives market or on another market in which the
price of securities depends on the course of the main market, on which these are traded, is not
viable, being totally discriminatory.
The spirit of principles that govern the capital market is claming the exact proving of the
purpose followed by the investor.
This operation will be realized, like in other situations, only by identifying some
circumstantial elements of nature to indicate the presence of an illicit behavior. Investigating
the presence of possible manipulation actions will have to consider a series of factors
connected to the specific conditions in which there were executed suspicious trades, like:
- volume of issued orders by the alleged manipulator and the volume of closed
trades, reported to the liquidity and depth of the market’s security, from the
moment of realizing suspicious trades and on a longer period of time; it is
possible that, at a certain moment, on the market there will be a supply or a
demand reduced comparative to the usual situation of the market’s security, so
that a good-faith investor has a dominant position and is influencing implicitly
the course by his trades, that do not refer to an illicit objective;
- the price variation registered as following the trades closed by the alleged
manipulator;
- the number of trades closed by that suspected investor, because, in general, only
one trade can not be considered to have influenced decisively the price;

1
We will analyze the arbitrage market practice in Chapter VI, p. 376- 443.
2
We will analyze the “hedging” practice, as a defense or exception from the application of norms regarding
market manipulation, in Chapter VI.
3
To see point 3.2 from the present section, p. 236-241

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 - the characteristics of the issued trade orders, respective the situation in which
there are “market orders” or “price limit”, and in this case the difference between
the market price from the moment of introducing the order in the system and the
limit value contained by that order;
- the price trend of that security;
- the degree of transparence of operations closed on the markets in question by the
investor suspected by market manipulation; a high degree of transparence of
executed operations may indicate the presence of a legal conduct then a illicit
conduct.
It has to be mentioned that this method of manipulation has similar characteristics with
one of “cornering”, because is grounded of having a dominant position on the market of a
security or product, of nature to offer the possibility to discretionary determine the price.
In case of the manipulation type analyzed in this sub point it is about holding this position
in certain specific conditions of the market, while in the situation of cornering we are dealing
with the holding of the dominant position in general, by accumulating a large quantity from the
total number of existing securities or commodities. With all these, manipulation by influencing
in an improper way the price of a security on another market is characterized by the same
situation of control over a large number of securities reported to the total number of securities
of the same type that were on the market. It can not be imagined the manipulation action by
improper influence of price on another market by an investor that has a reduced number of
value securities, reported, of course, to the total number of securities from the emission and to
the free float. Anytime, a person’s actions that is attempting to realize this type of manipulation
can be combated by the entrance on the market of some investors that have opened more
important positions and which, from this cause, can regulate by orders and executed trades the
course of securities, so this is set on the base of the natural law of demand and supply.
In the case of non-liquid titles, the absence of demand and supply on the market of a
security opens the path of influencing the course by trades having as object the reduced number
of securities, so any trade can change significantly the price. An investor that makes operations
on this type of non- liquid market and has opened positions on the same security also on
another market will be able to influence easier the course of that security. In order to prove the
illicit of the conduct in this situation, will have to be proven by the authorities the “improper”
character of influencing the course on a certain market by trades made on another market,
extremely difficult to do in the conditions of a lack of liquidity almost permanent on the market
of the security in question.
The key of the entire analysis of this technique of manipulation is proving this improper
character of influencing the price of a security traded on many markets.

In conclusion, it is important, in investigating an actions suspected of market abuse, to

establish the real, concrete, possibility, that trades of the investor in cause have been
influencing the course of the security to have a evolution against the natural trend of the
market.
In the same time, it is imposed the determination of the purpose of suspicious trades,
realizing a clear distinction between the activity of trading based on legitimate motives to
obtain profit or to limit the loss on the market where the investigated trades were closed and
the non-legitimate activity, with an illicit character, that has in sight creating and/ or

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maintaining an artificial price of some securities, with the purpose of “improper influencing”
the price of a security on another market.

Section 3

Trades and trading orders which assume fictitious methods or any other
type of fraud

§1. General specifications

Market manipulation by trades or trading orders which assume fictitious methods or any
other type of fraud takes place, usually, by applying in the same time the manipulation
methods, meaning making effective trades or issuing fictitious trading orders with the ones that
refer to the dissemination of wrong, false or delusive information.
Practically, by incriminating this type of actions, the legislator wanted to cover the
situation in which the manipulator, without sending out false signals by trades or trading
orders, takes advantage of the effects created by the spread of false news about certain
securities and closing trades from which he can obtain material gains, that he would not gain in
the conditions of a natural market.
Basically, we can say that this type of market manipulation has a mix nature, the material
evidence having the base on the subjective factor of misleading (although it is not mentioned in
the legal text), and the objective one of trading at artificial, incorrect prices, because of using
some fictitious methods, even if they can not identify the misled market participants.
In the case of this type of manipulation, the person that trades or issued orders can not
invoke and demonstrate on her defense the thesis according to which the reasons that
determined her to act like that are legitimate and those trades or orders are true to the market
practices admitted on the regulated market in cause.
This text of Directive no.6/2003 of the European Parliament is not an innovation in the
matter of defining and sanctioning different forms of market manipulation. In “Regulation
no.10b-5” issued by the Securities Exchange Commission for the application of Securities
Exchange Act 1934 is stipulated that the illicit of using criminal means in trading with
securities:
“Is considered illicit for any person that, uses any mean or instrument in the interstate
commerce or any facility of the national capital market, in regards to the purchase or sale
trades of any security:
a) uses any instrument, scheme or artifice in order to deceive;
b) makes false statements on a material or leaves out to declare a material fact
necessary in the statements that were made, from the perspective of the
circumstances under which there were made these statements, which are not
wrong;
c) engages in any type of act or practice, in the development of the business, that
produces or might produce a fraud for any type of person.
This regulation of the Securities Exchange Commission, with a wide character, stood on
the base of the interdiction to trade on the ground of privilege information in the United States,

193
because the previously mentioned text speaks about the illicit of any trade form that assumes a
fraud, including trading on the ground of insider information.
Neither the market abuse Directive, neither the directives that set the technical application
norms, especially the directive 2003/124/CE of establishing the application norms of Directive
2003/6/CE of the European Parliament and the Council regarding the definition and application
of confidential information and definition of market manipulation does not set up exactly the
content of the notion “fictitious methods or other types of fraud”. As we will see 1 , certain
behaviors on the capital market were considered fictitious method of trade by the Committee of
European Securities Regulators in the First Guide regarding standards of implementation of the
European’s Union legislation in the field of market abuse which refers to the accepted market
practices.

§2. Defining elements

Important to remember is that this type of manipulation of the market has similar
characteristics with the version qualified as fraud crime, foreseen and punished by article 215,
paragraph (2) Penal Code. Like in the case of manipulation foreseen by article 1, paragraph (2),
line b) from the market abuse Directive, the fraud sanctioned on the base of article 215,
paragraph (2) from the Penal Code, using criminal methods, called, in the case of manipulation,
“fictitious methods or other forms of fraud”.
In the case of capital market manipulation this fictitious methods consist in essence in
using and/or spreading dates or false, false or incomplete information.

2.1 “Fictitious methods and other type of fraud”

Applying a fictitious method with the opportunity of trading a security has as result, in a
last instance, also creating an artificial course of that security, even if trades or orders in cause
don’t have the effect of misleading the investors or do not maintain alone the price at an
abnormal or artificial level.
In the situation of this form of manipulation, the orderly function of the market is affected
and the manipulator is creating an advantage by the executed trades or the issued orders
because of misleading the other market participants by different forms of fraud.

We will make, here, the analysis of “dissemination of information” that is mentioned by

the third version of the manipulation action, foreseen by article 1, paragraph (2), line c) from
the Directive, and article 244, paragraph (5), line c) from the Romanian Law of the capital
market.
The form of manipulation analyzed in this section is based also on the effects produced
on the investors on the capital market by the circulation of certain information, relevant for the
course of securities, but they are not corresponding to the reality or are incomplete. The
exemplifying text previously mentioned of article 5 from the European Union’s Directive
no.124/2003 speaks also about information, investment recommendations, research actions
spread to the public that have an impact on the price of securities.

1
On point §4 from this section, p. 304- 318

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 In general, in case of manipulation by using fictitious methods, we are dealing with
spreading false information that causes effects on the price of stocks. It is about, in essence, the
execution of the material evidence of the action punished by the penal law under the name of
“fraud”, because we are dealing with presenting as true a false action. This way, the
manipulator or a person whom he acts with, transmits to the public information, a report, an
analysis etc. which has false elements that mislead the market participants, price is evolving in
the sense generated by that false information, which was credited to be the truth.
The fictitious method is, in these situations, the act of spreading false information,
regardless if containing positive or negative data about a certain issuer.
Important to remember is that disseminating these types of information is only a way to
execute the manipulation action and is not an action of manipulation. In order to complete the
material evidence of this version of capital market manipulation is necessary for the
manipulator or the person he acts with to trade at artificial prices.

2.2 The result of using fictitious method or any other types of fraud

The reaction of the market participants to false information distributed by the manipulator
is, in this version of capital market manipulation, trading at incorrect, artificial prices reached
because of the “fictitious methods”. The absence of trades following the spread of false
information leads to the non-fulfillment of the objective followed by the manipulator. Only in
the case in which the other market participants act as a consequence of false information spread
by the manipulator and are trading at artificial prices can be talked about the existence of a
manipulation action, in the form foreseen by article 1, paragraph (2), line b) from the Directive
no.6/2003.
From this point of view, is important that the manipulator takes advantage, by trading, by
the effects of spreading false information. If the manipulator doesn’t close these trades, then it
can be investigated if are or aren’t meat the conditions of article 1, paragraph (2), line c) from
market abuse Directive, regarding the manipulation by disseminating false or delusive
information. This type of interpretation results from the application of induction, as a form of
argument, starting from the text of article 1, paragraph 2 from the Directive of market abuse
no.6/2003 [or article 244, paragraph (7), line c) from the Romanian Law of capital market no.
297/2004]. In this legal text it is mentioned the mandatory profit gain following the spread of
opinions or information regarding a certain security for the action to be considered as capital
market manipulation.
In this form of manipulation foreseen by the legal dispositions, issuing trading orders,
which are not followed by effective trades realized in the benefit of the manipulator or the
persons he act with, can not be the material evidence of the action in question. Orders can give
false signals on the price or volume of demand and supply, so that other market participants
would close trades that would lead the price to artificial levels, but, in this hypothesis, we are in
the first version of the manipulation action, analyzed in Section I of this chapter.
From this perspective, we appreciate that the definition of this type of market
manipulation is incomplete and leaves room for abusive interpretations. Not any emission of
trade orders that takes place following dissemination of information, reports, false analysis is a
manipulation action. If that were true, would mean not to trade anymore following
dissemination of this type of information and trading orders would not be issued anymore.

195
 Another essential aspect that needs to be outlined is the one of causal link between the
use of fictitious methods or other types of fraud and creating artificial prices following the
trade activity of the good-faith persons or only of the manipulator’s and of the persons who he
acts with (in the second case the manipulation action can be made in different forms). In the
hypothesis in which it is not proven that the “fictitious method” has influenced decisively the
course of the securities, the manipulation action can not be held, because, it results that by
applying the logic argument of per a contrario, the trend would be the same, because of the
natural evolution of the market.
We appreciate that, in order to asses the market abuse, the competent authority needs to
consider all the elements that circumscribe the investigated action, including realizing a wide
analysis of the subjective side, in order to establish more accurately the elements that indicate
the presence or absence of fictitious methods in the activity enrolled on the capital market.
It was mentioned 1 the fact the investors of value on the capital market can recognize the
actions of manipulators which are using fictitious methods and can obtain profit from these
actions. When valued investors are trading in the same sense with the manipulator is possible
for them to take control on the situation, and limit the profit of the manipulator. Anyway,
valued investors will trade in order to block the price evolution at a large distance from its
fundamental value 2 .
When valued investors are trading in the opposite sense towards the manipulator
important will be the financial resources implicated on the market. In the conditions in which
the valued investors will have many more resources involved, the price will remain in the
normal parameters. In case in which the manipulator has a larger capital, then he will be able to
control the market, to determine a price evolution towards artificial levels and force this way
valued investors, with good- faith to close their opened positions, that are, as it has been
mentioned, contrary with the ones of the manipulator 3 .
The good- faith investors will not open short positions, in the conditions in which they
will not estimate the possibility to borrow on time these securities or, because of low liquidity
in general, they will risk to close their positions at absolutely non-favorable prices. On another
hand, the manipulator who uses fictitious methods will act especially in the area of the titles
with a reduced liquidity and on which there are little information spread to the market
participants 4 . From this, many manipulation situations by using fictitious methods intervene on
the markets outside the stock exchange like the Over the Counter market or in the trade
systems with a reduced degree of transparence.

2.3 The subjective element

We consider that in order to asses the manipulation action is necessary that the alleged
manipulator has been acting with the purpose of misleading other participants to the market, by
those fictitious methods or any other type of fraud. Dissemination of information that have an
influence on the market, if it is made without intent or without knowing their potential to affect
the market of one or many securities, it can not be framed in the sphere of stock exchange

1
L. Harris, Trading and Exchanges: Market Microstructure for Practitioners, 2003, Oxford University
Press US, p. 268.
2
Ibidem
3
Ibidem
4
Ibidem, p. 269

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illicit, because the person in cause didn’t know that the “method” used has a fictitious character
or represents fraud. The error on the false character of information considered to have a
fictitious character has a non-incriminatory character for the person who proves it.
In these conditions, has to be established precisely if the alleged manipulator knew the
false character of the information, whose spread in public is considered to be a “fictitious
method”, and if he took advantage in any form by the knowledge of the fictitious character or if
the trades which have been bringing profit on certain securities to the person in question have
been influenced by other type of factors then the “fictitious methods”. From these
considerations, is very hard to prove the aspect of knowledge by the alleged manipulator of the
fictitious character of information disseminated to the public, in conditions in which there are
not enough circumstantial elements that would prove the connection he has with the
person/persons that have produced and spread information, and the intent of these persons and
the person accused of market manipulation to lead the price to an artificial level to which he
would obtain incorrect profits.
The investor which obtained a trading profit following the spread of false information
made by another person can invoke in his defense the correctness of the investment decision,
beyond the character alleged to be fictitious of the method that stood on the base of the
evolution of price. The investor that beneficiated from the spread of false information can
justify his entire conduct on the market by the fact that he would have taken the same decisions
in any conditions, hence also in the absence of dissemination of false information.

§3. Situation considered by the market abuse Directive and the Romanian
legislation as capital market manipulation by using fictitious methods- Scalping

Directive 2003/6/CE in article 1, paragraph 2 [text took over from the Law no. 297/2004
article 244, paragraph (7), line c)] mentions a situation considered by the legislator as market
manipulation: To beneficiate from the occasional or regular access to the means of mass
communication traditional or electronic by issuing a opinion on this security (or indirect on the
issuer of the security), after it was adopted a position on this security, and to take advantage
from the impact of that opinion on the course of that security without making public in the
same time, in a correct and efficient way, the conflict of interest in cause.

3.1 Constitutive elements of the action

From the presentation of this situation in the legal norms, results the following
component elements that have to be considered in the analysis of the presence or absence of the
illicit on the stock exchange regime:

- the existence of an occasional or regular access of a person to the means of mass

communication traditional or electronic;
- initiating a position (long- purchase or short- sale) on a security;
- issuing an opinion through these means of communication regarding the security
on which it was initiated the position indirectly on the issuer of that security;
- concealing, not divulging to the public, the conflict of interest caused by having a
position on the security and issuing an opinion about it;

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 - the evolution course of securities on which it was formulated the opinion in the
sense expressed in that opinion;
- closing trades by that person on the course influenced by the issued opinions and
spread by the means of mass communication.
Apparently, the simple expression of an opinion regarding a certain security by a person
that has initiated positions on that security can not be considered market manipulation, as long
as she is not using deliberately false information in the support of creating the credibility of
that opinion. It might be considered that the existence of the illicit is determined by the
subjective attitude of the person that is issuing the opinion. In the hypothesis in which she was
also mislead the issuer of the opinion could not be held responsible for actions outside the
market abuse sphere. This type of interpretation is correct up to a point.
This form of market manipulation, known as scalping, is framed in the illicit field,
because the issuer of the opinion obtains a certain profit following the opinions,
recommendations that were expressed, trading as soon as the course of the security has evolved
in a certain sense, following his opinions or recommendations. Essential is that the issuer of the
opinion or the persons who he act with trades as soon as the course of the security on which
there was issued the opinion reaches the desired level and not the elements that are creating the
opinion’s credibility. This credibility is, thereby, enhanced by its dissemination through mass
means of communication.

These recommendations or opinions can be grounded on false, incomplete or wrong

information, mentioned as being real in the opinion, but they can also have on base certain
elements that are purely objective and non-questionable. In the French doctrine 1 , was outlined
that the manipulator (“scalper”) is satisfied with issuing a notice on the titles perspective,
without evoking in his recommendation any false or delusive elements.

3.2 The precedent created in the American jurisprudence

In the United States declaring the conflict of interests that involves the person who is
making investment recommendations and which, prior to issuing these opinions, is initiating a
position on some securities, became mandatory following a decision of the Supreme Court 2 in
the case of Securities Exchange Commission versus Capital Gains Research Bureau, resolved
in 1963. Capital Gains Research Bureau was a firm that had as activity issuing investment
recommendations (Investment Adviser Company). The company in cause issued a bulletin
distributed to approximately 5000 subscribers (in some situations the bulletin was distributed to
an approximate number of 100000 unsubscribed persons). In several situations, this company
bought certain stocks before recommending to its clients purchasing the same securities and
owning them on a long period of time. After increasing the price following the creation of
pressure upon purchase on the ground of distributing previously mentioned investment
recommendation, Capital Gains Research Bureau Company sold these titles in question,
obtaining substantial profits 3 . The company defended with the argument that the actions were

1
S. Loyrette, cited paper, p. 264
2
Securities Exchange Commission versus Capital Gains Research Bureau, Inc 375 U.S. 180 (1963),
http://supreme.justia.com/us/375/180
3
M.W. Tripp jr., Securities Regulation: Stock Scalping by the Investment Adviser: Fraud of Legitimate
Business Practice?, California Law Review, vol. 51, no.1 (March 1963), p. 232

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based on good- faith, but they were not enough to impede the Supreme Court from
pronouncing a decision by which the court admitted the demand of the Securities Exchange
Commission to force the persons that are making investment recommendations to make public
the conflict of interests created by holding (initiating positions) some securities prior to the
issuing of that recommendation. The United Stated Supreme Court considered that an
investment consultant, that is secretly trading on the market taking advantage from the effect
created by his recommendations, can be conscious or unconscious motivated to recommend
certain titles, not because they have a increased potential on the long term (which would be in
the benefit of the client), but because there is a increase potential of a short term, following the
emission of that recommendation (which is in the benefit of the consultant). The USA Supreme
Court showed that to an investor that resorts to the services of a consultancy firm in
investments has to be given the possibility to evaluate and decide if the “consultant is serving
to masters or only one, especially if the second master is his own interest”.
Practically, this decision, taken on the base of the dispositions of Investment Advisers
Act of 1940, stipulates the illicit behavior consisting in trading with securities previously
recommended by the authorized consultancy firm, without the firm declaring publicly a
conflict of interests.
As it has been shown, the European Union’s legislation, by norms resumed also by the
Romanian law of the capital no. 297/2004, is considering as capital market manipulation
obtaining profit following trading at prices influenced by the opinions expressed by means of
mass communication, without being made public the conflict of interests.

3.3 Persons which can have the quality as an active subject of the action

3.3.1 Persons which are realizing professionally investment recommendations

The persons that are developing with a professional title activities of analysis, research,
investment recommendations are aimed by the text of article 244, paragraph (7), line c) from
the Law no.297/2004. Fulfilling the condition of broadcasting by mass means of
communication some opinions about a security (or indirect on the issuer of the security) after it
was adopted a position on that security by a professional in the field draws the incidence of the
legal text mentioned previously.

In this category of professionals there are included also journalists that are issuing
opinions in the media regarding certain securities or certain issuers.
Of course, the manipulation action will exist also when investment recommendations,
expressed opinions, are grounded on false or delusive information presented to the public by
means of mass communication as being true.

3.3.2 The persons which have access to privilege information- Insiders

Taking into consideration the position held by these categories of persons around the
issuer is natural that their opinions have a significant impact on the course of securities of the

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issuing company. Anyway, insiders have the obligation to make public their trades on the
ground of juridical norms that are regulating the regime of insider information 1 .

3.3.3 Members of the authority of regulation, supervision and control, of the market
operator, of associations which make registry operations and compensation-settlement
operation and of other entities of the capital market

These categories of persons have, by their position, a certain influence on the capital
market. When an opinion is expressed about certain securities there are premises for the price
of that security to evolve in the sense expressed by that opinion directly or indirectly.
From these considerations, we appreciate that is necessary for the members of these
market entities to respect the legal dispositions regarding the revelation of conflicts of interest,
in the sense of making public, prior or along with the expression of an opinion on securities or
on the issuer of securities, if they have or not positions on those securities.

3.3.4 The other investors

In the analysis of illicit, in report to the text present in the market abuse Directive, is
important to determine if the expression of opinions by persons that are not issuing investment
recommendations with a professional title, without revealing the conflict of interests caused by
prior holding of a position on that security, is or it isn’t an illicit action.
Considering the constitutive elements of the procedure called “scalping” analyzed in this
point, as also the fact that the definition of the incriminated action by article 244, paragraph
(7), line c) from Law 297/2004 has in sight expressing opinions on securities and not false or
delusive information, we will treat this version of the manipulation action on the ground of a
restrictive interpretation, in the sense that we will consider that the situation mentioned has in
sight only the persons that, by the position of profession they have, can actually influence the
course of securities, when expressing an opinion about these.
Indirectly, from the description of the scalping action it results that the manipulator who
is using this method is taking advantage from his influence on the market, which imposes the
pre-existence of this type of influence for the manipulation to be successful. In the absence of

1
According to article 149, paragraph (4) from the Regulation of the National Securities Commission
no.12006, there are presume of having access to privilege information the following persons:
a) the members of administration board and members of executive management of commercial
associations, branches and associations controlled by these;
b) employees of commercial associations, branches or associations controlled by these which, by the
developed activity, can have access to this type of information (accountants, juridical counselors,
secretarial personnel etc.);
c) persons that are giving professional services for the commercial association, its branches or
commercial associations controlled by these and have access to this type of information (auditors,
lawyers, consultants etc.);
d) significant shareholders of the commercial associations; if they are juridical persons, the members
of their administration council and members of the executive management;
e) all persons known to have obtained these types of information from persons mentioned at line a)-
d);
f) all persons that are acting together with persons mentioned at line a)-e);
g) all the branches of the commercial association.

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an influence from the person that is issuing opinions on the capital market is clear that the
evolution of the security’s course on which it was issued the opinion can not be affected by the
points of view of those persons.
The other investors might be incriminated for committing the manipulation action in the
hypothesis in which they will spread false or delusive information and not just for issuing
simple opinions based on the objective, public, general elements.
The British doctrine 1 , showed that the “scalping” method means trading by an analyst or
a journalist that issued an opinion on a security, excluding this way the other categories of
persons.

§4. Signals of capital market manipulation by using fictitious methods or any other
type of fraud in the view of legislation and recommendations of the European
Union

In paragraph 6 of the Considerations of Directive 2003/124/CE of establishing the

application norms of Directive 2003/6/CE of the European Parliament and the Council
regarding the definition and publication of confidential information and definition of market
manipulations needs to be outlined that certain signals need to be considered by the market
authorities in analyzing the existence of manipulation actions by trades or orders that presume
fictitious methods:
a) if the issued orders or operations made by persons are preceded or followed
by the spreading of false or delusive information by the same persons or
other persons that are close to them;
b) if the orders are issued or operations are made by persons before these or
other persons that are close to them are making or spreading actions of
research or recommendations of investment that are false or eluded or
obviously influenced by a significant interest.
Paragraph 1 of the article 5 contains a very important mentioning according to which
these situations don’t have to be considered as market manipulations, but only as signals that
need to be considered in the activity of investigating the commitment of the illicit action to the
stock exchange regime incriminated by the market abuse Directive.
In the same time, the list of possible signals from article 5 does not have an exhaustive
character, but only an exemplifying one.
The text of article 5 from Directive no.124/2003 was resumed in article 164, line h) and i)
from Regulation of the National Securities Commission no.32/2006, regarding services of
financial investments 2 .

4.1 Issued orders or trades executed by persons are preceded or followed by the spread of
false of delusive information by the same persons or other persons that are close to them

1
B. Rider, K. Alexander, L. Linklater, cited paper, p. 15
2
Approved by the President’s Order National Securities Commission no.12/21.12.2006 (Official Monitor
no.103 from 12 February 2007)

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 The “fictitious method”, meaning the spread of false or delusive information is in direct
connection with the effective trades, following which the manipulator obtains benefits on the
capital market or is reducing his loss.
This situation represents a signal of the possible presence of the “scalping” method,
analyzed at point 3.3, described by the spreading of false or delusive information and not just
issuing opinions, based on objective elements.
Trade orders can issue false signals, that are misleading, regarding the volume of demand
and/or supply and price of the securities, situation in which the material evidence of the fraud
action is found completed also under the form foreseen by article 1, paragraph (2), line a) from
the market abuse Directive.
Manipulation by dissemination of false information is one of the most spread
manipulative practices, being incident in these cases of misleading by spreading false
information and in the legislation regarding the consumer’s protection 1 . Information that is
disseminated is brought to the attention of the public, meaning to the attention of non-
professionals of the capital market, by accepted dissemination methods. Misleading has
maximum chances to succeed, because the communication channel of information has
credibility.
In general, as the American authority of the capital market has noticed, small size
companies, less liquid, are more vulnerable to this type of manipulation by dissemination of
false information followed or preceded by trading in the benefit of the manipulator and the
persons connected with him 2 .
In applying this procedure of spreading false information in order to influence the course
of securities is used sometime a fictitious person, credited to represent “a sure source”,
eventually a person that has privilege information 3 .
From this perspective, it was shown in the doctrine 4 that internet is an additional danger
for the capital market from the perspective of manipulation, because the manipulator has the
possibility to change his identity and to convince a wide public that the disseminated false
information is actually true.
Among the most used manipulative practices based on disseminating this type of
information are “pump and dump”- that has in sight an artificial increase of the course of
securities and “trash and cash” – that has as objective a forced, unnatural decrease of the
price 5 .
The simple spread of false information by persons that are closing trades or are issuing
orders on the capital market can not be considered as a market manipulation, if it’s not
connected with other factors that would indicate criminal intents of that person. It would be
excessive to punish a person that by mistake disseminated information, without knowing their
false character. That is way, in these situations also, is imposed that, in the analysis of actions
suspected to be market manipulation is necessary, on one hand, to take into consideration the
entire ensemble of factors that are relevant for the evolution of the course of securities, and on
the other hand to analyze the circumstantial elements linked to the person of the alleged
manipulator, in order to establish the existence or non-existence of internal resolutions of this

1
B. Rider, K. Alexander, L. Linklater, cited paper, p. 98
2
http://www.sec.gov/investor/pubs/microcapstock.htm
3
B. Rider, K. Alexander, L. Linklater, cited paper, p. 99
4
Ibidem
5
Analyzed in §4 from the present section, p. 304- 318

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in the sense of dissemination of false information and obtaining profit following this action by
trades at artificial prices.
Thereby, it will be considered an indication of the manipulation intent the initiation of
positions regarding securities by a person, followed by spreading information regarding these
securities, without that person to reveal the conflict of interests.

4.2 Orders which are issued or executed operation by persons before them or other
persons that are close to them make or spread actions of research or investment
recommendation that are false of eluded or obviously influenced by a significant interest

This hypothesis mentioned in article 5 of Directive no.124/2003 has in sight a

determinative category of persons which can transmit, through certain documents, dates and
information which are misleading for the market participants.
When the person that is making the recommendation or the persons close to her obtain
profit following the emission of recommendation and holding, prior to this emission, a position
regarding the security aimed by the investment recommendation, we are dealing with the
procedure called “scalping” 1 .
Setting up the legal frame and the procedure of investment recommendations is making
the object of Directive 2003/125/CE of the European Commission, regarding the methods of
applying the Directive 2003/6/CE of European Parliament and the Council in what is regarding
the equitable presentation of investment recommendations and mentioning the conflict of
interests. The content of this European directive was resumed in the Regulation of the National
Committee of Securities no.15/2006 2 , regarding the presentation of investment
recommendations regarding securities.
We appreciate that the legal text is incident to the recommendations of investment
disseminated to the public by means of mass communication, and to the counseling activities in
investments realized with a particular character by an investment firm to one of his clients.
According to article 4, paragraph 1, point 4 from Directive 2004/39/CE-Market in
Financial Instrument Directive, “investment counseling” is providing personalized
recommendations to a client, either on his request, either to the initiative of an investment
company, in what regards one or several trades with securities 3 .
Information disseminated through the recommendations of investments, analysis,
research actions have a special impact on the public, because enjoys a wide presumption of
credibility. As it is shown in paragraph 4 from “Considerations” of the directive, the
investment recommendations are a possible ground for the investment decisions and, that is

1
Analyzed in §3 from the present section, p. 298-304
2
Approved by the President’s Order of the National Securities Commission no.81/6.10.2006 (Official
Monitor no.943 from 22 November 2006)
3
According to article 52 from Directive of the European Commission no 2006/73/CE (Official Journal of
the European Union no L 241 from 2.09.2006), recommendation needs to be presented as adequate for the
person in cause or needs to be based on a examination of that person’s particularities and need to constitute
a recommendation in order to make one of these operations:
a) purchase, sale, subscription, change, buy back or holding a certain security;
b) exerting or non exerting a right conferred by a certain security regarding the purchase, sale,
subscription, change or buy back of a security.
A recommendation is not a personal recommendation in case in which it is issued exclusive through the
channels of distribution or disseminated towards the public.

203
why, “need to be realized and disseminated with the highest level of attention in order to avoid
misleading the market participants”. Continuing, paragraph 6 is stipulating the essential rule of
the clear and precise character of investment recommendations.

Recommendation or suggesting an investment strategy is made either explicitly (like in

the case of recommendations of “purchase”, “maintaining” or “sale”), either implicitly (by
referring to an objective of the course or in another way).
It has to be mentioned also in this case that investment recommendations or actions of
research which are false or influenced by a significant interest do not have an illicit character,
being necessary to prove the knowledge of the false character of the recommendation by its
author. In the case in which the person which made the investment recommendation was wrong
about the real or false character of the obtained data, she will not be sanctioned for capital
market manipulation. This hypothesis is possible in the case in which the person that makes the
recommendation is in the possession and using false or incomplete data which comes from a
third source.
In consequence, for assessing the existence of the market manipulation action is
important to prove the criminal intent of the author of recommendation or research, and the
action of the recommendation’s author committed along with the person/persons that have
closed trades influenced by the content of the investment recommendation.
When the person that traded from which obtained an incorrect profit knew the false
character of the investment recommendation, but the executer of this was a person with good-
faith, being mislead by the data he had, this person could not be sanctioned neither as author,
neither as accomplice to the capital market manipulation action. In the hypothesis in which the
author of the investment recommendation knew its false character, but, neither him and neither
the persons close to him traded on artificial prices, can not be considered that it was realized
the material evidence of the manipulation action by fictitious methods, because is not
completed the essential condition of trading in order to take advantage by the use of delusive
elements of the investment recommendation. In this hypothesis will be analyzed if it was
committed the market manipulation action in the form foreseen by article 1, paragraph 2, line
c) from the market abuse Directive- manipulation by dissemination of false or delusive
information.

4.2.1 Notions of “recommendation of investment” and “research”

According to article 1, point 3 from the Directive no.125/2003, “recommendation” is

research or another information that is recommending or suggesting a strategy of investment,
explicitly or implicitly, regarding one or more securities or to the issuers of securities,
including opinions issued regarding the course or value present or future of these securities,
destined to the channels of distribution or to the public.
Article 1, point 4 from the same directive gives the following definition to “research” as:
a) an information presented by an independent analyst, an investment
association, a credit institution, any person whose main activity is presenting

204
 recommendation or a natural person whose activity is enrolled in their
account through a work contract or not and that, directly or indirectly,
expresses a specific investment recommendation regarding a security or an
issuer of securities;
b) an information presented by other persons than the one mentioned on point
a), that directly recommend a specific investment decision regarding a
security.
The European group of experts in the market of securities (European Securities Markets
Expert Group- ESME) 1 recommended in a report regarding the stage of implementation of the
market abuse Directive in the member states of the European Union to be realized an
exemplification of activities which “are not investment recommendations” in the documents
(guides) of implementation on level III of the market abuse Directive 2 .

4.2.2 The author of the investment recommendation or of research

The author of the investment recommendation is any natural or juridical person that
produces or distributes recommendations in the exercise of his profession or in the
development of his activity (article 1, point 5 3 ).

1
To see Chapter II, section 4, point 5.2, p. 73-74
2
http://ec.europa.eu/internal_market/securities/docs/esme/mad_070706_en.pdf
3
According to article 40 from the Regulation of the National Securities Commission no 32/2006 regarding
the financial investment services, in order to be authorized by the National Securities Commission, the
investment consultant, a natural person, has to complete cumulatively these next conditions:
a) to have a higher education graduating with a license degree or a diploma;
b) to have minimum 3 years of experience in the financial- banking field or in the capital market
field. Professional experience is calculated starting with the first year after getting the license
degree;
c) to have promoted the course of training on the capital market meant for the investment
consultants, organized by a vocational training organism authorized by the National Securities
Commission ;
d) not to have directly or indirectly, in his own account or with the wife/husband, and relatives in the
first degree a significant positions as shareholder of a company involved on the capital market or
be an employee or to have a management position at this type of company, with the exception of
the association of investment consultancy;
e) not to be an employee of a public administration institution public or central;
f) not to be sanctioned by the National Securities Commission, National Bank of Romania or the
C.S.A with the prohibition to practice his activity on the markets supervised by these;
g) not to have been convicted for criminal administration, breach of trust, forgery, use of forgery,
fraud, embezzlement, false testimony, giving or receiving bribe, and other economic offences;
h) to present all the documents foreseen by the present legislation.
According to article 40 from the Regulation of the National Securities Commission no.32/2006, juridical
persons must complete the following conditions:
a) are registered with the Registry of Commerce Office as commercial association constituted
according to Law no.31/1990, republished;
b) the object of activity of this association is enrolled exclusively in the financial field and refers
explicitly to investment consultancy;
c) the association has a social capital of minimum 20.000 Euro calculated on the reference course
communicated by the National Bank of Romania on the date of posting the demand;
d) the association has at least one employee authorized by the National Securities Commission as a
investment consultant;

205
 The identity of the person that does the investment recommendations, the norms of the
professional conduct and the identity of the competent authority on which the person depends
need to be mentioned, because it can represent an important information for the investors and
their decision to invest, is showed in paragraph 5 of “Considerations” of the Directive
no.125/2003. Any recommendation has to mention clearly and visible the identity of the
persons responsible for her presentation, especially the name and position of the juridical
person that has elaborated the recommendation and the name of the juridical person
responsible for her presentation.

4.3 Obligation of the persons which are making investment recommendations

The persons that are making professionally investment recommendations have to respect
a series of obligations, their main purpose being avoiding misleading the public that has access
to those recommendations and, as a consequence, blocking manipulation actions by the
fictitious procedure of distributing some analysis and research with a false character. Breaching
any of the following obligations can represent, surely in connection with other factors, from
which the most important is obtaining incorrect profits following the course evolution under
the influence of that recommendation, a sign of a possible manipulation action:
a) presentation of facts separated clearly by interpretations, estimations,
opinions and other types of non- factual information;
b) using only the viable sources or, if it isn’t the case, this thing is clearly
pointed out;
c) indicating all of the projections, previsions and objectives of course and
maintaining the main hypothesis retained for their setting up and use;
d) all the important sources regarding the essential aspects of the
recommendation are mentioned adequately, including the aimed issuer, and
the fact that the recommendation was communicated, depending on the case,
to the issuer and modified following the communication before
dissemination;
e) resuming adequately of any base and method use for the evaluation of a
security or to fixate the course objective of a security;
f) the meaning of any issued recommendation (for example, “purchase”, “sale”
or “maintain”), depending on the case, the time frame of the investment on
which the recommendation is reported it is explained adequately and there
are indicated adequately the warnings regarding the risks (including an
analysis of sensitivity of the retained hypothesis);
g) is mentioned the foreseen frequency, depending on the case, to the updating
of the recommendation, and for any important modification of the coverage
policy announced previously;

e) shareholders/significant associates, and members of the administration board not to have directly
or indirectly, in their own name or along with wife/husband, and relatives of first degree a
significant position as shareholders of an association involved on the capital market, with the
exception of a association of investment consultancy;
f) members of the administration council are fulfilling the conditions stipulated in article 40, lines f)
and g);
g) presents all the documents foreseen by the present legislation.

206
 h) is indicated, clearly and visible, the date on which it was disseminated for the
first time the recommendation with the purpose of distributing, and the date
and hour of the course indicated for any security;
i) in the case in which the recommendation is different from a recommendation
issued in the courses of the last twelve months referring to the same security
or to the same issuer, the change and the date of the previous
recommendation is indicated clearly and visible.
The investment associations and the credit institutions need to mention quarterly the
percentage of recommendations of “purchase”, “maintain”, “sale” or the equivalent of these,
from the total number of recommendations, and the percentage of issuers that is corresponding
to each category for which the investment association or credit institutions gave important
business banking services in the course of the last twelve months. For the natural persons or
juridical persons that are working for a investment association or a credit institution, with a
labor contract or not, that are participating to the elaboration of the recommendation, it needs
to be mentioned that their remuneration is linked, depending on the case, with the business
bank operations made by the investment association or the credit institution or any other
juridical person connected with these persons.
In article 250, paragraph (2) from Law no. 297/2004 is indicated the obligation of the
persons that are producing or distributing studies regarding the securities or the issuers of
securities, and of the persons that are producing or disseminating other information by which
are recommending or suggesting investment strategies using mass information methods to
assure that this type of information is correctly presented. These persons have to indicate the
nature of their interest or probable conflict of interests that regard the securities for which those
studies are conducted.

4.2.4 Significant interest

According to article 5, paragraph 1 from the directive, the persons that are making
recommendations need to mention all the relations and circumstances on which it can be
considered rationally to have the nature to harm the objectivity of the recommendation,
especially in the case in which the aimed persons have an important financial interest in one or
several securities that make the object of the recommendation or an important conflict of
interests with an issuer on which the recommendation refers.
In order to avoid the spreading of some partisan “interested” recommendations, the
analyzed European norms set up a series of obligation for the author of the investment
recommendation. Thereby it has to be mentioned clearly and visible in the content of the
recommendation the following information regarding the interests and conflicts of interests:
a) important participations that exist between the aimed person and any juridical
person linked with this person, on one hand, and the issuer, on the other hand.
These important participations include at least the following cases:
- the person in cause or any juridical persons linked with this person holds over 5%
from the total amount of capital issued by the issuer;
- the issuer holds over 5% from the total amount of capital issued by the person in
cause or any juridical person linked with this person.
Member stated can recommend lower thresholds then the 5% threshold foreseen in these
2 cases;

207
 b) other important financial interests of the person in cause or any juridical
person linked with this person in report to the issuer;
c) depending on the case, a statement in which is indicated that the person in
cause or any juridical person linked with this person is a market holder or a
supplier of liquidities in what is regarding the securities of the issuer;
d) depending on the case, a statement in which is indicted that the person in
cause or any juridical person linked to this person was, in the course on the
last twelve months, the first bidder or the first associated bidder for any
public offering of securities of the issuer;
e) depending on the case, a statement in which is indicated that the person in
cause or any juridical person linked with this person is a part of any
agreement with the issuer in regard to the carrying out services of bank
businesses with the condition that this does not lead to mentioning some
confidential commercial information, and the agreement to be in force in the
last twelve months or to be lead to the payment or a promised remuneration
in the course of the last period of time;
f) depending on the case, a statement in which is indicated that the person in
cause or any juridical person linked to this person is part of an agreement
with the issuer regarding the presentation of recommendation.
Also, according to article 5, paragraph 2, from the directive there has to be declared:
a) the interests or eventual conflict of interests of the aimed person or of the
juridical persons that are linked to this person, that are accessible or might be
in a reasonable way considered accessible to the persons that are participating
to the elaboration of the recommendation;
b) interests or conflict of interests of the person in cause or of the juridical
persons linked with this person, known as persons that have not been
participating to the elaboration on the recommendation, but had access or it
might be reasonably considered that they had access to the recommendation
before its dissemination to the clients or public.
In the first form of the Directive of implementation of the market abuse Directive it was
spoken about the necessity of a “material interest”, but discussions that took place in the pre-
adopting period revealed that it will be extremely hard to be defined uniform in the national
legislation of the member states of the European Union the notion of “material interest”. In
these conditions, it was agreed in choosing an expression with a general character meaning
“significant interest”, a wide notion that was considered to cover a large variety of situations in
which the investment recommendation doesn’t complete the criteria of objectivity.

4.3 The notion of “linked persons”

The notion of “linked persons” 1 is not properly defined in the European legislation.
Apparently, might be considered that the text of article 5 from Directive no.124/2003 has in
sight those persons that are in “close connections”, as it is defined this notion in article 4 point
31 from the Market in Financial Instrument Directive (Directive no.39/2004): “close
connections” is a situation in which at least two natural or juridical persons are linked by:

1
“Persons linked” in the English version of the Guide of the National Securities Commission

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 a) a “participation”, meaning owning directly or by control, at least 20% from
the capital or voting rights of a company;
b) a “control”, meaning the relation between the mother company and a branch,
in all the cases mentioned in article 1, paragraphs (1) and (2) from Directive
83/349/CEE or a similar relation between any person natural or juridical and
a company, any branch of a branch company being also considered as a
branch of the mother company that is conducting them.
A situation in which at least two persons natural or juridical are linked at all times by the
one and the same person by a relation of control it’s considered also as being a close
connection between those persons.
With all these, we consider a correct interpretation of the text of article 5 leads to
including in the category of “linked persons” all the persons that are acting together.
According to article 2, paragraph (1), line 23 from Law 297/2004, the persons that are
acting together are two or more persons, linked by an express or silent agreement, in order to
make a common policy regarding an issuer. Until the contrary evidence, the following persons
are presumed to be acting together 1 :
involved persons;
a) mother-company along with its branches, and any of the branches of the same
mother-company between them;
b) a commercial association with the members of the administration council and the
involved persons, and these persons among them;
c) a commercial association with its pension funds and the administration
association of those funds.

1
According to article 2, paragraph (3) from Regulation of the National Securities Commission no.1/2006 it
is presumed of acting together, until the contrary evidence, the following persons, without a limitation to
these persons:
a) persons that in the development of economic operations are using financial resources with the
same source or are coming from different entities that are involved persons;
b) persons that in the development of economic operations are directing benefits this way obtained to
the same recipient or to recipients that are involved persons;
c) juridical persons whose property structures, leadership or administration au mainly the same
content;
d) persons that have adopted or are adopting a similar investment policy, by purchasing securities
issued by the same issuer or by persons that are involved with the same issuer and/or by
transferring securities issued by the same issuer or by persons involved with the same issuer;
e) persons who have closed between them trades with previous negotiated securities, in their own
name or by persons involved with them or that are enrolling currently trades by entities controlled
directly or indirectly by one of them;
f) Persons who have exerted or are exerting identically voting rights given by the securities issued
by the same issuer;
g) Persons for which developing economic operations, of representation of interests or to exert voting
rights given by the owned securities, have named or are naming as authorized agent, respective
authorized agents the same person, respective persons that are involved;
h) Persons that have associated in any juridical form known by law, and the purpose or the objective
of the association is operations linked with one or more issuers;
i) Persons who have had or are having in the same time stocks on one or more juridical persons,
exerting control on them and enrolling a common policy , with or without connection to the capital
market;
j) Persons that have enrolled or are enrolling economic operations together, with or without a
connection to the capital market.

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 This type of interpretation resides in the argument that the manipulation action takes
place, usually, by the contest of many more persons that join their “efforts” to create an
artificial price of the securities and to obtain, this way, incorrect profits.
We have to notice that, in regard to the assumptions that the collaborated action from the
Romanian legislation, their sphere is very wide, giving birth to profound abuses from the
authorities. We weren’t able to identify the “source of inspiration” of the National Securities
Commission when elaborated the text of article 2, paragraph (3) from the Regulation no.1/2006
regarding the assumptions of the collaborated actions, but it is sure that this type of regulation
is not included in the norms of the European Union.

§5. Manipulation practices by trades implying fictitious procedures

In the present European norms there are no descriptive mentioning regarding the
typology and characteristics of the fictitious “means” considered by the text of the market
abuse Directive. In the first guide of the Committee of European Securities Regulators
regarding uniform implementation of the market abuse Directive there are mentioned a series
of actions considered to represent market manipulations by using fictitious procedures.
Presenting those illicit conducts is found also in some national legislation.
The authority of capital market supervision from Hungary (Hungarian Financial
Supervision Authority) issued a set of recommendations regarding the methods to apply the
Hungarian law of the capital market (Law CXX from 2001) regarding market abuse. From this,
regarding the analyzed text in the present section, there are distinguished those activities,
considered to represent trading, that imply using fictitious devices:
a) Violating regulation regarding the obligations of publishing information
about purchasing securities in the name of other persons, in the sense that
publication does not give a real image of the shareholding structure of the
association, with the exception of holdings in “nominee” accounts 1 .
Nominee shareholding is having stocks, in the name of a bank, stock
exchange agent, companies or of a person etc., name that it doesn’t belong to
the real beneficiary of the stocks. Holding stocks can be on the name of the
commissioners, in order to facilitate the businesses and trades, without
revealing the identity of the real owner. In the past, this type of cover was
frequently used in the early stages of hostile take over, to permit the
auctioneer to obtain discretely a substantial participation in the company he
had considered;
b) Opening a purchase position of a derivative security (futures or options),
followed by the public dissemination of positive information about a issuer
in order to increase the price after which there are closed the position on
those increased prices- “Pump and Dump” method; on another hand,
opening sale positions on derivatives, spreading negative news about that
issuer and closing positions after the price have decreased- “Trash and Cash”
method;

1
Oxford University Press, English-Romania Dictionary, Bic All Publishing, 2007, p. 471

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 c) Institutional investors and portfolio managers, whose investment decisions
are regarded in the market, are guiding the behavior of the other market
participants, are publishing investment decisions, accentuating the idea that
they want to buy securities on a long term, and then, after publication, on the
path made by the evaluation of the their decision by the other market
participants, they are readjusting their portfolio.
The guide of the Committee of European Securities Regulators regarding market
practices admitted is mentioning a series of operations on the capital market that are considered
by the Committee of European Regulation of the Securities Body as capital market
manipulations. These operations have been considered in the jurisprudence as having a illicit
character, the Committee of European Securities Regulators resuming the definitions and
assessments formulated by different trial courts or bodies of regulation and supervision of the
capital markets (Securities Exchange Commission in the United States, COB- Commission des
Operations de Bourse, AMF- Autorité des Marches Financières in France, FSA in Great
Britain).

5.1 Concealing ownership

This manipulative practice means initiating trades meant to conceal the identity of the
owner of a certain security, by holding it in the name of a person which he has connections that
were not revealed according to the regulations of that market.
The revealing can be delusive also in regards to the real holding of the active support of a
derivative security.
This practice doesn’t cover the cases in which there are grounded reasons for a part to
hold securities in the name of another part then the holder of the benefits. Thereby, not any
situation on which there are not made the necessary revealing is a market manipulation.
This type of exception situation is the one of nominee accounts. Holding titles in nominee
accounts is made from reasons of efficiency, the broker acting as nominee for his clients, titles
(stocks) being registered in his name, but the client are keeping all the benefits given by the
holding of those titles. The method gives the advantage of a much faster trades (payment are
made faster, sometime the transfer of securities is accelerated). Moreover, the costs are
lowered. A disadvantage of this system might be, that, not being listed as a shareholder, the
investor doesn’t receive the company’s reports and can not exert with all the information his
rights as shareholder, outside the situation in which the broker offers him the additional service
to resend these information 1 .
Introducing in the guide of the Committee of European Securities Regulators of the illicit
behavior that implies trading which have the purpose to conceal the identity of the real holder
of securities is keeping into account the conclusions of the bodies of supervision confronted
with these types of conducts of some participants on the capital market.
Concealing the identity of the real owner of security is considered market manipulation,
because it has as result the misleading of the other participants on the market, for example
regarding the structure of the shareholding of a company or to the identity of the person that
has a dominant position on the market of securities, being able to influence this way the
evolution of their course.

1
http://www.finance-glossary.com/terms/nominee-account.htm

211
 Market manipulation by concealing the identity of the real owner of securities is realized
by fictitious trades, the simple emission of orders not having any relevance on this
manipulation form.
In the British legislation- Code of Market Conduct- M.A.R. 1.5.14, paragraph 2- is shown
explicitly that concealing the identity of the owner of securities is creating a false or delusive
impression on the market of that security. This way is given a subjective side to interpretation
of the suspicious conduct of representing market manipulation, the accent being laid down on
the impression, perception of the participants to the market towards those trades. According to
the juridical British norm, if the other market participants are not mislead in regards to the
market of that security on which is realized the operation of concealing the owner’s identity,
then there are not meat all the elements that make a manipulation action.
Manipulation by concealing the identity of the real owner can be made also by the
method called “parking”, that can presume a sale of titles doubled with closing a contract in
which the parts binding to close a trade in contrary sense after a period of time.
This way, this type of illicit practice intervenes in the hypothesis in which is attempted
the concealment of reaching certain thresholds of ownership that have to be reported to the
market’s entities 1 . Concealing the identity of the real owner of titles can have as objective also
the preparation of an action of taking over that company (“parking violation”).
It is noticeable that this illicit action from the sphere of market abuse is doubled also by
the defeat of legal regulations regarding the mandatory reporting of name of the real
beneficiary of the trade. In some legislations (for example, in Cyprus 2 ), the manipulation
method by concealing the identity is mentioned only in connection with the violation of legal
dispositions regarding the reporting of relevant information in order to disseminated to the
public.

In some cases, concealing the identity of the real owner is made out of fiscal reasons,
with the purpose of avoiding paying taxes. This way, stocks can be put on the name of some
entities registered in fiscal paradise, controlled by the investor that seeks to conceal that he is
the real owner of those titles. This does not mean that it is illicit to have stocks through off-
shores 3 , but it is necessary to be respected the obligations of reporting the holdings demanded
by the regulations in force.
Concealing the identity of the true beneficiary can have as objective trading by other
persons that are in the possession of confidential information. Trades are made in the account
of a person with whom the person that found out the privilege information is acting with,
eventually as an insider. This person, presumed as the legal dispositions, of having privilege
information, might have an interdiction to trade until that information is disseminated to the
public. Trade by a persons, that does not have the quality of an insider, it is obtained by the
person that has the privilege information an incorrect profit by the fact that it is taking
advantage of the fact that the privilege information hasn’t reached the knowledge of the public.

1
S. Loyrette, cited paper, p. 263
2
Directive no.3/2005 of Cyprus Securities and Exchange Commission,
http://www.cysec.gov.cy/Downloads/Directives
3
Offshore companies are registered firms in certain countries or jurisdictions that have a fiscal law either
without taxes, either with very low taxes as long as the company doesn’t develop activities on the territory
of the country were are registered.

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This way is realized a market abuse by trading on the base of privilege information and by
market manipulation, through the procedure of concealing the identity.

5.1.1 Cases of market manipulation by concealing ownership

Relevant is the case of Drexel- Boesky 1 , investigated and sanctioned by the Securities
Exchange Commission in 1997, in which there were used many operations of concealing the
ownership through time. One of these had in sight the purchase of a company’s stocks in order
to increase the price of a public offering of taking over developed by a client of the brokerage
firm conducted by Drexel 2 . This way, he would take advantage by the confidential information
linked to the enrollment of the public offering and the price was artificially increased in order
to resell the stocks at a high price by a bidder.
Another case in which Securities Exchange Commission pronounced sanctions was
Weber-Rader 3 , in which Terry Don Rader, president, CFO and trade director of the Weber
Investment Corporation, Brokerage Company, from 1991 to 1997. Rader produced losses to
the company valued at 2, 4 million dollars, following trade activities. In order to cover up these
losses, Rader appealed to different methods in which there was also concealing the identity to
the real owners of securities, by making false registrations in the company’s accounting. This
way, in the accounting of the brokerage company Weber Investment Corporation there was
present fictively that the company would own certain securities, although those securities were
in the ownership of other persons.
Going back in time, has to be noticed that the method of concealing the identity of the
real owner of a company was executed by the German companies prior to the Second World
War. As a safety measure in front of a new war and with the desire of not knowing that they
have control on certain American companies, some German companies initiated a “cartel”
along with other associations that were based in other European states, by which they would
purchase control packages on American companies. Initially, the purpose of this cartel was, of
course, also the elimination of competition by concealing the fact that a certain firm has the
control on the relevant market for a product, but later on this objective was doubled by the
political one of a massive presence, still concealed, of the German companies on the American
market 4 .

5.2 Dissemination, through the media, of false or misleading information regarding

market

Dissemination through the media of false or misleading information with the intent to
modify the price of a security or of the active support of a security, in order for the person that
initiated the dissemination would benefit from these modifications.

1
http://www.sec.gov/litigation/aljdec/id115cff.htm
2
New York Times, 11.09.1988,
http://query.nytimes.com/gst.fullpage.html?res=940DE5D61338F932A2575AC0A96E948260&sec=&spon
=&pagewanted=6
3
US Securities and Exchange Commission, Administrative proceeding File no.3-11451,
http://www.sec.gov/litigation/admin/34-49507.htm
4
H.A. Berman, Cartels and Enemy Properties, Law and Contemporary Problems, vol. 11, no. 1, enemy
Property (Winter – Spring, 1945), p. 109

213
 This method can be considered as having the nature of the “scalping”, when
dissemination through the media of this information is made by opinions or investment
recommendations.
As we have analyzed the matter of dissemination of false or delusive information upon
the examination of “scalping” and on the point regarding signals that may indicate
manipulation by the use of fictitious methods (“orders that were issued or trades that were
made by persons are preceded or followed by the dissemination of false or delusive
information”), we will not resume the considerations expressed previously.
In the case of which opinions were not expressed by analysts or investment consultants,
he method in question has similar characters with the method of “pump and dump”, with the
mentioning that, in the case of the last method, is necessary also the sale of title at artificially
enhanced prices, whilst in the hypothesis considered on this present point the operation of
“unloading” is not necessary in order to have the constitutive elements of manipulation.

5.3 “Pump and dump”

The manipulation technique called “pump and dump” 1 is the actions by which an investor
is adopting a long positions on a certain securities followed by a new action of purchase and/or
dissemination of information that are misleading in regards to that action with the purpose of
increasing its price. Other market participants are attracted by the effect on the price and are
purchasing that stock. The manipulator is selling later on his holdings on a higher price.

Once the price of securities is raised enough, the manipulators are selling their titles and
stop the actions of artificial “pumping” with false data of the course. The course will have a
dramatic decrease, in fact a come back to the level set naturally and the investors mislead by
the manipulative actions are marking losses. The stages of applying this manipulation
procedure are the following 2 :
a) The premise situation of this technique of manipulating the market is holding, prior to
the start of applying the fictitious procedure, of some titles admitted to trade. These titles can
exist in the portfolio of the manipulator as base instrument, traded as such, or as an active
support of a derivative security on which it was initiated along position- of purchase. The titles
object of manipulation can be paid, can be purchased “out in the open” (which is a violation of
the legal norms that are indicating the obligation of payment on the settlement date of the value
of securities 3 ) or in margin.

1
“Pump and dump”. Another name for this procedure is “hype and dump”.
2
http://www.fraudbureau.com/investor/101/article15.html
3
This type of trade situation “out in the open” took place recently in the case of the Societe Generale Bank.
A trader from this bank initiated many positions on the derivative securities having as active support
indexes of some European stock exchanges. Towards the end of 2007 after a positive evolution, it followed,
after the winter vacation, a sudden fall of these indexes (mainly the CAC40- the index of the Paris Stock
Exchange). The trader tried to hide that the evolution of the course was absolutely negative and it was
necessary to cover the mandatory margins and he started to make unauthorized trades with derivatives on
these stock exchange indexes. These trades were not reported in the computerized system of the Societe
Generale. At a certain moment, that trader changed the tactic and initiated a position that suggested a
possible margin call for that derivative security. The computerized system launched automatically an alarm
signal and the routine control that followed found a large loss caused by the initiation of those unauthorized
positions. The management of the Societe Generale disposed the immediate closure of opened position on
the derivatives in order to limit the losses. The total value of the losses was 4, 9 million Euros, 2 million

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 A reduced free-float is, also, a premise for a possible manipulation through the method of
“pump and dump”. It is a lot easier to apply the “pump and dump” procedure when the
companies are small sized and the titles are held in their majority by the manipulator or by the
person acting together with him, and in the possession of the regular investors there are a small
number of stocks.
b) In the second stage (the pump), the manipulator starts a promotional campaign of that
security, to create and develop the interest of investors for this. Promotion can be advertising
campaigns, phone calls to investors, newsletters, messages, and emails through the internet or
any other method.
The manipulator tries to entice the investors with the illusion of substantial profit,
obtained with low risks. The manipulator is speculating this way the greed of investors that try
not to miss a profitable investment.
c) In the third stage, the manipulator is waiting for the interest of the market investors to
manifest by massive purchase of securities, creating a pressure upon purchase and raising, as a
consequence, the price.
He will continue the promotion campaign until the price will reach the level he wants.
There also the possibility that raising the price to be realized discretely by the
manipulator by placing purchase orders, without the intent to execute them or even by some
effective trades, in small enough volumes in order to keep the chances of a substantial profit on
high levels of price. Considering the existence of a reduced free-float, it won’t be necessary the
purchase of an important number of securities in order to raise the price. Information used is
usually rumors and is not based on actual data.
d) In the fourth stage (the pump), when the price of manipulated securities reaches a high
enough level, the manipulator and/or the persons that are acting with hi is selling his titles to
good- faith buyers. Along with these operations, of sale it is finished the promotion campaign.
Without the support of positive information or by purchase orders (or even effective trades), in
the absence of new buyers (that will not be entering the market in the absence of positive
news), the course of the securities crashes. The fall will be accentuated by the fact the rumors
that generated the increase of price are not coming true.
e) The fifth stage is the accentuated fall of the price sometimes under the level from
which the promotion campaign of those titles started, because there is a large pressure upon
sale.
Some investors, although they are not mislead by the promotion actions based on false or
delusive information, are trying to obtain profit by purchasing those titles on still low prices, at
the beginning of the promotion campaign and selling them before the their crash cause by the
“unloading” (sales) of the manipulator and the finish of the promotion campaign. The risk of
this action is that an uninitiated investor that is not acting long with the manipulator doesn’t
know the moment in which the promotion campaign is, being able to purchase those securities
on prices that the manipulator is starting to sell 1 .

following the trades made by the trader in cause, the rest being made by the action of the bank to liquidate
the positions on a volatile market, at loss. According to the Wall Street Journal, electronic edition, January
25, 2008, p. A1, http://online.wsj.com/article/SB120115814649013033.html?mod=googlenews_wsj
1
http://www.fraudbureau.com/investor/101/article15.html

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 There are two possibilities by which the method of “pump and dump” can be applied:
dissemination of false information or issuing purchase orders or even closing trade with the
purpose of raising delusively the price of securities.

5.3.1 Applying the method of “pump and dump” by spreading false or delusive
information

This procedure is based first of all on an interested advertising made to this security by
spreading false or delusive information on the market regarding it 1 . In this case we are not
dealing with investment recommendations by professionals and neither with the expression of
opinions based on general objective elements, because we would be in the situation of
“scalping”. Anyway, the manipulation by the use of “pump and dump” based on spreading
false information is close to the “scalping” method.

“Pump and dump” is typical, as we have seen, for small size companies and less liquid,
whose stocks are raised artificially by spreading information regarding their special increase
potential. This information can by of various types, for example the rumor that it will be closed
an extremely profitable contract, that it was discovered a new layer will raise spectacularly the
price of those stocks or that the company will be taken over by a multinational concern.
This market manipulation method is using intensely the internet, because this mean of
communication is addressing very fast to a large number of persons. The messages linked to
the course of securities, the so called “spam”, are a usual fact on the internet. Many times, the
initiators of this type of manipulations claim they have privilege information about the
development of the company or that are using “infallible methods”, based on the combination
of economic data and market, of determination the evolution of the price of securities 2 .
Manipulators can be even insiders, representatives of them or persons with whom they
act together. Application of this procedure can intervene in the situations in which there are the
premises of a decrease of the course of securities because of negative financial results, known
by only by insiders or by the persons with whom they act together. Before disseminating to the
public these negative results it takes place an action of misleading the investors by spreading
positive news about that company, that have as result the growth, artificial, of the stocks price.
After the insiders and/or the persons acting together with them are “unloading” (selling) in the
market their titles to the good-faith investors, there are given to publicity the information with a
negative impact about the company. This determines a natural drop of the stocks course,
causing losses for the good-faith investors.
The “pump and dump” applied by disseminating delusive information has an application
known also under the name of “boiler room”.

This last manipulative method is based also on misleading investors, in general by phone
calls. In some situations, the manipulators, in general brokers or the leaders of brokerage firms,
send to potential investor’s information about companies that do not exist, giving a series of
false information to win the trust of the persons contacted by phone.
In the case of applying the “boiler room” technique, manipulator is using a registered
brokerage firm, in order to receive in his account the money from investors. Each morning

1
http://www.sec.gov/answers/pumpdump.htm
2
Ibidem

216
there is a meeting with the brokers, in which there are set up the sale techniques for that day. In
this meeting there are set also the stocks (securities) that are proposed for sale to the investors
on that day. After the meeting, all the brokers have to contact by phone potential clients (the so
called “cold calls”, contacting by phone persons that were not expecting them) and trying to
pursued them to buy the “stocks of the day”.
Securities Exchange Commission identified the following action of brokers that are
acting in a boiler room manipulation operation:
- they give false information about the reputation and experience of the brokerage
firm, showing that it has an analysis department that has analyzed those stocks;
- they refuse to state negative matter about the titles they are selling, including the
risk factors;
- they make ungrounded predictions, promising that those titles will double their
price in a short period of time;
- they decline a false identity to the persons contacted by phone, usually of an
another broker in the firm;
- they are discouraging their clients to sell the titles of the manipulation action 1 .
In the case of “boiler room”, in the hypothesis in which the brokers are selling the stocks
of a company that it doesn’t exist, it is not about capital market manipulation, it is a genuine
criminal offence, because is not possible price manipulation of stocks which do not exist.

5.3.2 Applying the “pump and dump” method by issuing orders or making delusive or
misleading trades

This method consists in fast manipulation, in an increasing trend, of the price of a

security whose market is non-liquid and sensitive, by issuing a large number of purchase
orders, in general without having those orders in the account 2 . The purpose of issuing those
orders is to create the impression on the market that a large trade will take place, misleading
this way the market participants regarding the demand of that security and regarding the
evolution of the price. The manipulator will sell the manipulated securities at artificially
increase prices.
This manipulation technique by using fictitious methods is similar to the manipulation
mentioned in article 1, paragraph 2, line a) from the market abuse Directive [article 244,
paragraph (5), line a) from Law no.297/2004], meaning misleading the investors by issuing
orders without the intent to close effective trades.
A way execute this manipulative method is increasing gradually the price offering for a
certain security- “advancing the bid”- to create the impression that the activity of the market is
determining this ascending evolution of course 3 .

5.3.3. Cases of manipulation by the “pump and dump” method

1
http://www.sec.gov/investor/links/toptips.htm#boiler
2
S. Loyrette, cited paper, p. 264
3
http://www.market-abuse.com/id108.html

217
 We will present a few situations that took place in the United States in which it was
discovered by the authorities the existence of manipulation actions by using the “pump and
dump” method.
Michael Saquella (a.k.a. Michael Paloma) and the trader Lawrence Kaplan have initiated
a manipulation action based on the “pump and dump” method starting from 2003 until 2007,
after which they have obtained common profits of approximately 3 millions USD. Paloma,
initially, contacted small size associations, that were listed, but in a financial difficulty. After
borrowing those associations with the necessary amounts to cover their debts, they would ask
those associations to issue new stocks that were transferred in the exchange of the outstanding
debt detained by Paloma against those issuers by other associations controlled by Paloma. The
new issued stocks were usually important packages that ensured the control on the loaned
companies. In order to avoid the application of legal federal dispositions regarding the
obligation to make a public offering, Paloma obtained false juridical opinions from lawyers
upon which the transfer agents would issue the shareholding certificates without the re-selling
restrictions. Once the associations from the Paloma group obtained these free packages to
trade, they would start the promotional action of those issuers by millions of facsimiles or
emails sent to investors. When the price of the small size company’s titles would increase
enough, Paloma, in most situations through the trader Lawrence Kaplan, would sell his
holdings, the promotional actions would stop, and the course of those titles would dramatically
fall 1 . Paloma and Kaplan admitted their actions and pleaded “guilty” 2 .
Jeffrey R. Senger, Brad M. Nirenberg and Norman F. Piatti were accused by the
Securities Exchange Commission to have been manipulated the capital market by the use of the
„pump and dump” method on the stocks of Lifekeepers Company, from November 1999 until
December 2000.
In 1999, Senger and Nirenberg purchased substantial quantities of Lifekeepers stocks and
placed them in certain accounts of the brokers. With the support of Piatti, the CEO of
Lifekeepers Company, the two started to “pump” those stocks, manipulating the demand and
price of stocks. This way, these three persons issued false and delusive press releases that
would show that Lifekeepers bought 20% from the titles of a healthcare website called
MyMedic.com. This company that operated the website was hold and controlled by Senger and
had its headquarters in the lobby of Lifekeepers Company. The press release falsely indicated
that the package held by Lifekeepers at MyMedic was worth between 80 and 500 millions
USD. In reality, Lifekeepers had bought this package with 50 USD, after borrowing MyMedic
with the amount of 120.000 USD.
From November 1999 and until February 2000, Piatti determined Lifekeepers to issue
false press releases which would say that it is anticipated a significant increase of company’s
results in 2000 and that de division of diagnostic-testing will bring a profit of over one million
USD and an increase of profit of 20-30%. These press releases were false and delusive,
because the company was confronting important losses, needing very much cash and capital in
order to increase the activity up to the point where it would produce profit. In that period
Lifekeepers had an income smaller then 10.000 USD a month.
In the same period of time, Lifekeepers maintained an website where there were posted
false information, like, for example, that this company would provide service all over the
United States, in reality the company was operating only in Florida and Virginia, or that

1
http://www.sec.gov/litigation/litreleases/2007/lr20269.htm
2
http://www.informationweek.com/security/showArticle.jhtml?articleID=201804792

218
Lifekeepers is a profitable company, a leader in the field of healthcare. In reality, this company
never made profits and, of course, never was a leader in this field.
From January to February 2000 Niernberg sent aggressive emails in which he would
recommend, based on false press releases, to purchase Lifekeepers stocks.
Also in that time Nirenberg and Senger sold important quantities of Lifekeepers stocks at
artificially high prices by the methods mentioned previously. After Nirenberg and Senger sold
a large part of the stocks they have owned, the delusive promotion of the company stopped and
the price of the titles dropped, causing this way damages to the good-faith investors 1 .
These three persons got to an agreement with the Securities Exchange Commission,
acknowledging their guilt and were forced by the South District Court of the State of Florida to
repair the damages caused by their manipulation actions of the market2 . The court prohibited to
Nirenberg and Senger to participate to public offering having as object stocks of small size
companies- “penny stocks” 3 .

Jonathan Lebed , a 14 years old teenager from New Jersey, succeeded to apply the “pump
and dump” manipulative technique at an impressionable level standing only in front if his
computer. From September 1999 until February 200, having opened an account on the on-line
trading platforms E-trade and Ameritrade, he was making purchasing trades of stocks of small
size companies, after which he started posting favorable messages to these issuers on different
blogs or forums, especially on “yahoo.financial” 4 . In this period of time he bought stocks at
nine issuing companies (Manchester Equipment, Just Toys, Yes Entertainment, Fotoball USA,
Man Sang Holdings, West Coast Entertainment, Havana Republic, Classica Group and
Firetector). Lebed had many user accounts, based on different email addresses with different
names, configured on the AOL website. Information about these companies was posted online
in the morning, between 5 am and 8am, before leaving to school 5 . In the months he developed
this intense activity of “pump and dump”, teenager Lebed earned about 800.000 USD. If the
average volume of titles of the companies in cause that was traded in a stock exchange session
was about 60.000 USD, in the days that Lebed posted messages, this average volume reached a
few millions. Discovered and investigated by the Securities Exchange Commission, he
defended himself showing that his predictions regarding those stocks were based on correct
analysis and that the professional analysts were actually manipulating 6 . The investigation
finalized with an agreement closed between the teenager and the Securities Exchange
Commission, following which he agreed to return the illicit profits and to pay a civil fine that
rose to 285.000 USD 7 .
The “pump and dump” method return in the attention of the speculator investors and the
authorities in the second part on the 90’s, when it appeared on the markets of economic
developed states, especially in the United States, the phenomenon being called by economists
“New Economy” 8 . In this special economic development, based on a general enthusiasm, it

1
http://www.sec.gov/litigation/complaints/comp17685d.htm
2
http://202.108.100.164:8080/gate/big5/www.sec.gov/litigation/litreleases/lr19183.htm
3
http://www.sec.gov/litigation/litreleases./lr19183.htm
4
“Pump and dump at 14 years old”, Investments and Profit, September 2006, p. 77
5
M. Lewis, “Jonathan Lebed’s Extracurricular Activities” New York Times, February 25, 2001
6
Pump and dump at 14 years old, “Investments and Profit”, September 2006, p. 77
7
http://www.cs.brown.edu/~rbb/risd/Lebed.html
8
This phenomenon consisted mainly in passing from a developed economy based on industrial production
to an economy based of services, in the context of globalization and influence of the exchange course by

219
became a lot easier the use of methods meant to wake up the trust of investors in certain titles
of some unknown companies until then.
The increase of value of some companies stocks in the period of affirmation of the “new
Economy” was determined by the actions of some insiders that had a major interest in
promoting the titles of those companies. A fast growth of value of the titles belonging to the
company they managed and on which they had free obtained stocks or at low prices permitted
them to sell with an substantial profit that they would re-invest in actives (immovable, stocks
of other companies) still at low prices 1 . By the fact that the value of any securities will increase
in time no one doubted in the United States in the second part of the 90’s. In general, these
insiders managed to sell their titles before the market crashed, the real losses being reflected in
the patrimonies of investors and employees.
A form of manipulation by “pump and dump” method, but also by applying other
techniques, took place also in the famous crash of the Enron Company, like in the one, as
famous as this, the World Com firm. These cases, because of their complexity, along with
other laborious manipulation situations, will be presented in Chapter X.

5.4 “Trash and cash”

This capital market manipulation technique represents the opposite of the “pump and
dump” method. An investor adopts a short position on a certain securities followed by a new
stock for sale and/or a dissemination of misleading information regarding that stock with the
purpose of lowering its price. The manipulator is later on closing his positions on a low price.
This manipulation technique is also called “short and distort” 2 , this collocation keeping
into account that after the initiation of the short position it starts a denaturizing activity of the
price of that security in order to lower its course.
The “trash and cash” manipulation technique is similar with the “pump and dump”
technique, using practically the same methods and following the same steps. The sense in
which it is wanted the evolution of the course of securities object of manipulation is negative.
There are two important situations in which a persons has the interest for the price of
some securities to decrease: initiation of a short position on the market, either on the spot
market, either on the market of derivative securities- the security that is manipulated is the
active support for futures or options contracts traded on the derivatives market- or the intent to
purchase securities in cause at low prices and waiting then the come back of the market to
higher levels, established on the grounds of the natural law of demand and supply.

the government authorities and central banks. Some analysts began to consider that this change in the
economic structure will be a premise for a firm permanent economic development, lowering unemployment
and avoiding the cycles of increase or decrease in the economy. When the capital markets started to register
a significant decline it was proven that these analysts have been wrong. Some specialists are using still
today the term of “New economy” to describe the evolutions in the economic and business field.
In the capital market field from the United States, the “New Economy” field was associated with the
unprecedented development of internet firms at in the end on the 90’s- the so called “Dot-com boom”. This
development included the accelerated raise of the NASDAQ market, rivaling with the New York Stock
Exchange, a high rate of the IPO’s, the increase of titles of the internet companies above the ones of some
consecrated firms and wide scale use of options, as derivative securities,
http://en.wikipedia.org/wiki/New_economy.
1
R. Tillman, M. Indergaard, Pump and Dump: The Rancid Rules of the New Economy, Rutgers University
Press, New Brunswick, New Jersey, 2005, p. 5
2
Distort- deform, denaturalize.

220
 In both situations, using fictitious methods to which the text of article 1, paragraph (2),
line b) from Directive of market abuse is referring, finds its application.
The name of the method –“trash and cash”- means only the referral to the first
manipulative version, meaning dissemination of some negative information about an issuing
company of titles on which the manipulator has initiated a short position and closing this
positions on an inferior price level, determined by the fall of the price of the active support
following the spread of negative information. It is not less true that obtaining profit following
the closure of a shirt position can be followed by purchasing the same titles, at low prices, by
the manipulator or by the persons acting together with him.
The premise situation of this manipulation procedure implies, necessarily, the adoption
by the manipulator of short positions- sale on the market, either a spot market, where there are
allowed sales at loss, either an on term market. His interest, obviously, will be to provoke a
decrease of price of the securities on which he has a position of seller, in order to make profit
consisting in the difference from the price, higher price, on which he initiated the sale position
and the price, the lower price, from the due date or from the moment of closing that contract,
by initiating a contrary sense position, meaning of purchase, for the same security or the same
type of contract, having the same active support, in the same quantity.

5.4.1 Using the method of “trash and cash” by dissemination of false or delusive
information

Users of the “short and distort” method (or “trash and cash”) are trying to take advantage
by stimulating the fear of investors 1 . These manipulators will try to induce to the investors the
idea that any recommendation to invest in certain securities is linked to the issuing company
and the interested insiders. In the same time, it will be suggested by the campaign of messages,
transmitted as in the case of “pump and dump” method by different means of communication
(email, newsletter, telephone etc.), that the authorities are investigating the issuer and it won’t
take long until they will take measures against him, for example he will be suspended from
trading. The ones who spread these messages are also trying to assure the persons that they are
transmitting to that they are protecting the interests of investors 2 .
It was shown 3 that manipulation by the “short and distort” method only takes place when,
on a falling market, a investor is making short sales, and after that he uses a defamation
campaign to “pull down” more the price of those titles. The unethical investor will spread false
information to influence the decrease of price and to obtain profit from the executed short
sales. The losers will be the companies whose titles are manipulated and the investors that sold
their participations on low, artificial prices 4 .
The preexistence of a falling market (“bear market”) prior to the start of the manipulation
action does not represent a condition for using the “trash and cash” method. It is very possible
that there is a raising market for that security, and the manipulator’s stocks are so effective that
they would change the trend. It is true that a sudden change of trend, without some objective
1
R. Wayman, The Short and Distort- Stock Manipulation in a Bear Market,
http://www.investopedia.com/articles/analyst/030102.asp
2
Ibidem
3
G. Thompson, Don’t Play in the Street: Unless You Know Which Direction Your Stock is Traveling,
Dearborn Trade Publishing, 2003, p. 164
4
M. Howell, Predators and Profits: 100+ Ways for Investors to Protect Their Nest Eggs, Prentice Hall PTR,
2003, p. 258

221
reasons, can be an indication for the authorities in the sense of the existence of a manipulation
attempt on the market of that security.
A version of applying the “trash and cash” method is the actions of an investor that is
launching repeated attacks on the issuing company, initiating also the justice litigations, in
order to affect the credibility of the issuer on the market and to generate massive sale
operations from the shareholder. Of course that the attack in the justice has to be in the public’s
eye in order to get to the awareness of investors in those titles.
In Romania, according to article 113, line f) from the Regulation of the National
Securities Commission no 1/2006, the issuer has to report to the market’s entities all the
litigations in which he is involved, and the public take notice of the existence of these lawsuits
from the website of the market operator, where are published all these reports. This way, an
interested investor, that initiated a short sale position, can attack in justice the issuing company
in order to lower the course of its titles, this fact getting to the knowledge of the other investors
with minimum marketing efforts.

5.4.2 Using the “trash and cash” method by making effective trades or issuing trading
orders

The persons that are manipulating the market by using the method of “trash and cash” are
counting on the fact that adopting a short position- of sale will attract and influence also other
investors to sell those titles, at lower prices, on which the manipulators will buy back these
titles 1 . Short sales are legal, as we have shown before 2 . As the authority of the capital market
in the United States showed, there will be considered illicit those sales (initiating positions in
the case of derivative securities) short that have as objective price manipulation, by artificially
lowering his price 3 .
This form by which the method of “trash and cash” is put into application is the one of
initiating a short position, without managing to be borrowed the necessary titles until the
settlement date- naked short selling. This way, on the due date the titles won’t be delivered to
the buyer. This type of conduct has as effect an increase of price of that security 4 , because it
was created a pressure upon sale, without that person that initiated the shot position to close
this position by adopting a purchase position that would have a positive effect on the price of
the security. Sales without delivering the securities- Naked short selling can intervene on the
markets where short sales are made, but the settlement is made with natural delivery. In
general, the borrower of securities short sold is the brokerage house of that investor, that in
return to this loan of securities will ask the investor an interest and will demand him to
maintain a minimal amount of money, calculated as an percentage to the value of the
investment, a margin, to cover the risk of a negative evolution of the price 5 . Each time the
course evolution of the securities or derivatives determines a decrease of the availability in the
account of the brokerage house client under the margin level the broker launches the margin
call, asking the investor to complete the amount of money in the account until the margin is
1
J.D. Finnerty, Short Sellings, Death Spiral Convertibles, And The Profitability Of Stock Manipulation, p.
19, http://ssrn.com/abstract=687282.
2
In Chapter III, section 2, §3, p. 91-93
3
http://www.sec.gov/spotlight/keyregshoissues.htm
4
http://www.sec.gov/spotlight/keyregshoissues.htm
5
Price evolution is appreciated in report to the position adopted by the investor, of sale- short or purchase-
long.

222
covered. In the case of short sales in which there is not made the loan of securities until
settlement, naked short selling, the buyer will not receive the titles he bought on the settlement
date. Trade will remain valid, and the seller will be forced to find those securities on the market
in order to deliver them to the buyer. Making sales without delivering the securities upon the
settlement date intervenes, especially, in the case of persons authorized as market makers. In
the hypothesis in which it suddenly intervenes a large pressure upon purchase of titles, the
market maker is forced, according to authorization conditions, to assure maintaining the market
for these and, as such, he will have to sell, on the demand of investors of those titles, although
he doesn’t have them in patrimony and he didn’t close an agreement to borrow them from their
holder. This situation can intervene in the case of some securities with a less liquid market 1 .
In the beginning of 2005 Securities Exchange Commission issued an important regulation
in the field of “naked short selling”, the so called “SHO rule”, with the purpose of preventing
market manipulation by short sales, by which imposes, among others, that the brokerage firm
that makes short sales, in its own name or for its clients, “to have serious grounds to consider
that these titles will be borrowed until de settlement date”. Also, the brokerage house needs to
close their entire client’s positions (that implies trades with securities situated above a certain
threshold) with delays upon settlement bigger then 13 consecutive trade sessions 2 .

In the case of naked short selling, in the hypothesis in which the buyer or the settlement-
compensation house doesn’t insist for the delivery of sold securities, the manipulator can
beneficiate from the decrease of price, without investing any amount of money. He will be able
to redraw from his settlement firm’s account the amounts of money representing the difference
between the sale price and the market price, although he didn’t deliver titles or invested any
amount in their purchase 3 .
In Romania this type of situation is not possible, because, on one hand, the short sales can
not happen unless on the derivatives market, on term, and on the other hand, the settlement
takes place without the physical delivery. This way, on the due date, if there are not closed the
short positions of the investor, he will gave to pay a money difference to the compensation
house, if the price of securities has increased towards the moment of initiation the positions or
he will have to receive an amount of money from the compensation house, if the price of those
securities has decreased in that interval. So, the market manipulation by short sales without
borrowing the titles until the due date can not happen in our country.
The person that is adopting a sale position on a security can be treated as a manipulator
and also as an investor that has good- faith and is informed. He will be considered of good-
faith if he anticipated a decrease of the course of those titles and initiated a short position, but if
he will demonstrate that his only purpose of adopting the short positions was to determine a
decrease of price he can be treated as a manipulator, considering of course, other essential
elements that would prove the criminal intents.
The markets conditions can determine the existence of some persons that are
manipulating the price of securities by the method of “trash and cash” based on effective
trading or issuing orders. It was shown 4 that the existence of active informed investors on the
market of that security will stop the manipulator to trade, as the presence of some conditions of

1
http://www.sec.gov/spotlight/keyregshoissues.htm
2
Ibidem
3
J.D. Finnerty, cited paper, p. 36
4
Ibidem, p. 18

223
the market that are suitable to manipulation will determine the informed investors not to enter
on this market.

5.4.3 Cases of manipulation by using the “trash and cash” method

In the case Securities Exchange Commission versus Rhino Advisors, Inc. and Thomas
Badian, resolved by an agreement closed between Securities Exchange Commission and the
persons incriminated of market manipulation, took place, in the course of 2002, a market
manipulation action based on trading in order to lower the price of stocks of the Sedona
Corporation.
The investment administration company Rhino Advisors and its president Thomas
Badian have acted in the name of the client that held a convertible debt in stocks against the
Sedona Company. The conversion value was set depending on the average price of stocks on
the market five days prior to the exertion date by the client Rhino Advisors of the conversion
right. The lower was the value of Sedona stocks in the period prior to the conversion the more
stocks would get in the conversion the owner of the debt. Although by the loan contract
between client Rhino and Sedona Company was forbidden the initiation of short positions with
Sedona titles before exerting the right to conversion, Rhino Advisors disregarded this
obligation and engaged himself, in the name of his client, in a series of short positions. This
activity has as result lowering the price of Sedona stocks. For manipulating the price of these
titles, Rhino used other illicit methods “wash sales” and “matched orders” to cover the short
positions and to conceal the implication of the client in the trade that involved short positions
with Sedona stocks.
One of the most media attention cases of manipulation by using the method of “trash and
cash” was the one of Mark Jacob.
In this investigated case by the Securities Exchange Commission- SEC, the manipulator
“composed” a press release which he sent, through the internet, in the name of a listed
association on the capital market, EMULEX, to a company which had in the object of activity
distributing these types of releases. In that text it was shown that Securities Exchange
Commission is investigating the accounts of the issuer and that the general manager resigned.
The author of the false information has opened short positions in contracts having as object the
stocks of the issuer, and the price evolution of these at that moment was unfavorable. After
spreading the news, the stocks of the issuer knew a decrease, in 16 minutes the stock exchange
capitalization of the company dropping with 2, 2 billions of dollars. The manipulator was
identified, arrested and accused of “fraud by the use of internet in the field of securities” 1 .

5.5 Opening a position followed by closing it after being made public

This practice was usually followed by an administrator of portfolio or an important

investor, whose decisions of investment are seen by the other participants as relevant signals
regarding the future evolution of price. The incorrect action refers to closing on a certain
market a position as soon as this is made public, after which previously created the impression
long lasting holding. Anyway, in the case in which the position is made public according to the

1
Securities Exchange Commission versus Mark S. Jacob, civil action no. edcv-00-687 vap (mcx) (c.d. cal.),
http://www.sec.gov/litigation/litreleases/lr16671.htm

224
applicable legal regulations that demand or permit reporting the position, will not be
considered that it was given a false or delusive impression to the market 1 .
Treating this conduct as illicit is grounded on the fact that certain trades of important
investors, institutional, investment funds, pension funds, and banks are strong signals for the
other market participants regarding the future evolutions of the traded security by the
institutional investor. Adopting a long position, a purchasing position, will represent, for
example, a positive signal, that indicates an appreciation about the following period of the
course of that security.
Sudden closure of the position, as soon as it was made public, shows the intention of the
institutional investor not to continue the ownership of that position, either is a purchase one,
long, either is a sale one, short, although from the public announcement of the position results
the contrary. In this case, the public announcement appears as manipulative regarding the
position ownership, because the other investors were misled, having the impression that the
institutional investor will maintain the position for a longer period of time, existing this way
the chances of a course appreciation.
In reality, is possible that the public announcement of the position has as purpose the
influence of investors to adopt a similar position. The institutional investor intended in reality
to initiate a contrary position, but he didn’t find his counterparty and that is why he announced
in public, with a manipulative purpose counting on the impact that his announcement is going
to have, the open position on a certain security.
With all this, respecting the legal dispositions in the matter of reporting these types of
holdings can not be considered as market manipulation action, considers justified the European
Commission of Regulators.
Is possible that the disseminations to the public of the information regarding this type of
position to be asked by the applicable juridical norms (it’s not the case in the hypothesis of
short sales, of short positions). In this hypothesis, the institutional investor does nothing else
but to respect the legal dispositions that impose the elaboration of a report to the market’s
entities in a certain period of time from obtaining the position 2 . Nothing can stop him, as soon
as he made this legal report, that can have an influence of the market of that security, to
alienate his holdings, either the total amount, either just part of them. A contrary interpretation
would violate evidently the right of disposition of this investor, the principle of freedom to
contract and the one of free negotiation of financial titles.
In the hypothesis in which public dissemination of a certain position is not asked by the
market’s authorities, being allowed, it intervenes the role of the market authorities to analyze
the real purpose of the investor that is liquidating immediately after an announce that position.
It will have to be verified if from the announcement by which it was given to the publicity that

1
The translation in Romanian of the final text of this paragraph from the Guide of the Committee of
European Securities Regulators, posted on the website of the National Securities Commission is: Incorrect
action means closing on a certain market a position as soon as it is made public, after which previously
created the impression of a long lasting holding, with the exception of the cases in which the position is
made public according to applicable legal regulations.
2
According to article 228, paragraph (1) from Law no. 297/2004, in the case of purchase operations or sale
of securities issued by an association admitted to trade on a regulated market, that make the voting rights
that a person has to reach, exceed or lower under one of the thresholds of 5%, 10%, 20%, 33%, 50%, 75%
or 90% from the total number of voting rights, that person has the obligation to inform, in maximum 3
working days from the moment of acknowledging this operation, in the same time, the association, the
National Securities Commission and the regulated market on which there are traded those securities.

225
position might appear that it was suggested that the investor will maintain for a longer period
of time the holdings in cause (or the short position), if the text of the announcement belongs
totally or just in part to the investor or if it was drafted by another person, for example a
journalist, and it is about an error of understanding from his part of the investor’s intents.
Thereby, it will be difficult to establish if the closure of the held position is owed to
investment reasons, for example, reaching a price target, or is a final step of a market
manipulation plan, grounded in essence of the credibility which the investor has in front of the
other market participants.

5.5.1 Cases of manipulation by opening a position and closing it as soon as it was made
public

Jeffrey Vinik was the manager of the investment found Fidelity Magellan for several
years, until June 1996. In that time he earned a good reputation on the capital market in the
United States, being seen as a well informed investor. In the summer of 1996, Vinik left
Fidelity Magellan and started to enroll business by his own investments fund. In the following
months he purchased stocks packaged larger than 5% from the social capital of 13 small size
companies that were little known by the public. Because of the obligation to inform the market
regarding holdings that exceed 5%, Vinik made public his positions, which generated a
substantial increase of the price of stocks to a number of 11 out of the 13 companies in the
following period, because of the pressure created upon purchase on the ground of trust of the
investors in those titles, generated by the fact that the general impression was that Vinik is a
well informed investor. After the release in public of reports regarding holdings, Vinik sold
large part of his holdings.
Securities Exchange Commission considered that this type of conduct is market
manipulation, but didn’t accuse Vinik of executing an illicit action. The main reason was
because it couldn’t be established if he closed the positions for the followed price for those
securities was reached or because this action was part of a market manipulation plan by
trafficking the credibility he had among the investors1 .

Section 4

Dissemination of information through the mass-media, including the

internet or any other method

§1. General specifications

One of the main desiderative of legislation of the European Union in the matter of capital
market is, as stipulated in paragraph 1 of “Considerations” in the Directive of European
Commission no.125/2005 “presentation of information in an equitable, clear and precise way”.
In the same time, is imposed mentioning the interests and conflicts of interest, and the respect
of juridical norms that prohibits market abuse by the persons that produce or disseminate, by

1
L. Harris, cited paper, p. 269

226
channels of distribution or directly, to the public information by which is suggested or
recommended an investment strategy.
Market manipulation by spreading information that sends or might send false or
misleading signals on securities is a form of the action that found the most premature
incrimination. Before assessing the financial market’s distortion by trading or issuing trading
orders, the authorities noticed that market participants are misled, deceived by other investors,
by spreading false information, resulting in selling or buying titles at artificial prices.
The technological revolution and modernization of communication means had an impact
on the methods of influencing the investors on the capital market by dissemination of
information contrary to reality or incomplete. In paragraph 10 of “Considerations” of the
Directive no.6/2003 is indicated the internet as one of the elements that encourages market
abuse, because of his capacity to send information in a short time to an extremely large number
of persons. Also, in the doctrine it was underlined that along with the appearance and
development of the internet, there were created new premises of dissemination of information
and closing trades, increasing exponentially also the possibilities of manipulating the prices of
stocks on the capital market 1 .
This type of approach is absolutely natural. 100 years ago, for example, the capacity of
capital market manipulation by spreading false rumors was infinitely inferior to the one at
present time. On the other hand, there were reduced also the possibilities to verify the
authenticity of a information, like in the period of time were news and data of interest for the
market reached to knowledge of investors.
The legal text from the market abuse Directive, resumed also in the Romania legislation,
makes a distinction between journalists and the rest of the persons that are disseminating
information by the mass media, internet and other communication channel.
Unlike the market manipulation consisting in fictitious methods or other types of fraud, in
the case of this version of the action, for the illicit to intervene is enough to disseminate false
information that mislead or have the potential to mislead.

Thereby, to qualify as manipulative a conduct on the capital market it’s not necessary for
the manipulator to close trades, following which he would obtain illegitimate profit or to lower
his loss to artificial prices, reached by using “fictitious methods” (consisting, basically, as we
have seen, in spreading false information), but is enough to spread among the participants to
the market false information or that issue false signals regarding the demand, supply or price of
securities or commodities traded on that market (or that consists in the active supports for the
derivative securities traded on a market). This idea is also underlined at point 4.14 from the
first guide of the Committee of European Securities Regulators regarding implementation of
market abuse Directive.
The line between the two versions of the manipulation action is extremely fragile. The
incrimination of the manipulation action of some false information, without being interested if
the one that is making that spread of information is taking advantage or not from the evolution
of course in a certain sense, has the purpose to cover also this situation of distortion of the
market’s integrity, even if it can not be established if the persons that have obtained benefits
from the trading at an artificial course were or not in agreement with the manipulators.

1
E. Ferran, Ch. AE Goodhart, Regulating Financial Services and Markets in the 21st Century, Hart
Publishing (September 11, 2001), p. 337

227
 These false information, in order to become “market manipulation”, must produce in
reality the conviction for at least one investor on the capital market that titles in question have a
certain value, larger or smaller then the one obtained by natural market means or that the
volume of demand and/or supply is at another level then the one that would have existed in the
absence of false rumors. The simple transmission through the media, email, blogs, forums or
any other similar means of some unreal information about certain securities (either about
economic statuses of companies, either about certain actions of the state authorities or any
other news) can not be treated as a market manipulation in the situation in which investors in
those titles do no react according to the rumor. In this manipulation hypothesis, is necessary to
be realized by the state authorities called to investigate the violation of legal dispositions in the
matter, a very clear distinction between expressing an opinion regarding the securities and
deliberately spreading false information.

Creating a false impression on the market of a security can be realized also by concealing
information which can influence the price, information that should have been revealed. For
example, an issuer that has a type of information noted in the directive as privilege information
and he will not disseminate it to the public, the result would be creating a false public opinion
on the securities of that issuer.
Legal norms regarding incriminating capital market manipulation by false information
dissemination doesn’t contradict article 10 from the European Convention of Human Rights
regarding the right to expression. This right includes freedom of opinion and freedom to
receive or communicate information or ideas without the interference of the public authorities
and without regarding the boundaries.
Also, sanctioning the manipulation of capital market is in accordance to the texts of the
Treaty for the constitution of the European Union, article I-47- The principle of the
participative democracy- Institutions give the citizens and the representative associations, by
proper means, the possibility to make known their opinions and to trade opinions publicly, in
all the domains of action of the Union.
And of article II-17 paragraph 1- Freedom of expression and information- Any person has
the right to freedom of expression. This right includes the freedom of opinion and freedom to
receive or transmit information or ideas without the interference of the public authorities and
without regarding the boundaries.
The market abuse directive, in paragraph 44 from “Considerations”, stipulates this
conformity with the fundamental texts of the European Union’s Treaty and of the European
Convention on Human Rights:
“This present directive respects the fundamental rights and known principals especially
by the Charter of Fundamental Rights of the European Union, especially in article 11, and in
article 10 from the European Convention on Human Rights. In this sense, the present directive
does not impede in any way the member states to apply the constitutional dispositions in the
matter of freedom of the press and freedom of expression by the mass means of
communication”.

In Romania, article 30 from the Constitution stipulates that freedom of expression of

thoughts, opinions or beliefs and freedom of creations of any type, by speech, writing, images
or sounds or any other methods of public communication, are inviolable, and in paragraph (2)
forbids the censorship of any type. In the same time, in article 31 from the Constitution is

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stipulated, on one hand, that the rights of any person to have access to any information of
public interest can not be enclosed. On the other hand, in article 31, paragraph (4) is imposed to
the means of mass communication, public and private, the obligation to ensure the correct
information of the public opinion.
Finding its ground in these two large constitutional principles, the one of the right to
information and the one of realizing a correct information by the means of mass information,
legal norms regarding the market abuse committed by the journalists are necessary to be
applied with objectivity and keeping into account the particularities of the profession and the
journalistic genre that he is approaching.

§2. Information that sends or might send false or misleading signals regarding
securities

Information disseminated in regards to the traded securities on a capital market is

influencing the trades closed with those titles. In this sense, it was stated 1 that information is
founded in the price of the securities that they refer to.
In the first paragraph of “Considerations” from the European Union’s Directive
2003/6/CE of the European Parliament and the Council regarding the definition and publication
of confidential information and the definitions of market manipulations, is indicated the fact
that rational investors ground their investment decisions on the information that they already
have (“available information ex ante”). In consequence, in order to find out that a rational
investor would take into account, when he is making a decision of investment, of a given
information, the information that are available ex ante should be verified.
Also, it must be kept into account the anticipated impact of that information in the
context of the global activity of the issuer in cause, of the reliability of the information source
and of all the variables of the market that could exert an influence on that security and on any
derivative security from the base product.
This judgment is equally valid for the hypothesis of analyzing the suspected actions of
representing market abuse under the form of divulging or trading based on privilege
information.
Also, in the second paragraph of this directive is mentioned that information available
after taking the investment decision (ex post) can serve to verify the hypothesis of changing the
course of information available ex ante, but these can not be used for investigating a person
that could have reached to rational conclusions because of information available ex ante.
In the process of establishing the illicit character of the actions of disseminating
information on the capital market, is imposed the exact determination of information categories
considered by the legal texts, and of the nature and characteristics of these information.

2.1 Nature and characteristics of information considered by article 1, paragraph 2, line c)

from the market abuse Directive

Given the fact that in the European Union’s legislation there isn’t a definition or
description of the characteristics of information contained in article 1, paragraph 2, line c) from
1
M. Nelemans, Redefining Trade- Based Market Manipulation. Valparaiso University Law Review,
January 2008 Available at SSRN : http://ssrn.com/abstract=1078423, p. 14

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the market abuse Directive, we will start in the analysis of the nature of these information from
the dispositions of the Code of Market Conduct, elaborated, as we have shown, by the
Financial Services Authority in Great Britain. The text of this code, elaborated prior to the
adoption of the market abuse Directive, influenced widely the legislation implemented in the
European Union in this field.
The information in question needs to be in connection with the trading of securities on a
regulated capital market. Information has to be one of the reasons for which an investor is
closing trades on the market, even if that is not the only reason.
Information considered by the text of the market abuse directive should have, if there are
true, a relevant character for the market of that security.
It’s necessary for this information to have a relevant character in a reasonable way,
meaning to be considered as such by a regular investor 1 on the capital market that might be
influenced by the content of these data in order to trade that security properly.
Not any type of information can be described as having a relevant character. Information
and date of minimal importance for the issuer and for the security can not be considered in the
analysis of dissemination actions suspected of having a manipulative character on the capital
market.
Code of Market Conduct, M.A.R. 1.4.9, states that in order to establish the relevance of
the information the following elements can be considered.

2.1.1 Specific and precise character of the information

Specific character information is when a reasonable person doesn’t have access to that
information. Specific character information is opposed to the one with general character that
can get in the possession of any person without abilities, knowledge or special efforts. It was
shown that specific character information can consist in the existence of a financial crisis of a
company 2 or in the fact that a company is the object of a takeover offer 3 .
Information has a precise character if it refers to a certain situation, clearly identified.
Information with a precise character is in opposition with the vague, unclear information, in
which is not determined the situation, person (entity) or the object that refers to.

The collocation precise information is considered also by the text of the market abuse
Directive (and of Law no. 297/2004) in the field of privilege information. Considering that we
are in the presence of the sale legislator that issued norms in similar fields, we will take over
and research in this analysis the dispositions, recommendations and considerations expressed
by the European bodies in the presentation and description of “precise” character of the
information in the texts regarding the privilege information.
According to the second guide of the Committee of European Securities Regulators
(CESR) of implementing the market abuse Directive, the precise nature of information will be
evaluated case by case and depends on that information and the context in which the evaluation

1
To see Chapter IV, p. 142-168
2
Public Prosecutor versus Chodhury, 1980 MLJ 76 at 78, in B. Rider, K. Alexander, L. Linklater, cited
paper, p. 88
3
Green versus Charterhouse Group of Canada, 1976, 12 OR (2d) 280, in Rider, K. Alexander, L. Linklater,
cited paper, p. 88

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takes place. In the same time, Committee of European Securities Regulators considers that in
order to determine if a certain set of circumstances exist or a certain event took place, an
important aspect is the existence of clear and objective proofs and not just rumors or
speculations, in other words, it needs to be proven that these circumstances and surroundings
happened or exist.
For an information to have a precise character doesn’t have to be complete, only has to
give enough data for a reasonable investor to take an investment decision based on its content.
The Committee of European Securities Regulators guide indicated, as an example, the situation
of a public offering of taking over in which is not published the offer price. The information
regarding the existence of this offer is considered to be precise; can form the ground of an
investment decision, because, reasonably, a price increase is expected when that offer will
become a certainty, being officially announced.

2.1.2 The important character of the information (material information)

On the capital market, information is important if it has the potential to influence the
price of securities from the moment it becomes public 1 .

Examples of important information are: taking over a company, selling its actives,
changes in the management structure etc.
In 1976 in the case of TSC Industries, Inc. versus Northway, Inc, the Supreme Court of
the United States set certain rules (“material information test”) by which it can be determined if
a certain information has an important character under the regime of the federal laws. In the
previously mentioned litigation there was in question the content of a statement from an issuing
company, on which a stockholder claimed that is incomplete and that violates the dispositions
of the Securities Exchange Act 1934. The Supreme Court of the United States showed that
“overlooking a fact is substantial in the conditions in which a reasonable shareholder would
consider that is important in order to decide how to vote. It’s not necessary to prove that the
dissemination would have changed the vote of the shareholder. It is important that the
overlooked fact would have been a special signification in the voting process of that
shareholder. In other words, there must be a substantial probability that disseminating the
overlooked fact to be seen by a reasonable shareholder to have altered significantly the entire
quantity of available information” 2 .
Today, this “test: is used not just in connection with the exertion of voting rights by the
shareholders, but also with the trading of securities admitted to trade 3 .

2.1.3 The current character of the information

The information has a current character if it is of present interest, if it represents new or

fresh news, whose effects are not contradicted by recent information. The present information
has applicability in the moment in which it’s disseminated or in a following moment to the
dissemination.

1
http://www.investorwords.com/3011/material_information.html
2
http://www.sec.gov/news/speech/spch497.htm
3
Ibidem

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 The information that is referring to past events, that can no longer influence the market of
a security, doesn’t have a relevant character.

2.1.4 The credible character of the information

The credibility of information has to, first of all, be reported to a regular, rational investor
on the capital market. Will be considered an average person that has the capacity to understand
and interpret certain data and information, without a special training in the field of capital
market or in the financial field.
In the second guide of the Committee of European Securities Regulators is showed that
when the possibility for information about an event to become reality is evaluated, the main
aspect took in consideration has to follow if the conclusion based on the present information at
that moment is reasonable.
In the same time, is natural to interpret that the approach of the person that is
disseminating that information to its source represents an element that is amplifying the
credibility. Information disseminated by a person that is not close to the origin of the
information can become a rumor, and its credibility degree will decrease.
The credibility of the information must be seen in connection to the degree of risk that an
investor is assuming on the capital market. The more credible is the information; the lower is
the risk of the investment decision taken based on that information.

2.1.5 The existence of another important information that is already available for the
market participants

In the hypothesis in which a new information intervenes, with an important character, that
is already available to the market participants, and its effects are reasonably eliminating the
possible effects of the information that wasn’t already disseminated to the public by the
accepted official channels, this last information will loose its relevant character. This type of
information intervenes also in the case in which the new public information has a similar
content with the un-disseminated one, but also in the hypothesis in which it has an opposite
content, in the conditions in which has the effect to remove the credibility to the information
that wasn’t yet transmitted officially to the public. Relevant in this case is the novelty
character, of “last minute information”.
From this perspective, can not be considered that it’s taking place a capital market
manipulation in the case in which is disseminated to the public an information that has no
effects on the false information in cause.

2.1.6 The novelty character of the information

Information that has a similar content with the data available to the market participants
usually doesn’t have a relevant character. In order to obtain this feature, is necessary that the
information in cause to contain distinctive elements to the information accessible in general to
the public, already disseminated by official channels.
The affirmation according to which investors can be mislead by information whose
content was already public and assumed officially by the issuer and/or authorities can not be

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backed up. Thereby, can be affirmed at least, in the case in which a market participant registers
losses from trading based on that information, of a wrong investment decision.
From the point of view of the capital market manipulation, will not be able to state that
certain information has a relevant character and misleads or sends false signals in the
conditions in which that information is available to the public, being possible to be obtained by
legitimate means: for example, is contained in the public registries of the issuers or is obtained
by the participations to certain events. In the Code of Market Conduct- M.A.R. 1.4.7 is
mentioned that general available information obtained by legitimate means are, for example,
information obtained abroad not yet published in the origin state of the issuer or information
obtained by paying taxes.

2.1.7 Examples of relevant information

In the exemplification of situations that can form information with a relevant character
we will have as support the dispositions of the Code of Market Conduct (M.A.R. 1.4.11),
because represents up to this moment in time the only normative act in force in another state of
the European Union that describes these aspects.
Thereby, relevant information is the information referred to:
- businesses or prospects of a issuing company or of companies from the same
group in which the issuer is included;
- in the case of derivatives on commodities, information referring to the most
important suppliers in that field;
- information regarding official statistics, monetary and fiscal policies, before being
announced publicly.

2.2 Information referring to possible future evolutions

In the case of information that aims to certain future evolution of the issuer or of the
securities traded on a regulated market, it is imposed the analysis of additional factors 1 .
Thereby, it’s necessary to be established if those provided information can indicate, in a
reasonable way and with valid reasons, if these future evolutions to which those news are
referred to, will intervene in reality. In case it is absolutely impossible that a future event takes
place, information that are announcing it can not be considered to have a relevant character and
can not be taken into consideration in establishing the legal or illicit character of the person’s
action that disseminated it.
In the same time, it needs to be determined with precision also the meaning of those
future evolutions for the security that it refers to. Certain events with a low importance, on
which a regular and reasonable investor can not asses if they will influence the market of a
security, can not be taken into consideration, also, in the analysis of the person’s conduct that
disseminated them.

2.3 The juridical regime applied to rumors

1
To see Code of Market Conduct M.A.R. 1.4.10

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 The effects of the rumor on price demand or supply of securities can be significant, in the
conditions in which the market participants are grounding their investment decisions on the
data contained by the rumor.
The economy literature showed that rumors are a special form of the information and
their special characteristics must be considered when the financial theory is applied 1 .

The rumor on financial markets is information whose source can not be legalized. The
difference towards the information is that the information is confirmed immediately, while the
rumor is never confirmed immediately, but can or might be confirmed in the future 2 .
It was pointed out that using rumor in trying to affect the price of securities traded on the
financial markets of a widely spread practice 3 .
The rumors are spread in general by persons that are far away from the alleged original
source.
Rumors have as determinant elements the consequences and their meaning. Investors on
the capital market, usually, want to know only the consequences of the rumor, but they need to
know, also, what other people think about the rumor, in order to prepare their future actions 4 . It
was underlined that the main purpose of rumors is only to be believed. Some investors can act
on their ground, and from this point of view rumors aren’t different from verified information,
but it is clear that rumors are different from gossip, folklore and legends 5 . It was mentioned 6
that, considering, aside from the financial elements, the psychological and sociological side of
rumors, in the analysis of the effects that rumors have on the financial markets is necessary a
interdisciplinary approach.
There is no strict demarcation line between information and rumor. It is said that it’s
about information when people consider it true and is about a rumor when it is considered as
false or unconfirmed. When people want to understand a situation, but they do not receive any
official response, then it is about a rumor. When there are doubts regarding the authenticity of a
fact it is about a rumor 7 .
It was noticed that the intensity of rumors grows in the conditions in which there are
made massive sales in the periods of time when, usually, there is not much activity on the
market 8 .

In many cases, opinions of persons that pretend to be well informed are grounded on
rumors to which there are given certainty valences. In case those rumors are not confirmed, but
the market has reacted following their spread, there will be effects similar to the illicit action of
capital market manipulation, but, usually, it will be difficult to establish the author of the
manipulation. Expressing a simple opinion, even based on certain false data, that are
circulating as rumors, spread by an undetermined person, can not be considered as market
abuse, because it would result in forbidding implicitly the right to free expression.

1
M. Schindler, Rumors in Financial Markets: Insights into Behavioral Finance (The Wiley Finance Series),
Wiley Publishing, 2007, p. 1
2
Ibidem, p. 5
3
G. De Brouwer, Hedge Funds in Emerging Markets, Cambridge University Press, 2001, p. 84
4
M. Schindler, cited paper, p. 5
5
Ibidem
6
Ibidem, p. 1
7
Ibidem, p. 6
8
G. de Brouwer, cited paper, p. 84

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 Trading based on rumors can be a defense invoked by the persons accused of closing
operations on the market using privilege information.
We consider that, in the situation in which certain data transmitted to the public “by
media, internet or any other methods” doesn’t carry out the conditions pointed out at 2.1 in
order to be considered relevant information and remain in stage of “rumors” that are not
believable to the regular investor, won’t be possible to apply to them the juridical regime of
market abuse.

2.3.1 Cases of manipulation by spreading false rumors

A famous case in which there were given convictions for market manipulation by
spreading false rumors took place in Great Britain, in 1814, Rex versus De Berenger. In this
trial there were accused many persons of manipulating the market of British governmental
titles by spreading the rumor that Napoleon died and the war with France was coming to an
end. The court ruled that this conduct was considered a fraud, by spreading false rumors,
pointed against the public interest, because was affecting the interests of all those that had any
intention linked to those titles in that time (for example, to buy them) 1 .
At that time, in the Great Britain or anywhere in the world, there wasn’t a written law that
would incriminate in terminis the capital market manipulation.

2.4 Information that doesn’t create a false or delusive impression

A certain genre of information can not be considered, in general, as misleading or send

out false or delusive signals. This information is contained in mandatory or permitted reports of
the issuer whose securities are admitted to trade, in the situation in which the content of these
documents is accounting data that reflect accurately the reality. Also, we can speak about this
type of information in the case of financial analysis reports that present correctly, clearly and
without any doubt the financial status of an issuer.
It won’t be able to pretend or prove in neither of these cases by any investor that he was
mislead by information disseminated in public, because, in the conditions in which economical
results or the other data is presented correctly, an alleged prejudice that was suffered will be
possible to be justify it only by a bad investment decision.
M.A.R. 1.5.25 from the Code of Market Conduct is indicating the fact that making a
report or disseminating a information will not be considered as sending out false or delusive
information when the report or de information spreading is realized in conformity with all the
legal disposition, and, on the other hand, the report or dissemination is mandatory or is allowed
according to the normative regulations in force.
In order for the author of those reports or disseminated information to be incriminated for
marker manipulation, a necessary condition is to insert in the documents in question false data,
which is the same with executing the crime of intellectual forgery.

§3. Dissemination of information

1
W.G. Horton, G. Wegen, Litigation Issues in the Distribution of Securities: An International Perspective,
Kluwer, Law International, 1997, p. 497

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 The activity of disseminating information regarding the securities traded on the capital
markets is executed by communication channels. The market abuse directive speaks about
“media, internet or any other method”.

Code of Market Conduct is realizing a distinction between the activity of disseminating

information by a persons that has the intention to spread false information and the
dissemination of information by a person that has in her competence this activity doesn’t adopt
the necessary measures to prevent the dissemination of false or delusive information. In the
second case, is about spreading some information by an accepted channel that gives a high
degree of credibility to that information.

3.1 Dissemination by an accepted communication channel

Dissemination of information by an accepted communication channel by a person that

has to know that the information was false, delusive or misleading is detailed in the Code of
Market Conduct, M.A.R. 1.5.18- 1.5.20.
In this case, we are dealing with a person responsible with spreading information by an
accepted dissemination channel. Information that was disseminated is relevant and is giving the
regular investor on the capital market (regular user) a false of delusive impression regarding
the demand, supply, price or value of securities or commodities.
The person responsible with disseminating the information doesn’t adopt all the
necessary measures to ensure herself that this information is not false or delusive.
In general, there are two categories of accepted channels for disseminating information.
The first category refers to the information system of the investors regarding the press
releases and information disseminated by the issuer of these securities, but also by the market’s
entities, according to the legal reporting obligations. In this category there are the official
bulletins of the origin state and electronic publications or on the material support of the
market’s entities (market operator, supervision authority etc.).
In Romania, these channels with official character consist in: Official Monitor of
Romania, The Bulletin of the National Securities Commission, websites of market operators,
Bucharest Stock Exchange and the Monetary-Financial and Commodities Stock Exchange
Sibiu, the website of the authorized associations as a central depository (at present just the SC
Central Depositary SA).
Relevant information is disseminated by the media, including in this category all forms of
written press, audio and video. When there are involved press releases or official
announcements of the issuer or of the authorities published in international, national or local
spread newspapers, depending on the legal requests, we are in the presence of an official
accepted channel of communication. In this category should be included also the financial
analysis reports disseminated to the public, considering the regulations that are governing this
profession and starting from the role that this professional category has on the capital market.
The persons that have in their competence to disseminate information, persons
responsible from the part of the issuer or of the market’s authorities, consultants and financial
analysts, departments of public relations in these associations and institutions are held to take
all the necessary measures to ensure that disseminated information are not false or delusive.
In the hypothesis in which by the mass- media, including the electronic media, under the
form of internet pages, there are disseminated other information that don’t have an official

236
character, meaning they are coming from other persons then the one that have the right to send
out official data and information, these means of sending out data, although it represents an
accepted communication channel, must be looked at from another perspective. In this case,
responsibility comes back to the publishers, administrators and other competent persons in the
press body that “hosted” this information.
The legislation of the European Union tries to establish, on a principle level, the way to
disseminate relevant information to the market participants. In paragraph 4 of “Considerations”
of Directive no.124/2003, of establishing the application norms of Directive 2003/6/CE of the
European Parliament and the Council regarding the definition and publication of confidential
information and definition of market manipulation, is pointed out that protection of investors
doesn’t mean publishing on time confidential information only by the issuers. This mean, also,
the publication has to be faster and in sync for all the investor categories in all the member
states in which the issuer requested or accepted the admission of his securities on trade on a
regulated market, in order to guarantee the equality of chances in what regards the information
on a communitarian level for all investors and preventing the abusive use of confidential
information. With this purpose, the text of the directive mentions, the member states can
officially appoint the mechanisms which can be used when it comes to publishing.

3.2 Dissemination of information by other methods

By other methods, than the accepted ones should be understood all those means of
communication to the public by which there are transmitted information outside an official
frame and by other means than the ones offered by the mass- media.
In this category there are included blogs, forums and other websites that belong to
persons, natural or juridical, which can not be included among the official ones (there are not
issuers of securities, entities or financial market authorities) or in the mass- media sphere. By
these types of channels there are also transmitted rumors.
This category of means to transmit information has to include also verbal
communications, made within the conferences, symposiums, seminars etc. Code of Market
Conduct, M.A.R. 1.4.5 indicates that information can reach the public’s knowledge also by
“observing”, by assessing without a doubt an event, phenomenon etc. (for example, an
earthquake that causes multiple damages, situation that will affect the course of actions of the
insurance companies).
In these situations, it can’t be invoked the existence of responsibility in the website
administrator’s task that is hosting a blog or a forum or in the conference or symposium
organizer’s task for spreading false or delusive information. Responsibility will belong entirely
to the person that transmitted that information.
In M.A.R. 1.5.17 from the Code of Market Conduct is offered as example of
manipulative practice the dissemination of a information regarding the take over of a company
through the websites for chats, when the person that is sending out this information knows its
false or delusive character.
An important role among the communication channels to the public of certain
information has also the issuer’s registries that can be seen by investors. In the same time,
official information can be posted on the issuer’s website. In some cases, legal regulations
impose posting certain information on the issuer’s website (for example, announcing a general
meeting, the method of distribution of dividends etc.).

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 §4. Subjective side

4.1 The purpose of the dissemination of information activity- misleading or issuing false
signals

For the activity of dissemination of information that sends or might send false or
misleading signals to the securities to have an illicit character is necessary for the purpose
followed by the person that is spreading this information to be misleading other market
participants or emission of false signals.
Like in the situation of manipulation by effective trades or by introducing trading orders,
we are showing that is possible that neither of the market participants can be mislead by
disseminated information, but their potential would be to send false signals for the investors in
that title.
Although the text of the market abuse directive doesn’t mention the necessity for the
followed purpose by the person that is disseminating the information to be misleading other
market participants or emission false signals, is clear that only this objective followed by the
alleged manipulator can attract the illicit of the conduct. Code of Market Conduct mentions
expressly the necessity of the purpose to deceive in the constitutive content of the capital
market manipulation action. M.A.R. 1.5.15 paragraph 3 shows that the illicit activity of
dissemination follows the creation of a false or delusive impression. In the same time, mentions
that it’s not necessary for this to be the only purpose of this type of conduct, but is imposed that
the objective of misleading should be strong enough to determine this conduct (“actuating
purpose”).

4.2 The interest

The existence of a special interest, of the person’s that is disseminating the information,
in its spread is not required by the European directive dispositions and of the issued legislation
for implementation and application.
In case in which information dissemination is linked with trading and issuing trading
orders by the author of the dissemination, then we are dealing with manipulation that is
assuming using fictitious methods 1 .
The absence of a direct interest doesn’t form a cause of responsibility exoneration for the
person that disseminated the false or delusive information.
A person has a relative interest to a certain security
- either directly, if she has initiated a certain position in the security (including a short
position- of short sale),
- either indirectly, if she obtains any benefit from creating and maintaining of an artificial
price, in this category being included also the situation of obtaining a reward, bribe or any
other profit following the development of a action of dissemination of false or delusive
information.

1
Analyzed in Section 2, p. 291-345

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 In the second aspect, of the existence of an indirect benefit, the manipulator is acting in
complicity or in connection to persons who obtain profits directly from creating and
maintaining an artificial price, having open positions on the security object of manipulation.
This manipulator will receive a reward from the persons that have obtained profits following
dissemination of false or delusive information, but will be considered the author of the
manipulation (and even of the crime) of capital market manipulation, even if he never closed
any type of trade and hasn’t issued any stock order.

4.3 The intention and culpability

The conduct is illicit when the person that disseminated the information knew or should
have known that is false or misleading.
It results that the manipulation action by dissemination of false or delusive information
can be executed not only with a direct or indirect intention, but also from guilt, with precaution
or simple.
Manipulation by dissemination of false or delusive information is realized by persons that
want to create the impression they have access to certain relevant information for the market of
a security, not disseminated yet by official channels.
The matter of proving the culpability has a special importance in proving the illicit
character of a conduct on the capital market. The persons who are spreading the false or
delusive information will always invoke in their defense that they didn’t know about the false
character of those information. In the same time, in some situations, they will point out that
they have only expressed a simple opinion in regards to the security in question.
Sometimes, it will be easier to prove the existence of intent, an indirect intent also, in the
execution of the result, meaning the misleading of the other market participants or issuing false
signals, then to prove the culpability, because is hard to prove that a person had to know that
the information was false or misleading.
In the Romanian legislation, the line that separates the intent from culpability has the role
to separate also the contravention illicit from the penal one, according to article 279, paragraph
(1) from the Law of capital market no.297/2004.

§5. Dissemination of information by journalists

5.1 Juridical frame applied to dissemination of information by journalists

In the case of information disseminated by journalists, in their profession, it needs to be

conciliated the principle of freedom of expression with the prohibition from the special
legislation of the capital market to not manipulate the market by spreading false or delusive
information.
The European Union’s Directive regarding market abuse contains an exception from
applying the incriminatory norm about manipulation by spreading false information, without a
doubt, pointed out in the text: “In the case of journalists that are acting in their profession, this
type of dissemination of information must be evaluated, without prejudicing article 11, keeping

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into account the regulations that are applied to their profession, with the condition that these
persons will not obtain, directly or indirectly, goods or benefits following the dissemination of
information in cause.”
The present formulation in the Romanian law presents, in our opinion, a certain degree of
ambiguity: “Referring to journalists, in their profession, dissemination of information will be
taken into consideration keeping into account the rules which are regulating their activity,
except the persons which are using this information with the purpose of obtaining, directly or
indirectly, advantages and profits.”
It needs to be mentioned that in Romania there is not another law of the press, as for the
legislation of the European Union in the matter which is also extremely frail.
In article II-17, paragraph (2) from the Charter of the Fundamental Rights of the
European Union is foreseen the fundamental principal according to which freedom and
pluralism of the mass means of communication are respected.
On the other hand, article 10, paragraph (1) from the European Convention of Human
Rights dedicated the right to free expression, right that includes the freedom of opinion and
freedom to receive or communicate information or ideas without the intermission of the public
authorities and without considering boundaries. Paragraph (2) of article 10 contains the thesis
according to which exertion of freedom comes with obligations and responsibilities, can be
submitted to formalities, conditions, restraints or sanctions foreseen by law, that constitutes
necessary measures in a democratic society, for the national security, territorial integrity or
public safety, defending the order and preventing crimes, protection of health or morale,
protection of reputation or other people’s rights, in order to stop divulgation of confidential
information or to guarantee the authority and impartiality of the juridical power.

The philosophy of European Union’s legislation in this field is to leave to the member
states and to the bodies of organizing the journalist profession the freedom to set norms and
auto regulations that would prevent and stop the execution of actions which are included in the
market abuse sphere.
The regulation in the market abuse directive points out, as we have seen, only the
situation in which a journalist obtains a benefit directly or indirectly from disseminating false
or delusive information. That is why, any exoneration or responsibility clause that is mentioned
in the normative acts incident to the profession of journalist doesn’t find its application in the
situation in which the journalist which is disseminating false or delusive information obtains
directly or indirectly benefits from this activity.
On the other hand, even in the hypothesis in which we are not dealing with obtaining a
profit directly or indirectly by a journalist, following his texts that contain false or delusive
information disseminated to the public, is necessary to analyze the impact made by those
information on the price, demand or supply of certain securities and to be established the
responsibility that belongs to the journalist in cause for distorting the market. These aspects
will have to be established based on internal legislation disposition of each member state or of
the norms issued by the professional bodies in the field of journalism.
The European Commission’s Directive no.125/2003, regarding method of application of
the Directive 2003/3/CE of the European Parliament and the Council in what regards the
equitable presentation or investment recommendation and mentioning the conflicts of interests,
stipulates the applicability of its texts in the matter of the journalists, only in the hypothesis in
which they do not respect a proper equivalent regulation in the member states, including a

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proper equivalent auto regulation, with the condition that the regulation will produce similar
effects to the ones in the directive.
Directive no. 125/2003 was introduced in the Romanian legislation by the Regulation of
the National Securities Commission no. 15/2006 1 regarding the presentation of
recommendations for investments in securities.

At present time, in the European Union is regulated only the situation in which there are
made investment recommendations by journalists and not the aspects connected to the market
manipulation by this professional category by disseminating information, on another type then
the previously mentioned recommendations, false or delusive.

5.2 Obligations of the journalist to prevent market abuse actions

In the absence of regulations equivalent to member states legislations or in the norms

issued by the professional bodies with self regulatory power, that would produce similar
effects, journalists that publishes information regarding financial markets needs to respect a
series of obligations, according to the dispositions of European Union’s Directive no.125/2003.
Thereby, regarding the identity of the persons that have elaborated investments
recommendations needs to be mentioned with clarity the identity of the persons that is
responsible for her presentation, especially the name and profession of the natural person that
elaborated the recommendation, and the name of the juridical person responsible for this
presentation.
About the equitable presentation of investment recommendations, journalists that are
conducting this activity need to assure that:
a) facts are clearly separated by interpretations, estimations, opinions and other
types of non- factual information;
b) all the sources are valid or, if it’s not the case, this thing is mentioned clearly;
c) all the projections, predictions and course objectives are clearly indicated as
such, and the main hypothesis that are reserved for establishing them and
their use are mentioned.
In the field of interest conflicts, journalists are obligated to respect all the valid
notification obligations for any person that is making investment recommendations 2 .
The Regulation of the National Securities Commission no. 15/2006 has a similar content
with the one of the European directive. In addition, the is the important specification according
to which the National Securities Commission is the only body that has the right to pronounce
on the equivalence of regulations incident to the profession of journalist, including the ones
issued by the professional bodies, and on “the similar nature of the effects produced by these”.
This type of disposition might be considered to respect the spirit of article 7, paragraph (6)
from the Statute of the National Securities Commission, approved by the Government
Emergency Order no. 25/2002, approved by Law no. 297/2004, according to which the
National Securities Commission can realize, on demand or official, the official interpretation of
all the juridical norms issued by this, applicable to the regulated and supervised entities. This

1
Approved by the President’s Order of the National Securities Commission no.81/6.10.2006 (Official
Monitor no. 943 from 22 November 2006)
2
Presented at point 4.2 in section 3, p. 307-316

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situation regards the interpretation of text elaborated and adopted by other bodies that do not
have a direct link to the legislation applicable to the capital market.
In the period of time following the adoption of Regulations of the National Securities
Commission in question, there were reactions of journalists in the field of capital market
regarding the abrogation by the National Securities Commission of this prerogative to “regulate
in the press field” 1 . Is not possible legally speaking to attribute to the competence of another
authority or entity the matter of interpretation of the norms incident to the capital market,
because there have to be considered the general order dispositions of article 1, paragraph (3)
from Law no.297/2004, which stipulates that the National Securities Commission is the
competent authority with the application of capital market’s law. The application of law
consists also in interpretation and application of subsidiary norms, issued by other authorities
or entities, but which aims to aspects that result from the organic law dispositions mentioned
previously. In the same time, article 2 from the Statute of the National Securities Commission
sets up a series of essential objective of the Commission, among which there is also the
promotion of trust in the regulated markets and in securities investments; assuring the
protection of operators and investors against the non-loyal practices, abusive and criminal;
promoting the correct and transparent function of regulated markets; preventing the market
manipulation and fraud and assuring the integrity of regulated markets; preventing affecting the
information equality and treatment of investors or their interests. Fulfilling all these
specifications can not be realized without efficiently connecting all the regulations incident to
the capital market.
In the same time by the text of the National Securities Commission Regulation no.
15/2006, sets up the obligation for the publication, position or electronic service that hosted an
investment recommendation, made by a journalist, to spread, on the request of the National
Securities Commission, the sanction applied for not respecting the regulations regarding the
investment recommendations.
These legal texts are not applicable when the journalist expresses simple opinions
regarding certain aspects, situations, events or phenomenon, without being possible to conclude
that, even indirectly, he is making an investment recommendation.

5.3 The sphere of norms application regarding market abuse made by journalists

5.3.1 The notion of journalist

A definition of the notion of journalist doesn’t exist in the European Union’s legislation.
There is only one directive in the field of mass-media which contains norms that apply to the
audio-visual, Directive 89/552/CEE 2 , modified by Directive 97/36/CE 3 and by Directive
2007/65/CE 4 .
Article 1, line d) shows that by “supplier of media services” are understood a natural or
juridical person having editorial responsibility for selecting the audio-visual content of the
media audio-visual service and sets the organizational process. In the same time, according to
article 1, line c) from the directive by “editorial responsibility” is understood the exertion of an

1
N. Sarbu, See no evil, hear no evil, speak no evil, “Investments and profit”, no.10 November 2005, p.3
2
Official Journal of the European Union no L 298 from 17.10.1989
3
Official Journal of the European Union no L 202 from 30.07.1997
4
Official Journal of European Communities no L 332 from 18.12.2007

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effective control over the selection of programs and over their organization either in a
chronological grid, in the case of television transmissions, either in a catalogue, in the case of
audio-visual media services on request. The editorial responsibility doesn’t imply necessarily a
juridical responsibility according to the national right for the content of delivered services. We
appreciate that these definitions can be applied mutatis mutandis also in the field of written
press.
In the normative frame in Romania, the notion of journalist is defined in the Deontology
Code of the Journalist adopted by the Romanian Press Club 1 , on which also refers article 2,
paragraph 2, line b), point 2 from the Regulation of the National Securities Commission no.
15/2006.
Thereby, according to paragraph 3 from “Preamble” of the Deontology Code, a
professional journalist is the person that has as main and remunerated occupation the press, has
in possession a press book known by one of the professional organizations, meaning any
reporter, editor, press photographer, press drawer, editing secretary, section or department
chief, editor in chief or assistant, publication director, radio or television, with a minimum
length of service in press of one year (time considered probation in this activity).

5.3.2 Journalistic activities aimed by the legal norms regarding market abuse

From the point of view of the journalistic activities on which there would be incident the
legal dispositions regarding the market abuse needs to be mentioned that the text of Directive
no. 125/2003 article 1, paragraph 4, point b) indicates the applicability of norms regarding
investment recommendations and for information that recommend directly a specific
investment decision regarding a security, even of there are presented by other persons than the
independent analysts, investment associations, credit institutions or person whose main activity
is to present recommendations.
In a more explicit way than the European directive text, Regulation of the National
Securities Commission no.15/2006, in article 2, paragraph (2), line b), point 2 shows that a
research or another information that is recommending or suggesting an investment strategy,
aimed by the text of National Securities Commission a information realized by a professional
journalist defined according to the Deontology Code of the journalist adopted by the Romanian
Press Club which recommends directly the investment in a certain security.

5.4 Obligations of journalists according to dispositions of the Deontology Code of the

Journalist adopted by the Romanian Press Club

We appreciate that the norms inserted in the Deontology Code adopted by the Romanian
Press Club represent, from the point of view of the market abuse legislation, oriented elements
on which can be asserted the conduct of a journalist that is elaborating and transmitting by
mass means of communication information regarding certain securities and their issuers, even
if that journalist is not a member of this professional organization.
The main obligations contained by the Deontology Code that represents an interest from
the point of view of the capital market manipulation by spreading information are:

1
http://www.pressclub.ro/publicatii/cod.html

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 a) the journalist can give to the publicity only the information whose
authenticity is valid, after being verified, usually, from at least two believable
sources (article 2);
b) the journalist doesn’t have the right to present his opinions as facts. The press
news has to be exact, objective and not to contain personal opinions (article
3);
c) the journalist will give to public the points of view of all the implicated parts
in the case of a contrary opinion. Will be avoided publication of comments
and taking stands on causes discussed in justice. This doesn’t exclude the
objective representations on their evolution (article 5);
d) the journalist has, also, the right to refuse any text of false presentation of
data (article 7);
e) in his profession and relations he has with public authorities or different
commercial associations, the journalist is forbidden agreements that might
affect his impartiality or independence. He doesn’t have to accept any
privileges, special treatments, gifts or favors that might compromise the
integrity of the journalist. In order to avoid conflicts of interest, is
recommended for the journalist not be a member of any political party and
not be employed as an informer or under cover officer of the secret service
(article 8);
f) the journalist that is distorting on purpose the information makes false
accusations, plagiarizes, uses without authorization photographs or television
images and sources or lies is committing professional deviations of maximum
gravity (article 9);
g) the journalist and editorial staff have the obligation to make the necessary
modifications in case, from their fault, there will be given to the publicity
inexact information. In these cases, that press institution has the obligation to
publish/broadcast in 5 days from receiving, for daily publications, news
agencies, television and radio stations, and soon, periodical publications, the
right to answer of the claimant, as an initial form of fixing the prejudice
brought to him.

5.5 Conclusions regarding capital market manipulation made by journalists

Direct recommendation by a journalist of an investment or initiating a certain position

(including a short sale position) on a security, in conditions in which it’s presented under the
form of false or delusive information can be included in the market abuse sphere.
Specific regulations to the profession of journalist will be considered only in the situation
in which the person that has this type of profession hasn’t used the information with the
purpose of obtaining, directly or indirectly, advantages or profits.
Also in the case of press representatives, in order for the illicit to take place, the form of
culpability with which the action is committed is enough to be a simple culpability.
A special importance in the analysis of conduct of the journalist that disseminated false or
delusive information will be his good-faith, although won’t be possible to speak entirely of
removing the illicit character of the action in the hypothesis in which the journalist in cause had
to know that the information was false or misleading.

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 In Romania, respecting by a journalist the norms from the “Deontology Code” adopted
by the Romanian Press Club excluded, in principal, any illicit character of the action. The illicit
of a conduct will have to be analyzed, of course, for each case, because, as we have shown
previously, the code of the Romanian Press Club has an orientation character, not having the
nature of a normative act for the profession of journalist (not all journalist in Romania are
members of the Romanian Press Club).

§6. Manipulation practices through disseminating of false information

The first guide of the Committee of European Securities Regulators of implementing the
market abuse mentions two manipulative practices by disseminating false or delusive
information.

6.1 Dissemination by the media of false or misleading information

The action represents posting information in an on-line bulletin or issuing a press release
containing false or delusive information regarding a certain company whose stocks are
admitted to trading on a regulated market.
The condition for this type of action to enter in the illicit sphere is necessary for that
person that is disseminating information to have the awareness that the information is false or
delusive and to realize this in order to create a false or delusive impression.
The guide of the Committee of European Securities Regulators showed that
dissemination of these types of information through a known channel of information
dissemination towards the users is a practice which can have serious negative effects, because
is important that the market participants can count on disseminated information through these
official channels.
In practice, a version of this manipulative technique, describing posting negative
information on the internet in order to manipulate the price or to cause prejudices to the issuer,
was called “cybersmear” 1 .

6.2 Any activity meant to disseminate false or delusive information

This type of market manipulation refers to any behavior meant to create a false or
delusive impression by other means than the media.
The guide of the Committee of European Securities Regulators gives as example
displacing commodities quantities in order to create a false impression regarding the
demand/supply in connection with this commodity or in connection to the active support of a
security. In this case, delusive information can regard also the price of the commodity, as a
proper object of trade on the commodities exchange and as an active support of a derivative
contract.

1
http://www.market-abuse.com/cybersmear.html

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 In the Code of Market Conduct is represented as an example the activity of spreading
false information and moving an empty cargo ship, with the purpose of creating a false
impression regarding the demand, supply or price of a product or of a derivative security whose
active support is that product.

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 Chapter VI
Defense and exceptions from application of sanction regime in
the matter of capital market manipulation

We will analyze in this chapter the judicial institutions that can make the defense against
charges of capital market manipulation, and also those exceptions from the legal regime of
market abuse, exceptions that are specifically stipulated in the incidental normative acts,
especially in the market abuse Directive, but also mentioned indirectly in other regulations that
apply to the judicial relations closed on the capital market.
With regards to the defense that can be built against charges of capital market
manipulation, the law particularly accredits certain judicial institutions that frame a judicial
regime derogatory from the rules that incriminate market abuse, such as, actions meant to
stabilize the price or programs to buy back stocks.
On the other hand, the authorities of regulation and supervision of the capital market
within the European Union are allowed based on the dispositions of article1, paragraph 2, line
a) paragraph 2 and article1, paragraph 5 from Directive no.6/2003, to accept certain practices
on the regulated markets on which they hold jurisdiction, which even though suppose
operations similar to those considered to be manipulation actions, do not stand under the
incriminatory regime applicable market abuse.
The other means of defense that can oppose the accusations of capital market
manipulation hold ground on the judicial institutions that imply the existence of an
authorization from an competent organism (the market maker) and transactions that have a
legitimate motivation, with an acknowledged legal status ( such as, hedging and arbitrage).

Section 1

Possible defense facing allegations of capital market manipulation

charges

There are different forms of defense that can be built when facing manipulation
allegations. Some are expressly recognized from the legal point of view, while others are
indirectly founded on exonerating causes of responsibility.
In order to successfully respond to charges of capital market manipulation, the accused
persons basically has to prove the legitimacy of his conduct either based on a legal text or a
market operation admitted directly or indirectly as being licit. On the other hand, the party
suspected of market manipulation, can also simply prove the absence of any behavioral fault
from his part on the capital market.
The legitimacy of conduct can be founded, for instance, on particular transaction
strategies that are not prohibited by laws in force, of which most relevant are: arbitrage,
hedging and short selling.
The various defense plans which can be put together in a case of capital market
manipulation may focus on two core objectives:

247
 - either the person incriminated tends to prove that the entire conduct does not
subscribe to market abuse sphere, meaning didn’t mislead, sent out false
signals, maintained the price at an artificial level or disseminated false
information;
- the person incriminated will try to prove/show one could not foresee that the
actions taken will have an effect of manipulation on the regulated market in
discussion.

§1. Not meeting the conditions required by law for the capital market manipulation
action

The defense mostly used against capital market allegations is built / tends to demonstrate
that the actions of the person incriminated do not subscribe to the illegal conduct incriminated
by regulations in the sphere of market abuse.

In such circumstances, the accused will try to impose the conclusion according to which
the content associated to the act of capital market manipulation has not been met. In reality, the
task of bringing the evidences is attributed to the body for investigation, market authority or
criminal pursuit body. The presumption of innocence can generate legal effects in this area as
well.
The counter tests administered on demand of the accused will aim to fight the
conclusions resulting from the evidences managed by the body for investigation and to prove
the legal nature of the conduct displayed on the capital market.

1.1. The absence of the material evidence

The person accused to have committed the illicit action of market manipulation will be
able to prove that the material evidence of the manipulation has not been committed. Such
hypothesis is valid especially in cases of manipulation by dissemination of false or delusive
information, because in the case of the other means under which the material evidence occurs,
meaning issuing orders or closing of transactions, when the person in question does not commit
them, no allegations can be brought along, author wise, but only those such as complicity or
instigation.
In the case of the defense to manipulation charges by dissemination of false or delusive
information, the person accused will show that the information released was true or could be
regarded as be being true in the context they have been provided or corroborated with other
factors. For instance, a piece of information regarding the opportunity to close a lucrative deal
for an issuer can be considered as being true if negotiations have indeed taken place, even
though later, the contract has not been signed. In the same manner, the information concerning
an issuer of commercial bills on securities, whose executives could have been arrested, may
not be taken as delusive, if those executives were indeed under investigation for certain actions,
which could have resulted in the issuance of an arrest warrant.

A similar logic is valid in the case of manipulation by transactions or orders to trade that
involve fictitious procedures, because, in this situation as well, in order to regard a conduct as

248
being illicit, we would have to deal usually, with the transmission of false data and
information. Hence, in order to demonstrate the licit nature of the behavior based on the
absence of the material evidence of the action incriminated by the law, the person accused will
be retained to prove that the data and information sent, either as a recommendation for
investment or various other means, were real, true.

1.2. The result established by law does not occur / take place (that of immediate pursuit)

The immediate result of a manipulation action consists of: perturbation of normal security
trading, materializing in transactions closed at artificial prices or not being closed at all due to
the existence of abnormal prices. The result of manipulation must not necessarily reside in the
existence of a prejudice in the patrimony of some of the market participants. As previously
seen 1 , market manipulation also takes place when market participants are being prevented from
trading because of maintaining artificial prices, but also in the hypothesis in which transactions
or orders of trading have the potential to send out false signals on the market, even tough, in
reality, these signals are not transmitted.
A strong defense based on the absence of the immediate pursuit of the manipulation
action will show that the result of the actions investigated did not consist in misleading the
other market participants, in transmitting false signals or maintaining an artificial price level. It
will furthermore have to prove that those suspected operations have also not had the potential
to send out false signals to other market participants.
The result of the operation taken by the suspected person is regarded in correlation with
the possible indications of the manipulation act, stated in article 4 and 5 of Directive no.
124/2003 2 .

In such circumstances, the defense of the person incriminated resides in proving that the
immediate pursuit has not happened, a procedure that is further more difficult when dealing
with allegations that concern the potential of a conduct to send false signals.
In this hypothesis, it will be necessary to determine the content of the “false signals”
notion. An exhaustive description in a normative act would be the “happiest” alternative,
especially for avoiding the abuse in the interpretation of activities that are legal on the capital
market. Certainly this is not easy to put in practice. Not even the Committee of European
Securities Regulators guide for implementation of the market abuse Directive has tried to
create a definition of the notion “false signals”. There’s a risk that any transaction on the
market can be regarded as one which send out false signals if it’s not closed at the price
previously registered on the market and, especially if it causes a sensitive variation of rate.
In the current frame of the legislation, the path considered optimum to be followed by
competent authorities (authority for market supervision, criminal pursuit bodies, trial court) is
that given by the Code of Market Conduct, meaning the realization of an objective model of
the regular investor that takes actions on the capital market where the conduct suspected to be
illicit has manifested. The conduct of any of the investors suspected to have transmitted false
signals on the market will be judged based on this objective model.

1
Chapter I, section 1,§2, p. 3-5
2
Analyzed in Chapter V, section I, §3, 2nd section, §3 and 3rd section, §4, p. 181-196, p. 229-242 and p.
304-318.

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 Mislead or transmitting false signals should be judged more severely on markets where is
also present retail investors as opposed to markets where only operate institutional investors,
which are considered to be professionals of the market, as they are expected to have thorough
knowledge on capital market trading. 1

1.3. The causal link between the conduct of the person accused and the result generated
on the market does not exist.

1
According to Annex II of the Markets in Securities Directive no. 39/2004 Directive, from the prospect of
the investment firms, a professional client is a client that has the experience, knowledge and competence to
make his own investment decisions and to correctly evaluate the risks involved. In order to regard a client
as being a professional one, the following criteria must be met.
I. Professional client’s category.
These clients are considered to be professionals with respect to all services, investment activities and
securities as in the present directive :
1. Entities to be authorized or regulated to operate on the financial markets. The following list is
thought to include all authorized entities that exert activities characteristic to the mentioned
entities, whether they are authorized by a member state based on a directive, authorized and
regulated by a member state without referral to a directive or authorized and regulated by a third
country:
(a) Institutions offering loans
(b) Investment groups
(c) Other authorized and regulated financial institutions
(d) Insurance companies
(e) Collective investment bodies and the administration units
(f) Pension Funds and the associated administration bodies
(g) Entities that carry out transactions with raw materials and derivatives.
(h) Local firms.
(i) Other institutional investors
2. The enterprises that meet two of the following requirements, at individual level:
- total balance : EUR 20 million
- net turnover : EUR 40 million
- own capital : EUR 2 million
3. National and regional governments, public organisms that manage the public debt, central banks,
international institutions and supranational, such as the World Bank, International Monetary Fund,
European Central Bank, European Investment Bank and the other similar international organizations.
4. Other institutional investors whose main activity consists of securities investments, especially the
entities that are concerned with obtaining capital by valuing transferable securities in assets or other
financing operations.
The entities mentioned previously are regarded as professional. However, these entities have to be
able to solicit the treatment reserved to non-professional entities, and the investment enterprises can
accept to give a higher level of protection. In the case the client of an investment company is another
company, in the view of the previously mentioned, the investment company must inform the client
before providing any services that based on the information held, they are considering it as a
professional client and will be treated as such, except the cases in which it’s otherwise agreed. The
company also has to let the client know that it can solicit a contract amendment / modification in order
to benefit of higher protection.
The client that is considered to be a professional has the responsibility of requesting this higher
protection, when it is estimated that it can not manage the risks to which it would be subject to.
This higher level of protection is given when a client that is regarded as being a professional, signs an
agreement with the investment company, stating that it should not be treated as a professional client
within the meaning of the applicable behavior rules. This agreement mentions the services, transactions
or all types of products or transactions to which they apply.
II. Clients that can be considered professional on their demand.

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 In the case when the cause, meaning the illicit action taken by the alleged manipulator,
consisting of either transactions or trading orders, or dissemination of false information, does
not produce the effect provided by the legal normsnm that makes the ground for the illicit
conduct, the existence of a fact of manipulation of the capital market is not to be an argument
here.
A particular result that can be generated on the market, such as the abnormal price
variation that would prevent investors from trading at artificial prices, may be the effect of
some other factors.
Assuming that the investigation bodies are not able to prove the causal link between the
operations of the person accused and the result generated on the market, the actions will not be
considered illicit.
Where the immediate pursuit (the result of the action) consists in creating a state of
protocol, for instance in the situation in which the transactions or trading orders may send false
signals regarding the demand, supply or price of securities, the investigation body doesn’t have
to prove the causal link.

1.4. The subjective part is not met – the absence of culpability1

The person accused can build the defense by demonstrating that there was no reasonable
way to have foreseen that the conduct and actions taken would create a false or misleading
impression on the price or value of traded securities, for the other market participants. It has
been shown in the doctrine 2 however, that for the success of such defense, it will not be
sufficient to plead that others have proceeded similarly in cases alike and that such conduct has
been present for years on that market.
In the case such a defense is built, the person suspected to have committed the act of
capital market manipulation will have to show that is barring no culpability for the illicit
action, which is stated in the legislation which incriminates the market abuse.
It results form the way the legal text is expressed, incriminating the capital market
manipulation, that the European legislator considered also incriminating the action committed
by fault and not only that committed intentionally.
In such conditions, the person incriminated will have to prove that the outcome of the
action was not foreseen and neither could have and should have been foreseen. In this
circumstance also, it is acknowledged that it’s of great help to use the “regular investor”
abstract model taken over from the British legislation. It would be necessary in such
conditions, to establish whether or not a regular investor could have foreseen the result subject
to investigation, happening. In analyzing the fact, it is of course required to take in to account
the profile of the person suspected of market manipulation. The ability to foresee the
consequences of certain conduct on the capital market is increasingly visible in the case of

1
In chapter IX we will develop the essential elements that characterize the culpability for manipulation of
the capital market.
2
G. Brazier, Insider dealing, Taylor & Francis Group, Cavendish publishing, 1996, page 259.

251
professional investors (institutional investors) compared to that of smaller investors (retail
investors) or occasional ones.
It is also of rather important relevance, when sustaining the defense by proving that the
legal conditions regarding the subjective side have not been met, at least in the Romanian law
system, to establish the fact that the intention to commit the act pertaining to the sphere of
market abuse, was missing. The presence of this intention gives the act of manipulation a penal
disposition according to article 279 of Law no.297/2004.
In these circumstances, it is extremely important for the person accused to prove that at
least the action was not taken with intent, although it may be understood that the possibility to
foresee the result of the action taken on the capital market existed.
Starting with the definition of the criminal offence committed with indirect intention,
contained in article 19 Penal Law, the person incriminated will have to convince the
investigation party and the court of law, that even tough the result of the action has been or
could have been foreseen, it was not followed or accepted.

§2. Trading strategies allowed by legal norms

The trading strategies permitted by the law in force can comprise capital market
manipulation actions when they are executed in a manner which sends out false signals,
misleads market participants, maintains price at an artificial level or implies imaginary
procedures or any other delusive form. These strategies are not meant to be manipulative but
can turn in to such illicit actions because of the way in which the orders are introduced to the
trading system.

2.1. The arbitrage

The arbitrage is recognized by the Committee of European Securities Regulators 1 as a

market activity which implies a trading strategy that cannot be considered illicit in itself.
In establishing the licit or illicit nature of this action is relevant the mean by which it was
applied.
The arbitrage consists in the simultaneous execution of operations with securities,
currency or merchandise, of opposite effect, on two or more markets in order to obtain profit
from the securities price differences manifesting on those markets.
The essential principle of arbitrage consists in buying a security on the market where it is
traded at a lower value and selling of the same instrument/security on the market where the
trading price levels are higher. The arbitrage operation is known also as “risk free profit” 2 . In
principle, the arbitrage notion refers to the securities operations.
The persons engaging in arbitrage operations are called arbitrageurs.
In order to realize an arbitrage it is necessary to meet the following conditions:

1
The first guide of the Committee of European Securities Regulators for the implementation of market
abuse Directive, Chapter II, “Accepted market practices” paragraph 2.10
2
http://www.investopedia.com/terms/a/arbitrage.asp

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 a) - a security has to be traded on several markets, either all spot markets 1 , or
one or more spot markets and one or more forward markets 2 , or
- a security and a derivative that has active support the respective security or
two derivative securities with the same active support for example the futures
or option contracts.
b) - buying and selling of the same security or derivative with the
same active support have to be performed simultaneously in order to avoid
the risk generated by the market’s evolution.
Buying of cheap agricultural products in the rural environment and reselling them at a
higher price in the urban environment represents an old form of arbitrage.
There are multiple forms of arbitrage at this time 3 :

- merger arbitrage, which consists in buying the stocks of the company that is
about to be integrated and short selling the stocks of the company taken over;
-
convertible arbitrage, which means buying the convertible bonds (type of bond
that can be converted into stocks in the issuing company) and simultaneously
selling those stocks;
-
depository receipts arbitrage, that is buying at a lower price depository
receipts that grant rights over some of the stocks of a particular company on a
market where those stocks are being traded etc.

It can be said that arbitrage has a generic role to level in time the price discrepancies
showing on different markets for the same product or security, having thus, from this point of
view, a beneficial role for the world economy in the context of globalization.
We will not continue with a further analysis of arbitrage as this is not the purpose of the
present paper. Engaging successfully in arbitrage implies, when trading with the same security
on different markets, a rapid reaction from the part of the traders involved in the operation in
order to profit the moments of optimal price differences of the security in discussion. In the
case of derivatives with the same active support, one has to identify the undervalued and
overvalued securities in order to take the selling or buying positions that present potential for
profit. Thanks to the fact that arbitrage implies having some good knowledge on the financial
markets, but also knowledge on how to use the most sophisticated trading mechanisms in
general, these operations are performed by experimented investors, by professionals.
A form of arbitrage is that called risk arbitrage, present especially in the United States, an
activity that consists in buying a company’s stock before it is taken over, in hope that the price
of those stocks will increase after the takeover 4 . When the decision to invest in the purchase of
securities is based on rumors, the operation is legitimate. In case it is based on possession of
privileged information this activity enters the sphere of stock exchange illicit.
The arbitrage as shown above is a trading strategy allowed by the majority world capital
markets.
1
For example, Erste Bank stocks are currently being traded on three spot markets, Vienna Stock Exchange,
Prague Stock Exchange and Bucharest Stock Exchange, investors being able to engage in arbitrage, taking
profit off of the price differences on these markets.
2
Arbitrage operations can be performed, for instance, the regulated spot market operated by the Bucharest
Stock Exchange and Monetary- Financial Stock Exchange and Commodities Sibiu.
3
http://en.wikipedia.org/wiki/Arbitrage
4
http://legal-dictionary.thefreedictionary.com/Risk+Arbitrage

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 The manner of executing it can transform the activity of the arbitrageurs in manipulation
actions of the capital market. Some operations on one or more markets can be justified by its
author through the intent to profit from the price differences between two markets, between the
price of a security and a derivative instrument that has that particular security as active support
or between two derivative securities with the same active support. We consider from this point
of view that the arbitrage operations subscribe to the dispositions of article 1, paragraph 2, and
letter a) paragraph 2 of Directive no. 6/2003, and can constitute “legitimate reasons” for
trading.
In order to not meet the elements that constitute the manipulation fact it is necessary that
the immediate effect of the manipulation action does not occur or there is no causality between
the market evolution to the price artificial levels and the action of the arbitrageurs.
On the other hand, it is necessary that the arbitrageur is guilty, meaning he could have not
foreseen the result of his operations, in the case these operations have not sent out any false
signal or have maintained the market at an artificial level.

2.2. Hedging

In a synthetic way, the hedging has been defined as a method for reducing the risk caused
by the price fluctuation 1 .
In essence, the hedging is an operation meant to cover risk, with features extremely close
to those of arbitrage, consisting of the initiation of positions with different effects on the same
security, either directly, on two or more markets, or by transactions on some derivatives that
contain the titles as active support.

Hedging mainly consists of buying (adopting a long position) a security followed by the
selling of the same security, either directly, if possible, or indirectly (adopting a short position)
on the basis of a derivatives contract (futures or options). Hedging can also produce through
convertible bonds.
This way, no matter the market evolution, the investor neither will lose nor will he win
anything.
Hedging is a market activity that can make a legitimate reason for an investor to adopt a
certain trading policy , in the sense mentioned by article 1, paragraph 2, letter a), paragraph 2
of the Directive no. 6/2003 [article 244 paragraph (6) of the Law no. 297/2007]. Similarly to
arbitrage, in the case of hedging as well the way of executing the operations to cover the risk
can result in manipulation, although the hedging is acknowledged on all world markets as a
licit activity.

2.3. Short Selling

Security short selling implies selling the securities that the seller does not own at the
moment of the sale, which were borrowed beforehand 2 .

1
http://www.britannica.com/search?query=hedging&ct=&searchSubmit.x-0&searchSubmit.y=0
2
This is the legal definition of this operation contained by article 190 paragraph (2) of the National
Securities Commission no. 32/2006

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 Short selling is a licit operation regarded as having an important contribution to the
efficiency and maintenance of the market liquidity, but can generate by its nature significant
risks for the market participants, especially in the amplification of some opportunities to
manipulate the market. Hence the necessity to regulate with increased attention this type of
operations has been imposed.
In the Romanian legislation the main rules are comprised by the National Securities
Commission regarding the financial investment services, and the Code of the Bucharest Stock
Exchange – market operator. The main rules that govern short selling on the capital market in
Romania are:
- transferable securities purchased on margin serving as collateral cannot be used
for short selling [article 203, paragraph (2) of the Regulation no. 32/2006.
- the investor has to notify in writing that the order given to the broker is a short
selling order [article 204, paragraph (1) of the 32.2005 Regulation] ;
- prior to performing the shorting, the dealer has to identify whether those particular
transferable securities or other equivalent transferable securities are available for
lending with the purpose of delivering them to the buyer at the time of the
settlement [ article 204, paragraph (2)] ;
- short selling is to be carried out at a value at least equal to the price the last
transaction has been performed [ article 205, paragraph (1)] ;
- the orders associated to the short selling of a particular transferable security can
be brought into the Bucharest Stock Exchange system only if it complies
altogether the follow two requirement :
a) their price is higher or equal to the price of the last transaction carried out on the
primary market of that particular transferable security;
b) their price is higher or equal to the best selling price registered on the primary
market of that transferable security, at the time the short selling operation order is
placed [ article 137, paragraph(2) of Title III of the Bucharest Stock Exchange Code –
market operator].
- the orders associated to the shorting operations are exclusively limited orders and
cannot be hidden orders [article 137, paragraph (3) and (4) of the Bucharest Stock
Exchange Code – market operator];
- the information regarding the short selling carried out on a regulated market shall
be made public by the market operator as soon as possible in reference to the time
the order is being executed [ article 205, paragraph (4) of the National Securities
Commission Regulation no. 32/2006].
Compliance with the legal requirements that govern over the short selling process on a
market does not represent in itself a guarantee of the conduct’s lawfulness.

Assuming these short selling operations send out delusive signals to the market
participants or contribute to the keeping of the price at an artificial level or they are being
founded on imaginary procedures, the investor in discussion will be sanctioned for committing
illicit actions on the stock exchange.
At the same time, short selling is not in itself an operation that should be suspected by the
market authorities to eminently having an illicit character. As previously seen 1 , on some
markets, especially in the United States, even in the hypothesis that a short selling is carried out
1
In Chapter V, section 3, point 5.4., page 335-342.

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without borrowing the securities sold before the settlement, in the case of the naked short sales
operations the ab initio existence of an illegal fact is not presumed. The Regulations of the
Securities Exchange Commission – SHO Rule 1 , in order to prevent the market manipulation,
impose that the brokerage firm which performs short selling, in his own account or for its
clients, present a solid ground for considering that these titles will be let until settlement.
Manipulating by short selling – naked short sales - can occur even when the information
about the operation being a short selling one is kept secret, which can mislead the other market
participants and can have negative effects on the titles by causing a pronounced depreciation of
the titles.
In such conditions, we conclude that the shorting operations present a risk for
manipulation more reduced provided they are more precisely regulated and are ensured an
increased transparency such that the market participants can know with precision, in an
accessible manner, the nature of the operations carried out on that market.

Section 2

Accepted market practices

§1. General specifications

The purpose of the accepted market practices. Conditions in which accepted

market practices are exonerated of responsibility

1.1. General theoretical aspects

The institution of the accepted market practices is on a special relevancy in the domain of
capital market manipulation. In essence, by outlining this institution the delimitation between
licit and illicit is created on a capital market.
While in the British law, the supreme criterion on which the illicit of a conduct is being
determined is represented by the standards expected by a regular user test (ordinary investor),
in the vision of the European Union the separation line is being given by the admissibility of
some practices on the security market, in compliance with the legal norms and incidental
regulations of the country.
We will analyze the practices accepted on the market from the perspective of the
European Union legislation, showing also the fact that this institution is being considered by
the American common law for tens of years, without receiving legislative establishment. The
legal wording on which we will found our analysis represents the first guide of the Committee
of European Securities Regulators regarding the uniform implementation of the market abuse
Directive.
In the Anglo-Saxon law system, in strong relation with the matter of the specific
standards expected by an ordinary investor, can be found an institution specifically called “safe

1
http://www.sec.gov/rules/final/34-50103.htm

256
harbor” 1 . From the legal stand safe harbor means a legal or statuary provision that reduces or
eliminates the legal responsibility of a person, on condition that this person acts in good faith.
The safe harbor judicial institution finds the most substantial applicability in the area of
personal data protection 2 .
From the point of view of the European Union legislation regarding capital market
manipulation and that of the norms from the national legislation issued in its implementation,
the safe harbor institution can be applied as circumstantial element (the motivation in itself)
and not legal, in the area of the defense built against market abuse allegations. Opposite to that,
in the British legislation, considering the regulations comprised by the Code of Market
Conduct, safe harbor is consecrated from the legal point of view and the overlapping of one of
the situations referred to in this code, with a conduct of a market participant leads to the
exoneration from responsibility of this participant.

1.2. The purpose for accepting some of the market practices

The essential purpose of the “accepted market practices” is to extract from the
sanctionary regime of the Directive on market abuse (and the normative acts for its
implementation in the national legislations of the member states) those conducts that can
reasonably have a legitimate motivation, in certain circumstances and conditions. It would
represent an excessive measure to punish those activities on the capital market that support the
development, the increase in liquidity, draw of new investors, but which, by some strict
interpretation of the legal wording, would get an illicit character.
By creating the possibility to introduce these accepted market practices in the national
legislations of the member states, the European legislator allowed the creation of particular
zones in which the market operations, based on legitimate reasons, are approached differently,
in a more indulgent manner, adapted to the specific conditions of the market and its
participants.

1.3. Conditions for exoneration from responsibility

It’s important to highlight that not just any execution of the accepted market practices can
lead to the exoneration of responsibility result of the person that proceeds in such manner. The
text in article 1, paragraph 2, letter a), paragraph 2 of the market abuse Directive no. 6/2003
[taken from article 244, paragraph (6) of Law no.297/2004 regarding the capital market]
unequivocally indicates the fact that it can’t be spoken of manipulation in the case where two
conditions are cumulatively met :
- the persons that execute the transactions or issue trading orders prove that the reasons
are legitimate;
- the persons in question prove that these transactions or trading orders are compliant
with the accepted market practices on the regulated market.

1
The Romanian translation would be “adapost sigur”, but we will use this expression as we find it slightly
bizarre given the context, such that we would prefer the English expression, used as a neologism.
2
The United States Department of Commerce and the European Commission within the European Union
have developed in 1992 a set of seven principles regarding the rules to follow in the case of transfer of
personal data. In the European Union these principles have been approved with the Decision 2000/520/EC
(OJ nr. 215 25.08.2000)

257
 The transactions and trading orders represent an exception from the sanctionary regime
for the market abuse when they serve the pursuit of an objective for which the specified market
practices have been accepted. In this respect, the reasons of the persons in question would
appear as being legitimate only if the closed transactions and the orders issued subscribe the
purposes legally recognized for the accepted market practices on that regulated market.
The task to prove the legitimacy of the reasons residing at the core of the conduct of a
person suspected to have committed acts of abuse on the market, is attributed at this stage of
the regulation, to the market participants on trial.
The exoneration of responsibility will only function in the case of transactions or trading
orders:
a) that give or might give false signals or mislead regarding demand, supply or price of
the securities, at an abnormal or artificial level, or
b) that maintain through the action of one or more persons acting together, the price of
one or several securities at an abnormal or artificial level.

In all the other variants of the action of manipulation, that is the transactions or trading
orders that imply fictive procedures or by dissemination of false information, this clause of
exoneration of responsibility will not operate.

Recent orientations expressed at the level of experts around the European Commission,
European Securities Markets Expert Group 1 , shows a change of vision with respect to the task
of bringing the proof in the case of allegations formed by the competent authorities regarding
the facts in the sphere of markets abuse.
Hence, an European Securities Markets Expert Group recommendation from July 2007,
regarding the stage for the implementation of the Directive on the market abuse in the member
states of the European Union 2 , recommends a level 1 modification of the legislation, of the
Directive on the market abuse itself, considering as legitimate the reasons that are the grounds
for trading and for the practices accepted on the market used, excepting those which are
expressly declared by the market competent authority as illegitimate and unaccepted.

§2. Relevant provisions

In paragraph 20 of the Directive on the market abuse no. 2003/6 is stipulated that “a
person who enters into transactions or issues trading orders which are constitutive of market
manipulation may be able to establish that his reasons for entering into such transactions or
issuing trading orders were legitimate and that the transactions and trading orders were in
conformity with accepted practice on the regulated market concerned”. However, if the
competent authority establishes that there was another, illegitimate, reason behind the
concerned transactions or orders to pay, sanctions will be applied regardless the admissibility
of a practice.
In article 1 paragraph 2 letter a) of the 2003/6 Directive is indicated that the person who
carried out the transaction or issued the trading orders establishing that his reasons for doing so
are legitimate and that these transactions or orders to trade conform to accepted market
1
To see Chapter II, Section 4, point 5.2., pages 73-75
2
http://ec.europa.eu/internal_market/securities/docs/esmc/mad_070706_en.pdf

258
practices on the regulated market concerned, will not meet the conditions defining the
manipulation of the market by transactions and orders to trade that mislead or give false signals
as to supply for, demand of and price of a security or secure the price of a security at an
abnormal or artificial level.

This provision was included in the Romanian legislation in article 244 paragraph (6) of
the Law no. 297/2004.
In Romania, the Law no. 297/2004 regarding the capital market determines in article 244
paragraph (3) that fact that the “accepted market practices will mean practices that are
reasonably in one or more financial markets and are not accepted by National Securities
Commission in accordance with Community procedures”.
Within the second level of the legislating process at the European Union level, the
European Commission adopted on the 29.04.2004 the 2004/72/CE Directive on the norms for
implementation of the 2003/6.CE Directive of the European Parliament and Council with
respect to the accepted trading practices, definition of the confidential information for
securities deriving from base products, establishing of the list of people that have access to
confidential information, declaration of operation performed by the persons that exert
leadership responsibilities and notification of suspect operations.
There is yet no implementation in the Romanian legislation of the content of 74/2004
European Commission Directive.

§3. The notion of “accepted market practice”

Principles which form the ground of accepted market practices

3.1. Definition of accepted market practices (article 1 paragraph 5 of the 2003/6/CE

Directive)

Accepted market practices mean practices that are susceptible to usage on one or several
financial markets and are accepted by the competent authority in accordance with the
guidelines adopted by the European Commission and with the procedure laid down in Article
17, paragraph 2 of the market abuse Directive 1 .

1
Article 17, paragraph 2 of the 6/2003 Directive states that “where reference is made to this paragraph,
Articles 5 and 7 of Decision 1999/468/EC shall apply, having regard to the provisions of Article 8 thereof,
provided that the implementing measures adopted according to this procedure do not modify the essential
provisions of this Directive”. For accuracy purposes, we present excerpts from the text of Articles 5, 7 and
8 of the 1999/468/CE Directive.
Article 5 - Regulatory procedure
(1) The Commission shall be assisted by a regulatory committee composed of the representatives of
the Member States and chaired by the representative of the Commission.
(2) The representative of the Commission shall submit to the committee a draft of the measures to be
taken. The committee shall deliver its opinion on the draft within a time-limit which the chairman
may lay down according to the urgency of the matter. The opinion shall be delivered by the
majority laid down in Article 205 (2) of the Treaty in the case of decisions which the Council is
required to adopt on a proposal from the Commission. The votes of the representatives of the
Member States within the Committee shall be weighted in the manner set out in that Article. The
chairman shall not vote.
(3) ……

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 The accepted market practices can be defined by interpreting “per a contrario” the text in
paragraph 1 of the 74/2004 Directive considerations.
Thus, the market practices that would not inhibit the interaction of supply and demand by
limiting the opportunities for other market participants to respond to these transactions, would
not affect the market integrity, hence the competent authorities should accept them.
At the same time, the practices that comply with the norms and dispositions meant to
prevent the abuse of the market and also abide by the code of conduct applied on the market
concerned, can be considered acceptable.
It is important to remember that the accepted market practices are not safe harbor, a
conclusion specifically expressed by the Committee of European Securities Regulators 1 . In the
view of the Committee of European Securities Regulators, from the perspective of the
European Union legislation safe harbor programs are the stabilizing programs, the stocks pay
back programs and also other situations in which is indicated that the legislative system
founded on the 6/2003 market abuse Directive, is not applicable (for instance, Article 7 of the

(4) If the measures envisaged are not in accordance with the opinion of the committee, or if no
opinion is delivered, the Commission shall, without delay, submit to the Council a proposal
relating to the measures to be taken and shall inform the European Parliament.
(5) If the European Parliament considers that a proposal submitted by the Commission pursuant to a
basic instrument adopted in accordance with the procedure laid down in Article 251 of the Treaty
exceeds the implementing powers provided for in that basic instrument, it shall inform the Council
of its position.
(6) The Council may, where appropriate in view of any such position, act by qualified majority on the
proposal, within a period to be laid down in each basic instrument but which shall in no case
exceed three months from the date of referral to the Council.
If within that period the Council has indicated by qualified majority that it opposes the proposal,
the Commission shall re-examine it. It may submit an amended proposal to the Council, re-submit
its proposal or present a legislative proposal on the basis of the Treaty.
If on the expiry of that period the Council has neither adopted the proposed implementing act nor
indicated its opposition to the proposal for implementing measures, the proposed implementing act
shall be adopted by the Commission.

Article 7 – (1) Each committee shall adopt its own rules of procedure on the proposal of its chairman, on
the basis of standard rules of procedure which shall be published in the Official Journal of the European
Communities.
Insofar as necessary existing committees shall adapt their rules of procedure to the standard rules
of procedure.
……
Article 8 - If the European Parliament indicates, in a Resolution setting out the grounds on which it is
based, that draft implementing measures, the adoption of which is contemplated and which have been
submitted to a committee pursuant to a basic instrument adopted under Article 251 of the Treaty, would
exceed the implementing powers provided for in the basic instrument, the Commission shall re-examine the
draft measures. Taking the Resolution into account and within the time-limits of the procedure under way,
the Commission may submit new draft measures to the committee, continue with the procedure or submit a
proposal to the European Parliament and the Council on the basis of the Treaty.
The Commission shall inform the European Parliament and the committee of the action which it
intends to take on the Resolution of the European Parliament and of its reasons for doing so.
1
http://www.cesr-eu.org/index.php?page=groups&mac=0&id=51.Frequently Asked Questions.

260
6?2003 Directive which stipulates that the directive does not apply directly – for reasons that
concern the monetary , currency or public debt administration policies – carried out by the
European Central Bank System, by a central national bank, by any organism officially
appointed or any person that takes action on the account of them).
The matter of establishing whether or not a conduct on a financial market is a practice
accepted or not, is left to the national legislation. The reason for choosing this orientation
resides in that the acceptance of a practice is a matter of national responsibility that is related to
the specific of each market separately. Some practices can be considered as likely to be
accepted on a market but not accepted on another market, depending on the specific of such
trading place.

3.2. Principles residing at the grounds of the accepted market practices

The first Committee of European Securities Regulators guidelines on the implementation

of the market abuse Directive sets up a series of fundamental principles that have to be taken
into consideration by the competent authorities “to ensure that the accepted practices do not
undermine market integrity, while fostering innovation and the continued dynamic
development of financial markets”.

3.2.1. Practices on new or emerging markets that should not be assumed to be

unacceptable by the competent authority simply because they have not been previously
accepted by it

Using some new investment procedures by the investors for a particular market should
not constitute in itself a practice that cannot be accepted on the market concerned. The
diversification the securities present on a market reclaims in some situations, adopting of some
new investment strategies that support the market efficiency and stimulates the investments
growth in that particular market.
The development of a capital market necessarily consists in the permanent
implementation of some new instruments and methods to correspond to the economic
requirements in the concerned stage of development. A restrictive interpretation of the legal
dispositions would stop these new and original mechanisms from being introduced.
This principle is legislatively consecrated; in the level 2 regulations of the European
Parliament and Council number 72/2004, in Article 2, paragraph 2: “the practices, in particular
new or emerging market practices are not assumed to be unacceptable by the competent
authority simply because they have not been previously accepted by it.”

3.2.2. Practicing fairness and efficiency by market participants is required in order not to
create prejudice to a normal market activity and market integrity

Accepting a market practice and considering it as being admitted on a particular market is

fundamentally influenced by the fairness of the market participants. Failing to determine their
honest conduct, it would be difficult to establish the fact that a certain method used by them
would subscribe to the sphere of the accepted market practices.

261
 A market practice at the same time can be considered to be accepted as long as it does not
alter the market integrity. This market integrity factor, in essence, consists in creating the
prices on that particular market based exclusively on the free interaction of supply and demand.
This requirement is specifically stipulated also in paragraph 1 of the 72/2004 Directive
considerations.

3.2.3. Competent authorities should analyze the impact of the relevant market practice
against the main market parameters such as weighted average price of a single session, daily
closing price, specific market conditions, before carrying out the relevant market price.

It is necessary that every investigation on a conduct suspected of being illicit, to take into
consideration the specific characteristics of the security market or of the product the analyzed
practice refers to. An abstract conduct model valid for all financial markets cannot be
established.
This principle is legislatively consecrated in Article 2, paragraph 1 of the 72/2004
Directive; competent authorities especially analyze the impact of the market practice
concerned, on the main market parameters and especially the special dominant market
conditions before applying that practice, the weighted average price of a single session or the
daily closing price.

3.3. The comparative analysis of the accepted market practices with other activities
performed on a capital market

The matter of determining a distinction has been approached in practice, from the
perspective of the market abuse, between that which the European legislator has called
“accepted market practices” and other operations and activities carried out on a capital market.
On point 2.10 of the first Commission of European Securities Regulators guidelines for
the implementation of the market abuse Directive, is indicated the fact that the Commission of
European Securities Regulators has created in a consistent manner, the distinction between the
practices and activities carried out on financial markets.
In the Committee of European Securities Regulators 1 documents was shown that the
“Activities” would cover different types of operations and strategies that may be undertaken
such as arbitrage, hedging and short selling. On the other hand, market “practice” would cover
the way these activities are handled and executed in the market.
In the view of Committee of European Securities Regulators members, “activities” are
considered to be too broad to qualify for the status of accepted market practices. An “activity”
such as short selling or hedging could be undertaken in many different ways. If the activity is
carried out in a way which does not constitute market manipulation, then the question of giving
it accepted market practice status does not arise. On the other hand, if the “activity” is carried
out in a way which would constitute market manipulation, it is unlikely that a competent
authority would be prepared to accept it as an accepted market practice. Hence to give an
activity a blanket accepted market practice status, as per point 2.11 of the Committee of
European Securities Regulators guidelines, “would neither be meaningful nor desirable”.

1
03 September 2003-The Committee of European Securities Regulators Advise on the Second Set of
Implementing Measures for the Market Abuse Directive
http://www.cesr-eu.org/index.php?page=document_details&fromtitle=Documents&id=216

262
 The Committee of European Securities Regulators members also considered the issues of
whether certain more specific practices, such as crossing/pre-arranged trades, should be given
accepted market practice status, considering that these operations can hold manipulative
elements or, provided that parties involved are of good faith, can send false signals to the other
market participants. The Committee of European Securities Regulators members came to the
conclusion that, in most of the cases considered, conduct of practice in conformity with the
rules of the relevant regulated market would be sufficient in itself to promote market integrity
and therefore the question of giving the practice accepted, market practice status would not
arise.

§4. Evaluation criteria of market practices

In the process of determining the admissibility of some procedures and conducts

manifested on the capital market, the competent authorities had to apply some criteria, with
content as objective as possible, depending on which the behavior of the investors suspected to
have committed actions subscribing to the sphere of market abuse, would be judged.
In Article 2 of the 72/2004 Directive are specified the factors to be taken into
consideration by competent authorities when assessing the acceptability of a market practice,
considering the specific of each market in compliance with the principles named above.
These factors apply in all European Union member states, but the acceptability of a
practice will occur at the level of each country separately. We reckon that these factors
elaborated at the European Union level have to be implemented in the national normative
systems, in order to ensure the transparency of decision making and regulating, both when
accepting or rejecting a market practice.

4.1. The level of transparency of the relevant market practice to the whole market

The transparency of market practices by the market participants is a fundamental criterion

that competent authorities have to take in consideration for determining in what way a given
practice can be accepted.
In the first Committee of European Securities Regulators guidelines for implementing the
market abuse Directive and in paragraph 2 of the 72/2004 Directive considerations, is
highlighted that a low level of transparency of a market practice would decrease the chances
for it to be accepted. However, practices on non regulated markets might for structural reasons
be less transparent than similar practices on regulated markets. Such practices should not be in
themselves considered as unacceptable by competent authorities, as shown in the Committee of
European Securities Regulators guidelines.

Fundamentally, ensuring an increased transparency of a market practice, by fully

informing the market participant regarding the conditions and the objective of some of the
operations characteristic to such practice, is meant for eliminating the manipulative potential of
those operations. In consequence, the market participants would not claim that they were
misled or received false signals following the transactions carried out or orders issued by the

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author of the practice. With regards to keeping an artificial price level for securities as the
subject of the market practice, ensuring full transparency warns the market participant about
possible price evolutions as a result of executing that practice, such that they can react in
consequence of this information.
We would like to underline that the legal norms regarding the capital market
manipulation adopted in the juridical system created by the 6/2003 Directive are only
incidental for the regulated markets, as per the dispositions of Article 9 of 2003/6/EC market
abuse Directive 1 . In such context of absence of incrimination in the European Union
legislation, for the market abuse committed outside the regulated markets it is necessary to
look at the entire analysis regarding the admissibility of a practice on a regulated market.
Committee of European Securities Regulators however, as shown above 2 , recommends
that the norms and criteria for the assessment of the market practices are applied for Over the
Counter markets as well.

4.2. The need to safeguard the operation of market forces and the proper interaction
between the forces of supply and demand

In paragraph 1 of the 72/2004 Directive preamble, is stipulated that the market practices
inhibiting the interaction of supply and demand by limiting the opportunities for other market
participants to respond to transactions can create higher risks for market integrity and are,
therefore, less likely to be accepted by competent authorities.

This criterion for the assessment of the market practices has the value of a true principle,
as it considers the free interaction between the forces of supply and demand. Naturally, a
market practice that indicates a limitation of the normal interaction between supply and
demand cannot be taken as admissible by authorities.
In conformity with the provisions of Article 2 paragraph 2 of the 72/2004 European
Commission Directive, in order to support the free interaction, the competent authorities
particularly analyze the impact of the relevant market practice against the main parameters of
the market and the special dominating market conditions before carrying out the relevant
market practice, the weighted average price of a single session or the daily closing price.
Therefore, if it’s concluded that a certain conduct of an investor on the capital market
does not affect the free interplay of the forces of supply and demand, the competent authorities
will be able to consider the particular practice as accepted, not subscribing to the sphere of
exchange illicit from this point of view.

4.3. The degree to which the relevant market practice has an impact on market liquidity
and efficiency

In the same paragraph 1 of the 72/2004 Directive preamble is mentioned the clear
orientation of the European legislator towards the stimulation of liquidity increase on the
regulated markets, by positioning the practices that enhance market liquidity among those that
have a chance to be considered as accepted and by rejecting at the same time, the practices by
actions of which the liquidity is decreased.

1
See Chapter III, section 4, §1, pages 136-137.
2
See Chapter III, section 4, §2, pages 137-139

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 The operations on the capital market that have the potential to contribute to the increase
of liquidity and market efficiency will tend to be accepted as market practices by the national
authorities, in light of the normative system based on the market abuse Directive. From this
perspective, we consider to be useful the introduction on the Romanian capital market of some
practices capable of supporting the increase of liquidity.
In the British legislation, the Code of Market Conduct, the matter of liquidity is also
regarded as a factor that can influence the analysis of an investor’s conduct on the market. In
M.A.R. 1.6.5 is shown that it is less likely that a conduct reflected in the closing of a deal at
most profitable time and dimensions for an investors with the purpose of obtaining a maximum
of profit, regardless of whether it concerns a long term investment, operations for covering the
short term risk or speculations, will represent in itself a distortion of the market. Such conduct
is regarded as supporting market efficiency and liquidity.
Liquidity is influenced by a series of practices with high risk manipulative character for
the orderly functioning of the market, such as cornering or abusive squeeze.

4.4. The degree to which the relevant practice takes into account the trading mechanism
of the relevant market and enables market participants to react properly and in a timely manner
to the new market situation created by that practice

Any activity on the market of an investor has to be analyzed considering the specific of
the regulated market concerned. The fact itself that the setting up of the accepted practices on
the regulated market is a matter left, by the European Union normative acts, to the national
legislations, is an eloquent proof of the vision of the European legislator in this respect.
A good number of factors, starting with the level of transparency required by the legal
and regulation norms (including those issued by the self-regulation organisms), the reporting
requirements and ending with the practical manner for closing the transactions on that market,
influence the operation of a financial market. In some cases, the trading mechanisms allow a
more rapid reaction from the part of the market participants in newly created circumstances,
and abuse practices are inhibited by the rules applied to these markets. In other situations
though, the reduced level of transparency or heavier trading mechanisms restrain such fast
reaction.
In order to meet this condition specified in Article 2 letter d) of the 72/2004 Directive, the
market practice that a national authority has to recognize, must allow every market participant
(meaning the regular investor, with a medium level of knowledge on the capital market and the
operating mechanismsof this market 1 ), to get to know and understand the purpose and the
conditions for carrying out an operation close within this market. Only such, the market
participants can react and adapt the investment decisions to the newly created circumstances by
executing the accepted market practice.

4.5. The risk inherent in the relevant practice for the integrity of, directly or indirectly,
related markets, whether regulated or not, in the relevant security within the whole
Community.

1
See Chapter IV, Section 2, pages 157-163

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 The practices of the participants to the market operations have to comply with the
principles of equity and efficacy in order not to disturb the normal market activity and its
integrity (paragraph 1 of the 72/2004 Directive).
The practices pertaining to a given market must not compromise the integrity of other
European Union markets it may have, directly or indirectly, connection with, regardless
whether those markets are regulated or not. Hence, the higher the risk of affecting the integrity
of such markets within the Community, the smaller the possibility that competent authorities
approve of such practices (paragraph 3 of the 72/2004 Directive Considerations).
Market’s integrity refers to the ability of investors to transact in a fair and informed
market where prices reflect information 1 .
The market abuse Directive states that at a principle level, the requirement that member
states ensure that the appropriate measures are being taken such that competent authorities can
control the activity of the investment companies so to can make sure they exert it a fair,
equitable and professional manner that benefits the market integrity.

The risk of affecting a market’s integrity by accepting a practice that is inevitably similar
with that of manipulation is major. In the case that the price of a security traded o a market can
be influenced by the rate of the same instrument but on a different market, a market practice
that regards the concerned security will have to be assessed with increased precaution.
The trading mechanisms on the market concerned have to allow the market practice roll
such that no false signals are sent about the price, supply and demand of that security and nor
the price be kept at an artificial level.
It is important, on the other hand, to try to avoid conflict of interests by carrying out
operations within the accepted market practice.

4.6. The outcome of any investigation of the relevant market practice by any competent
authority or other authority mentioned in Article 12(1) of Directive 2003/6/EC, in particular
whether the relevant market practice breached rules or regulations designed to prevent market
abuse, or codes of conduct, be it on the market in question or on directly or indirectly related
markets within the Community

This market practice evaluation factor, provided in Article 2, letter f) of the 72/2004
Directive, is based on the premise situation in which the particular market practice has been
used previously on a market within European Union state.
The authorities that refer to this legal text are: the authority for the regulation and
supervision of the capital market in any of the European Union member states (in Romania, the
National Securities Commission), the competent judicial authorities, other authorities present
on the concerned market (Article 12, paragraph 1 of the 6/2003 Directive).
The conclusions of any investigation and the investigations carried out on some identical
market practices or with many similarities, are an extremely important factor that must be
taken into account by the national authority called upon to accept a market practice. In the case
that these investigations have identified negative effects in the way the similar or identical
market practices have been carried out, the national authorities have to be reserved about
accepting the practice concerned.

1
http://www.asx.com.au/about/pdf/The_Importance_of_Market_Integrity_-_September_2004.pdf

266
 4.7. The structural characteristics of the relevant market including whether it is regulated
or not, the types of securities traded and the type of market participants, including the extent of
retail investors’ participation in the relevant market

The normative system based on the market abuse directive is basically applicable for
regulated markets 1 . The applicability of the principles that govern the market though can be
also extended in the case of non-regulated markets, alternative systems (multifunctional) for
trading or systematic internaliser.
In the analysis of a market practice whose acceptability is required on the capital market
in one of the member states, the characteristics of it are of maximum importance. It is obvious
that the state titles market contains extremely different to a stock market, such as a forward
market is fundamentally different from a spot market.
The presence of small investors (retail investors) determines a big influence on the way in
which the operations performed on that market are analyzed. Every time retail investors are
present in a great number there’s a risk that they are misled or forced to transact at prices
considered to be artificial or prevented from trading because of such prices. This risk follows
particular operations carried out on the market in question, due to the low level of knowledge
and information on these as well as the significantly reduced financial force. This
differentiation between the retail investors and institutional investors is also underlined in the
Code of Market Conduct, in M.A.R 1.2.3 paragraph 4, highlighting that the conduct standards
expected from a retail investor are above and differ from those considered for institutional
investors.
The practice accepted on a market where retail investors are present has to favor their
participation to transactions and to support the liquidity increase of the securities it refers to.

§ 5. Acceptance procedure of a market practice

Accepting a market practice implies that the competent authorities perform a certain
procedure, complying with the dispositions of Article 3 of the 72/2004 Directive.
The essential principle rising from the market abuse Directive is that that the acceptability
of a practice is done by the competent national authorities, the European Committee for
Regulations, which can issue guidelines. It is possible that in some circumstances, a market
practice that is accepted on a market will not be accepted on another market in the Community,
to which it is compared. In this case, as shown in paragraph 4 of the 72/2004 Directive
considerations, the Committee of the European regulation authorities of the securities markets
can examine the matter in order to find the optimal solution.
According to the dispositions of Article 3, paragraph 2 of the 72/2004 Directive, Member
States shall ensure that competent authorities, before accepting or not the market practice
concerned, consult as appropriate relevant bodies, in particular representatives of issuers,
financial services providers, consumers, but also other authorities and market operators,
especially when there are other markets to compare the concerned market with.
It’s important to highlight that the procedure provided by the 72/2004 Directive states
that other competent authorities are consulted, in particular when there are other markets

1
See Chapter II, Section 4, §1 and §2, pages 59-67

267
comparable from the perspective of their structure, volume produced or types of operations
carried out. The purpose of consulting procedure consists in ensuring the European market
integrity.
Competent authorities have to make sure that the market participants and final users can
benefit a high level of consultancy and transparency. In this sense, the competent authorities
are accounted for making public the decisions regarding the acceptance of the market practice
in question, also providing an appropriate description of those decisions. The competent
authorities must also communicate these decisions, in the shortest time, to the Committee of
European Securities Regulators, which will post them without delay on the www.cesr-eu.org
website, in order to inform the public from all member states. These practices will be
completed with other information, as the Committee of European Securities Regulators has to
post all new data on their website.
The information that will be made public has to state the factors that have been
considered in determining whether or not the practice concerned should be accepted, especially
in the cases where the conclusions regarding the acceptability is different depending on the
markets of the member states.
In case the investigations have already been started regarding these precise cases, the
consultancy procedure can be postponed until conclusions from the investigations are drawn
and possible sanctions determined.
An accepted market practice can only be modified, once the consulting procedure has
been applied, by applying another identical consulting procedure.

§6. Examples of accepted market practices

Accepting market practices, such as those defined in Article 1 paragraph 5 of the market
abuse Directive and described in the 72/2004 Commission Directive, are, as previously seen , a
problem that is entrusted to the national legislation of each member state of the European
Union. The European legislator has only issued guidelines which the accepted market practices
should comply with.
Acknowledging some of the operations on the capital market as being part of an accepted
market practice that is in accordance with the normative system of market abuse produces
effects only on the market in question, and will not be extended on other markets on which
securities are traded.
In Romania, the authority for the regulation and supervision of the capital market, the
National Securities Commission, has never to date accepted any practice on the market, in the
manner established by the dispositions of the 72/2004 Directive and of the first Committee of
European Securities Regulators guideline for the implementation of the market abuse
Directive.

In some European Union states, after the enforcement of the market abuse legislation,
were regulated the accepted market practices in accordance with the provisions of this
legislation.

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 6.1. Liquidity contract 1

Closing a liquidity contract is an accepted market practice on the capital market in Spain.
The liquidity contract is a contract signed by issuing company, admitted to trade on a
regulated market in Spain, and an investment firm or credit institution, by means of which the
intermediary, acting on behalf of the issuer, buying or selling the stocks of the latter, with the
only aim of enhancing the liquidity of the transactions and the regularity of the quotation of the
stocks of the issuer within the limits established in the authorization from the Shareholders
General Meeting to transact business on the own stocks of the issuer.
The issuer is only allowed to sign a liquidity contract with a single financial intermediary.
The issuer will not be able to give instructions to the intermediary regarding the way to transact
the stocks.
All transactions based on the liquidity contract will be carried out on the regulated market
on which they are allowed, and all the closed transactions will have to be registered in special
account opened by the intermediary in the name of the client – the issuing company. In reality,
there will be two special accounts in the name of the issuer and used only for the purpose stated
in the liquidity contract, a securities account and corresponding cash account
This liquidity contract has to be compliant with the principle of proportionality which
requires that the contract includes the conditions in which the buying and selling will be done,
considering the aim of enhancing the liquidity and ensuring equilibrium between the balance of
stocks and cash.

The contract clauses must also specify the conditions in which the cash transfer can be
done from the account specifically opened based on the mediating contract on behalf of the
issuer to another account designated by the issuer.
Where, at the time of entering into a liquidity contract, the issuer does not deposit a
sufficient amount of stocks into the securities account to enable the financial intermediary to
commence selling transactions as well, the liquidity contract must stipulate a period of time in
which the intermediary will only buy stocks until it attains the volume that is pre-determined in
the contract. Such acquisitions will be done with the purpose of obtaining the results in the
issuer’s best interest but without interfering with or hampering normal market operations and
without misleading third parties.
At the end of the liquidity contract, the two parties can extend the initial period by a
length of time not greater than the initially established period, terminate the contract or
establish a lower number of stocks.
The financial intermediary cannot, at any time, occupy a dominant position in trading in
the issuer’s stocks. For this purpose, it may not in any event exceed 25% of average daily
trading in the main market in the official primary market in the previous 30 sessions.
During the auction periods, and particularly during the closing auction, the financial
intermediary must take great care to ensure that its actions do not have a decisive influence on
issuer’s stock price performance. At the time of the auction periods, the financial intermediary
must be careful not to create artificial changes in the issuer’s stock price, hamper normal
market operations or mislead the other market participants. Therefore, a buy order must be

1
AMP(Accepted Market Practices) – Spain: Liquidity Contracts
http://www.cesr-eu.org/index.php?page=groups&mac=D&id=51

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made at a price not greater than the price of the last trade in the market between independent
parties and the highest price of a buy order in the market order book, whichever is higher.

Also, a sell order must be made at a price not lower than the price of the last trade in the
market between independent parties and the lowest price contained in a sell order in the market
order book, whichever is lower.
Applying this kind of accepted market practice requires a high level of transparency.
Therefore, among others, the public must be informed about the identity of the financial
intermediary, with which the liquidity contract has been arranged, the number of stocks and the
amount of cash deposited in the accounts the intermediary opened for this contract. Each
quarter and when the liquidity contract is terminated, the issuer must disclose the transactions
in own stocks made under this contract, detailing the number of own stocks that were
purchased and sold, the amount of cash paid and received as a result of the operations
performed under this contract etc.
Furthermore, the issuer may not engage in any other trades in its own stocks while the
liquidity contract is in force.
The reason for which this procedure for liquidity enhancement needed to be given the
status of accepted market practice rose from the fact that these transactions can send false
signals and mislead the market participants. The intermediary’s activity in the case of this
accepted market practice is similar to the manipulative method called painting the tape. The
transactions carried out at the time the liquidity contract is in force do not have an economic
justification like obtaining profit for an investor, but only aim at enhancing liquidity. The price
evolution, as a consequence of these transactions, can fluctuate to artificial levels. If full
transparency is shown when carrying on the contract in question, the other market participants
would be appropriately warned that there’s a “player” on the market with different objectives
than the regular ones, and their investment decisions will take this aspect into account.
A market practice similar to the liquidity contract used on the regulated markets in Spain
has been accepted in France and is in the process of being accepted in The Netherlands as
well. 1

6.2. Valuation transactions 2

Valuation transactions are an accepted market practices on the bond market in Austria.
Members of the Vienna Stock Exchange are allowed to carry out a valuation transaction
by acting for both the buyer and the seller in government bonds and in bonds where they are
the issuer or are closely related to the issuer, in order to provide the market with a reference
price.
This practice has similar traits with the procedure called wash trades, where there is no
effective change of the proprietor of the traded titles. In such conditions, market participants
that perform such transactions to manipulate the capital market by sending false signals are

1
Ibidem
2
Valuation transaction on the bond market on the Vienna Stock Exchange,
http://www.cesr-eu.org/index.php?page=groups&mac=0&id=51#doc

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likely to receive sanctions. Ensuring full transparency for such transactions, a complete,
prompt and efficient informing of all market participants on the conditions and the purpose of
these transactions removes the misleading character of the operations and brings them in the
domain of the legal. In addition, we have to underline the legitimate reason generating these
types of transactions.

6.3. Buy back programs. Purchase of own stocks to hold them for future acquisition of
stocks of another company 1

We will develop here the matter of buy back programs as an accepted market practice and
not as a legal exception from the market abuse regime, as this is a particular case where the
issuer buys back his own stocks, without meeting the condition of the European norms
regarding the way these operations are to be carried out.

The European legislator regards the case when an issuer buys back the stocks, as an
exception from the sanctionary regime applied to deeds in the sphere of market abuse.
The market abuse Directive, in Article 8, states that the prohibitions provided in this
Directive will not apply to trading in own stocks in ‘buy back’ programs. In the enforcement of
this directive were adopted the 2273/2003 European Commission Regulation for the
implementation of the 2003/6/CE European Parliament and Council Directive regarding
exemptions for the buy back programs and stabilization of securities.
In such conditions, we can talk about a legal exception from the market abuse regime.
When an issuer buys own stocks to ensure the payment of the stocks value of a company
that is about to be acquired we are dealing with an operation that received the status of
accepted market practice at the Euro next Stock Exchange, and is recognized by the Financial
Markets Authority in France (Autorite des Marches Financiers – AMF).
This practice characterizes in that an issuing firm whose stocks are admitted for trading
on a regulated market, purchases and holds own stocks for a future acquisition of stocks of
another company. Own stocks can be kept for an unlimited period of time. If holding these
stocks is no longer necessary, the issuer can allocate them within programs for the reduction of
capital, to meet obligations arising from the debt securities exchangeable into equity
instruments or employee stock option programs or other allocations of stocks to employees of
the issuer or of an associate company. The own stocks unnecessary for holding can be also
allocated to other accepted market practice or sold.
The transactions carried out with this practice can only generate ownership of a
percentage as high as 10% of the issuer’s capital.
When using stocks representing more than 1% of its stockholder equity to acquire a
company, the issuer requires an evaluation on the exchange from an independent expert.

1
Accepted Market Practices: a market practice related to stock buy back programs. Buy and hold for future
use as means of payment for acquiring another company on Euro next (France) ,
http://www.cesr-eu.org/index.php?page=groups&mac=0&id=51

271
 Section 3

Legal exceptions from the sanction regime of market abuse

§1. Express legal exceptions and virtual legal exceptions

The situations in which the market abuse juridical framework does not apply to some
operations carried out on the capital market, result in some cases directly from legal
dispositions, and in other cases indirectly.
The express legal exceptions from the sanction regime of the legislations released for the
implementation of the market abuse Directive are stipulated in Article 8 of the 6/2003
Directive.
“The prohibitions provided for in this Directive shall not apply to trading in own stocks in
‘buy-back’ programs or to the stabilization of a securities provided such trading is carried out
in accordance with implementing measures adopted in accordance with the procedure laid
down in Article 17 paragraph (2).”
In these conditions, we are dealing with two express legal exceptions, specified as such in
Article 252 of Law no. 297/2004: trading in own stocks in ‘buy-back’ programs and
stabilization measures.
These two express legal exceptions are subject to the European Commission Regulation
2273/2003 implementing Directive 2003/6/EC of the European Parliament and of the Council
as regards exemption for buy back programs and stabilization of securities.
In paragraph 3 of the Regulation’s “Considerations”, is expressly stated that the
derogations stipulated in the regulation regulate only the conduct directly relating to the
objective of the buy-back and stabilization activities. For that matter, the conduct not
connecting directly with these buy-back and stabilization activities are hence regarded, as any
other action under the incidence of the 2003/6/CE Directive and can be subject to sanctions or
administrative measures if the competent authority concludes it is a case of market abuse.
The two activities, in order for to obtain the juridical status of legal exceptions from the
sanction regime for market abuse, have to show that there is no objective other than the one
established in the special regulations with a character derogatory from the rules that
incriminate the capital market manipulation. If they are directed to other purpose than that
recognized by these derogatory legal regulations, these activities will be subject to the
sanctions stated in the juridical regulations for market manipulation in force.
On the other hand there are some virtual legal exceptions from the sanction regime of the
market abuse legislation. These exceptions hold this status thanks to the increased number of
causes that derive from the special character of the operations (transactions and orders to trade)
in question.
Therefore, it is about those operations carried out on the special buy-in and sell-out
markets, the transactions excepted from the legal regime for performing sell and buy operations
within the existing market parameters (transactions for inheritance division, privatization etc.),
the orders and transactions of market makers and other transactions closed based on contractual
or legal requirements.

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 §2. Transactions closed within the “buy-back” programs

2.1. Principles governing the buy-back programs

Buy-back programs of own stocks adopted by an issuer admitted for trading on a

regulated market has to comply to a series of principles included in the considerations of the
2273/2004 European Commission Regulation.

2.1.1. Principle of transparency

Considering that ensuring an increased level of transparency contributes to preventing
actions to take place in the domain of market abuse, the issuers adopting buy back programs
have to inform the competent authority to which they belong, regarding this and, by case, the
public as well.

2.1.2. Principle of limited stock volume traded in a buy back program.

In order to avoid market abuse, the daily volume in own stocks operations carried out in
the buy back program has to be limited. However, a certain flexibility is required for market
adaptability, for instance to a low level of trading.

2.2. The purpose of buy back activities exempt from the sanction regime set up based on
the market abuse Directive.

Buy back activities that can be excluded from the domain of prohibitions stipulated in the
2003/6/CE Directive, are the operations of issuers that:
- want to reduce capital
- to meet obligations arising from the debt securities converted into equity instruments
- to meet obligations concerning employee stock option programs or other allocations
of stocks to employees of the issuer or of an associate company.
Buy back programs with any other objective, when they are authorized by the entities or
competent authorities, does not exempt the issuers conduct from the sanction regime set up
based on the market abuse Directive.

2.3. Legal criteria concerning buy back programs

The program for buying back own stocks has to comply with the regulations of Article 19
paragraph 1 of the Second Directive of the European Economic Community, 77/91/EEC 1
Directive taken over in Article 103 of Law no. 31/1990 regarding trading companies:

a) authorization to obtain own stocks is given by the Extraordinary General Assembly of

the Shareholders, that will establish the conditions for obtaining it, especially the maximum
number of stocks that will be obtained, the duration of the authorization, which can not be
longer than 18 months, and, in case of obtaining it for good and valuable considerations, its
maximum and minimum value.

1
Official Journal L 026 of 31.01.1977

273
 b) nominal value of the own stocks obtained by the company, including that of the stocks
already in the portfolio, may not exceed 10% of the subscribed capital.
c) the transaction’s object can only be fully paid stocks(non-assessable).
d) the payment of stocks obtained such will be made only out of the profit that can be
allocated or from available reserves of the company, included in the last approved annual
financial report, except the legal reserves.

2.4. The issuer’s obligations concerning disclosure

Before initiating the operations, the detailed program in which the issuer is requesting the
admission of his actions for trading on a regulated market, is made public to member states.
The detailed buy back of own stocks program incorporates especially the objective to be
pursued, meaning reducing capital or meeting obligations arising from debt securities
exchangeable to equity instruments or allocation of stocks to the employees of the issuer, the
maximum value, the maximum number of stocks that must be bought and the time period of
the authorization for the program.
Any later modification of the program requires that the member states are appropriately
informed about it.
The issuer is called upon to, by required means, clear the obligations for informing the
competent authority on the market the operations for trading these stocks were admitted, about
them. This mechanism allows each operation to be registered in a buy back program. Article 79
of the 1/2006 National Securities Commission Regulation stipulates that the issuer has to
register every transaction carried out in the buy back program, by specifying the name and
number of the instruments bought of sold, the date, hour and price of the transactions, means to
identify the financial intermediaries involved.
The following information also needs to be provided, as per Article 20 paragraph 1 of the
93/22/CEE Directive 1 :
a) relevant data on transactions relating to the services which they have carried
out in instruments dealt in on a regulated market, whether the transactions
concerned were carried out on a regulated market or not.
b) reports regarding these transactions, if transactions concerned refer to:
- stocks or other instruments giving access to capital,
- bonds and other forms of securitized debt,
- standardized forward contracts relating to stocks or
- standardized options on stocks.
The issuer has to make public the details of all operations from the buy back program by
the end of the 7th trading day from the time of their execution. According to Article 80 of the
1/2006 National Securities Commission Regulation, regarding issuers and the market
operations, the reports comprising the details associated to all transactions have to be submitted
by the issuer to the regulated market and National Securities Commission and disclosed in a
national newspaper, in the Romanian language or a language accepted by the National
Securities Commission, not later than the end of the trading session of the seventh trading day
after the date of executing the trading.

1
Official Journal L141 of 11.06.1993

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 2.5. Conditions for trading in own stocks buy back programs (Article 5 and Article 6 of
the 2273/2003 European Commission Regulation)

In so far as price is concerned, when executing trades under a buy back program, the
issuer will not purchase stocks at a price higher than the price of the last independent trade or
the highest current independent bid on the trading venues where the purchase is carried out,
should the price be higher.

If the trading venue is not a regulated market, the price of the last independent trade or of
the highest current independent bid, taken in reference, shall be the one of the regulated market
of the member state in which the purchase is carried out.
Where the issuer carries out the purchase of own stocks through derivative securities, the
exercise price of those derivative securities shall not be above the higher of the price of the last
independent trade and the highest current independent bid.
In what volume is concerned, the issuer must not purchase more than 25% of the average
daily volume of the stocks on the regulated market on which the purchase is carried out. The
average daily volume figure is calculated based on the average daily volume traded in the
month preceding the month of public disclosure of that program and fixed on that basis for the
authorized period of the program.
Where the program makes no reference to that volume, the average daily volume figure
must be based on the average daily volume traded in the last 20 trading days preceding the date
of purchase.
In case of extremely low market liquidity, the issuer may exceed the 25% limit, on
condition that:
a) the issuer informs the competent authority of the relevant market, in advance,
of its intention to deviate from the 25% limit;
b) the issuer discloses adequately to the public the fact that it may deviate from
the 25% limit;
c) the issuer does not exceed 50% of the average daily volume.
In order to benefit from the exemption provided by Article 8 of Directive 2003/6/EC, the
issuer shall not, during its participation in a buy back program, engage in the following trading:
a) selling of own stocks during the life of the program;
b) trading during a period which, under the law of member states in which trading
takes place, is a closed period;

c) security trading where the issuer had decided to delay the public disclosure 1 .
Closing period is a notion that is not defined in the Romanian system of law. The notion
means that period between the time the annual financial reports are made and the time of their
release. During this period insiders are not allowed to trade in stocks of a company. 2
Selling of own stocks during the life of the program is permitted if the issuer is an
investment firm or credit institution and has established effective information barriers (Chinese

1
According to Article 6, paragraph 2 of the market abuse Directive 6/2003, an issuer may delay, under his
own responsibility, public disclosure of inside information, such as not to prejudice his legitimate interests,
provided that such omission is not likely to mislead the public and that the issuer ensures confidentiality of
that information.
2
http://financial-dictionary.thefreedictionary.com/close+period

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Wall) subject to supervision by the competent authority between those responsible for the
handling of the inside information related directly or indirectly to the issuer and those
responsible for any decision relating to the trading of own stocks (including the trading of own
stocks on behalf of clients), when trading in own stocks on the basis of such decision.
Operations carried out in the closed period or when the issuer has decided to delay the
public disclosure of privileged information, do not apply when the issuer is an investment firm
or credit institution and with regards to the information, has established effective information
barriers (Chinese Wall) subject to supervision by the competent authority between those
responsible for the handling of the inside information related directly or indirectly to the issuer
(including trading decisions under the buy back program) and those responsible for the trading
of own stocks s on behalf of clients, when trading in own stocks on behalf of those clients.
These restrictions concerning the way in which the trading operations in own stocks are
carried out, do not apply:

a) the issuer has in place a time-scheduled buy back program; or

b) the buy back program is lead-managed by an investment firm or a credit
institution which makes its trading decisions in relation to the issuer’s stocks
independently of, and without influence by, the issuer with regard to the timing of
the purchases.

§3. Stabilization actions

3.1. The notion of stabilization. Object of stabilization actions.

According to the dispositions of Article 2 paragraph 7 of the European Commission

Regulation 2273/2003, “stabilization” means any purchase or offer to purchase relevant
securities, or any transaction in associated instruments equivalent thereto, by investment firms
or credit institutions, which is undertaken in the context of a significant distribution of such
relevant securities exclusively for supporting the market price of these relevant securities for a
predetermined period of time, due to a selling pressure in such securities.
Relevant securities mean transferable securities as defined in Directive 93/22/EEC 1 ,
which are admitted to trading on a regulated market or for which a request for admission to
trading on such a market has been made, and which are the subject of a significant distribution.
Associated instruments mean the following securities (including those which are not
admitted to trading on a regulated market, or for which a request for admission to trading on
such a market has not been made, provided that the relevant competent authorities have agreed
to standards of transparency for transactions in such securities):
a) contracts or rights to subscribe for, acquire or dispose of relevant securities;

1
According to Article 1 paragraph 4 transferable securities mean:
- stocks in companies and other securities equivalent to shares in companies
- bonds and other forms of securitized debt which are negotiable on the capital market and
- any other securities normally dealt in giving the right to acquire any such transferable securities by
subscription or exchange or giving rise to a cash settlement excluding instruments of payment.
The 93/22/CEE Directive has been abrogated by the Markets in Financial Instruments Directive 39/2004.

276
 b) financial derivatives on relevant securities;
c) where the relevant securities are convertible or exchangeable debt instruments, the
securities into which such convertible or exchangeable debt instruments may be converted or
exchanged;
d) instruments which are issued or guaranteed by the issuer or guarantor of the relevant
securities and whose market price is likely to materially influence the price of the relevant
securities, or vice versa;
e) where the relevant securities are securities equivalent to stocks, the stocks represented
by those securities (and any other securities equivalent to those stocks).
The object of the stabilization activities are the securities admitted for trading on a
regulated market, but also the securities that are not admitted or are about to be admitted on a
regulated market, but which can influence the price of the instrument admitted or that in the
process of being admitted on a regulated market.
Relevant securities include securities that become exchangeable (fungible) after an initial
period, as they are identical from a structural point of view, although initially they offer rights
to dividends or different interests.

3.2. Principles governing stabilization activities

In order to meet the legal conditions for exemption from the sanction regime for market
abuse, the stabilization activities have to comply with several principles.

3.2.1. Time limitation principle

It’s the principle according to which the stabilization activities have to be carried out in a
time period that is determined by the essence of these activities.

In respect of stocks and other securities equivalent to stocks, the time period shall, in the
case of an initial offer publicly announced, start on the date of commencement of trading of the
relevant securities on the regulated market and end no later than 30 calendar days thereafter.
For stabilizing activities carried out for stocks and other securities equivalent to stocks,
where the initial offer has been publicly announced and whose object is a security that is
already admitted for trading on a regulated market, the time period shall start on the date of
public disclosure of the final price in a national paper, in Romanian or other language accepted
by the National Securities Commission and can be no longer than 30 calendar days from the
date of allotment.
With regards to bonds and other forms of securitized debt (which are not convertible or
exchangeable into stocks or into other securities equivalent to stocks), the time period will start
on the date of adequate public disclosure of the terms of the offer of the relevant securities, in a
paper of national circulation, in Romanian or any other language accepted by the National
Securities Commission, and end whatever is earlier, either no later than 30 calendar days after
the date on which the issuer of the instruments received the proceeds of the issue, or no later
than 60 calendar days after the date of allotment of the relevant securities.
For stabilizing activities performed for securitized debt convertible or exchangeable into
stocks or into other securities equivalent to stocks, the time period will start on the date of
public disclosure of the final terms of the offer of the relevant securities in Romanian or any

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other language accepted by the National Securities Commission, and end, whatever is earlier,
either no later than 30 calendar days after the date on which the issuer of the instruments
received the proceeds of the issue, or no later than 60 calendar days after the date of allotment
of the relevant securities.

3.2.2. Principle of transparency

Stabilization activities can send out false signals or mislead the investors on the capital
market if an increased level of transparency is not ensured for these operations.
For the purpose of market integrity an adequate public disclosure is required regarding
the stabilization activities of the issuers and entities performing the stabilization activities on
their behalf.
The methods used to adequately make this information public have to be efficient and
may consider the market practices accepted by the competent authorities.

3.3. The purpose of stabilization activities

Stabilization transactions mainly have the effect of providing support for the price of an
offering of relevant securities during a limited time period if they come under selling pressure,
thus alleviating sales pressure generated by short term investors and maintaining an orderly
market in the relevant securities.
This is in the interest of those investors having subscribed or purchased those relevant
securities in the context of a significant distribution, and of issuers.
In this way, stabilization can contribute to greater confidence of investors and issuers in
the financial markets 1 .

3.4. Obligations concerning disclosure and reporting

In conformity with the dispositions of Article 9 paragraph 1 of the European Commission

Regulation 2273/2003, issuers, offerors, or entities undertaking the stabilization acting, or not,
on behalf of such persons, before the opening of the offer period of the relevant securities shall
adequately publicly disclosed the following information :
a) the fact that stabilization may be undertaken, that there is no assurance that it will be
undertaken and that it may be stopped at any time;
b) the fact that stabilization transactions are aimed to support the market price of the
relevant securities;

c) the beginning and end of the period during which stabilization may occur;
d) the identity of the stabilization manager, unless this is not known at the time of
publication in which case it must be publicly disclosed before any stabilization activity begins;
e) the existence and maximum size of any overallotment facility or greenshoe option, the
exercise period of the greenshoe option and any conditions for the use of the overallotment
facility or exercise of the greenshoe option.

1
Paragraph 11 of the European Commission Regulation 2273/2003

278
 Within one week of the end of the stabilization period, the issuers, offerors, or entities
undertaking the stabilization acting, or not, on behalf of such persons will adequately disclose
to the public the following information:
a) whether or not stabilization was undertaken;
b) the date at which stabilization started;
c) the date at which stabilization last occurred;
d) the price range within which stabilization was carried out, for each of the dates during
which stabilization transactions were carried out.
Issuers, offerors, or entities undertaking the stabilization, acting or not, on behalf of such
persons, must record each stabilization order or transaction with, specifying at the minimum,
the name and number of instruments purchased or sold, the date, hour and price of the
transaction, methods to identify the financial dealers involved.

3.5. Rules for trading within the stabilization activities

Block trades 1 , carried out within stabilization activities, are not considered significant
distribution 2 of the values concerned, as these are not strictly private operations.
In the case of a stock offer or other securities equivalent to stocks, their stabilization must
not be done at a price higher than that of the offer.
In what concerns the securitized debt convertible or exchangeable into stocks or into
other securities equivalent to stocks, stabilization must not be done at a price higher than the
market price of these instruments at the time final terms of the offer are disclosed.

§4. Market maker

The market maker institution has taken shape on the United States and Great Britain
capital markets, with characteristics definite for the first time by praetorian way.
In the European Union at the moment, the market maker institution has found an express
legal consecration, the market players that intent to act as market makers, having to obtain
necessary authorization from competent authorities.
The market maker is a virtual legal exception from the sanctions regime applicable to
deeds in the area of market abuse, this consequence not resulting directly from the legal
regulations in force. For these reasons we have chosen to approach this institution from the
legal exceptions from the sanctions regime of market abuse.
It is necessary to show that the activity of an authorized market maker is, until contrary
proven, an element of the legitimacy of a conduct on the market capital, in the view of Article
1, paragraph 2, letter a) of the market abuse Directive 6/2003.

1
The object of block trade is represented by a large amount of securities, which is normally traded by
institutional investors. In the United States block transactions are those operations of at least 10.000 stocks
or bonds with a minimum value of USD 200.000,
http://www.investorwords.com/502/block_trade.html
2
‘Significant distribution’ is an initial or secondary offer on a regulated market , of relevant securities,
publicly announced and distinct from ordinary trading both in terms of the amount in value of the securities
offered and the selling methods employed.

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 4.1. Definition and purpose of a market maker.

According to the dispositions of Article 2, paragraph 1, letter n) of the European

Parliament Directive 2004/109/EC on the harmonization of transparency requirements in
relation to information about issuers whose securities are admitted to trading on a regulated
market and amending Directive 2001/34/EC 1 , “market maker” means “a person who holds
himself out on the financial markets on a continuous basis as being willing to deal on own
account by buying and selling securities against his proprietary capital at prices defined by
him”.
In the Romanian legislation, the definition of the market maker is given in Article 1,
paragraph 1, point 39 of the Preliminary Title of the Bucharest Stock Exchange Book – market
operator:
“Market maker” on the regulated market concerned means a Participant 2 undertaking the
responsibility of maintaining market liquidity for a securities traded on the regulated spot
market, utilizing its own capital, by introducing and maintaining firm offers of buy/sell in its
own account, and conclude transactions based on these quotations over the period the
Participant has this quality.
The purpose for which the market maker institution has been recognized on the capital
market was that of increasing efficiency of these markets by creating certain mechanisms to
maintain a required liquidity level for certain securities. The market of these securities could be
distorted by several causes, such as the reduced degree of stock dissipation, the presence of
investors in a reduced number on the market of the instrument concerned etc. In these
conditions, market manipulation would occur by formation of “cornering” 3 , but also by other
methods, such as “wash trades” 4 or “improper match orders” 5 .
One of the highly known markets on which the market maker institution is manifesting in
a plenary way, is the NASDAQ 6 market, where over 500 brokerage firms are authorized as
market makers 7 .

4.2. Considerations for which the market maker activity does not fall under the incidence
of the sanctions regime of market abuse

Authorized financial intermediaries that attain the status of market maker assume the risk
of having in their own account a number of securities of an issuer, with the purpose of ensuring

1
Official Journal L390 of 31.12.2004
2
According to Article 1, paragraph 1, point 50 of the Bucharest Stock Exchange Book Preliminary Title-
market operator, Participant on the Bucharest Stock Exchange trading system or Participant –
Intermediaries/investment firms enlisted in the National Securities Commission Registry, authorized to
trade on the regulated spot market, administered by the Bucharest Stock Exchange, subject to the rules set
in Title I, Book I of the Book under review and enlisted in the Participants‟ Registry.

3
See Chapter V, section 2, point 4.1., pages 242-257.
4
See Chapter V, section 1, point 4.1., pages 197-204.
5
See Chapter V, section 1, point 4.3., pages 209-215.
6
NASDAQ – National Association of Securities Dealers Automated Quotations.
7
http://www.investopedia.com/terms/m/marketmaker.asp

280
market liquidity and facilitating the trading of those titles. They have the legal obligation of
maintaining firm quotation both for selling and purchasing, during the entire period of the
trading session or a particular predetermined minimum period.
The market maker will obtain profit: from the difference between the selling price and
buying price of the securities (the bid/ask spread).

In principle, it cannot be deemed that the market of the security on which the market
maker is authorized is manipulated by the market maker, provided that the intermediary
in question complies with the legal regulation based on which is carrying out its activity.
Although this intermediary enters in the trading system, at the same time, buy and sell
orders that have approximately the same parameters, no accusation can be brought for
manipulation by improper match orders as there is a legal duty to maintain both sell and
buy quotations for the security it has been authorized as market maker.
Establishing some rules based on which the authorized market maker with perform does
not entirely reduce the risk that these intermediaries manipulate the capital market. In case a
single market maker is authorized for a security, this market maker with hold monopoly on that
market. If this intermediary authorized as market maker will exert prerogatives in bad faith, the
premises of an artificial market will be created. Price distortion may occur despite the
protection parameters established by the operators of that market. In the same manner, even in
the situation that there are several intermediaries authorized as market makers on the market of
a security, an agreement closed between these market makers for the purpose of setting sell and
buy prices at an artificial level, would determine the other market participants to trade at prices
that are distorted (or would inhibit trading).

4.3. Conditions regarding authorization. Rights and Responsibilities of dealers authorized

as market makers on the regulated market operated by the Bucharest Stock Exchange

In order to obtain the quality of Market Maker on the regulated spot market, an
intermediary has to meet several conditions altogether, as per Article 16 of the Second Title of
the Bucharest Stock Exchange – market operator, of which most important are :
a) the right to hold the right to trade securities in his own account in accordance with the
domain of activity mentioned in the registration document from the National Securities
Commission, Intermediaries section;

b) to own an individual ‘House’ account within the electronic trading system that has no
legal or technical restrictions;
c) to submit a written request to demand the status of Market Maker on the spot market;
d) to submit a standard Bucharest Stock Exchange form to request the registration as
Market Maker for at least one security ;
e) to have no overdue financial or any other type of obligation towards the Bucharest
Stock Exchange;
f) to assign at least one market agent as a contact person to maintain contact with the
Bucharest Stock Exchange while holding the status of Market Maker;

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 The main obligations an authorized intermediary as a market maker should have,
according to the regulations of the Bucharest Stock Exchange market operator, refer to some
specific parameters by which the concerned intermediary carries out his activity.
These parameters refer to 1 :
a) the minimum volume corresponding to the firm sell and buy offer;
b) maximum spread ( the difference between the selling quotation and buying
quotation) between the sell and buy price displayed by the market maker;

c) minimum period for maintaining the buy and sell offer during one trading session or
certain periods of time (for example one month);
d) maximum period of time until updating the firm buy and sell offer;
e) a minimum or maximum number of securities for which a sole participant may be
enlisted as market maker;
f) the minimum period of time for which a market maker must have this status
g) the maximum number of trading sessions during one calendar month for which a
market maker may not show firm buy and sell offers.
The intermediaries that are enlisted as market makers for a particular security may close
transactions on that specific security in their own names, both on the House account as well as
the account of the customers.
The specific parameters and the eventual additional requirements are identical for all
intermediaries with the market maker status for a security and are comprised in the contract
signed between the intermediaries and the Bucharest Stock Exchange.
The responsibilities of a market maker regarding opening and maintaining the sell and
buy firm offers are carried through a stock agent.

4.4. Trading Rules

The identity of the market maker that supplies buy and sell firm offers, is not visible to
the other intermediaries, only to the specialized department within the Bucharest Stock
Exchange market operator.
The Bucharest Stock Exchange may decide regarding the possibility to display the
identity of the market maker in the trading system, meaning to let other intermediaries
participating on the trading system, view the identity as the electronic system used by
Bucharest Stock Exchange allows it.

The firm buy and sell offer is entered on the ‘House’ account by using limit buy and sell
orders for the securities for which the participant is registered as market maker.

1
For example, for intermediaries authorized as market makers for the titles of Erste Bank Oesterreich,
Sparkassen AG Bucharest Stock Exchange approved the following specific parameters : minimum
corresponding price of a buy and sell offer – 200 stocks; maximum spread between the sell and buy price
shown by the market maker-1% ; minimum time period for maintaining the buy and sell offer during one
trading session -70% of the trading session or if the code was suspended from trading , from the period
when the trading was done during the session; minimum number of securities that a single intermediary can
register for as a market maker – one security ; minimum period in which a market maker can hold this
status- 1 calendar month; maximum number of sessions for trading during 1 calendar month where a
market maker may not show firm buy or sell offers.

282
 In the case of the hidden limit orders, market makers have the obligation to introduce and
maintain a visible volume equal with at least the minimum volume established by the Stock
Exchange Council.
It is considered that a Market Maker has a firm buy and sell offer for a securities, if there
is at least one buy order or at least one sell order entered by the Market Maker on the House
account which respects all the requirements established for each securities by the Stock
Exchange Council.
In the case in which a market maker finds himself in the situation of not complying with
one of these requirements, the participant has the obligation of re-placing in the requirements
stipulated, in the time frame established by the Stock Exchange Council.
These requirements are notified to the public and are applicable for all intermediaries
registered as market makers for those securities.
Transactions are closed by automatic execution of the market orders in accordance with
the principles for the execution of the orders on that market.
The rights and obligations of an intermediary as a market maker on the spot regulated
market are considered to be fulfilled, that is, exerted by taking into account only the activity
carried out by the intermediary on the ‘House’ account.
According to article 16 of the Second Title of the Bucharest Stock Exchange Rulebook-
market operator, the Bucharest Stock Exchange will assess the activity carried out by an
intermediary that holds the status of market maker on the regulated market in order to verify
that that the obligations undertaken as a result of holding the market maker status, have been
fulfilled, and to give the benefits/facilities that derive from the market maker quality.
In assessing the activity of a market maker, Bucharest Stock Exchange may consider the
following elements, but without limiting to:
a) the securities for which that intermediary has the obligation to maintain firm buy and
sell offers;

b) the date at which the intermediary has been recorded as market maker for that certain
securities;
c) the obligations that market maker has to fulfill.
In the process of evaluating the activity of a market maker, that intermediary has the
obligation of supplying to Bucharest Stock Exchange, promptly and correspondingly, any
document or explanatory notes regarding the activity outlaid as market maker.
In the case when, following the evaluation process of the activity outlaid by an
intermediary as market maker on the regulated spot market, it is observed that provisions have
not been kept, BSE may adopt the following measures:
a) the inclusion in a special observation list (Watch List) of the market maker’s activity;
b) suspension of the enlistment as market maker for one or all securities;
c) withdrawal of the market maker status.
Market makers may be authorized for government titles and also for derivative securities
as specified in the Second Title of the Second Book – Forward regulated market of the
Bucharest Stock Exchange Code – market operator.

283
 §5. Trading based on the base of legal or contractual requests. Operations closed
on certain types of market segments.

There are some situations in which closing transactions on the capital market is not based
on the investing decision of a legal or natural person, but arises from the legal or contractual
obligation.
This exception from the enforcement of the juridical regulation regarding the market
abuse is also included in the British legislation, in the Code of Market Conduct, MAR 1.4.20,
constituting a safe harbor 1 from the point of view of the incidental capital market abuse
legislation.

5.1. Direct securities transfers

The Romanian legislation on the capital market stipulates several situations in which the
so-called exempted transactions. In these cases, regardless of the closing price of these
transactions and of their volume, may not be state that there are effects of manipulation of the
capital market. It is necessary, of course that the fundamental requirement of ensuring the
transparency of these operations is complied with, within the terms of the law.
The Bucharest Stock Exchange Code states in Article 130 of the 3rd section of Chapter V
of the Second Title of the book one that exempted transactions are the direct transfers of
security’s property rights, qualified as such by the National Securities Commission regulations.
These direct transfers are not performed on stock market platforms, but are operated directly by
the entity that is competent in carrying out these register, clearing-settlement operations.
According to Article 81 of the National Securities Commission 13/2005 concerning
authorization and functioning of the central depository, clearing houses and central
counterparties 2 , the central depository shall operate direct transfers of ownership over the
securities, as an effect of:
a) Succession;
b) Giving up joint ownership;
c) Assignment by the issuer of its own stocks to its personnel;
d) Acquisition by the issuer of its own stocks as a result of withdrawal from the company
of the stockholders who do not agree with the decisions taken in the general stockholders
meeting (in case of merger/spin-off, followed by the allotment of stocks that are not listed, in
the case of the modification of the essential elements of the company – change of location, of
the legal form, of the main object of activity). This measure is applicable also in the case of
withdrawal of the stockholders from the company concerned as a result of the issuer leaving
the trading place based on the Extraordinary General Assembly (AGEA) Decision ( according
to the rules from the National Securities Commission 8/2006 Disposition of measures);
e) Merger, spin-off or dissolution;
f) Executing a final and irrevocable judgment, vested as writ of execution.

1
See section 2, point 1.1, of present chapter, pages 391-392.
2
Official Monitor 983 of 4th November 2005

284
 In this case, the price for assigning the right of property over the stocks is established by
court decision, and those stocks may not form the object of capital market transactions until the
execution of the court decision.
g) Privatization of the issuer. In this situation, were considered justifications purely
economic, relating to the interest of passing a buddle of stocks (majority or minority) from
state property in to private property. The national interest of privatization, of making the
economy efficient, has prevailed.
h) Request of transfer from the name of one of the spouses to the name of both of them,
as joint holders of the securities. The justification as to why this is excluded regards the quality
of the contractual parties, as well as the purpose (cause) of the juridical act.
i) Deeds with certain obligation attached or free of charges concluded between relatives
or affiliates until the forth grade and/or legal person controlled by them, under the condition
that the activity of those legal persons not to be the subject of National Securities
Commission’s supervision and authorization, complying the following requirements:
- neither of the parties in the transaction it is not or, as a result of the transaction, it is not
becoming a significant stockholder;
- the total volume of those transactions shall not exceed in a 12 months period 1% of the
total number of the securities of the same type and class, issued by the same issuer;
- are notified to National Securities Commission and to regulated market on which the
securities are traded in a
maximum of 3 working days from the date on which the deed has been concluded;
- the deed concluded by the mentioned parties shall be certified by a public notary.
The transfer of ownership over the securities mentioned above shall be operated by the
central securities depository in 3 working days from the date of the request submission and
filing up the complete documentation needed for each case.
In the case of carrying out direct transfers of ownership over the securities accounting for
at least 10 % of the issuer’s stock capital, the central depository shall immediately inform the
National Securities Commission and the regulated market and the alternative trading system,
where appropriate.

The central depository shall be held responsible where it may carry out direct transfers of
ownership over the securities without having received appropriate instructions.
The central depository shall report to the National Securities Commission, in 3 working
days from the registration, the request for the direct transfer for ownership over the securities
which are contradictory or interpretable on its opinion, as well as the contests regarding the
operated transfers.
According to Article 131 of the First Book, Second Title of the Bucharest Stock
Exchange Code – market operator, exempted transactions will be carried out by the central
depository and will not be disclosed to the public, except the cases stated by law.

5.2. Transactions closed on auxiliary markets of the primary market 1

The transactions and orders issued on the auxiliary markets of the primary market, that
are not taken into account when setting the price of reference and which have, in some cases,
the source in the legal requirements that impose the correction of some errors, and in other
1
For the description of these types of market see Chapter III, section 3, points 1.3.-1.6., pages 104-110.

285
cases facilitate the transfer of securities, in exceptional situations are not subjected, in some
cases, to the sanctions regime incident to market abuse.
In other cases, the transactions closed and orders issued on some special markets, such as,
the market of special operations or the market of public offers, it is necessary that they are
interpreted in a different manner than the transactions and orders on the primary markets,
thanks to the specific conditions characterizing them.
Within this section we have developed the matter of the operations closed on diverse
types of markets, as in some of the cases, the characteristics of the market segment, auxiliary to
the primary market, prevents market manipulation deeds from taking place. In some situations,
it’s not about a total exclusion of the applicability of manipulation techniques but only the
impossibility of executing only certain manipulative procedures.

Therefore, Buy-in and Sell-out markets serve the exclusive objective of correcting the
errors occurring within the trading process. The matter of sending false signals or maintaining
the prices at an artificial level can not be raised here.
On Odd lot market, the securities are traded in smaller quantities than a trading block. It
would practically be impossible to carry out manipulation acts on this type of market, because
of the reduced securities volume traded, but also because of the reduced volume of orders
entered in the system. It is obvious that there won’t be any interest from the part of a possible
manipulator, to send false signals or to maintain an artificial price level on this kind of market.
The price of the securities traded on Odd lot market, is usually different from that regularly on
record, because of the reduced volume of securities traded. Theoretically though, it is possible
to execute manipulative techniques on this market, such as wash trades or improper match
orders, or even to hide the identity of the real beneficiary of the titles, however, we repeat that
it is extremely improbable that these deeds happen, because of the reduced value of the
transactions closed on this market but also because the price of these transactions does not
contribute to setting the reference price of that security.
Deal market is characterized as well, by a series of distinct features, which exclude, in
principle, the applicability of juridical regulations that sanction market abuse. In other words,
some manipulative practices can not be applied on the Deal market, thanks to the special
characteristics of this market. For this matter we have also enumerated, within the virtual
exceptions from the sanctions regime of the market abuse, the operations closed on this type of
market.
The deal market serves for closing transactions whose object is represented by large
volumes of securities, negotiated beforehand. It is not the order driven type of market, hence
there will be no quotations permanently displayed in the system, the mechanism of closing
transactions being based on the negotiation between the stock agents. There’s a consequence
resulting from here which is extremely important: the market participants shall not be
influenced by the orders initiated in the trading system.

Transactions signed on deal market can have as source, a previous agreement between
the parties, even a sell-buy pre-contract.
The presence of certain rules regarding the maximum admissible variation for deal
transactions in a market session prevents the execution of these operations for values
sensitively different from the reference price set in the trading system of the bid type on the
primary market.

286
 Some forms of capital market manipulation can also be present on the Deal market. By
sending false signals on the primary market, for instance some investors can be determined to
close transactions with large packages of securities, at negotiated prices, but the elements
considered in the negotiation process are altered by using some fictive procedures or by
sending false or misleading signals. For example, using the manipulative procedures pump and
dump, trash and cash, concealing ownership, can have effects over transactions closed on the
Deal market. Generally, manipulation by using fictive procedures or by spreading false or
misleading information can occur on this type of market.
On the other hand, other manipulative techniques can be applied under no mean on the
deal market. Thus we won’t be able to talk about abusive squeeze, marking the close or
cornering on the Deal market.
On the market of special operations, considering the isolated and special character of the
operations carried out in this trading system, we can’t talk about capital market manipulation.
As shown previously 1 , the special operations market is especially used for transactions closed
within procedures of forced execution and bankruptcy, but also in other situations such as
selling of residual packages by the Authority for State Assets Recovery.
Complying with the legal regulations concerning the means for carrying out transactions
on this type of market, will maintain the operations performed on this market in the domain of
the licit, regardless of the price and volume of the securities making the object of the acts of
translated ownership.

It is possible to apply certain manipulative techniques in special situations, as the manner

in which the transactions are closed, at an exclusive price and calculated according to the
opening algorithm, prevents from both technical and juridical points of view, that these illicit
deeds in the domain of market abuse are committed.
Thus, buy orders initiated in the system cannot maintain the price at an artificial level.
They can though influence the final price of the transactions closed. Initiating some orders at
high prices, with considerable value, could influence the other investors interested in closing
operations with titles that make the object of special selling. Retrieving buy orders before their
execution, according to legal regulations, at the end of the third day of carrying out the
procedure, may constitute an indication of market manipulation by sending false or misleading
signals.
At the same time, committing manipulation deeds on this market by using fictive
procedures such as “pump and dump” cannot be excluded, as the hypothesis of their
manipulation by dissemination of false or misleading information can’t be excluded.
In these conditions, this may not be regarded as a total exclusion for usage of some
manipulative procedures on this type of market.
This reasoning is applicable also for the market of special offers, resulting in similar
consequences for the case of this type of market as well. In the case of a public offer made at
an exclusive, firm price, manipulation can occur for instance by creating a false impression
regarding the level of subscription, a situation deemed to cause investors to have a distorted
appreciation of the later evolution of the security that is the object of the secondary market.
Therefore, in the case of initial public offer, for example, generating an incorrect
impression regarding the quantity of subscriptions, by sending false information that attest a
higher subscription than in reality on the course of the public offer process, can attract more
1
See Chapter III, Section 3, point 1.6., pages 107-110.

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investors for subscription to the concerned issue, because of the fact that they prefigure a
gradual increase of the rate on the secondary market after the listing, thanks to the special
interest shown by subscribers. Sometimes, this method of manipulation can be applied by
artificially increasing the level of subscribers, for instance by handing letters of guarantee to
investors interested, without them having the corresponding guarantee or sufficient reserves in
the account. It is a way of artificial increase of subscription that reduces the number of titles
that go to the subscribers if pro rata allotment method is used. The fact that the investors
willing to subscribe receive a reduced number of instruments following the allocation, together
with the considerable interest shown for those titles, may generate a buying pressure once the
trading has started on the secondary market. A false signal is sent this way concerning the
demand for the security that makes the object of the initial public offer.
Manipulation actions by misleading the market participants can be carried out also on the
occasion of other types of public offers. In the case of a public buy offer, false information
regarding the financial status of the issuer can be spread, which anticipates a negative evolution
of the rate on the secondary market in the following period of time. The owners of the issuer’s
titles are influenced, this way, to sell the securities owned for the price of the offer, regarded as
acceptable in light of the disseminated information. It is a variant of the manipulative method
called ‘trash and cash’.
On the other hand, in the case of operations carried out on the market of the public offers,
the manipulation action can’t be performed by maintaining an artificial price level or just by
issuing some trading orders.

5.3. Other trading situations permitted on the basis of legal or contractual provisions

In case there is a specific legal or contractual requirement to determine the close of

transactions on a financial market that complies with certain parameters, the incidence of the
legal regulations with respect to market manipulation will be limited or removed.
In some of the cases, a certain type of transaction is permitted by the legal guidelines and
regulations, including those adopted by the self-regulating organisms, market operators,
entities that carry out register operations etc.

On British financial markets where the Code of Market Conduct is applied, are permitted,
according to MAR 1.5.24, those transactions that are carried out with the purpose:
- to profit from the difference in the taxation of securities or commodities (if these
differences derive only thanks to the identity of the beneficiary of those incomes) or
- to profit from the price difference on different trading places (on more markets or
trading systems).
The transactions consisting in loaning or borrowing securities or commodities are also
regarded as being licit, on condition that these transactions correspond with the natural demand
manifesting on the market.

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 Chapter VII
The role of the market authority in combating manipulation of
capital market
The main entity called to ensure maintaining an orderly and efficient market and to
prevent and combat market manipulations is represented by the authority of regulation,
surveillance and control.
In this chapter we will analyze legal norms incident to exertion of attributions of
regulation, surveillance and control of this authority from the perspective of combating capital
market manipulation.

Section 1

Principles which govern the activity of capital market authority.

Legal and regulating attributions of the capital market authority

§1. Fundamental principles of the activity of the capital market authority

Principles of organization and function of this authority from the perspective of the
market abuse phenomenon are presented in “Considerations” of the Market abuse Directive no.
6/2003.

1.1 The principle of oneness of the authority of regulation, surveillance and control of the
capital market

The European legislator recommends a single state authority to be competent in the field
of capital market surveillance in the member states of the European Union. In paragraph 36 of
“Considerations” of Directive no.6/2003 is mentioned that the presence of a multitude of
competent authorities in member states, with different responsibilities, can create confusion
among the economic operators. Each member state should appoint a single competent authority
which will assume at least the final responsibility in controlling the respect of adopted
dispositions according to the present directive and collaborating on an international level.
Appointing a unique competent authority that will handle the market abuses doesn’t
exclude establishing collaboration relations or even instating a competence delegation, under
the responsibility of the competent authority that would act between the authority and market
companies, in order to guarantee an efficient control of respecting the dispositions incident to
the market abuse.
According to the dispositions of article 11 from Directive no. 6/2003, each member state
appoints a unique administrative authority, with competence in assuring the application of

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dispositions adopted in the field of market abuse and grounded on the norms of Directive
no.6/2003.
In all the states of the European Union there is only one authority with the responsibility
of surveillance, control and emission the secondary legislation of the capital market. In some
states, France, Holland, Denmark, Czechoslovakia, for example, there is a unique authority for
all types of financial markets.
The dispositions of the market abuse Directive do not coincide with the ones of the
Market in Financial Instrument Directive. In paragraph 58 in Directive no. 39/2004 is
mentioned that member states should be able to give responsibilities to more competent
authorities regarding the application of a varied range of obligations foreseen by the Market in
Financial Instrument Directive.
In these conditions, results that the will of the European legislator expressed in the sense
of the existence of a single competent market authority in the matter of preventing and
combating market abuse, and in other fields of the capital market, in the sense of creating the
possibility to appoint more public authorities that would have prerogatives in order to apply the
incident legislation.

1.2 Capital market authority should be a matter of public law

The authority should have an administrative nature, in order to guarantee its

independence with the economic operators and to avoid conflicts of interest.

According to article 48, paragraph 1 from Directive 2004/39/CE- Market in Financial

Instrument Directive, each member state of the European Union appoints the competent
authorities which are given the responsibility to execute each of the functions foreseen by the
different positions of the European directive regarding the market of securities. These
authorities are public authorities as it is shown in paragraph 2 of article 48.
Member states will communicate to the European Commission and competent authorities
of the other member states the identity of the national competent authority and informs them,
also, in relation to the prerogatives held by this. The European Commission publishes once a
year in the Official Journal of the European Union a list with the competent authorities and
updates it continuously on his internet website.
The competent authorities have the possibility of delegating tasks to other entities, in
cases in which this possibility is foreseen expressly, for example, administrative attributions,
preparatory and auxiliary regarding the release of authorization for investment companies
exclusive amenities of investments counseling or a service of receiving and sending out orders
(article 5, paragraph 5 from the Market in Financial Instrument Directive) or administrative
tasks, preparatory or auxiliary regarding regular surveillance of respecting the execution
conditions of activity by the investment companies exclusive amenities of investment
counseling.
No task delegation of this type can refer to the exertion of public authority or to the use of
discretionary competences of decision.
In Romania, the competent authority in the field of regulation, surveillance and control of
the capital market is the National Securities Commission, according to article 1, paragraph (3)
from Law no. 297/2004. According to dispositions of article 1, paragraph (1) from the Statute
of the National Securities Commission, approved by the Government Emergency Order no.

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25/2002 1 , approved and modified by Law no. 514/2002 2 , the National Securities Commission
is a administrative authority self-governing with a juridical personality, being, according to
paragraph (3) of the same article, under the subordination of the Parliament.

1.3 Member states should ensure a proper financing of the competent authority according
to internal legislation

Executing efficiently the attributions of regulation, surveillance and control by the market
authority can not intervene without ensuring by the state authority of the means of proper
financing.
In Romania, the National Securities Commission is financed exclusively from incomes
outside the budget, according to article 13, paragraph (1) from the Statute of the National
Securities Commission.
Incomes of the National Securities Commission come from:
a) a quota of at most 0,08% from the value of transactions enrolled by any
regulated market or an alternative trading system, sustained by the buyer,
with the exception of the markets regulated by derivative securities;
b) a quota of at most 0,1% from the value of the net active of collective
placement bodies in movable values and other bodies of collective
placement;
c) a quota of at most 0,5% from the value of sale public offers;
d) a quota of at most 2% from the value of purchase-take over public offers;
e) fees and commissions for transactions enrolled on the regulated markets of
derivative securities;
f) fees and commissions perceived on activities for which it is issued by the
National Securities Commission an individual act;
g) fees perceived for carrying out services by the supervised entities or third
parties;
h) penalties set by own regulations as patrimonial sanctions;
i) donations;
j) activities of publishing, advertising, multiplication;
k) any other legal sources.
According to article 14, paragraph (3) from the Statute of the National Securities
Commission, in case of necessity, expenses linked with the organization and function of the
National Securities Commission will be financed, in part or entirely, from the state’s budget of
the Government’s special founds.

1.4 The market authority should have the competencies to issue juridical norms in
applying the legal dispositions and to supervise the market

1
Official Monitor no. 226 from 4 April 2002
2
Official Monitor no. 539 from 24 July 2002

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 This essential principle refers in fact to the fundamental role of the capital market
authority: to regulate, by norms which represent the secondary legislation, the field of the
capital market and to supervise this market.
The market abuse Directive states that is necessary, on a national level, to instate a
minimum common ensemble of competencies and means of firm actions that the competent
authorities from each member state will have which will guarantee the efficiency of the
surveillance. Directive no. 39/2004 mentions that is necessary to enhance the convergence
powers which the competent authorities have, to realize equal application of norms inside the
integrated financial market. From this consideration, is imposed setting up a minimum set of
powers, with proper resources, that will guarantee the surveillance’s efficiency.
On the other hand, the authority must have the proper consulting mechanisms to operate
eventual modifications that need to be brought to the internal legislation, for example a
consultancy committee made of issuer’s representatives, of the financial services deliverers and
consumers, so it will be completely informed about their position and activities.

§2. Functions and attributions of market authority

2.1 Functions of the market authority

Legislation incident to the matter of capital market consecrated the presence of four
essential functions that need to be fulfilled by the competent administrative authority: function
or regulation, function of surveillance and control, function of sanction and function of
authorization. The first three have a special relevance from the perspective of the market abuse,
and the fourth has an adjacent impact on the field which makes the object of this paper.

These functions might be completed with success in the conditions in which the market
authority would try to exert an additional role, the educational role. For example, in the United
States, Securities Exchange Commission has taken into consideration very seriously the
completion of a educational-prevention function by transmitting to investors through mass
means of communication, especially through the internet, information whose purpose is to
familiarize them with the operations enrolled on the capital market, with the meaning of terms
and, particularly, with the position of the Commission in regards to practices and market
activities 1 . In the Romanian doctrine 2 it was emphasized the necessity for the National
Securities Commission to assume this educational role “for combating the investor’s naiveté”.

2.1.1 The regulation function

Competent authorities of the capital market in a member state of the European Union, but
also in the United States or Australia have an important role to regulate 3 , by norms from the

1
For example, theoretical information, but also practical extremely useful for investors can be seen on
http://www.sec.gov/answers.shtml
2
Gh. Piperea, cited paper, p. 350
3
In Japan all the capital markets are under the control and surveillance of the prime minister that gives
them the license to operate, the stock exchange institutions in cause having a widely extreme role of self
regulation.

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plan of the secondary legislation, significant domains of the capital market. In some situations,
the power of regulation is delegated to other entities, especially to the operators of the market
or of the trading system which have self regulation attributions. In the Market in Financial
Instrument Directive of the market abuse Directive this function is not mentioned explicitly,
but it results implicitly from the ensemble of existing norms in those normative acts.
The regulation function is given based on a normative act with law power by the state
legislator body and is completed by issuing juridical norms in the application of normative acts
adopted by the Parliaments or other legislative bodies.
In Romania, the market authority, the National Securities Commission, has this function
on the ground of article 1, paragraph (2) from its Statute, approved by Government Emergency
Order no. 25/2002. In article 7, paragraph (1) from the Statute of the National Securities
Commission is stipulated that completing the objectives of the National Securities Commission
regarding regulation is realized by adopting norms, issuing individual acts and disposal of
measures.
In the same time, is given to the National Securities Commission, by article 7, paragraph
(6) from the Statute the prerogative to realize, on demand or officially, the official
interpretation of all juridical issued norms, applicable to the regulated and supervised entities.

2.1.2 The surveillance and control function

The attributions of the market authority regarding combating capital market manipulation
have their grounds in dispositions of article 12, paragraph 1 from Directive no. 6/2003, which
shows that this body has all the competencies of surveillance and investigation necessary to
exert its functions (an identical text is contained by article 50, paragraph 2 from Market in
Financial Instrument Directive).
In Romania, the market authority, the National Securities Commission, according to
article 1, paragraph (2) from the Statute, is supervising the capital market, the regulated
markets of commodities and derivative securities, and the institutions and operations specific to
them. In the attribution of surveillance, with a wide signification, it is enrolled the prerogative
to exert control over the entities regulated and supervised from the perspective of respecting
the capital market legislation. The purpose instating the surveillance function is underlined by
article 7, paragraph (2) from the Statute: “In order to complete its objectives regarding the
protection of operators and investors against non-loyal practices, and for correct and
transparent function of the market, preventing manipulation and avoiding the appearance of
systemic risk on the regulated markets, the National Securities Commission will supervise in
real time and periodically the institutions, operators and operations on the capital market and
on the regulated markets of commodities and derivative securities”.
The function of surveillance and control provides the right to the market authority to
follow the observance of all dispositions of the capital market legislation [thereby, article 1,
paragraph (3) from Law no. 297/2004 in indicating without a doubt that the National Securities
Commission is the “competent authority which applies law specifications”], through a series of
methods and instruments offered by the legal dispositions. Executing the prerogatives that
result from the exertion of this function follows avoiding unbalances on regulated markets and
trading systems supervised and regulated, altering their function and the appearance of market
abuse.

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 The control function of the competent authority has a central part also in the Market in
Financial Instrument Directive, article 25, paragraph 1 stipulating that member states need to
ensure that proper measures are taken for the competent authorities to be able to control the
activity of investment companies in order to make sure that they are exerting their activity
honestly, equitable and professionally, which would favorites the market’s integrity.
Practicing this function means creating specialty departments in the competent authority
which would include qualified personnel with professional training elevated enough to
understand the function mechanisms of the capital market and to be able to identify the action
subscribed to the illicit sphere. Unfortunately this objective remains only a theoretical
desideratum, because in practice, at least in Romania, we are at a considerable distance from
completing it.
The Romanian law of capital market mentions in article 2, paragraph (5) a series of
specific attributions held by the National Securities Commission in order to exert the
surveillance activity:
a) to check the method of execution of attributions and obligations legal and
statuary of administrators, directors, executive directors, and of other persons
in connection with the activity of regulated or supervised entities;
b) to solicit to the administration board of regulated entities a meeting with its
members or, depending on the case, summoning the general meeting of
shareholders, establishing the problems that need to be subscribed in the
daily agenda;
c) to require to the competent court to dispose a convocation of a general
meeting of shareholders, in case there are not honored the dispositions from
line b);
d) to require information and documents to issuers whose movable values make
the object of a public offer or are admitted to trading on a regulated market
or traded in an alternative trading system;
e) to survey the head offices of regulated and supervised entities by the National
Securities Commission;
f) to interrogate any person in connection with the activities of the regulated
and supervised entities by the National Securities Commission.
In the stated of the European Union the activity of surveillance, control and investigation
is enrolled based on the principle of cooperation between the state competent authorities,
according to article 16 from Directive no.6/2003. This collaboration means giving support in
order to discover and sanction the actions outside the sphere of market abuse, including first of
all transmitting in real time all the necessary information.

2.1.3 Sanctioning function

Non- observing the legal dispositions, either there are included in primary legislation,
either in the secondary one is necessary to attract the application of sanctions. The main goal of
these sanctions is to determine the active subject of the illicit action before returning of the
legal land.
The capital market authority would not be able to realize its fundamental objectives in the
absence of juridical norms which might be brought to completion by the coercive force of the
state authorities.

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 Paragraph 38 from “Considerations” of the market abuse Directive shows without any
doubt the necessity of identifying and sanctioning without delay any violation of the
interdictions or obligations foreseen in the legislation incident to the market abuse. In this
sense, the European legislator considers that sanctions should be discouraging enough and
directly proportional with the gravity of the violations and with the realized benefits and have
to be applied consistently. This way, article 14, paragraph 1 from Directive no.6/2003 shows
that “without touching their right to impose penal sanctions, members states have to ensure that
according to the internal legislation, there can be taken proper administrative measures or can
be applied administrative sanctions to the persons responsible of violating the adopted
dispositions for applying the present directive. Member states guarantee that measures in cause
are effective, proportional and with effects of discouragement”.

The sanctioning function has to be brought to completion on the ground of objective

criteria of interpretation of the legal norms, without realizing other differences between the
persons or entities that violated the legal dispositions, than the ones foreseen by legal norms in
regards to the application of extenuating circumstances or aggravating circumstances. In the
European Union, this thesis was outlined in paragraph 39 from “Considerations” which
emphasizes the necessity of homogeneity of regulations in the member states of the European
Union in the matter of the sanction regime of the market abuse.
From the point of view of the sanction regime, it needs to be notice that in Romania, the
market authority has the competence to establish and asses the contraventions in the regime of
capital market, and to apply sanctions according to article 280 from Law no. 297/2004, in a
derogatory procedure from the common law contained in the Government’s Order no.2/2001
regarding the juridical regime of contraventions.

2.1.4 Authorization function

This function doesn’t have a primary relevance in the matter of the market abuse, but its
incidence intervenes especially in situations where it is raised the problem of redrawing or
suspending an authorization given to a market’s actor for committing actions in the sphere of
the market abuse.
According to article 5, paragraph 1 from the Market in Financial Instrument Directive,
each member state requires that providing investment services or exerting investment activities
as an occupation or usual activity with a professional title has to make the object of a previous
authorization in accordance with the legal dispositions. Authorization has to mention the
services or activities of investment which the company of investment is authorized to deliver.
The authorization is valid on the entire territory of the Community and allows an investment
company to provide services or exert activities for which it was authorized in the entire
Community, either by setting up a branch, either by free providing of services.
Among the situation of withdrawal of the authorization mentioned by article 8 from the
Market in Financial Instrument Directive there are also the one which have in sight the serious
and systematic violation of the functioning conditions by the investment companies.

In Law no. 297/2004 there are mentioned among the administrative sanctions applied to a
person or entity that doesn’t respect the legal or regulation dispositions also suspension or
withdrawal of the authorization.

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 2.2 Fundamental objectives of the capital market authority in Romania

In front of a primary legislation which is extremely summary, the capital market authority
in Romania grounds most of its solutions on the principle dispositions inserted in article 2 from
the Statute of the National Securities Commission- Fundamental Objectives. These objectives
describe, in a non-exhaustive measure, the role held by the capital market authority according
to the Romanian legislation:
a) establishing and maintaining the necessary frame for developing regulated
markets;
b) promoting trust in the regulated markets and in securities investments;
c) ensuring the protection of operators and investors against the non-loyal practices,
abusive and criminal;
d) promoting the correct and transparent function of regulated markets;
e) preventing market manipulation and fraud and ensuring the integrity of regulated
markets;
f) setting standards of financial solidity and honest practice on the regulated
markets;
g) adopting necessary measures to avoid the systemic risk on the regulated markets;
h) preventing the prejudice of equality of information and treatment of investors or
their interests.

2.3 Prerogatives of the capital market authority

According to the dispositions of article 12, paragraph 12 from the market abuse Directive
no.6/2003, the market authority, in the execution of its attributions, has the following
prerogatives:
a) the right to access any document under any form and the right to receive a copy;
b) the right to demand information to any person, including the ones which
intervene successively in the transmission of orders or in trading, and to their
representatives and, if there is necessary, the right to summon a person and to
interrogate her;
c) the right to make inspections on site;
d) the right to demand telephone records and electronic changes of existent data;
e) the right to demand ceasing any contrary practice to the dispositions adopted in
the application of legal incident dispositions;
f) the right to suspend trading of securities or to demand the market operator to
suspend the trade;
g) the right to demand freezing and laying a distrait on the actives;
h) the right to ask to temporary forbid the professional activity.
The additional prerogatives of the market’s authority are stipulated in article 50,
paragraph 2 of Directive no.39/2004- Market in Financial Instrument Directive, these having,
in certain circumstances, relevance also in regards to combating the market abuse. Thereby,
this authority has:
- the right to ask the authorized auditors of the investment companies and of the
regulated markets to disclose information;

296
 - the right to adopt all the necessary measures to ensure that the investment
companies and regulated markets are continuing to respect the legal demands;
- the right to send out a case to the competent bodies in order to take penal
action;
- the right to authorize auditors or experts to make verifications or
investigations;
- the right to demand the withdrawal of a security from trading, from a regulated
market or from any trading infrastructure.
Article 12, paragraph 2 from the market abuse Directive shows that these prerogatives
mentioned previously are exerted according to the internal legislation of each member state.
In Romania, in executing the prerogatives of surveillance and control of the regulated
markets, according to article 135, paragraph (3) from Law no. 297/2004, the National
Securities Commission can appoint an inspector whose main attributions are:
a) to follow the observance of legal incident regulations;
b) to participate, without a right to vote, to the general meeting of the shareholders
and to sessions of the administration board of the market operator, being able to
make observations and demanding that these be included in the session’s minute;
c) to have free access in all the enclosures, to all the documents, information and
evidences of the market operator;
d) to informs and propose to the National Securities Commission measures for any
situation that he asses.
The market operator has to assure the means and conditions necessary in order to
complete the inspector’s attributions.
Also in the exertion of its surveillance function, the National Securities Commission can
demand the modification of regulations issued by the market operator or the procedures issued
by the system operator.
The National Securities Commission can, also, appoint an inspector in order to delegate
the powers of surveillance and control of the alternative trading systems, according to article
142, paragraph (2) from Law no. 297/2004.

2.4 The method to exert attributions

The authority is exerting its competencies, according to article 12, paragraph 1 from
Directive no.6/2003.

2.4.1. Directly

There will be exerted directly the majority of the owned prerogatives, among which the
prerogatives regarding the access to documents and information, the right to make inspections,
the rights to temporarily forbid professional activity etc.
According to the Romanian law, the market authority has the prerogative to suspend
directly the trade of titles of an issuer [article 234, line b) from Law no. 297/2004] or to
withdraw from trading those securities [article 234, line d) from Law no. 297/2004].

2.4.2. In collaboration with other authorities or other companies on the market

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 Collaborating with other authorities or companies on the market will intervene in the
situation of exerting the attributions regarding demanding information from intermediaries,
auditors, investors etc., the right to suspend from trading, the right to demand laying a distrait,
the right to demand telephone records and electronic changes of existent data etc.
Cooperation with other authorities which have competence in the capital market domain
including also relations with the juridical bodies of the state, police bodies, prosecuting
magistracy and trial courts. It is essential that this collaboration be made in an institutional
setting, which excludes the appearance of any encroachments, influenced by interests
economical, political or any other nature.
According to article 5 from the Statute, in order to realize its fundamental objectives, the
National Securities Commission is working with the National Bank of Romania, the
Commission of Insurance Surveillance, The Council of Competition, The Public Ministry and
other public authorities and institutions, being able to trade information both public and
confidential with these institutions.

2.2.3. By delegation towards other authorities or companies on the market under its
responsibility

Competence delegation can be realized, according to the Market in Financial Instrument

Directive, in the case of administrative attributions, preparatory and auxiliary regarding
releasing authorizations. In the matter of the market abuse it is not allowed the competence
delegation.

2.2.4 By noticing the competent juridical authorities

Noticing the competent juridical authorities is realized, first of all, when there are
indications of committing a criminal offence, but also in the case in which the market authority
is promoting certain actions in justice, in the exertion of its attributions.
According to article 7, paragraph 8 from the Statute of the National Securities
Commission, this authority has an active process identification and can intervene in any
process regarding the adopted norms or individual acts issued by him, without the obligation
of proving any interest.

Section 2

Territorial competence of the regulation, surveillance and control

authority

Cooperation between the competent state authorities in order to combat

market abuse

§1. Territorial competence according to the normative system grounded on

Directive no. 6/2003

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 The territorial competence of the authority of regulation, surveillance and control in the
member states of the European Union is mentioned in article 10 from Directive no. 6/2003.
Thereby, the national authorities are competent to investigate:
a) the actions committed on their territory or outside their territory in regards to
securities admitted to be traded on a regulated market situated or functions
on their territory or for which it was laid down a trading application on that
market;
b) the actions committed on their territory regarding securities admitted to be
traded on a regulated market in a member state or for which it was laid down
a trading application on that type of market.
According to article 2, paragraph (4) from Statute of the National Securities Commission,
its authority is exerted on the entire territory of Romania.

§2. International cooperation

In case an element of international matter intervenes, the authorities of member states of

the European Union are called to cooperate in order to detect and sanction any actions which
might enter in the stock exchange illicit sphere.

2.1 Legal frame and essential elements of the cooperation between the authorities of
regulation, surveillance and control

2.1.1 Cooperation between the competent authorities according to the norms of European
legislation

The market abuse Directive foresees in article 16, paragraph 1 the obligation of
collaboration between the competent authorities as many times as it is necessary to complete
their responsibility, using the prerogatives given by the present directive or by the internal
legislation. Competent authorities must give assistance to the competent authorities from the
other member states.
An important matter regarding the international cooperation between the member states is
trading of information between competent authorities, as a component element of cooperation
during the investigations.
On demand, the competent authorities in a member state will communicate at once any
information requested by another authority in another member state, according to article 16,
paragraph 2 from Directive no. 6/2003. If necessary, the competent authority to which it is
addressed the demand takes immediately the necessary measures to obtain the requested
information. In case it is not in the position to present at once that information, must bring to
the knowledge of the authority which demanded the information the reasons that lead to the
encumber of the action in cause. The given information is regulated by the obligation of the
professional secrecy which belongs to the persons employed or that were employed by the
competent authorities who receive the information.

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 A demand regarding communication of information addressed by a competent authority
to the corresponded institution in another member state of the European Union can be refused
in one of the following situations:
- communicating that information is susceptible to damage the suzerainty, security and
public order of the member state in cause;
- it was initiated a juridical procedure for the same actions and for the same persons by
the authorities of that state;
- it was pronounced a final decision against the persons regarding the actions committed
by them in that state.

In the case of initiating a procedure or pronouncing a final decision, the competent

authority that deposited the demand is informed in consequence, providing detailed
information on that procedure or decision.
A competent authority whose information demand doesn’t receive an answer in the
reasonable term or is refused can submit this problem to the attention of the Committee of
European authority of regulating the movable values market which will examine it in order to
identify a fast and efficient solution.
The market abuse directive imposes using received information in the procedure of
international cooperation in the European Union only for exerting their functions, as they are
defined by the market abuse legislation and the administrative or juridical procedures that
derives from the exertion of these attributions. This disposition doesn’t refer to the situation of
responsibilities which belong to the authority of surveillance and control and its employees in
the juridical procedures with a penal character. With all this, in case the competent authority
which is communicating the information gives its acceptance, the authority that received the
information can use it in other purposes and can transmit it to the competent authorities from
other states.
In case the competent authority has the conviction that on the territory of another member
state there are committed or were committed acts which violate dispositions of this present
directive or has knowledge about acts that are damaging traded securities on a regulated market
in another state, has to inform about this the competent authority in that member state in a very
detailed manner. The competent authority in the member state in cause, based on its territorial
competence, has the right to adopt necessary measures for reestablishing the legality. This
authority has to communicate to the competent authority that informed it the results of its
intervention and, as possible, to inform about the main features of its action’s evolutions.
The actions initiated by the competent authority on the territory of the member state on
which it was committed the illicit act can not harm the competencies of the authority that
transmitted the information, according to article 16, paragraph 3 from market abuse Directive.
In case the execution of an illicit action in the stock exchange regime draws the competence of
more administrative authorities from different members states of the Union, they have the
obligation to mutual consult on the propositions regarding the way of resolving the case.
In the frame of the international cooperation is foreseen the possibility for the competent
authority of a member state to requires to the competent authority of another member state to
develop their investigation on the territory of the last. The competent authority in cause can
require that some members of its own personnel to be authorized to accompany the ones of the
competent authority from the other member state on the course of the investigation.

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 In this situation, investigation will be completely placed under the control of the member
state on whose territory it is developed.
The authorities of surveillance and control can refuse the demand of investigation on the
state’s territory where are competent or they can not authorize for the members of personnel of
the competent authority of another state to accompany the members of personnel of their own
state on the ground of a demand presented according to the second paragraph, in case the
investigation is susceptible to harm the suzerainty, security or public order of the involved state
or in the case it was already initiated the juridical procedure for the same actions and against
the same persons in front of authorities of that state or in case the persons were already trialed
for the same actions in that state. In this case, they notify this to the competent authority that
made the demand, presenting detailed information about the procedure or decision in cause.
The competent authority whose demand to open an investigation or to allow agents to
accompany the ones of the competent authority of the other member state doesn’t receive an
answer in a reasonable term or its refused can submit that situation to the attention of the
Committee of European Security Regulators (CESR), that will examine the problem in order to
identify a fast and efficient solution.

2.1.2 The cooperation of the National Securities Commission with competent authorities
from other states

The Statute of the National Securities Commission foresees in article 6, paragraph 1 the
obligation of the National Securities Commission to cooperate with the competent authorities
from member states also on the base of reciprocity with the competent authorities that are not
members as many time as there are necessary, in order to complete the obligations they have,
using the powers given by law. In this sense, the National Securities Commission will assist
competent authorities from member states, especially in regards to the exchange of information
and cooperation in the investigation activities. This type of assistance includes, without
limitation on these:
a) providing public information or not disclosed to the public about or in
connection to a natural or juridical person, subject of the regulation,
surveillance or control of the National Securities Commission;
b) providing copies of records held by the regulated entities;
c) collaboration with the persons that have information about the object of the
investigation.
According to the dispositions of article 214 from the Regulation of the National
Securities Commission no. 32/2006 regarding services of financial investments, cooperation
with authorities from member states has in sight providing assistance and exchange of
information in situations that represent violation of dispositions of the regulations in force in
each member state, as in the case of investigations that are not developed following the
violation of this regulation.
In the situation in which the National Securities Commission has serious reasons to
suspect that actions contrary to dispositions of the regulations in force are or were developed,
on the territory of Romania, by entities that are not submitted to its surveillance, will notify
this, as detailed as possible, to the competent authority from the origin members state.

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 The National Securities Commission can request the cooperation of a competent authority
from a member state in the activity of surveillance, for verification on the entity’s head offices
or for an investigation. In the case of dealers that are members of a regulated market from
Romania having direct access from the member states of origin, the National Securities
Commission can choose to address directly to them, case in which will inform in consequence
the competent authority in the origin member state of the market’s member.
In the situation in which the National Securities Commission receives from a competent
authority in another member state a request for a verification on site or regarding an
investigation, in the limitations permitted by the power invested in it:
a) will develop the verification and investigations, with personal resources; or
b) will allow the competent authority that submitted the request to make the
verifications and investigations; or
c) will allow auditors or experts to make the verifications and investigations.
The National Securities Commission can close agreements of cooperation regarding the
exchange of information with the competent authorities from member states only if information
which will be disclosed is the subject of guaranteeing the professional secrecy (work). The
exchange regarding information must be in connection with the execution of attributions of
those competent authorities.

2.2 Super state bodies- binder of the international cooperation. Committee of European
Securities Regulators

International cooperation in the field of the capital market, in general, and in the case of
market abuse, especially, generated super state bodies which have a role in the harmonization
of applicable regulations.

2.2.1 International Organization of Securities Commissions (IOSCO)

Globally, there is the International Organization of Securities Commissions- IOSCO that

has the following fundamental objectives 1 :

- cooperation in order to promote high standards of regulation with the purpose

of maintaining correct, efficient and solid markets;
- exchange of information regarding situations manifested on different markets
of the world in order to develop internal markets;
- unification of efforts to set standards regarding an effective surveillance of
international trades;
- providing mutual assistance in order to promote the market’s integrity by
rigorous application of standards of surveillance and by effective execution of
measures taken against the illicit actions.
The International Organization of Securities Commissions has as members the authorities
of regulation and surveillance of main stock exchange markets of the world: SEC (United
States), AMF (France), FSA (Great Britain), BAFIN (Germany) etc.
According to the principles of the International Organization of Securities Commissions 1 ,
the main objectives of a competent authority in the field of regulation, surveillance and control
1
http://www.iosco.org/about

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of the capital market are: protection of investors, ensuring efficiency, transparency and fairness
of the market, reducing the systemic risk.
In 2002 it was adopted by the International Organization of Securities Commissions
members the Multilateral Memorandum of Understanding regarding the consultation,
cooperation and exchange of information between the regulators of movable values, members
of the International Organization of Securities Commissions.
According to this Memorandum 2 , assistance provided mutually by the members of the
International Organization of Securities Commissions will refer to providing documents and
useful information in the files of the authority that made the assistance demand; obtaining
information of nature to determine the history of transaction in a period of time, and the
transfer of funds between the bank and brokerage firm in order or following the execution of
trades, moment of trading, sold or purchased quantity, price of trades, identity of the broker
that traded; obtaining information regarding the persons that exert control on the involved
juridical persons in the suspected trades.

An assistance demand has to be written, in a form agreed by the International

Organization of Securities Commissions and will have as content:
- a description of the content of requested assistance;
- a presentation of motives for which the requested information contributes to
the investigation’s solution;
- useful information in the investigation’s solution;
- indicating necessary measures of precaution which need to be taken in the
course of gathering information requested from the point of view of the case
investigation’s success;
- the legal and regulation norms violated in the matter of the investigation.
In urgent situations, the assistance request can be made also by phone or fax, under the
reserve of later confirmation through an original signed document.
After making this request of assistance, the authority which received the request will take
necessary measures to obtain the information requested from any persons that has them.
The authority which made the request of assistance can use the information and
documents obtained this way that do not have a public character only for these purposes:
- in order to complete the objectives mentioned in the assistance request,
including to assure the respect of legal and regulation norms violated by the
investigated persons;
- in order to respect the general legal frame, including to put into application the
taken measures following the violation of legal and/or regulation dispositions,
to assure necessary assistance to bodies of penal action, trial courts or the
market’s entities with a auto regulation power (market operators or of trading
system).
In case the authority that received assistance wants to use the non-public information and
documents, received in the course of the assistance procedure regulated by the Memorandum,
in other purposes than the ones previously mentioned, will have to receive the express approval
of the competent authority that provided them.

1
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD154.pdf
2
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD126.pdf

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 2.2.2 Committee of European Securities Regulators
In the European Union, the Committee of European Securities Regulators has a position
which allows an effective implication in matters regarding the regulation and interpretation of
juridical norms issued by the competent bodies of the Union.
The market abuse Directive indicated in article 7, paragraph 1 that this committee will
support the European Commission in the application of incident legislation to this matter.
The Committee of European Securities Regulators was founded by Decision no.
2001/527/EC 1 of the European Commission as an independent body following the
recommendations formulated in the Final Report of the Committee of the Wise Men regarding
the regulation of movable values European markets (The Committee of the Wise Men-
Lamfalussy Report).
The Committee of European Securities Regulators is an independent committee formed
by 29 members (representatives of authorities of the member states of the European Union and
of the two states in the European Economic Space: Iceland and Norway). A representative of
the European Commission participates, also, at discussions, except the confidential ones.
The committee is presided by a chairman and a vice president, elected from among the
members for a 2 years mandate. The current activity of the Committee of European Securities
Regulators is assured by a secretariat managed by a general secretary. The committee is
financed by annual contribution of its members. The head offices of the Committee of
European Securities Regulators are in Paris.
The objectives of the Committee of European Securities Regulators are:
- improving the coordination between the European regulators of securities ;
- assisting the European Commission in the elaboration of measure of
application of directives in the securities domain;
- ensuring a coherent implementation of communitarian regulations in the
Member States.
In order to complete these objectives, the Committee of European Securities Regulators
assists the European Commission regarding the policy problems of the securities and makes all
the efforts to fulfill the mandates given by the European Commission. In order to implement
uniformly the legal frame regarding the securities in the European Union, the Committee of
European Securities Regulators is elaborating guides, recommendations and standards 2 .
In the market abuse field the Committee of European Securities Regulators elaborated
until now two orientate guides for the implementation of Directive no. 6/2003. The first guide
aims, according to point 1.1 from it content, three domains considered to be a priority: accepted
market practices in connection to the market manipulation, indications regarding what
members of the Committee of European Securities Regulators consider to be market
manipulation, and indications and a general format of report for notifying suspicious
transactions. The second guide refers to the content of the institution of insider information, to
the legitimate reasons for postponing privilege information, to the situations in which an
information regarding the waiting orders of a client are insider information and to the list of
persons which have access to insider information in all the jurisdictions.
In the Committee of European Securities Regulators there were set up many work groups
in order to make easier the cooperation between the competent authorities in the member

1
Official Journal of the European Union no L191 from 13.07.2001
2
http://www.cnvmr.ro/ro/CooperareInternationala/CESR.htm

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states. From these, a special relevance has the CESR-POL, a permanent operational group
created with the purpose to facilitate the beyond borders cooperation and the exchange of
information between members. Cooperation of CESR-POL members in the field of
surveillance is realized on the ground of the Multilateral Memorandum of Understanding.
CESR-POL has as main objectives 1 :
- monitoring the operation enrolled in the Multilateral Memorandum;
- examination of possible mechanisms of information exchange, cooperation
and coordination of activities of surveillance and control between the members
of the Committee of European Securities Regulators’
- analysis of practical and common interest legislative cases that might affect
the activities of surveillance and control of Committee of European Securities
Regulators members;
- creating a forum in which the Committee of European Securities Regulators
members have the possibility to trade experience regarding the activities of
surveillance and control;
- warning the Committee of European Securities Regulators members regarding
factors that might threaten the integrity of regulated markets or the investor’s
interests;
In the CESR-POL, in 2005, there was set up the subgroup of “Surveillance and
Intelligence (S&I group)” to analyze aspects connected to the surveillance of Markets and
investment firms and for exchanging information regarding regulated and non-regulated
activities.

Section 3

Investigating and sanctioning capital market manipulation actions

In Romania, the procedure of investigating capital market manipulation actions is

submitted to the juridical norms of the National Securities Commission Regulation no. 11/1997
regarding the control to comply with the legal dispositions in the movable values field2 . By this
regulation, the National Securities Commission sets the norms and procedures for ensuring the
respect of legal dispositions and regulations of the National Securities Commission, and
application of preventing measures and sanctioning in the field of the capital market in
Romania.

1
Ibidem
2
Approved by the President’s Order of the National Securities Commission no 21/28.10.1997 (Official
Monitor no 327 from 25 November 1997)

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 §1. The competence of investigating and issuing sanctions

Obligations of the competent persons to investigate

Incompatibilities

1.1 Competent body

Competence regarding the surveillance, control and sanction of illicit actions in the
juridical regime of the capital market reverts, according to Law no. 297/2004 and the Statute of
the National Securities Commission, to the National Securities Commission, in its positions as
an independent administrative authority. On the ground of article 10, paragraph (1) from the
Statute of the National Securities Commission, this authority can delegate some of its agents or
of institutions or regulated markets bodies, subordinated to this, one or more of the
prerogatives given by law. A similar disposition is the one in article 7 from Regulation
no.11/1997, according to which “the activity of discovering and investigating the law violation
reverts to the National Securities Commission that acts through the specialty control
personnel”.
The legal norm which indicate expressly the obligation of issuing a mandate to natural
persons for assessing the illicit actions is mentioned in article 274, paragraph (1) from Law no.
297/2004: “Committing contraventions mentioned in article 272 are assessed by the natural
persons, mandated in this purpose by the National Securities Commission, that exerts
attributions regarding the surveillance, investigation and control of respecting legal
dispositions and regulations applicable to the capital market”.
Regulation of the National Securities Commission no. 11/1997 stipulates in article 2 that
the National Securities Commission, by decision delegates and revokes its attributions
regarding the control and investigation of capital market participants to the Department of
control and investigation that functions inside of the National Securities Commission. In the
National Securities Commission organizational chart, attached to the Regulation no.1/2004
regarding the organization of the National Securities Commission 1 , is not foreseen the
existence of this department in the National Securities Commission.
In the National Securities Commission organizational chart there are foreseen two
different departments that might have under jurisdiction the investigation of facts
circumscribed to the market abuse sphere: the Control Body and General Direction of
Surveillance. The Control body of the National Securities Commission has in subordination the
Inspections Service and Investigations Service, this indicating that the competent body to
investigate actions suspected of being market abuse would be this. The General Direction of
Surveillance has in subordination the Direction of investigation and monitoring and the Issuers
Direction, each of these having in subordination more services.
In reality, without this competence to be mentioned in a normative act or in a regulation
made public, in the investigation of actions in the market abuse there is involved the personnel
of the General Direction of Surveillance. With all this, it can not be identified in the
subordination of the General Direction of Surveillance any direction or service that would

1
Approved by the President’s Order of the National Securities Commission no.6/18.03.2004 (Official
Monitor no 272 from 29 March 2004)

306
contain, according to the National Securities Commission organizational chart, competences in
this field.

Thereby, the Direction of Monitoring- investigation in the General Direction has as

attributions coordination and organization of activity of the four subordinated services
regarding the surveillance, monitoring and investigation of entities regulated by the National
Securities Commission. It’s monitoring, also, the respect of prudential and conduct rules by the
entities that are subjects of these rules. The four subordinated services of this direction are:
service of monitoring- investigating issuers, service of electronic surveillance, service of
analysis and service of monitoring regulated entities 1 .
The Direction of Issuers in the General Direction has in competence coordination of the
activities of the three services in subordination, with attributions in authorizing operations
specific to the regulated market, keeping the evidence of movable values and informing
investors. The three subordinated services are: service of market operations, service of
evidence and service of informing and protection of investors 2 .
Unfortunately, considering the competencies of the Control Body, meaning realizing the
control activity- investigation in order to identify, prevent and/or sanction the violation of legal
norms specific to the capital market, becomes obvious that this body took the place of the
Department of control and investigation mentioned by the Regulation of the National Securities
Commission no.11/1997. The competencies in this field need to acknowledge also by the
General Direction of Surveillance, having in consideration the disposition of article 274,
paragraph (1) from Law no. 297/2004, that indicated that natural persons having attributions
regarding surveillance, investigation and control of complying to the legal dispositions and of
the regulations applicable to the capital market have in competence assessing the contravention
to the law of the capital market in Romania.
In the absence of a delegation decision or to mandate natural persons, according to article
274, paragraph (1) from Law no.297/2004, the competence is only in the hands of the National
Securities Commission, as a independent administrative authority, composed, according to
article 3, paragraph (1) from the Statute of the National Securities Commission, of 7 members,
from which a president, 2 vice presidents and 4 commissioners. In case there isn’t a decision of
delegating the competences, we appreciate that the entire procedure of investigation should be
completed, under the sanction of the nullity of the administrative act issued following this one,
by the seven members of the National Securities Commission.
This confusing situation in regards to the competent department in the National Securities
Commission to realize the investigation of market abuse actions is a negative factor for the
capital market in Romania.
In France, for example, the investigation attributions are given into the competence of the
Direction of investigation and surveillance in the Authority of Financial Markets- AMF. The
persons that are realizing the investigation of suspected actions are appointed by competence
delegation by the general secretary of the Authority of Financial Markets, according to article
621-9-1 from the Monetary and Financial French Code. Direction of surveillance and
investigation is composed of magistrates, judicial police officers, jurists and other professional
of the capital market 3 . The persons to which there are delegated the attributions of realizing the

1
http://www.cnvmr.ro/ro/organigrama.htm
2
Ibidem
3
S. Loyrette, cited paper, p.30

307
investigation by the general secretary of the Authority of Financial Markets has to have a
professional experience of minimum 2 years and not to have has penal convictions resulting
with incarceration longer than 6 months for certain economic crimes or of certain gravity.

1.2 Attributions and obligations of the competent persons to realize the investigation

1.2.1 Attributions and prerogatives

Attributions of members or personnel in the National Securities Commission to which

there are delegated the competences to investigate illicit action in the stock exchange regime
are mentioned in article 4 from Regulation no.11/1997:
a) exert the control of complying with the legal dispositions regarding movable
values, as a continuous activity;
b) investigate and inquire in cases in which there are noticed situation of
violation of the law by persons took into consideration;
c) check registers, correspondence and any type of papers and evidences of the
considered persons;
d) realize inspections which are programmed, announced and unforeseen to the
considered persons;
e) develop activities according to their competence, in order to prevent eventual
frauds or irregular activities on the capital market;
f) draws up, directly or by agents of control- investigation, in the course of the
development of actions, administrative papers by which there are disposed or
proposed different measures;
g) realize the surveillance and hierarchical control on the activities of the agents
of control- surveillance;
h) informs other bodies or state institutions with similar attributions (Public
Ministry, Police, Financial Guard), in case they asses the incidence of their
competence, and collaborate with them in order to efficiently resolve these
cases;
i) receives notifications of the bodies and entities mentioned previously, when
there are of the National Securities Commission competence;
j) checks notifications, information and denunciations receive in order to be
resolved, according to its competence, taking and proposing proper measures;
k) investigates causes, means and methods used in the most frequent violations,
centralizes and correlates obtained data, in order to establish general and
normative measures, as for the general policy of the National Securities
Commission in the field;
l) develops any other activities foreseen by law and the National Securities
Commission acts, with a normative character, that enter in its competence.
The National Securities Commission personnel with the responsibility to investigate have
as prerogatives, according to article 5 from the Regulation no.11/1997:
- developing investigations, inspections, check-ups and other preliminary
investigations;
- the right to request the presentation of documents, situations, information
stored on physical support, magnetic or any other type;

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 - developing interrogations;
- taking conservatory measures etc.

1.2.2 Obligations

Obligations of the National Securities Commission members and of the personnel that
there were delegated competences of investigation of action in the sphere of the stock exchange
illicit are stipulated in the National Securities Commission Regulation no.5/1995 regarding the
code of ethic and conduct of members and personnel of the National Securities Commission 1 .
Thereby, article 3 from the Regulation foresees the general principle according to which
members of the National Securities Commission will follow in their activity the principle of
independence of opinions, not letting be influenced by requests or opinions partisan of
popularity and personal notoriety considerations. In the French jurisprudence 2 , the court
annulled a decision of the market’s authority (the former Commission des Operations de
Bourse), because it was violated with the occasion of deliberations the principle of impartiality.
Article 9, paragraph (1) from the Regulation forbids the National Securities Commission
members that, in the exertion of their investigation attributions, would suggest, vote or
participate to a investigation out of reason of enmity, revenge or with the purpose of creating
prejudices or advantages to the investigated person. Pronouncing a decision must be realized
only on the base of administrated evidences.
On the ground of article 9, paragraph (2), any public pronunciation of the results of an
investigation will be made only on the base of conclusive evidence that would lead to the
conclusion that the law was violated and making public the results of the investigation is in the
interest of the citizens. This legal text is an application in matter of the fundamental right of the
assumption of innocence in the period of time prior to the pronunciation of a legal and final
decision of sanction.
In connection with the matter of market abuse there are found attributions foreseen in
article 10 of the Regulation, according to which, members and personnel of the National
Securities Commission must avoid the execution of acts and actions which create false
representation on the institutions of the capital market and to abstain from any action that
might cause male functions in the normal activity of the capital market.
It is forbidden the dissemination of false or with any ground information about events and
factors that have incidence on the capital market.

It is instated the prohibition for members and personnel or the National Securities
Commission to develop activities that would influence negatively the public opinion about the
realizations on the capital market.
In the same time, it is forbidden to the members of the National Securities Commission,
and to the hired personnel of this authority to use their official position and/or confidential
information in obtaining personal profit or to request or accept any type of gift, service, favor
that would create advantages to the persons with whom they are in official relations in the
name of the National Securities Commission. Revealing confidential information or reissuing

1
Approved by the President’ Order of the National Securities Commission no.58/14.09.1995 (Official
Monitor no 213 from 19 November 1995)
2
CA Paris, 7 March 2000, in S. Loyrette, cited paper, p. 65

309
documents that contain this type of information on the request of the representatives of a state
power body is stopped, in the absence of an authorization from the Commission.

1.2.3 Incompatibilities. Abstaining and challenging a member of the National Securities

Commission

According to article 12 from the Regulation, members of the National Securities

Commission can not exert another paid function, public or private, except the ones of
university professor.
Members and employees of the National Securities Commission can not be shareholders,
employees or members in the Administration Boards to the persons authorized by the National
Securities Commission.
Members and personnel of the National Securities Commission can not be significant
shareholders to the issuers of movable values, subjects in the surveillance of the Commission.
Members and employees of the National Securities Commission can not be part of the
Administration Boards of juridical persons, subjects of surveillance of the National Bank of
Romania or to significant shareholders to these juridical persons.
Employees of the National Securities Commission can not exert another paid function,
public or private that generates conflicts of interest or reduces the employee’s capacity to
complete his attributions in the National Securities Commission.
An employee of the National Securities Commission that in the course of exerting his
work attributions receives the task to develop activities regarding to associations involved in
the capital market in which he owns securities, has a personal interest, was employed in the last
5 years, is a client or a significant shareholder of this, has the obligation to present this
situation without delay to his hierarchical superior. In the conditions of assessing a conflict of
interest, the hierarchical superior will take the decision to challenge that employee.
In the completion of their juridical attributions, members of the National Securities
Commission:
- will engage the discussion of problems with the commission’s personnel and
with the persons submitted to its regulation, only in the measure in which that
matter regards these persons;
- they will abstain from participating in a procedure if there are circumstances
from which it results that:
a) he, spouse or relative until the second and third degree are interested under any
form;
b) before becoming a member of the National Securities Commission he was a
representative or lawyer of any of the parts.
If a person that is interested demands for any reasons that a member of the National
Securities Commission redraws from certain procedure, that member of the Commission will
might be the judge of his own challenge, according to article 8, paragraph 2 from the
Regulation. This disposition is derogatory from the common law applicable to the juridical
procedures enrolled through the trial courts, where it is foreseen in article 30, paragraph (1)
from the Code of civil procedure that the challenged judge can not enter in the formation of the
panel of judges that are judging the challenge demand.
Regulation of the National Securities Commission no. 5/1995 institutes, also, restrictions
regarding transacting securities admitted to be traded by the members and personnel of the

310
National Securities Commission. Thereby, members and employees of the National Securities
Commission can not purchase movable values:
- of the issuers of held by intermediation associations that make the object of a
inspection or investigation enrolled by the National Securities Commission;
- of a commercial association found in one of the stages of reorganization or
juridical liquidation.

§2. Procedure of investigation

2.1 The stages of the investigation action of alleged illicit facts

The investigation procedure of the illicit actions in the capital market regime, including
of course in this category also the capital market manipulation actions, is developed according
to the prerogatives held by the market authority, mentioned in the normative acts with law
power or belonging to the secondary legislation of the capital market issued by the competent
authority on the grounds of the regulation function.
The stages of enrolling the investigation action are mentioned in article 11 from the
Regulation of the National Securities Commission no. 11/1997:
1. Issuing the order by which the action is enrolled;
2. Delegation of the agent that is developing the action;
3. Issuing the order for interrogating the considered person, in case of actions
developed at the National Securities Commission head offices;
4. Notification, in the case of actions programmed or announced, developed at the
residence/head office of the considered person;
5. Studying, researching and verification of papers, files and any other document
that is linked to the object of the action;
6. In the case of taking conservatory measures, as picking up documents or titles,
agents will draw a minute that will record this act;
7. In the case of committing a crime connected to the movable values, the agents
will take statements from the wrongdoer and witnesses, will apprehend criminal
objects ,will evaluate the damages, will take other measures considered necessary,
that they will record in a minute (article 214 Code of penal proceeding) and will
advance the file to the penal research bodies;
8. During the development of the action, agent will draw up declarative notes,
questionnaires, and interrogation notes containing responses of the considered
persons to the questions asked by the agent. In case the considered persons can
not or will not answer to the questions asked, it will be registered in the act of
finalization of the action;
9. In case it will be recorder the execution of contravention action foreseen by law, it
is drawn up a minute of establishment, with the registration of the executed
actions, of the violated legal norm, and of the juridical framing of the action. The
minute of finding is sent at once to the competent body, depending on the case, to
the chief of the Control Body or to the general manager of the General Direction

311
 of Surveillance 1 , the National Securities Commission or the trial court, that
applies the sanction according to the law;
10. The action is finalized by drawing up an investigation report, control-
investigation, that contains:
a) registering the assessments resulted on the course of the action’s development;
b) proposals regarding taking measures, including sanction measures.
11. On the base of the sanction proposition present in the report of the investigation
and/or in the minute of registration and in the file of cause, the National Securities
Commission issues an order 2 through which disposes sanctioning with a fine,
verbal warning or written or other complementary contravention sanctions.

2.2 Opening the procedure

The procedure of investigating the illicit actions on the stock exchange regime opens
based on an order issued by the National Securities Commission, on the ground of article 8
from Regulation no. 11/1997. The persons considered by the investigation actions enrolled by
the National Securities Commission will register the Order of opening the procedure in her
evidence, according to article 12, paragraph (2) from the Regulation no.11/1997.
The Order of opening the procedure is issued officially or on the grounds of a notification
transmitted by any means.

Issuing a special order of opening the procedure of investigation finds its juridical
grounds also in the dispositions of the Statute of the National Securities Commission,
document that was approved by a normative act, the Emergency Order no. 25/2002, approved
by Law no. 514/2002 that represents an organic law. Thereby, in article 12, paragraph (2) from
the Statute mentions that “orders are acts by which the National Securities
Commission…disposes inquiries or other investigations…”
This disposition is a matter of public order, the absence of the order by which the
National Securities Commission disposes the investigation regarding the possible violation of
law and the regulations in force representing a formal violation of a imperative norm that can
be sanctioned only by absolute nullity.
The order of opening the procedure of investigation has to contain, according to article
25, line 1 from Regulation no.11/1997:
a) name of the National Securities Commission institution;
b) legal ground of issuing the order;
c) type of action;
d) content of action;
e) name of the considered person, subject of the action;
f) date of issue of the act;

1
The formulation of the Regulation no.11/1997 speaks about the Director of Department of control and
investigation, but his attributions have been took over by either by the general manager, either by the chief
of the Control Body.
2
In the text of the Regulation no.11/1997 it is mentioned the possibility that the Department of control and
investigation, on the base of the competence delegation, to issue the sanction order. Closing this
department, on one hand, and on the other hand, the dispositions existent in article 7, paragraph (1) and (4)
and article 9, paragraph (2) from the Statute gives the competence to issue sanction orders only to the
National Securities Commission, meaning to the members of the Commission reunited in a plenum session.

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 g) signature of the National Securities Commission president and the institution’s
stamp;
Opening the investigation procedure following a notification is preceded, according to
dispositions of article 16 from Regulation no.11/1997 by a preliminary research. According to
this normative text, the National Securities Commission, receiving a complaint, information or
notification, verifies, through the competent directions (The Control Body or the General
Direction of Surveillance, depending on the case) if it has enough ground of fact and law to
justify the opening of a investigation. If the complaint or the notification doesn’t have relevant
data to justify the opening of an action, that department has to communicate in writing to the
author, wit mentioning the reasons, in a 30 days term from the date of registration of the
notification or the complaint. When the notification or complaint is grounded, the department
that analyzed the notification will forward a memorandum, requesting to the National
Securities Commission the opening of an investigation.
Considering the attributions of the General Direction of surveillance, especially the
existence in its subordination of the services of electronic surveillance and services of
monitoring- investigation of issuers and monitoring regulated entities (intermediation
associations), this department is, in many situations, at the origin of opening investigations
regarding committing actions that subscribe to the market abuse sphere. A similar situation, in
the sense that the market’s surveillance service stood on the base of opening the largest part of
investigations on the capital market 1 , took place also in France, by analyzing a number of
investigated cases by the AMF incomparable larger than the ones investigated by the National
Securities Commission.
In this first preparatory part of the development of the investigation procedure of illicit
actions takes place also the delegation of the agent that will realize the proper activities of
investigation. This delegation of competence takes place, as we have seen, on the ground of a
decision. Dispositions of article 2 from the Regulation of the National Securities Commission
no.11/1997 are in agreement with the ones of article 9, paragraph (1) from the Statute of the
National Securities Commission that foreseen that “decisions are those individual acts by
which the National Securities Commission annuls or confirms actions of its agents, delegates
or withdraws powers…”.
When the opening of the investigation is disposed, the National Securities Commission
will establish the investigation team and will appoint the agent responsible for drawing up the
report of investigation control-inquiry, agent that handles all the papers of the investigation
procedure and proposes to the National Securities Commission or to the director taking
measures that are in their competence. The agent is responsible, in continuation, of following
the execution of disposed measures and of archiving the file.

2.3 Enumeration of activities enrolled by the National Securities Commission agents in

the course of the investigation

The main activities enrolled by the National Securities Commission agent in the course of
the investigation are: soliciting information, documents, situations; proper investigation and
consulting the other parts; interrogation; report of the investigation.
The appointed agents based on the law and specially mandated can execute investigations
to the head office and/or on site, can solicit statements, any documents necessary to complete
1
S. Loyrette, cited paper, p. 34

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the mission, can seal, collect registries and any documents, releasing to the person submitted to
the investigation copies from the original papers, or obtain copies, leaving the originals to that
person.

The agent is mandated to make inspections that were not announced, whose result will be
registered, depending on the case, in a report and/or a minute of finding, being authorized to
receive when he is convoked or on site information and justifications.

2.4 Obligations of the considered persons during the investigation

The notion of considered persons refers to any natural or juridical person that submits to
the authority of the National Securities Commission, according to article 3, line f) from the
Regulation no.11/1997. From this formulation results that any person that has a connection
with any type of activity enrolled on the capital market in Romania has the quality of a
considered person.
According to article 17 from Regulation no.11/1997, the considered persons in the
investigation have the following obligations:
a) to place to the disposition of the National Securities Commission, at the
moment of request, accounting documents, document specific to the trading
activity, minutes, situations, correspondence and any other type of papers of
information requested by the persons with the right to request according to
this regulation and to the other normative acts incident in the field;
b) to allow the verification of movable values which are being administrating or
the ones in custody or in deposit;
c) to give information and explanations which are real and exact, verbally or in
writing, in connection to the action enrolled by the National Securities
Commission. Verbal explanation can be given at the considered person’s
head office or at the National Securities Commission head office, under the
form of interrogations. In this last case, the considered persons are obligated
to present themselves at the place and date indicated by the order issued by
the National Securities Commission. In case in which, in the order issued and
communicated to the juridical person or to other entity, it is indicated also a
natural person, employed to that juridical person or entity, that natural person
has to present herself exclusively, requested by the order, for developing the
interrogation, under the sanction of taking administrative measures against
the juridical person or entity;
d) to allow the agents in their function to execute in the best conditions of the
actions started according to the law and the normative acts of the National
Securities Commission, without obstruction in any way their action and to
assure the support and necessary conditions to optimum develop them;
e) to allow the access to documents, without invoking the character of “secret”
or “confidential” of these documents, data and information. Agents,
receiving access to the documents, data and information mentioned, are
obligated to respect the secrecy character of these documents.
The market abuse Directive establishes, on a principle level, in article 14, paragraph 3 the
right of member states to impose sanctions to persons that are guilty of not cooperating with

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the competent authorities that are enrolling an investigation action of actions in the market
abuse sphere. This legal text is also resumed in article 257 from the Law of capital market in
Romania.

2.5 The analysis of main prerogatives of inspectors (agents) of the National Securities
Commission during the investigation

2.5.1 The right to access documents

The persons in the National Securities Commission to whom there were delegated by
decision the competence of starting investigation regarding an actions suspected of being illicit
will exert in a primary stage the right to access (the right to solicit) any document under any
form and the right to receive a copy on this papers. All the participants to the activities
enrolled on the capital market have the correlative obligation to provide the National Securities
Commission with the required papers. According to article 257 from Law no. 297/2004, the
National Securities Commission can impose sanctions to any person natural or juridical that is
not cooperating in the investigation developed by the agents of this authority.
Legal and regulation dispositions do not contain specifications regarding the nature of
documents to which the agents (or members) of the National Securities Commission have
access. There is the possibility for this right of the National Securities Commission
investigators to enter in contradiction with the constitutional right that guarantees the secret of
the correspondence.
The right to access documents has to be exerted only in order to reach the objectives set
by the order of opening the procedure, mentioned in article 8 from the Regulation no.11/1997.
Among these prerogatives held by the Market authority is also found the right to request
phone call registrations regarding transmitting orders or any other existent data. According to
dispositions of article 141, paragraph (3) from the National Securities Commission Regulation
no.32/2006, orders transmitted by clients of an intermediary by phone must be registered, but
only after it was obtained their express consent. In the notion of “data transmission” it is found
also the communications made through the internet.
It is clear that in these circumstances we are in the presence of juridical norms which
application tends for the violation of the correspondence secret.

2.5.2 The right to make inspections on site

Theoretically, according to the capital market legislation in force until now, this right is
exerted by the agents of the National Securities Commission in conformity with the
dispositions of article 11, point 4 from the Regulation no.11/1997. Thereby, it is necessary to
be send out a preliminary notification to the natural or juridical person considered in which it is
announced that inspection.
“Making inspections on site” represents a way of applying the prerogative of the market’s
authority to have access to any relevant document from the perspective of the investigation.
Executing “the right to access documents” leads to creating the possibility for the authority’s
agents to verify information and documents in the places where there are.

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 Regarding the inspections made at the head offices of entities regulated and supervised by
the National Securities Commission, this right is also mentioned by the dispositions of article
2, paragraph (5), line e) from Law no.297/2004 regarding the capital market.
The notification addressed to the considered person has to be written, communicated to
this person and will mandatory contain:
a) name of the National Securities Commission institution and of the direction
that is making the investigation;
b) period of time of the action’s development;
c) individual act on which the notification is issued;
d) name and complete address of the considered notified person;
e) field of action;
f) indication of documents or titles or the category of documents or titles that
need to prepared in order to be verified by the delegated agents;
g) notification’ issuing date;
h) signature of the Direction’s manager that is making the investigation.
The absence of a preliminary notification will have effects on the investigation procedure.
According to article 4 and article 12 from the Regulation no.11/1997, actions in the
investigation may have an unforeseen character, so it won’t be possible to enclose, on the
ground of the argument of absence of the notification or its incomplete character, the access of
the National Securities Commission agents in that location, if there are respected the other
legal conditions regarding the right to inspection.
In the absence of a notification that will have the content mentioned before, the persons
considered will not be sanctioned for not presenting the required documents. The considered
persons will have to offer verbal or written explications to the agent that is investigating the
alleged violation of legal or regulation dispositions, on the ground of article 255, line b) from
Law no. 297/2004.
This right to make inspections, foreseen also in article 12, paragraph 2 from the market
abuse Directive, must be considered from the perspective of constitutional norms and penal
procedural norms regarding the inviolability of residence and house searches.
Inspection on site, stipulated in article 12, paragraph 2 from Directive no.6/2003, text
resumed in article 255, line c) from Law no.297/2004, might be considered as having the
juridical nature of a house search when it is enrolled in a space that fulfills the characteristics
foreseen by law for the notion of residence. Although it’s not present an express disposition in
the current Code of penal proceeding, is assimilated to the notion of residence, the head office
of juridical persons, and the professional head offices of persons that exert independently an
activity, lawyers, notary, mediators etc.
Exerting this right of inspection is limited by the fundamental right of residence
inviolability, whose development and guarantees are found in the penal procedural norms 1 .

Not respecting the right of the market authority to make inspections on site by the
considered person is sanctioned according to the dispositions of article 257 from Law no.
297/2004 for the action of not cooperating with the agents of this authority in order to complete
the legal prerogatives. Sanctions might be issued according to article 271- 274 from the Law of
capital market no. 297/2004.

1
To see point 2.6 regarding the limits of investigation powers of the authority of surveillance and control
agents, p 487-496

316
 In case the authority of the market didn’t respected the legal dispositions in force on the
course of exerting the right to inspection, it will not be possible to issue sanctions, starting with
transmitting the notification mentioned in article 11, point 4 and ending with the constitutional
norms and penal procedural norms regarding the inviolability of residence and conditions of
executing searches, it will not be possible to issue sanctions.
Exerting this right by the National Securities Commission agents will need, usually, the
support of another state power, meaning of the judicial authority.

2.5.3. The right to interrogate

In the development of the investigation regarding executing illicit action to the juridical
regime of the capital Market, the competent authority has the special important prerogative to
interrogate any person that might provide information regarding the investigated aspects.
The right to interrogate any person that has information connected with illicit actions on
the stock exchange regime is consecrated in the Romanian legislation in article 2, paragraph 5,
line f) from Law no. 297/2004, which contains a generic formulation that aims to the right of
the National Securities Commission to interrogate “any person in connection with activities of
the regulated and supervised authorities by the National Securities Commission”. Article 255,
line b) from the law of capital market provides the right, in the same time, to the National
Securities Commission to interrogate “any person, including here also those persons that are
involved successively into transmitting orders or are developing market operations and to their
superiors”.
According to article 9, paragraph 2 from the Statute of the National Securities
Commission and of article 11, point 3 from the Regulation no.11/1997, interrogation of a
person is realized in the National Securities Commission head office on the base of an order
issued by the market authority.

The absence of this order doesn’t have as effect the absolute nullity of the entire
procedure, but the default of a person to the interrogation will not be sanctioned according to
article 257 from Law no. 297/2004, because there were not fulfilled the legal formal conditions
for realizing that interrogation.
The interrogation order will have to be written and communicated to the considered
person. We appreciate that the considered person will ignore any invitation addressed under
any other form, without being made responsible.
The order by which it was disposed the interrogation will have to contain, according to
article 25, point 2 from Regulation no.11/1997:
a) name of the National Securities Commission institution and of the direction
that is realizing the investigation;
b) individual act based on which it was issued the interrogation order;
c) legal ground of issuing the citation;
d) full name and address of the considered persons that was summoned;
e) the quality in which the considered person is interrogated;
f) purpose of the interrogation;
g) hour, day, month, year and place of appearance, and also the invitation of the
interrogated person to present on the date and place indicated in the order,
mentioning the legal consequences in case of default;

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 h) the date of emission of the interrogation order;
i) signature of the National Securities Commission president and the director of
the Direction of control and investigation and the institution’s stamp.

2.5.4. The right to assess the execution of contraventions

The legal ground of this right of the National Securities Commission agents is found, first
of all, in article 14 from the market abuse Directive that provides the right of taking
administrative measures for executing market abuse actions.
The right of the National Securities Commission agents to assess the execution of
contravention is stipulated by article 274 from Law no. 297/2004 and article 11, point 1 from
the Regulation no.11/1997.
In the matter of assessing the contraventions to the capital market regime it must be
shown that, according to article 280 from Law no. 297/2004, the procedure of establishing and
assessing contraventions foreseen in law of capital market derogates from the dispositions of
the Government’s Order no. 2/2001 regarding the juridical regime of contraventions, approved
with modifications and additions by Law no. 180/2002, with later modifications and additions.
In case the National Securities Commission agents to whom there were delegated
competences to realize an investigation regarding actions presumed to frame into the market
abuse sphere are assessing the execution of some contravention actions foreseen by law they
will file a minute of finding, with assessing the executed actions, the violated legal norm and
the juridical framing of the action. The finding minute is sent at once to the competent body, to
the National Securities Commission.
The minute of finding has to contain:
a) name of the National Securities Commission institution and of the direction
that is realizing the investigation;
b) date and place of closing;
c) name, surname and quality of the one that is closing it;
d) individual act on which it was closed the minute;
e) legal ground of drawing up the minute;
f) description of the committed action, date on which it was committed,
indicating the violated juridical norm and of the normative act that
establishes it;
g) name, surname, residence, series and number of the identity card and
position, within the juridical person or considered collective entity, of the
natural person considered to have committed the action, or name, head office
and legal representative of the collective entity, in case the action was
committed by this type of entity;
h) measures that were disposed during the investigation;
i) objections of the natural person, considered responsible, with regards to the
actions registered in the minute;
j) signature of the agent and the considered natural person or of the
representative of the juridical person or other considered collective entity,
subject of the assessment, on each page of the act. In case of refusing to sign,
the agent will register this, and the motive of the refusal, confirmed by the
signature of a witness.

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 According to the dispositions of article 274, paragraph (2) from Law no. 297/2004, upon
receiving the assessment papers of its agents, the National Securities Commission can dispose
the extension of investigations, taking conservative measures and/or interrogating the
considered persons, meaning sanctioning the controlled actions.
Sanctions will be disposed only by the National Securities Commission by issuing an
order, according to article 7, paragraph (4), article 9, paragraph (2) and article 17, paragraph (2)
from the Statute of the National Securities Commission.

2.5.5 Obligation to carry out acts of findings of criminal offences and to notice the penal
action bodies

Capital market manipulation committed with intention is a criminal offence punished by

the penal law.
Dispositions of article 214 from the Code of penal proceeding force the administrative
authorities to close certain acts of procedure in case of criminal actions that are violations of
dispositions whose application they control. These bodies will proceed in taking statements
from the wrongdoer and from the witnesses that were present to the execution of a criminal
offence and will draw up a minute about the concrete circumstances of its execution, in case
they have the quality of:
a) bodies of state inspections, other state bodies, and bodies of units on which
article 145 from the Penal Code refers to 1 , for criminal offences that are
considered violations of dispositions and obligations which respect is
controlled by the law;
b) control bodies and the ones of management of the public administration, of
other units to which article 145 of the Penal Code refers to, for criminal
offences committed in connection with workplace by the ones under the
subordination or their control.
This obligation of the National Securities Commission agents charged with the
development of the investigation is also stipulated in article 11, point 1 of Regulation of the
National Securities Commission no.11/1997 2 , indicating that, in case of a criminal offence in
connection with movable values, the agents will take statements from the wrongdoer and
witnesses, will detain criminal objects, evaluate damages, will take also other measures
considered necessary, that will be included in a minutes and forward the file to the penal
research bodies.
Noticing the penal action bodies in case there are registered criminal offences is realized
by the market authority in Romania on the ground of article 17, paragraph (2) from the Statute.

2.6 Limits of investigation powers of the market authority

1
Article 145 Penal Code: by the term public it is understood everything that regards the public authorities,
public institutions, institutions or other juridical persons of public interest, administration, use or
exploitation of public property goods, services of public interest, and also goods of any type which,
according to the law, are of public interest.
2
The cited legal text contains an express reference to dispositions of article 214 of the Code of penal
proceeding.

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 In the French doctrine 1 there were identified a series of limitations of rights of the
investigation body of the market’s authority, starting from a decision of the Commercial
Section of the Court of Cassation in 1996. This junction considered that article 6 from the
European Convention on Human Rights regarding to a fair trial is applicable also to the
administrative procedures enrolled by the capital market authority in France.
The three limitations of the investigation powers of the market authority identified on the
base of dispositions of the European Convention of Human Rights are 2 :
- respect of the presumption of innocence – article 6, paragraph 2 from the
European Convention;
- respect of the right to defense- article 6, paragraph 3 from the European
Convention;
- respect of the right to a private life- article 8 from the European Convention;
in this institution of respecting the right to a private life it is found the right to
residence inviolability and right to the secret of correspondence.

2.6.1 Presumption of innocence

Article 6, paragraph 2 from the European Convention on Human Rights foresees that any
person accused of a criminal offence is presumed innocent until her his culpability will be
legally established. Mutatis mutandis legal text with an express incidence in the penal matter
can be applied also in the contravention matter.

The presumption of innocence is founded as a fundamental right in the Constitution of

Romania in article 23, paragraph 11. In the fundamental law of Romania, the law norm doesn’t
contain a direct reference to the penal matter, speaking only of the necessity of presuming the
innocence of a person until the intervention of a final junction of conviction, without
mentioning if it’s exclusively about the penal field or the contravention field.
The presumption of innocence imposes to any employed person or under the management
of the market authority not to express opinions regarding the culpability of a person on which
is or was developed an investigation about the market abuse, until intervenes a decision that
will set according to the law the person’s culpability. In principle, it’s a court order of final
conviction of this person, but in this analyzed matter we consider that the presumption of
innocence works, until is issued a decree of sanctioning the investigated person.
In the French case law, the Court of Cassation established through a decision ruled in
3
1996 according to which incriminating statements of the president of capital market authority
(the former president of the COB- Commission des Operation de Bourse, organisms replaced
in 2003 by the present AMF) made between the moment of notifying an investigated person in
connection with certain illicit actions on the stock exchange regime and the moment of issuing
the sanction on this person is a violation of the presumption of innocence.
Not respecting the presumption of innocence by the competent persons to investigate or
to rule sanctions in the matter of market abuse by expressing opinions prior to the pronouncing
of a sanction decision is a case of pre pronouncing, that might cause the removal of that person
from that procedure, according to article 8 from Regulation no.5/1995. This way, article 9,

1
S. Loyrette, cited paper, p. 40
2
Ibidem, p. 41
3
Ibidem

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paragraph (2) from this regulation of the National Securities Commission indicates without any
doubt that “any public ruling of results of a investigation will be made only on the base of
conclusive evidence that would lead to the conclusion that the law was violated and the
advertising the investigation’s result is in the interest of the citizens”.

Thereby, Regulation no.5/1995 has other dispositions which have a warranty value for
the respect of presumption of innocence by the members and employees of the National
Securities Commission in certain situations:
- specialists among the personnel of the National Securities Commission which
can make public information about its activity and to other institutions
involved in the capital market are appointed through decision by the members
of the National Securities Commission (article 14);
- in their didactical or editorial activity to the employees of the National
Securities Commission are forbidden … to make comments on current
litigations or in which the National Securities Commission has the quality as
part [article 15, paragraph (3) line b)].

2.6.2 The residence inviolability

This limitation of the powers of investigation of the market authority’s agent is grounded
on the dispositions of article 8, paragraph 1 from the European Convention of Human Rights.
The Romanian Constitution mentions this fundamental right in article 27:
“(1) The domicile and residence are inviolable. No one can enter or remain in the
domicile or residence of a person without her authorization.
(2) From the dispositions of paragraph (1) there can be derogated by law the following
situations:
a) Executing a warrant of arrest or an injunction;
b) Eliminating a dangerous situation regarding life, physical integrity or a person’s
belongings;
c) Defending the national security or public order;
d) Preventing the spread of an epidemic.
(3) The search if disposed by the judge and in made under the conditions and forms
foreseen by law;
(4) Searches during the night are forbidden, outside the case of flagrant criminal
offences”.
Remains to discuss in what measure the right of the market’s authority to make searches
on site can be exerted in front of the exigencies of the European Convention and of the
constitutional one by internal law.

In case the natural or juridical person that owns the space that will be inspected by the
market’s authority agents (National Securities Commission) allows them to enter in that
enclosure, completing this prerogative of verification on site can be realized directly, without
any problems, by these agents.
In the case of absence of this agreement, the right to inspect has different shades.
First of all, by the notion of residence it needs to be understood also the head office of a
juridical person or the professional office of a free lancer. By an important decision, ruled on

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16 April 2002 in file no. 37971/97 by the European Court of Human Rights 1 , it was stated that
entering in the head office of an association by the agents of an administrative authority 2 by
virtue of the inspection right, to enter in the possession of documents useful in the
investigation, is a violation of article 8 from the European Convention of Human Rights, if is
realized without the preliminary authorization of a trial court.
This present Code of penal proceeding of Romania doesn’t assimilate explicitly in the
notion of residence also the notion of head office or professional office. In the project of the
new code of penal proceeding it is stipulated in article 151, paragraph (2) that “by residence it
is understood a home, room, head office of a juridical person or of a public authority, of an
lawyers office, or any other space that pertain to a natural or juridical person”.
In these conditions, exerting the right to inspection on site by the agent of the market
authority has a real limitation grounded on article 8 from the European Convention, no matter
if it is the access in a space that is a natural person’s residence, the professional office of an
authorized natural person or of a professional association without juridical personality, or the
head office of a juridical person.

Keeping into account the actual level of the Romanian legislation, we are showing that
access in these spaces is difficult to realize by the National Securities Commission agents even
in the conditions of trying to obtain an authorization from a trial court, because there is no
norm that would foresee explicitly the possibility of approval by the court of entering of
representatives of a administrative body into the residence or headquarters of a natural or
juridical person. It might be followed, on the other hand, the common law procedure of
assuring the evidence, regulated by article 235-241 Code of civil proceeding.
In regards to the applicability of penal procedure norms about the residence search that
might be approved by court, this has to be limited by dispositions of article 100, paragraph (6)
Code of penal proceeding, which states that residence search can not be disposed prior to the
penal action, or, in the moment of realizing the investigation by the National Securities
Commission agents, can not be about, usually, of a penal action already started.
Thereby, the right to inspection on site of the National Securities Commission agents
empowered with making the investigation regarding the actions suspected of market abuse can
not be exerted without the agreement of the considered natural or juridical person, owner, by a
legal title of the space being investigates by the representatives of the capital market authority.
This fact doesn’t mean a limitation of the authority’s in cause agents to have access to
any document or information useful for the investigation, because the only restriction considers
the right to enter in certain non-public spaces. Even if a natural person or representatives of a
juridical person refuses the access of administrative investigation bodies in this type of space,
the obligation of providing the market authority’s agents all the necessary documents and
information still stands. Not completing this obligations rivals with the refusal of cooperation
and is sanctioned accordingly to dispositions of article 257 from Law no. 297/2004. This
normative text will not be considered righteous ground for issuing a sanction against the person
that refused the access of agents of the control authority in a residence or headquarters, because

1
Case of Colas Est. versus France
http://cmiskp.echr.coe.int/tkp197/portal.asp?sessionId=6055990&skin=hudoc-en&action=request
This decision is also mentioned in S. Loyrette , cited paper, p. 43-44
2
It is about an investigation of the French Department for competition, consumer’s protection and
preventing frauds- DGCCRF

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there will prevail the constitutional dispositions of article 27 and the ones of article 8 from the
European Convention of Human Rights regarding the inviolability of residence. In other words,
the refusal to permit access to representatives of administrative authority in a space that is a
residence or headquarters can not be sanctioned.
A similar judgment is applicable also in the case of fiscal inspections, the right of the
fiscal body to inspect the places where the tax payer is developing his activity, foreseen by
article 103, paragraph (3) from the Code of fiscal proceeding, being able to exert it only with
the approval of the tax payer in question.
De lege ferenda, we consider that it needs to be imposed the implementation of a norm
(eventual in the frame of a code of administrational proceeding) that would regulate the right to
inspection of the administrative authorities in the conditions of an authorization given by a trial
court. This type of norm might be introduced at least on the level of the specific legislation of
the capital market.

2.6.3 The inviolability of the secret of correspondence

In the right of access to any document of relevant information, the agents of the market
authority competent to investigate actions that might be included in the market abuse sphere
have the right to request to the considered persons, according to article 12, paragraph 2, line d)
from Directive no. 6/2003 phone call records and registrations of existent trades of data,
including the ones transmitted electronically.
This prerogative contradicts the dispositions of article 8, paragraph 1 from the European
Convention of Human Rights that guarantees the right to any person to have respected her
correspondence. The inviolability of the secret of correspondence is acknowledged also by
article 28 from the Romanian Constitution.
In this case we are dealing with the right of the market authority to request those phone
call records made by the intermediaries that acted this way in the execution of a brokerage
contract with providing services on distance, according to article 28, paragraph (3) from Law
no. 297/2004, in general for taking over their clients orders. Also, the authority’s prerogative
has in sight also the correspondence between the dealer and his clients transmitted by post, fax
or electronically (by email).
It is clear that those phone call records or emails has an overwhelming importance in the
process of finding out the truth in the developed investigation. In the absence of not knowing
by the agents of market authority of all the relative aspects through which it was carried out the
relation between the dealer and client it is difficult for this authority to rule an legal
administrative and grounded solution.
From these considerations and having as legal ground dispositions of article 8, paragraph
2 from the European Convention of Human Rights that allows the interference of public
authority in the private life in order to “protect the order and prevent penal actions or to protect
the rights and freedoms of other persons”, we appreciate that the right to access of agents of the
market authority to phone call records and to data trading can not be limited, in principle.
The only limitation intervenes when the violation of correspondence doesn’t have a
connection with the investigated actions 1 . In this hypothesis, agents of the authority commit the
criminal offence of violating the correspondence secret foreseen and punished by article 195
Code of penal proceeding.
1
S. Loyrette, cited paper, p. 47

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 In our analysis we are considering only the situation in which the market authority
requests to considered persons handing over or to the penal action bodies transmitting the
phone call records and data trading and not in the hypothesis in which it comes to intercepting
and registering conversations or communications made by phone or by any electronic
communication mean by the penal action bodies.
In this case, where there is, according to article 91 1 , paragraph (1) from the Code of
penal proceeding “solid data or indications regarding the preparation or execution of a criminal
offence for which the penal action is made officially (capital market manipulation satisfies this
request- our note), the market authority has to notice the penal action bodies. The prosecutor
that is making or supervising the penal action, if he will consider that interception and
registration are imposed for establishing the actual situation or to identify or locate the
participants can not be made by any other means or it would delay the research, he draws up a
request of authorization to intercept and record phone call conversations or communications
made in any way.
In these conditions, it results that market authority’s agents (National Securities
Commission) don’t have any type of competence, according to the Romanian legislation in
force, to intercept, even with the court’s authorization, phone call conversations or
correspondence. They will have access to registrations only up to the point when these will be
communicated by the penal action bodies in the virtue of the principle of cooperation between
the state authorities.

2.6.4 Professional secrecy

According to article 254, paragraph (3) from Law no. 297/2004, exerting attributions of
the National Securities Commission regarding surveillance, investigation and control enter
under the incidence of the professional secrecy.
In the law of capital market there are foreseen also other dispositions regarding keeping
the secrecy about information acknowledged by the members and personnel of the National
Securities Commission in the exertion of their attributions. Thereby, according to article 262,
the National Securities Commission has the obligation to assure the confidentiality of
information received from the auditors, with the exception of the ones with a penal nature.
The Statute of the National Securities Commission stipulates also a limitation of the
method of use of received information in the period of exerting professional activities by the
members and employees of the National Securities Commission. Article 11, paragraph (1)
foresees that members and employees which are or were part of the National Securities
Commission, and representatives and payroll entities whose the National Securities
Commission delegated one or many from the prerogatives given by the law have the obligation
to respect, regarding the obtained information in the course or following the exertion of
attributions and weren’t made public, the juridical regime applicable to the professional
secrecy.
On the other hand, article 7, paragraph (2) from the Statute of the National Securities
Commission disposes that the obligation of keeping the professional secrecy can not be
opposed to the National Securities Commission in the exertion of its attributions foreseen by
law. Having into consideration the derogatory character of this special disposition from the
Statute of the National Securities Commission, approved by a normative act that has the
1
S. Loyrette, cited paper, p. 47

324
juridical power of an organic law, towards the dispositions of the Penal Code regarding the
disclosure of professional secrecy, we appreciate that finds its total applicability. Thereby,
persons that disclose to the National Securities Commission agents data that were given by
certain persons or that acknowledged about in the virtue of their profession or function can not
be made responsible in the virtue of dispositions of article 196 from the Penal Code, because
transmission is realized on the base of express legal dispositions, not being completed the
condition stipulated in the penal norm of divulgation “without right”.
From the perspective of data that are considered professional secrecy, there is a partial
limitation of the power of market’s authorities, mentioned in article 7, paragraph (2) from the
Statute, that imposes their use only in certain limited situations by law. According to this legal
text, information under the nature of professional secrecy received by the National Securities
Commission in the exertion of its attributions can be used only with these purposes:
a) with the purpose of verifying the observance of imposed conditions for
authorizing the regulated entities, for facilitating surveillance, on
consolidated or non consolidated bases of developing the activity of the
regulated entity, especially of request to adjust capital, the accounting
procedures and administrative and of mechanisms of ensuring the internal
control;
b) with the purpose of imposing sanctions;
c) inside the administrative complaints and actions filed against the individual
acts issued by the National Securities Commission.
Using information of a professional secrecy in other purposes than the ones previously
mentioned is submitted to the incidence of the penal norm in article 196 Penal Code regarding
disclosure of professional secrecy.
Juridical norms regarding keeping information confidentiality received during the
investigations developed by a market entity are found also in the market abuse Directive.
Article 13 from the Directive mentions that the obligation of professional secrecy is applied to
all persons working or which have worked for the competent authority or for authorities or
associations on the market, to whom the competent authority has delegated its prerogatives,
including inspectors and mandated experts by that authority. Information under the incidence
of the professional secrecy can not be communicated to any other person or entity than on the
grounds of legal dispositions.
In the same time, article 16, paragraph 2, alignment 5 shows that competent authorities
that receive information from another competent authority from another member state of the
European Union, in the virtue of principle of cooperation, can use these information only for
exerting their functions, as they are described by the present directive and by the administrative
procedures or juridical connected with that exercise.

2.7 Exerting the right to defense

The investigation enrolled by the agents of the market authority doesn’t have a contrary
character, because it is assimilated from the point of view of developing the penal
investigation.
Investigation doesn’t have a public character. Agents of the market authority that
received the delegated competencies are administrating the evidence without discussing with
the other involved parts.

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 This feature is not equivalent to the absence of the right to defense of the person subject
of the investigation. Regulations in force are evidencing, although in an incomplete and
summary way, the exertion of the right to defense during the investigation developed by the
National Securities Commission for actions in the stock exchange illicit sphere.
An important guarantee of the right to defense is the right of the investigated person to be
informed regarding the development of investigation. The absence of this information was
considered in the doctrine 1 as being contrary to article 14, paragraph 3 from the International
Pact regarding the civil and political rights that devotes the principle of auto- incrimination.
When a person is asked to deliver certain documents and make certain statements, not knowing
that is the subject of an administrative investigation, can provide the administrative authority
with information contrary to its interests.
This is the main reason for which the market authority is forced to acknowledge the
investigated persons regarding her quality.
In the Romanian legislation (article 11 from Regulation no.11/1997), we identify as
guaranties of respecting this right of informing the considered person, the obligation of
previously notifying in the case of a inspection on site and transmitting the interrogation decree
in the case of requesting it addressed to a considered person to present herself to the National
Securities Commission headquarters in order to be interrogated.

Exerting the right to defense means also the right to be assisted or represented by a
lawyer on the course of the entire investigation, especially on the course of the interrogations
or with the opportunity where there are given statements to the market authority agents.
In exerting the right to defense, to the considered person has to be ensured the possibility
to annex to the file of the investigation evidences considered necessary in supporting her
innocence. Only this way will be respected the principle of finding out the truth that can not be
eluded inside the administrative investigation developed by the agents of the capital market
authority.
In connection with the interrogation of considered persons, Regulation no.11/1997
contains a series of dispositions representing guarantees to exerting the right to defense in the
appeals filed against the sanction papers, whose implicit abrogation we can not assess, because
it doesn’t contravene to any of the later regulations. Thereby, according to article 35 from this
Regulation, the appealer will be able to demand being interrogated, to make a deposition that
will be considered evidence in the case of resolving the appeal. The National Securities
Commission will not refuse this right to interrogation of this sanctioned person that made the
appeal, dispositions of article 25, paragraph (2) from the Regulation indicating that the capital
market authority has to “notice at once the director of the D.C.A (director of the competent
direction that replaced the DAC- our note) to start the procedures regarding its development”.

2.8 Finalization of the investigation. Drafting the investigation report

The persons appointed to make the investigation regarding committing illicit actions on
the stock exchange regime have the responsibility to finalize the operations though an
investigation report.
The content of the report on the investigation is mentioned in article 25, point 7 from
Regulation no.11/1997:
1
S. Loyrette, cited paper, p. 47

326
 a) name of the institution of the National Securities Commission and of the
Directions that developed the investigation;
b) data of closing the report;
c) name, surname and quality of the person/persons that are drafting the report;
d) time period in which the action was developed;
e) name/denomination of the considered person that made the object of action;
f) individual act by which it was started the action;
g) legal ground of the report;
h) short description of the actions moments;
i) assessments made and measures taken on the course of the action;
j) proposals of the agent/team of agents for taking measures regarding the
considered person.
To the report is added all the papers closed on the course of the action, mentioning them.
According to article 19, paragraph (2) from Regulation no.11/1997, when during the
investigation is assessed that there were committed contraventions, the agent will immediately
draw up the minute of finding and will record this act in the report of the investigation of
control-inquiry. In case, following the investigation, there were assessed only contraventions
report on the investigation of control-inquiry will also be the minute of finding.
The agent/team of inquiry has the obligation to communicate the report of inquiry to the
considered persons, according to dispositions of article 19, paragraph (4) from Regulation
no.11/1997. This obligation is not, unfortunately, respected in practice by the National
Securities Commission officials. More over, to the investigated persons has to be required
along with this communication of the inquiry report to communicate in writing, until a certain
date, observations to the report. The term for communicating the observations by the
considered persons will be set from case to case, considering the complexity of the inquiries,
and it will not be shorter than 3 days from the date of receiving the investigation report. This
term can be extended with the approval of the National Securities Commission, on the request
of the part that has strong reasons regarding her circumstance.
The agent responsible will forward to the direction manager that developed the inquiry
the report on the investigation control- inquiry, summarizing the observations of considered
persons, the answer of agents of the objections that were made, measure and, depending on the
case, proposed sanctions, along with the complete file of the cause. The file of the cause
contains all the papers filed during the action. The manager of that direction (The Control Body
or the General Direction of surveillance) receives the general report and file, verifies the
drafted papers, the action that were discovered and the measured proposed by the agents, after
which, if these are in complete accordance with the law, he will forward to the National
Securities Commission the file along with an memorandum with the point of view of the
manager in cause.
The inquiry report is susceptible of being sent to other authorities, penal action bodies,
trial courts, authorities of the competent markets from other member states of the European
Union etc., on their request, in order to complete their legal attributions.

§3. Sanctioning capital market manipulation actions

3.1 Legal ground and character of the sanctions

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 The power to sanction the market abuse actions is exerted, as we have seen 1 , by the
competent authorities of the capital market from the European Union in the virtue of
dispositions of article 14, paragraph (1) from Directive no.6/2003. The last thesis of this legal
text marks out the characters which the applied sanction should have: effective, proportional
and with a discouragement effect.
Effective sanctions are measure that can be put in reality into application against the
culpable persons. A sanction that can not be put into execution doesn’t reach its goal.
Proportional sanctions are administrative measures took into consideration regarding the
gravity of the illicit action that was committed and of the personal and real circumstances of
this action. Applying a proportional sanction means realizing the operation of individualization
of the punishable administrative measure that was taken.
Sanctions with the effect of discouragement are punishments that have the potential to
preclude the manifestation of similar conducts with the one that marked out the illicit action.
In the Romanian legislation, the juridical ground of applying an administrative sanction
by the National Securities Commission is article 274, paragraph (2) from Law no. 297/2004.

3.2 Sanctions foreseen by the Romanian legislation for illicit actions in the juridical
regime of the capital market

According to dispositions of article 273, paragraph (1) from Law no. 297/2004,
contraventions to the legislation of the capital market is sanctioned with:
a) warning;
b) fine;
c) complementary contravention sanctions, applicable depending on the case;
1. suspending the authorization;
2. withdrawal of the authorization;
3. temporary prohibition of developing activities and services under the incidence of
the present law.
The same sanctions are foreseen also in article 17, paragraph (2) from the Statute of the
National Securities Commission.
Theoretically, all these sanctions can be applied in the case of committing capital market
manipulation actions founded under the incidence of the dispositions of the Romanian law.
According to dispositions of article 276 from Law no. 297/2004, the limits of the fines
are set according to this:
a) between 0, 5% and 5% from the invested social capital, depending on the
gravity of the committed action, for juridical persons;
b) between 5.000.000 lei and 500.000.000 lei, for natural persons, these amount
being updated by a decree of the National Securities Commission president;
c) between half and total amount of the transaction’s value that was made by
committing the actions from the market abuse sphere.

3.3 Cumulating the administrative sanction with the penal sanction. Not applying the non
bis in idem principle in the Romanian legislation.

1
To see section 1, point 2.1.3, p. 451-452

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 A person can be sanctioned, in the case of committing illicit actions to the juridical
regime of the capital market, from an administrative point of view and a penal point of view.
These two responsibilities can be cumulated, in the matter of market abuse this
conclusion being pointed out expressly by the disposition of article 14, paragraph 1 from
Directive no.6/2003: “Without prejudicing their right to impose penal sanctions, member states
will ensure that, according to the internal legislation, there can be taken proper administrative
measures or can be applied administrative sanctions to the persons responsible of violating the
adopted dispositions for applying the present directive”.
In some law systems, the rule of non bis in idem finds its partial application in the case of
sanctioning by contraventions and also penal the same action. Thereby, article 621-16 from the
Monetary and Financial Code in France indicates that the penal court can impute the
administrative fine applied by the capital market authority on to the fine decided in the penal
matter. In the hypothesis in which the quantum of the penal fine is superior to the one of the
contravention fine, already applied and, eventual, executed, will be subtracted from the penal
fine ruled by the court the amount established as a sanction by the administrative authority.
This way, the person found guilty in the contravention and the penal matter will have to pay,
following the decision of the penal trial court, only the difference which remained. It is about a
purview norm and not an imperative one, being necessary for the penal court to foresee
expressly the imputation.
In the Romanian legislation this type of regulation doesn’t exist, but we appreciate that
the judge of the penal file will have the freedom to take into consideration, in the
individualization of punishment, all the aspects circumscribed to the cause being judged,
including that it was also applied an administrative sanction by fine, that, eventual, was paid
off.
In general, the administrative inquiry is developed a lot faster than the penal process
which needs to cover two stages: penal action and trial. From these considerations, the
administrative authority of the capital market will reach a lot sooner than the trial court in the
situation of applying a sanction.
In practice, can appear the situation in which the market authority might notice the penal
action body without applying an administrative sanction, because it concludes that the
manipulation action of the market was obviously committed with intention.
It must be shown that in the actual stage of the legislation applied fines in the
contravention matter by the National Securities Commission can be considerably higher than
the ones applied in the penal matter, because article 53 and 53.1 Penal Code set up a general
maximum of the fine punishment of 50.000 lei for natural persons and 2.000.000 lei for
juridical persons.

It also needs to be marked out that in the case of developing and administrative inquiry
that aims an action which makes the object of a penal action it is applicable the penal principle
that holds in one place the civilian, stipulated by article 19, paragraph (2) Code of penal
proceeding.

3.4 Applying sanctions. Individualizing sanctions. Prescription

Applying administrative sanctions for violating dispositions of the capital market

legislation is the responsibility of members of the Commission, reunited in a plenary session,

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according to dispositions of article 274, paragraph (2) from Law no. 297/2004 reported to the
ones of article 3 from the Statute of the National Securities Commission.
This prerogative can be delegated, on the ground of article 10, paragraph (1) from the
Statute of the National Securities Commission “to institutions or bodies or regulated markets,
subordinated to the National Securities Commission”. The first thesis of article 10, paragraph
(1), regarding delegating competencies to the agents of the National Securities Commission,
doesn’t find its application in the case of applying sanctions, because article 274, paragraph (2)
is indicating without any doubt that establishing sanction is realized by the National Securities
Commission and not of natural persons to which there were delegated attributions.
Thereby, at present time, in the current stage of the legislation, delegating attributions
regarding issuing sanctions for actions in the stock exchange illicit sphere can be realized by
decision, according to article 9, paragraph (1) from the Statute, only by market operators.
In regards to the individualization of sanctions, article 275, paragraph (1) from the Law
of capital market foresees keeping into account the personal and real circumstances of
committing the action and of the doer’s conduct.
In the same time, article 275, paragraph (2) from the law contains a serious circumstance,
incident in the situations in which there are committed by a person, repeatedly, in the course of
a 3 years time, many more contraventions, or it is committed a new contravention by a person
that was sanctioned in the last 3 years and for which the prescription didn’t intervene.
In this case, the established sanction will be applied cumulatively with the maximum of
fine for the last committed contravention.

In the case of contest of contraventions, meaning discovering two or more than two
committed contraventions, it is applied the biggest sanction, increased up to 50%, depending
on the case, according to article 275, paragraph (3). This disposition is an application of the
law rule maior poena cum asperatione, meat in the penal law mainly, that outlines the punitive
system of cumulating the punishments or of the juridical cumulus 1 .
Contravention sanctions for committing capital market manipulation actions can be
applied to natural persons and to juridical persons, no distinction being made by the law.
Regarding the conduct of natural persons that influence the juridical acts and actions of
the juridical persons, article 277, and paragraph (1) from Law no. 297/2004 shows that the
National Securities Commission can apply sanctions to natural persons to whom, as
administrators, legal representatives or exerting de iure or de facto leadership positions, or
exerting professionally activities regulated by the present law, that contravention is imputed
because, although they could and should prevent its happening, they didn’t do it.
Natural persons found guilty have to also repair the patrimonial prejudices they caused by
the contravention action. If the action is imputed to many more persons, they have to be united
in fixing the prejudice they caused.
The term of prescription of the application finding and of executing the contravention
sanction is of 3 years.

3.5 Sanction decree

1
C. Bulai, cited paper, p. 496

330
 Sanctions are applied by the capital market authority in Romania through a juridical act
named sanction decree, defined according to article 9, paragraph (2) from the Statute of the
National Securities Commission.
The sanction decree has the juridical character of an individual administrative act 1 .

Outside the dispositions of article 25, point 8 from the regulation of the National
Securities Commission no.11/1997 there is no other legal disposition in force that would
contain referrals to the content of the decree of sanction. According to this legal text, the
administrative act by which the National Securities Commission imposes sanctions for
committing illicit action on the juridical regime of the capital market, must contain:
a) name of the National Securities Commission institution;
b) legal ground of issuing the decree;
c) name/denomination of the considered person;
d) number and date of the finding minute and/or of the report on the investigation
control-inquiry on which it was issued the decree;
e) indication of violations and action committed that are contraventions;
f) legal dispositions violated through the committed actions;
g) the measure applied, legal ground of the applied measure and the term for
completing the measure;
h) term, foreseen by law, inside which the considered person or the offender can
attack the act in front of the National Securities Commission;
i) date of issuance of the decree;
j) signature of the National Securities Commission president and the institution’s
stamp.
The sanction decree must contain, imperatively, a motivation in fact and an
argumentation in fact of the adopted solution. This request is grounded on the dispositions of
article 6, paragraph 1 from the European Convention of Human Rights that imposes the respect
of right to a fair trial.
Grounded on this text of the Convention, the European Court of Human Rights
considered by a species decision 2 that there is a right of motivation in the benefit of justice
people that needs to be respected. This right to beneficiate from motivated solutions has as
correlative obligation the responsibility of the competent jurisdiction to indicate the reasons for
which it was held a certain argument or it was rejected another in taking the decision3 .
Motivating the adopted solution allows the competent jurisdiction to censor, to observe if there
have to be considered in its pronunciation all the arguments invoked by the parts 4 .

1
Article 2, paragraph (1), line c) from Law 554/2004 regarding the administrative court makes a distinction
between individual administrative acts and normative administrative acts
2
Case of Van de Hurk versus The Netherlands,
http://cmiskp.echr.coe.int/tkp197/view.asp?item=1portal=hbkm&action=html&highlight=Van%20%7C%2
0de%20%7C%20Hurk%20%7C%20c.%20%7C%20Pays-
Bas/v.%20%7C%20the%20%7C%20Netherlands&sessionid-=6107957&skin=hudoc-en
3
S. Loyrette, cited paper, p. 65
4
Ibidem

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 §4. Taking action against disposed sanctions

4.1 Legal ground of taking action

In the market abuse directive there is a special juridical norm, in article 15, that imposes
the presence in internal legislation of member states the possibility to take action in the case of
measures disposed by the capital market authority for actions in the market abuse sphere:
“Member states are ensuring that decisions taken by the competent authority can make the
object of a action taken in front of a court trial”.
In primary legislation specific to the capital market in Romania there is only one norm,
with a general character, that stipulates the possibility of taking action against the measures
disposed by the market authority, the one in article 2, paragraph (3) from Law no. 297/2004,
which shows that “any natural or juridical person, if considered injured in her rights recognized
by law though an administrative act or by the unjustified refusal of the National Securities
Commission to solution the request regarding a right acknowledged by law, she can address in
a legal dispute to the Bucharest Court of Appeal”.
In the same time, article 10, paragraph (3) from the Statute of the National Securities
Commission foresees that issued individual acts and disposed measures in exerting the power
delegation can be challenged before the National Securities Commission, this situation having
relevance only in the hypothesis in which the market operator that were delegated
competencies of investigation and sanction of manipulation actions issues a decision by which
he applies punishments for the investigate actions. In this case, taking action is realized before
the Commission and not in front of the trial court. Of course that in case the complainant is not
satisfied with the National Securities Commission answer he address to the competent
administrative court, on the ground of article 2, paragraph (3) from Law no. 297/2004.

Taking actions against the disposed measures by the National Securities Commission
departments or by the National Securities Commission as an administrative public authority, is
foreseen also in Regulation no.11/1997, in chapter V, but those juridical norms can be
considered as implicitly abrogated.

4.2 Preliminary complaint addressed to the administrative authority (graceful appeal).

The term for submitting the preliminary complaint

Considering the juridical nature of the decree by which there were disposed measured for
violating the capital market legislation, the one of an administrative individual act, it is only
natural to be submitted to regulation in the law of the administration court, because there is no
derogatory norm in the special legislation of the capital market.
In these conditions, there can be taken actions against the sanction decree, on the ground
of article 7, paragraph (1) from Law no. 554/2004 regarding the administrative court, in front
of the issuing public authorities, meaning the National Securities Commission, in a 30 days
term from the date of communicating the act. The complainant, being a “persons considers
herself injured in one of her rights or in a legitimate interest”, will have the right to request
revocation, fully or partially, of the decree by which it was disposed sanctions against her.
We appreciate that on the ground dispositions of the administrative court law there can be
taken actions also against the report of the investigation, because this document also is a

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juridical administrative act that can injure a right or a legitimate interest of a person. The legal
ground on this case is represented by dispositions of article 7, paragraph (1) second thesis from
the Law of administration court, according to which “the complaint can address equally to the
body hierarchically superior, if it exists”.
The term to exert the complaint, in this case, is of 30 days from the date of
communication of the investigation report.
Equally, the persons considered by a investigation developed by the market authority will
have the right to exert the graceful appeal, on the ground of article 7 from Law no.554/2004,
against the decree of proceeding the investigation, issued according to article 8 from
Regulation no.11/1997, and against and issued administrative act in the procedure of
investigation, under the conditions of proving the suffered injury. When there are invoked
reasons of absolute nullity, like for example, irregularity of drafting the administrative act
challenged for the absence of mandatory legal mentioning, it is not necessary to prove the
injury.
The preliminary complaint in the case of unilateral administrative acts can be inserted, for
grounded reasons, after the 30 days term, but no later than 6 months from the issuing date of
the act. This 6 months term is a prescription term.
In practice, it is possible for an administrative act issued in an investigation procedure
that considers a certain person to injure a right or a legitimate interest of another person. The
law of the administrative court acknowledges to this third part the right to exert the graceful
appeal against the individual administrative act in a 6 months term since he took note of its
existence.
The entire procedure of solution the preliminary complaint against the sanction decree
and of other administrative acts issued by the National Securities Commission during the
inquiry of the market abuse actions is submitted to the constitutional principle present in article
21, paragraph (4) according to which “special administrative jurisdictions are optional and
free”. This principle eliminates thereby the obligation of covering the entire stage of the
graceful appeal before introducing the action in justice against the injurious administrative act.

4.3 Procedure of solution the graceful appeal. Solutions which can be ruled

The Regulation of the National Securities Commission no.11/1997 contains, in chapter

VI, certain special procedural dispositions, that remained in force in our opinion, regarding the
procedure of solution the preliminary complaints against the sanction decree issued following
the investigation of illicit actions on the stock exchange regime.
This entire procedure of solution has as central element interrogating the contestant, the
person against which it was issued a sanction decree.
The interrogation takes place, according to article 35 from the Regulation, as many times
as one of the parts, meaning the National Securities Commission or the contestant considered
person, are requiring this.

The interrogation, as article 39, paragraph (1) is indicating, has the purpose to verify the
legality and firmness of the decree by which measures where applied, including sanction
measures, reason to question any matters that might lead to establishing the truth.

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 The National Securities Commission can appoint the persons that will be part from the
interrogation commission and their leader. The number of members in the commission has to
be uneven.
Members of the interrogation commission will be appointed from the National Securities
Commission personnel. The interrogation session is lead by a person appointed by the National
Securities Commission.
After establishing the commission and date of the interrogation, the National Securities
Commission will dispose the citation by decree of the claimant. The interrogation will take
place at the National Securities Commission headquarters.
The interrogation, not being public, is made only in the presence of the commission’s
members, the agent that wrote the report on the investigation of control-inquiry, the claimant
and, maybe, other considered persons, summoned by the National Securities Commission or
have a connection or knowledge on the case. With these persons, participating in the
interrogation, without having an active role, will be also a person that will register the debates
in the session’s minute, a person which will that session’s secretary. The claimant has the right
to be assisted or represented by a defender.
The questions regarding the case in question can be drawn up by any of the members of
the interrogation commission and are registered, along with the answers of the claimant, in the
session’s minute.
The interrogation session is closed when the claimant is summoned, in order to sign at the
National Securities Commission headquarters the minute of the interrogation session. The
signatures of the interrogation leader and the claimant will be applied on every page of the
minute. To the claimant it will be read the content of the minute, before signing.
Based on the interrogation minute, the leader of the session will draw up in 15 days from
its closure a memorandum containing a synthesis of debates, closed with the decision
formulated by the members of the interrogation commission regarding its legality and firmness
of the disposed measures. The memorandum and the minute of interrogation will be forwarded
to the National Securities Commission, along with the cause file, in order to solution the legal
dispute. The decision of the interrogation commission is consultative for the National
Securities Commission.
The National Securities Commission, analyzing the preliminary complaint formulated
according to article 7, from Law of the administrative court, will be able to admit it entirely or
partially and to abolish all the disposed measures by the challenged administrative act or just
part of those. In case of finding it without grounds, the National Securities Commission will
reject the preliminary complaint and will maintain the challenged administrative act that
disposed sanctions for the illicit action to the capital market regime.

4.4 Filling a complaint. Competent court

Prescription of the right to action

Filling a complaint is made against the administrative measures issued during the
procedure of investigation, especially against the sanction decree.
Filling a complaint can be made against the damaging administrative act without going
through the procedure of the preliminary complaint.

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 According to article 8 from the Law of the administrative court, the object of the
complaint is demanding to cancel, entirely or partially, the act, fixing the cause damage and,
maybe, repairs for moral damages.
The claimant has to annex to the complaint the copy of the administrative act he is taking
action against, meaning the sanction decree or another issued act during the investigation
procedure.
The justice demands foreseen by the law of the administrative court can be formulated
also personally against the natural person which elaborated issued or closed the act if there is
demanded compensation payment for the caused prejudice. In case the complaint is admitted,
that person will be forced to compensation payment, united with that public authority.
As we have seen, the law of capital market gives an exclusive competence to the
department of administrative court of the Bucharest Court of Appeal for all situations in which
there is challenged an administrative act of the National Securities Commission, including
decrees of sanction. This disposition with a special character is in agreement with the general
norm from article 3, point 1 from the Code of civil proceeding that assures to the appeal courts
the competence of trialing causes in the matter of administrative court regarding the acts of
institutions and central authorities. From the point of view of the territorial competence, the
Bucharest Court of Appeal has the right to trial the demands pointed against the act of the
National Securities Commission, because the headquarters of this institution is in Bucharest.
Demands by which there is requested the annulment of an individual administrative act
issued by the National Securities Commission and fixing the caused damage are necessary to
be introduced, according to article 1, paragraph (1) from Law no. 554/2004, in a 6 months term
from the:
a) date of receiving the answer to the preliminary complaint or, depending on
the case, date of communication of the refusal, considered unjustified, of
resolving the demand;
b) date of expiration of the legal term of solution the demand, without
exceeding the 6 months term.
The juridical nature of the 6 months term is the one of statute of limitations, being
possible, thereby, to be suspended or interrupted and operating in its regard the institution of
restoring in term.
The law of the administrative court foresees also a term of decline of a year for
introducing complaints against the prejudicial administrative acts, in case the person has
evidences of the existence of “firm reasons” for not introducing the demands in the statute of
limitations of six months.

4.5 Suspension of executing the sanction decree or other administrative acts issued during
the investigation

Demand regarding suspending the execution of the prejudicial administrative act can be
separately formulated or by main action.
Article 14, paragraph (1) from Law no. 554/2004 shows that, in well justified cases and
for preventing an imminent prejudice, along with notifying the public authority that issued the
act, the prejudiced person can demand to competent court to dispose the suspension of
executing the administrative act until the trial court will rule.

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 The Bucharest Court of Appeal gas to solution the suspension demand, immediately, with
summoning the parts. Closure or, depending on the case, sentence by which it is ruled the
suspension is enforceable. It can be challenged with an appeal in 5 days from the ruling.
Suspension of executing the sanction decree can be required by the claimant also by a
demand addressed to the competent court to solution the suspension, entirely or partially of the
challenged act, meaning to the Bucharest Court of Appeal. In this case, the court can dispose
the suspension of the challenged administrative act, until final and irrevocable solution of the
cause. Demand of suspension can be formulated along with the main complaint or by a
separate complaint, until the solution of the court complaint.

4.6 Solutions of the administrative court.

The way to challenge
Execution

The court, resolving the demand formulated against a sanction decree or another act
issued by the National Securities Commission during the investigation procedure, is able,
depending on the case, to cancel, entirely or partially, the challenged administrative act.
The court is competent to rule also on the legality of the papers or administrative
operations that stood on the base of the emission of the act submitted to trial.
In case of admitting the demand, the court will decide also on the compensations for
material and moral prejudices that were caused, if the claimer requested this. When the
prejudiced person required the annulment of the administrative act, without asking in the same
time compensations, the statute of limitations for the compensation demand runs from the date
when he acknowledge or should have acknowledged the extent of the prejudice.
The decision has to be justified immediately, at the most 10 days from ruling.
According to article 20, paragraph (1) from Law of the administrative act, the decision
ruled first can be challenged with an appeal, in 15 days from communication 1 . The appeal
suspends the execution and is trialed immediately.

The final and irrevocable injunctions, by which there were admitted the complaints
formulated against the National Securities Commission decrees of sanction or other
administrative acts issued during the investigation procedure, are enforceable titles. The final
and irrevocable injunctions, by which there were annulled administrative acts with a normative
character, are generally mandatory and have power only for the future. They are published in
the Romanian Official Monitor, Part I, or, depending on the case, in the official monitors of
district or of the town of Bucharest, on the request of the execution court or the claimer, being
absolved of paying the advertising taxes.

1
Article 20, paragraph (1) from The Law of the administrative court made the object of an exception of non
constitutionality, admitted by the Constitutional Court by Decision no. 189/2006 (Official Monitor no 307
from 5 April 2006). The initial form of the normative act foresaw that the appeal term runs from ruling or
communication, without mentioning the cases in which these disposition were applied, situation that
created a confusion and contravened to article 21, paragraph (1) and article no. 129 from the Constitution.

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 §5. Legal grounds regarding maintaining in force and applying the juridical norms
of the National Securities Commission Regulation no.11/1997

It is necessary to make a few specifications regarding the applicability of dispositions of

the National Securities Commission Regulation no.11/1997, normative act from the secondary
legislation of the capital market, issued based on and in application of Law no. 52/1994
regarding movable values and stock exchange markets 1 , abrogated expressly by article 185,
paragraph (3) from the Government’s Emergency Order no.28/2002, this normative act being
also abrogated expressly on the ground of article 291, paragraph (1) , line c) from Law no.
297/2004.
Article 185, paragraph (3) from the Government’s Emergency Order no. 28/2002 is
abrogating expressly any dispositions contrary to this normative act. This legal text is a
application of the general norm regarding the abrogation of normative acts, contained by article
60, paragraph (1) from Law no. 24/2000, regarding the norms of legislative technique for
elaborating the normative acts 2 , according to which dispositions from a normative act, contrary
to the new regulation on the same level or a superior level need to be abrogated.
Abrogation can be express or implicit. An implicit abrogation intervenes, according to
article 63, paragraph (1) from Law no. 24/2000, in special cases, in which in the elaboration
and adoption of a regulation wasn’t possible to identify all the contrary norms. In these
situations, it can be resumed that contrary regulations made the object of their alteration,
completion or implicit abrogation.
Thereby it is introduced the notion of “contrary norms (or dispositions)”, that doesn’t
have a legal definition, but the its sense can be easily detached from the semantics of the term
“contrary”, and adjective meaning opposite, in contradiction, in opposition with the main
element. Contrary norms are the ones found in contradiction with regulation in the law or
adopted normative act.
The premise situation of the analyzed case is that the National Securities Commission
Regulation no.11/1997 didn’t make the object of an express abrogation, thereby in question
there is only the matter if this normative act was abrogated implicitly.
In case of the National Securities Commission Regulation no.11/1997, regarding the
control of respecting the legal dispositions in the movable values field, there can be identified
only a few contrary norms Government’s Emergency Order no.28/2002, Government’s
Emergency Order no.25/2002 regarding the approval of the National Securities Commission
Statute or Law no. 297/2004, because is regulating aspects that were considered only briefly
and on a principle level, by the normative acts from the primary legislation. Contrary,
regulation no. 11/1997 refers to, for example, a series of individual acts issued by the National
Securities Commission, decrees, decisions, whose objective and character is explained in
article 9, paragraph (1) and (2) from the National Securities Commission Statute, being in full
agreement with dispositions from the previously mentioned Regulation.
Contrary norms of the legislation in force or do not reflect the actual realities at present
time are:
a) Disposition in article 2, according to which the National Securities
Commission “is delegating and revoking its attributions regarding control

1
Official Monitor no 210 from 11 August 1994
2
Official Monitor no 139 from 31 March 2000

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 and inquiry of capital market participants by the Department of control and
inquiry, that runs under it”; it is about an implicit abrogation, because this
department doesn’t exist anymore, under this name, according to norms in
force, his place being taken by the General Direction of Surveillance and by
the Control Body;
b) Disposition from article 3, line a) from the Regulation, according to which
the National Securities Commission develops its activity according to
disposition in chapter II from Law no.52/1994, because this law is abrogated;
c) Disposition in article 45, according to which “not fulfilling or improper
completion, with guilt, of obligations set up in the regulation, by actions
foreseen by the law as being contraventions, it will be established and will
work according to Law no.52/1994 or Government’s Emergency Order
no.24/1994.” In this case also we are dealing with the express abrogation of
Law no.52/1994 and Government’s Order no.24/1993;
d) Dispositions regarding taking actions against the acts issued by the National
Securities Commission in the procedure of investigation- inquiry contained
by article 24 and article 26-33 from the Regulation. These legal dispositions
have been abrogated implicit because of the intervention of a norm of
superior juridical force, meaning article 2, and paragraph (3) from Law no.
297/2004 that has contrary dispositions to the ones in the Regulations.
Dispositions of article 2, paragraph (3) from the Law of capital market refers
indirectly to the Law of administrative court.
e) Disposition of article 43, according to which the amounts paid as fines are
transformed into state budget revenues, because article 17, paragraph (3)
from the Statute of the disposes that fines are transformed in revenues for the
budget of the National Securities Commission, according to legal
dispositions. We consider that this norm, having a special derogatory
character, prevails over the dispositions of article 295 from the Tax Code,
which shows that fines are integral revenues to the local budgets of the
administrative-territorial units.
Article 185, paragraph (1) from the Government Emergency Order no.28/2002 is
indicating without any doubt remaining in force of all the existent regulated norms at the
moment of adopting the order, until adopting by the National Securities Commission, in
maximum 90 days, of the regulations foreseen by the emergency order. Issuing a regulation
regarding the method of executing the control of respecting the legal dispositions by the
National Securities Commission, object of settlement of Regulation no.11/1997, is not included
in Government Emergency Order no.28/2002.

Further analyzing the relevant texts of Law no.297/2004, we notice that article 291 in
paragraph (1), line h) is abrogating “any disposition contrary to the law”. It is necessary to be
made the same mention like in the case of Government Emergency Order no. 28/2002:
Regulation no.11/1997 doesn’t mostly include dispositions contrary to the law of capital
market in force. It concludes, thereby, the inapplicability of this legal text to all the norms of
the Regulation in cause.
Article 290, paragraph (3) from Law no.297/2004 is stipulating that regulation issued by
the National Securities Commission until enforcing the Law remain in force until the adoption

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of new issued regulations in its ground, with the exception of contrary dispositions. Partially
finding contrary disposition in the Regulation no.11/1997 the incidence of norms that establish
a second moment of abrogation may appear: issuing regulation by the National Securities
Commission on the ground of Law no.297/2004, in the subject matter of existent norms prior
to the enforcing of the present law of the capital market. The National Securities Commission
didn’t yet issue new juridical norms that would replace the old ones in Regulation no.11/1997.
In this present analysis, we have to take into consideration also the dispositions of article
60, paragraph (4) from Law no. 24/2000 which stipulates that, in the situation in which a high
level norm, with the same object, wasn’t abrogated expressly by the high level normative act
this obligation comes back to the authority that issued first the act. In this present case, we are
not dealing with an express abrogation from the National Securities Commission of Regulation
no. 11/1997, but neither with the existence of parallel norms with the same object.
Partial abrogation of a normative act is known explicitly by dispositions of article 60,
paragraph (1) second thesis of Law no.24/2000. On the other hand, article 60, and paragraph
(5) from the law in question is indicating without any doubt that “partial abrogation is
assimilated to the modifications of normative acts, the partial abrogated normative act
remaining in force by its non abrogated dispositions”.
In these conditions, we can only assess that Regulation no.11/1997 can not be considered
entirely abrogated implicit by the juridical norms of a superior or equal forces that later
intervened to its adoption in 1997, which leads to the conclusion that this normative act is in
force and produces complete juridical effects.
It might be sustained that express abrogation of the law on which it was issued an inferior
level normative act leads automatically to the implicit abrogation of that normative act. In other
words, abrogation of Law no.52/2004 might lead implicit to taking out of force all the
regulations from the secondary legislation issued in its application. From the logic and
systematic interpretation of dispositions of article 60-63 from Law no.24/2000, results that this
conclusion is wrong.
Implicit abrogation intervenes, according to article 63, paragraph (1) from Law no.
24/2000, in special cases, in which in the elaboration and adoption of a regulation was not
possible to identify all the contrary norms. Applying the argument of interpretation per a
contrario, results that norms that are not contrary to the new regulation are not presumed to be
implicit abrogated.
More over, this hypothesis of implicit abrogation is considered by the legislator a
situation of exception, temporary. According to article 63, paragraph (2) from Law no.
24/2000, in its attributions, the Legislative Council has the obligations to identify all the legal
dispositions that had implicit legislative events and to propose the Parliament and the
Government necessary measures of express abrogation of these. In the case of regulation of the
National Securities Commission in question this type of procedure wasn’t begun, principal
justification being that it can not contain contrary dispositions to later normative acts.
If it were to assent to a principle according to which any abrogation of a normative act
draws upon the implicit abrogation of all the normative act with an inferior force issued based
and/or in its application it would result an unacceptable conclusion for the legislative stability
of a state: adoption of a new Constitution and abrogation of the old one would lead to the
collapse of the entire legislative system that existed until then, because the laws are normative
acts of an inferior force to the Constitution. Surely this type of solution would represent a
disaster impossible to repair for a state’s legal system.

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 According to dispositions of article 154 from the present Constitution of Romania, the
laws and the other normative acts, adopted prior to the promulgation of the Constitution,
remain in force as long as they do not contravene to the present Constitution. It is a logical
solution that is keeping into account the constitutional norm which shows that Romania is a
rule of law, and the desideratum of saving a law system in the moment of replacement with a
fundamental law.
The same argumentation is applicable, of course, also in the support of maintaining in
force the Regulation no.5/1995.
In addition, we have to mention, also, a main argument essential in the support sustaining
that Regulation no.11/1997 issued by the National Securities Commission is in force at present
time. Disposition included in this regulation not only that are not contradictory to the legal
norms that intervened at later time, but they refer to situations that are not regulated by any
other legal or regulatory form. The first conclusion imposed if we would assent to the contrary
thesis would be that an entire investigation procedure, including formal aspects regarding the
content of closed administrative acts, would remain not regulated.
In article 280 from Law of capital market no. 297/2004 it is mentioned without any
doubt that, in what regards the procedure of establishing and assessing contraventions, and of
applying sanctions, dispositions of the present law are derogating from the dispositions of the
Government Order no. 2/2001 regarding the juridical regime of contraventions. Or, in the
application of Law no.297/2004 it wasn’t issued any normative act of the secondary legislation
that would include dispositions regarding the procedure of establishing and assessing
contraventions to the capital market legislation. In the law of the capital market the only
reference to this procedure is included in article 274 which shows that this assessment will be
executed by natural persons empowered by the National Securities Commission. There is not
word which refers to the development of the procedure or the content of the administrative acts
that are about to be closed in this procedure. It is not acceptable that the “procedure of
establishing and assessing contraventions” on which refer article 280 from Law no. 297/2004
to be resumed only to the norm according to which this assessment in made by natural persons
empowered by the National Securities Commission.
As we have seen, the fact that a series of dispositions are abrogated implicit by the
intervention of new laws doesn’t draw the total implicit abrogation of Regulation no.11/1997,
but only the partial one, situation that is assimilated to the modifications of normative acts.

In these conditions, even if, for example, the method of disputing the individual acts
issued by the National Securities Commission is made according to different dispositions from
the ones of the Regulation no.11/1997, it can not be said that the entire Regulation is
abrogated.

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 Chapter VIII
Obligations capital market actors regarding combating
manipulation

The role of all the capital market actors in combating the market abuse is expressed
without doubt in “Considerations” of Directive no.6/2003.
In paragraph 24 of these “Considerations” is outlined the importance of fast and equitable
communication of information to the public. Realizing the efficient transmission of information
to the market participants and to the market’s entities is consolidating the integrity of the
market, while selective presentation from the issuers can determine the loss of trust from the
investors in the integrity of the financial markets.
Thereby is stipulated that professional economic actors should contribute to the market
integrity by different means, like establishing “grey lists”, application of trading windows for
sensitive categories of personnel, elaborating internal conduct codes and creating “Chinese
walls”. These measures of prevention can contribute to combating market abuse only when
they are firmly applied and are the object of rigorous inspections. A proper inspection of
applying these measure means appointing persons responsible with respecting these
dispositions in the bodies in cause and periodical inspections made by independent auditors.
Regarding the market operators, paragraph 27 from “Consideration” of the market abuse
Directive states their mandatory contribution to the market abuse prevention, by adopting
“structural dispositions that would aim for the prevention and identification of market
manipulation practices”. These dispositions can contain requests about the transparence of
closed trades, complete publication of agreements in the matter of regulating the course, an
equitable system of association the stock orders, introducing an efficient system of identifying
the atypical orders, a valid system of setting up the reference course of financial instruments
and clarity of norms regarding suspending trades.

Section 1

The obligation of the market professionals to notify suspicious trades

According to dispositions of article 1, paragraph (3) from Directive no. 72/2004, “a

person professionally trading” means at least one investment fund or a credit institution”. In
this category are included, of course, also the investment firms (brokerage companies).
In applying legal texts regarding the obligation to notify suspicious trades will be
considered natural persons that have leading attributions and are representative in the juridical
persons mentioned previously. Dealers which act on the capital market have usually appointed
at least one person that has in her responsibilities to make sure that the employees of the dealer
are following the incident legislation on the course of developing capital market operations, but
also to notice eventual violations of legal norms in force committed by the clients of that
company.

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 §1. Legal ground for the obligation of notifying suspicious trades

The principle of notifying without delay by persons that are professionally trading by the
market authority of actions from the market abuse sphere is set in article 6, paragraph 9 of the
market abuse Directive.
“Member states decide that persons trading with professional securities have to notice
without delay the competent authority in case the persons in cause have reasonable motives to
believe that a trade can be considered insider dealing or market manipulation”.

The obligation to notify without delay actions or information indicating reasonable

ground for suspicion concerning certain operations made on the capital market is also
underlined by dispositions of article 8 from Directive no.72/2004 of the European
Commission.
Juridical norms issued in the application of the market abuse Directive emphasize the
obligation of notifying suspicious trade. Thereby, according to article 7 from Directive
no.72/2004 the persons that are trading professionally have to decide, on the base of examining
each case, if an operation can be reasonably suspected of insider dealing of market
manipulation.
Persons whom are trading are submitted to the notifying norms of the member states
where their head office is, central administration or branch. Notification is addressed to the
competent authority of that member state.
The Romanian capital market law resumed this text regarding the obligation of notifying
suspicious trades in article 250, paragraph (3), using the same collocation of “reasonable
grounds” that is creating to the market professional the conviction that a trade could be
considered a market manipulation action.

§2. Notion of “reasonable grounds”

In the legislative system grounded on the market abuse Directive there is no description
of elements which characterize the notion of “reasonable grounds” that leads to the persuasion
of a market professional that he is in the presence of an action circumscribed to the market
abuse sphere.
Reasonable grounds which generate notifications of certain trades to the market authority
need to be identified for every case, being impossible to build an ideal type and abstract model
applicable in every situation.
In paragraph 9 of “Considerations” in the market abuse Directive it is shown that
“notifying the competent authorities of suspicious operations made by persons operating with
professional securities needs to be accompanied by conclusive indication regarding the
existence of a market abuse risk, meaning serious reasons which determine the suspicion that
those operations might be insider dealing or a market manipulation”. This way, the European
legislator considers that, although certain proper operations might appear as free of a
suspicious character, nevertheless reported to other operations, to a certain behavior or other
information can provide indications regarding the possibility of a market abuse.

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 §3. Indications concerning possible suspicious trades

3.1 General specifications

In the first guide of the Committee of European Securities Regulators (CESR) regarding
the implementation of the market abuse Directive are foreseen a series of indications that can
describe the presence of capital market manipulation actions. It needs to be shown that these
possible signals are completing the ones foreseen in article 4 and 5 from Directive
no.124/2003, of establishing the application norms of Directive 2003/6/CE of the European
Parliament and of the Council regarding definition and publication of confidential information
and definition of market manipulation.
The guide of European regulators stipulates at point 5.3 that indications offered which are
neither fully comprehensive (a trade can be suspicious even if it doesn’t fit in any presented
situation), neither determinant (a trade is not necessarily suspicious if it fits in a presented
category). Offered indications represent, in these conditions, only starting points as it is showed
by this guide of the Committee of European Securities Regulators. Dealers have to evaluate
themselves the situations before deciding if it is the case or not to make the notification to the
market authority.
It is important to mention also that a certain trade can appear at the moment of its
arrangement as being closed in perfectly legal and good- faith conditions, and then, following
new information, additional to get a suspicious character from the perspective of the juridical
norms incident to the market abuse. These information or new events can be publishing the
financial results, dissemination of attentions about obtaining profit in a financial exercise or
publishing ads regarding public offering of taking over regarding a certain issuer. The
obligation of notifying market professionals exist also under these conditions. The guide of the
Committee of European Securities Regulators mentions although that this type of responsibility
doesn’t mean that investment firms and credit institutions are force to review retroactively all
trade closed immediately after this type of event.

3.2 Enumeration of indications regarding capital market manipulation

The first guide of the Committee of European Securities Regulators regarding

implementation of market abuse offers a non-exhaustive list of elements which can be taken
into considerations by persons that are professionally trading when they appreciate if an
operation raises suspicions from the point of view of norms regulating market abuse:
a) an unusual concentration of trades regarding securities (for example
connected to one or more institutional investors known as being close to the
issuer or a persons with a certain relative interest to the issuer, like an bidder
or a potential bidder);
b) unusual reiteration of a trade inside a limited group of clients over a certain
period of time;
c) unusual concentrations of trades and/or orders connected to one client, with
different accounts of securities of a client or a limited number of clients
(especially if the clients are connected between them);
d) trading that have an apparent justification in order to increase/decrease price
or increase volume of trading of a security. A special attention will be given

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 to this type of orders which lead to the execution of a trade in the proximity
of a reference point during the day of trading- for example, in the proximity
of closing the day;
e) sending out orders which, given their relative size on the market of that
security, will have a significant impact on demand, supply , price or value of
that security;
f) trading that apparently has the purpose to increase the price of a security in
the period of time prior to the emission of an derivative associated to this one
or a conversion of that security;
g) trading that apparently has the purpose to maintain the price of a security in
the period of time immediately prior to the emission of a derivative associated
to this one or of a conversion of that security, in the conditions in which the
price has the tendency to decrease;
h) trading that apparently has the purpose to modify the evaluation made to a
position (purchase or sale) in the conditions in which the value of that
position remains constant;
i) trading that apparently has the purpose to increase/decrease the daily
weighable average price or of a period of time inside the trading session;
j) trading that apparently has the purpose to establish the market price in the
conditions in which the liquidity for a security is not enough to set a price
inside the trading session (with the exception of the case in which regulations
of that market allow explicitly this type of trades);
k) trading that apparently has the purpose to go around the parameters of market
safety (for example, limits of the trading volume, parameters of
demand/supply etc.);
l) situation in which a trade is arranged by changing the price of demand/supply
registered in the trading system, if this change influences the price of that
trade;
m) introducing significant orders in the trading book minutes before the moment
of determining the bid price followed by their annulment seconds before the
moment of closing the book so the theoretical opening price shows higher or
lower than it should;
n) trading that apparently has the purpose to maintain the price of a security
inferior to the price of exercise of an inferior derivative regarding that
security on the due date;
o) trading that apparently has the purpose to modify the price of a security so it
will exceed the price of exercise of a derivative regarding that security on the
due date;
p) trading that apparently has the purpose to modify the closing price of a
security when this price is used as a reference price to determine the margins.

§4. The procedure of reporting suspicious operations

4.1 The method to report suspicious operations

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 According to article 10 from Directive no. 72/2004, notifying suspicious operations can
be realized to the competent authority under the form of a letter, electronic message, fax or
telephone, with the stipulation that in this last case, on the request of the competent authority, it
is necessary to be sent a written confirmation.
Persons that are making reports regarding suspicious trade must not have necessarily all
the needed information when contacting the competent authority. If the situation is one that,
according to the person subject of the reporting obligation, needs to be brought to the attention
of the competent authority, the guide of the Committee of European Securities Regulators
mentions that first contact must be realized as soon as possible. This can be done over the
phone if possible, offering the main aspect and motives of suspicion, other information being
provided in a later time.

4.2 Content of the notification regarding the suspicious operations

The content of the notification of suspicious operations that might enter into the
framework of the market abuse sphere has to respect dispositions of article 9 from Directive
no.72/2004 1 . Thereby, it is necessary to be mentioned:
a) description of the operations, including the type of order (limit order, market
order or other characteristics of the order) and the type of trading market
(such as block trade); according to the guide of the Committee of European
Securities Regulators there have to be provided information regarding the
security, including the ISIN code of the security, relevant market, date/time
of introducing the order, price and size of the order; moment and dimension
of the order; type and other characteristics of the order;
b) reasons for suspicion that the trades might constitute market abuse;
c) means for identification of the persons on behalf of whom the trades have
been carried out, and of other persons involved in the relevant trades; in the
reporting standard included in the guide of the Committee of European
Securities Regulators previously mentioned, it is indicated the necessity to
mention the name, address, phone number, date of birth, account number,
identification code used by the firm to identify the client; regarding the other
persons involved, the reporting standard mentions that there will be
transmitted the following data:
- for other persons involved in that trade- name, address, phone number, location,
date of birth, relation they have with the persons that executed that trade, position,
role etc.
- for the person that executed the trades- action quality, meaning broker, agent,
subscriber etc.;
d) capacity in which the person subject to the notification obligation operates
(such as for own account or on behalf of third parties); the guide of the
Committee of European Securities Regulators mentions the obligation of
transmitting data regarding denomination/name of the person, position in the
firm, contact details, etc.;

1
Text of article 9 from Directive 2004/72/CE resumed completely in article 165, paragraph (2) and (3)
from the Regulation of the National Securities Commissions no.32/2006 regarding financial investment
services.

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 e) any information which may have significance in reviewing the suspicious
trades.
Where that information is not available at the time of notification, the notification will
include at least the reasons why the notifying persons suspect that the trades might constitute
insider dealing or market manipulation. All remaining information will be provided to the
competent authority as soon as it becomes available.

4.3 Responsibility of the persons that are making the notification regarding suspicious
operations and keeping the professional secrecy

According to article 11 from Directive of the European Commission no.72/2004, persons

that send the notification to the competent authority have the obligation not to inform any other
person regarding it, especially the persons on behalf of whom the operation have been carried
out parties related to those persons, except information has to be made on legal dispositions.
The fulfillment of this requirement will not involve the notifying person in of any kind of
responsibility, providing the notifying person acts in good faith.
The competent authorities are not allowed to disclose to any person the identity of the
person having notified these trades. It is natural for this prohibition to exist because if
disclosing the identity would be likely to harm the person having notified the trades.
Regulation no.32/2006 mentions in article 166 that notifications regarding suspicious
operations will be made exclusively by the National Securities Commissions, and persons
transmitting them will ensure that those notifications are not available to other persons, in
particular on behalf of whom the trades have been carried out or parties related to those
persons, except the cases laid down by the law. The National Securities Commissions has to
transmit received information to the competent authorities of the regulated markets on which
are traded securities object of suspicious trade, and to the market operator.
In accordance to dispositions of article 11, paragraph 3 from Directive no. 72/2004, good-
faith notification transmitted to competent authorities is not a violation of the restriction of
disclosing the received information through a contract or a power legal act or an administrative
act and doesn’t presume any responsibility to the person disclosing it.
Interdiction of disclosing information by the market authority regarding the identity of
the person that made the notification will not harm the requirements of the control regime to
apply and sanction foreseen in the normative system incident to market abuse or to the norms
regarding transfer of personal data.
In the same time, European norms in force do not foresee an express legal sanction for
when the competent authority of regulation and supervision (its servants) is disclosing the
identity of persons that made the identification, and this if harming those persons. In this case,
incident will be the common law that regulated the criminal civil responsibility.

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 Section 2

Obligation of the market and system operators

The juridical persons in their capacity as market operator or multifunctional trading

system (according to the Romania law, alternative trading system) have the generic obligation
to combat actions in the market abuse sphere.
Market operators have a special interest in combating capital market manipulation
practices, having in consideration their main role, to maintain an efficient market, where a high
number of trades were to be realized having an increased value. The doctrine 1 has pointed out
that market manipulation has negative effects on the market’s cash flow, affecting this way
directly the market operator.

§1. Legal ground of the obligation of combating capital market manipulation

According to disposition of article 43, paragraph 1 from Directive no.39/2004- Market in

Financial Instrument Directive, “regulated markets are supervising trades made by their
members or participants inside their system, in order to identify any violation of those norms,
of any trade condition that would disturb the market’s stability or any behavior that might
suggest market abuse”.
Article 26 from the Market in Financial Instrument Directive stipulates that investment
firms and operators exploiting a Multilateral Trade System have to instate and maintain
efficient dispositions and procedure, about an Multilateral Trade System, to control regularly
that the users of this system are respecting the norms. Investment firms and market operators
exploiting an Multilateral Trade System should control trades made by users in this system to
identify norm violations, and any trading conditions that would disturb the market’s stability or
any behavior that might suggest market abuse.
Article 6, paragraph 6 from Directive no.6/2003 foresees that state members must ensure
that market operators are adopting structural dispositions following the prevention and
identification of market manipulation practices.
In the Romanian legislation, article 133, paragraph (4) from Law no.297/2004 shows that
the market operator has to respect the National Securities Commissions requirements regarding
prevention and identification of market abuse. In the same time, article 140, paragraph (1), line
e) imposes market operators to respect the National Securities Commissions requirements
regarding the prevention and identification of market abuses.
The law of capital market mentions in article 249 the obligation of market operators to
adopt structural dispositions, in order to prevent and identify market manipulation practices.

§2. Obligation of supervision of operations in order to prevent market abuse

According to paragraph 27 of “Considerations” of the market abuse Directive, market

operators have to contribute to the prevention of market abuses and to adopt structural

1
A.C. Pritchard, Self- Regulation and Securities Markets. Regulation, vol.26, No.1, Spring, 2003, p. 34

347
dispositions to prevent and identify market manipulation practices. These dispositions can
summarize requirement regarding transparency of trades, complete publication of agreements
in the matter of course regulation, equitable system of association the stock orders, introducing
an efficient system of setting up the reference course on securities and clarity of norms
regarding suspending trades.
The main market operator in Romania, the Bucharest Stock Exchange has introduced by
the Code of the Bucharest Stock Exchange- market operator a series of norms regarding
prevention of actions in the sphere of capital market manipulation.
Thereby, article 236, paragraph (1), line c) from Title II, Book I of the Code foresees that
Bucharest Stock Exchange monitors trades made through the trading system of the stock
exchange in order to identify market abuse practices. This obligation has its origin in
dispositions of article 44, paragraph (1) from Regulation of the National Securities Committees
no.2/2006, which stipulates the obligation of the market operators to set and maintain efficient
procedures for permanent monitoring of respecting the trading rules by the participants to the
regulated administrated markets. Market operator has to monitor trades made by participants
through their systems to identify the violation of trading rules which may affect the proper
function of the market, and of practices which might involve market abuse.
Particularly, the National Securities Committees regulations show that inside the
obligation of monitoring, market operator has to follow the buy-back process of stocks issued
by commercial companies admitted to trade on regulated markets, and trade based on insider
information.
Market operator has the responsibility to supervise the conduct of market participants and
to investigate and interrogate those problems which regard violation of regulations of the
regulated markets. The Regulation of the National Securities Committees no.2/2006 indicates a
right of the market operator to set up sanctions for violating its regulations, apart from the
sanctions set up by the National Securities Committees.
In our opinion, the right to impose sanctions can not have a legal origin, as long as the
market operator is representing a juridical person of private law, in the case of Romania a
commercial company of stocks. The legal ground of sanctions that the market operator can
dispose is the contract closed between dealers or issuers and market operator. In this case, the
sanction will intervene following the violation of contract obligations that may include respect
of all regulations issued by the market operator in question.
Regarding the system operator, article 70 from the National Securities Committees
Regulation no.2/2006 is indicating the necessity to set up and maintain efficient procedures for
permanent monitoring the respect of trading rules by participants inside the alternative trading
system administrated. The system operator has to monitor trades made by participants in its
system to identify the violation of trading rules, situations that might affect proper execution of
trades and practices involving market abuse.

§3. Obligation authority of supervision and control to inform

According to dispositions of article 43, paragraph 2 from the Market in Financial

Instrument Directive, operators of regulated markets have to notify the competent authority of
the regulated market any significant violation of norms or any condition of trade that would
disturb the market’s stability and involve a market abuse.

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 Also, operators of the regulated markets have to provide without delay relevant
information to the competent authority in investigations and justice actions regarding market
abuses on regulated markets and to provide complete necessary support for investigation and
justice action of market abuses committed inside the systems of regulated markets or through
them.
This obligation involves also operators of the multifunctional trading systems. According
to article 26, paragraph 2 from the Market in Financial Instrument Directive, investment firms
and operators exploiting a Multilateral Trade System need to notify to the competent
authorities the serious violations of norms that regulate the trading system and any aspect of
trading that might disturb the market’s stability or any behavior that might suggest market
abuse.

Investment firms and operators exploiting a Multilateral Trade System have to transmit
without delay relevant information to the market authority for research and justice action of
market abuses and to provide with all the necessary help for the research and justice action of
market abuses committed inside the systems or through them.
In the Romanian legislation, the obligation to inform the market authority by the operator
of the regulated market is contained in article 44, paragraph (5) from Regulation no.2/2006,
according to which reports have to be sent to the National Securities Committees, without
delay, about any significant violation of regulations on the administrated regulated markets,
causes encumbering the proper execution of trades, violating conduct rules, and practices that
might be market abuse. The market operator has to provide the National Securities Committees
information and necessary assistance to investigation and sanctioning of market abuse inside
the regulated market.
The Code of the Bucharest Stock Exchange- market operator foresees in article 237 from
Title III of Book I that the Bucharest Stock Exchange will inform the National Securities
Committees or other competent bodies (such as, the penal action) if in the course of the
monitoring activity developed by the Bucharest Stock Exchange are notices actions made by
participants to the trading system in the course of the trading activity, on which there is the
suspicion of market abuse, according to Law no. 297/2004 and regulations of the National
Securities Committees. The Commission will be informed immediately by the market operator
also when entering in the possession of documents or information considered being clues
regarding actions or acts in the market abuse category committed by participants to the trading
system in the course of the trading activity on the regulated spot market.
In application of legal dispositions regarding trade based on market abuse, the Bucharest
Stock Exchange has the obligation to provide the National Securities Committees with all the
technical and informational means that would allow to see and register trades made inside the
Bucharest Stock Exchange, including on Insider accounts and to transmit every day to the
National Securities Committees the situation of all trades made in the course of the trading
session, including the ones made on the Insider accounts.

Regarding operations made inside an alternative trading system, according to article 70,
paragraph (2) from the National Securities Committees Regulation no.2/2006, there have to be
reported to the National Securities Committees, in maximum 24 hours, any significant
violation of alternative trading system rules, causes encumbering to the proper execution of
trades, and practices considered market abuse. The market operator has to provide to the

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National Securities Committees, without delay, relevant information, and complete necessary
assistance for investigation and sanction of market abuse inside the alternative trading system.

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 Chapter IX

The capital market manipulation criminal offence

On the course of this paper we have analyzed in detail aspects which outline the illicit
action of capital market manipulation, stressing particularly on elements of the contravention
side. In this chapter we will analyze the criminal offence of market manipulation, under all the
aspects which derive from application of penal law norms.
There will be no emphasis on the material evidence of this criminal offence because it
was already presented in Chapter I and analyzed in Chapter V.
The matter of the active subject and the passive subject of the manipulation action was
presented in Chapter IV that is why we will not resume these considerations.
The capital market manipulation action can be considered, in certain circumstances, a
criminal offence in 25 of the 29 states of the European Union 1 .

Section 1

General characteristics of capital market manipulation criminal

offence.

Juridical object and material object

Criminal offence is, according to article 17, paragraph (1), Penal Code, the action
presenting social danger, committed with culpability and foreseen by the penal law.
From this legal definition of criminal offence there are pointed out four essential
characteristics that describe any type of criminal offence: committing an action, presence of a
social danger of the committed action, existence of culpability of the action’s author and
existence of a penal law norm which incriminates that action.

§1. Committing the action of capital market manipulation

In order to enter in the sphere of penal illicit a person’s conduct must consist in certain
acts of exteriorizing the physical process which generates it. Only those exterior conduct acts
of a person can be considered criminal offences and not the simple physical processes that take
place in the individual’s conscious 2 .

1
“Executive summary to the report on administrative measures and sanctions as well as the criminal
sanctions available in member states under the Market Abuse Directive (MAD)”, http://www.cesr-
eu.org/index.php?page=groups&mac=0&id=22
2
C. Bulai, Manual of Penal Law. General Part, All Publishing, Bucharest, 1997, p. 152

351
 In case of the capital market manipulation action exterior conduct must always
materialize by an action. The analyzed action can not be committed by non-action. Even in the
hypothesis when a certain person has the obligation to make a report of trading or portfolio
holdings and is not completing this obligation, misleading the other market participants, can
not be stated that this non-action is a manipulation action.
To receive the illicit character, a person’s conduct has to necessarily consist in a trading
action or emission of trading orders, or of disseminating fictive or delusive information.

§2. The social danger of the action of capital market manipulation

Capital market manipulation has the role to affect seriously in some situations the
juridical circuit creating a serious encroachment in the freedom to contract of the investors on
the capital market misleading them by delusive acts of the manipulator. In these conditions,
market manipulation is an enhanced social danger, by a certain gravity, which created the
necessity to incriminate this as criminal offence 1 . Bringing prejudice to values guarded by the
penal law raises the need to apply penal punishments for the wrongdoer.
Legal dispositions which sanction capital market manipulation have in sight protecting
the social relations with an patrimonial character, although the definition of this action from the
Market Abuse Directive, resumed as we have seen in the Romanian legislation, doesn’t
mention neither the necessity of a prejudice in patrimony assets of the passive subjects neither
the pursuit or creation of a material good in the patrimony assets of the action’s author.
Thereby is natural to consider social relations protected by legal norms that forbid market
manipulation actions has a patrimonial nature, because this character is the essence of trades
closed on the capital market.
Depending on the legislative system, either the legislator in the states inspired by the
Roman-German law, either judicial bodies, in states applying the system of the common-law,
estimates is the abstract social danger of the manipulation action requires or not framing this
action in the category of criminal offences. Trial courts are called, no matter the applicable law
system, to asses if the concrete social danger of the action requires application of a penal
action.

§3. Culpability

The matter of culpability is the most significant aspect when analyzing the framing of the
capital market manipulation illicit action.
We will analyze further, inside the subjective side research, elements of the psychical
attitude of the person incriminated for committing the manipulation action towards her actions.
We just underline here that capital market manipulation is a criminal offence only in the
hypothesis in which is committed under the form of intention, directly or indirectly.

1
Ibidem, p. 153

352
 §4. Action foreseen by the Penal Law

The capital market manipulation action is a criminal offence according to imperative

dispositions of article 279, paragraph (1) reported to article 244, paragraph (5) and article 248
from Law no. 297/2004 regarding the capital market. We are, thereby, in the presence of a
penal right norm inserted in a special law, with an extra penal character.
The possibility of member states of the European Union to include in the internal
legislation penal sanctions for committing market abuse actions resides in dispositions of
article 14, paragraph 1 from Market Abuse Directive no.6/2003.

§5. Juridical object and material object of the capital market manipulation criminal
offence

The juridical object specific to the criminal offence of capital market manipulation is in
concrete social value which is prejudiced by committing this illicit action, meaning in social
relations manifested on the capital market, of a patrimonial nature, that requires, for its normal
development, maintaining a proper, regular and efficient market, in which trades with
securities are closed at prices set on the natural law of demand and supply.
The protected social relations have a patrimonial nature, because the honest character is
the essence of transfer of ownership acts closed on the capital market.
The material object of the capital market manipulation criminal offence consists in
securities admitted to trading on a regulated market. The condition for the securities that make
the object of manipulation activity to the traded on a regulated market, even on the primary
market of public offerings, is in the same time also the premise situation of this criminal
offence 1 .

Section 2

Objective side of the capital market manipulation criminal offence

§1. Material evidence of the manipulation criminal offence

The material evidence is the main component of the objective content of a criminal
offence and consists in the forbidden conduct act 2 .
In the case of market manipulation criminal offence, the material object can have the
following forms of action:

1.1 Trading or issuing trading orders which

1
To see Chapter III, Section 4, p. 136-142
2
Ibidem, p. 174

353
 a) Give or might give false of misleading signals regarding the demand, supply or
price of securities.
Inside this variety of the material evidence, can be distinguished the following forms of
action that might be a capital market manipulation criminal offence:
- trading which has in sight purchasing or selling a security when modifications
relative to the beneficiary do not intervene or market risk or trades in which the
risk transfer or the benefit is realized between parts that act together openly or in
the dark (wash trades);
- trading in the trading system only to create the impression of a activity or a price
modification in regards to the security (painting the tape);
- trading for which the purchase and the sale order are introduced approximately in
the same time, at the same price and quantity by different parts, but acting
together (improper match orders);
- introducing orders without the intent to execute them.
b) Maintaining, by the action of one or several persons acting together, the price of one or
more securities, at an abnormal or artificial level.

Inside this method of market manipulation are subscribed the following forms that the
material evidence can have:
- trading and/or introducing trading orders by one or many persons, acting together
to assure a dominant position on demand and supply of securities, having as effect
fixating, directly or indirectly, the price of sale or purchase or creating other
incorrect conditions of trade (cornering);
- sale or purchase of securities at the moment of closing the market, in order to
distort the price of these securities (marking the close);
- actions prior to a Initial Public Offering, having as result artificial increase of
securities price that made the object of the offer;
- trading or introducing trading orders which have as effect exploiting the dominant
position held in regards to the supply, demand or delivery mechanisms for a
certain security and distorting its price (abusive squeeze);
- trading or introducing trading orders which have as effect creating a minimum
ceiling about price;
- trading or introducing trading orders which have as effect creating an supply-
demand deviation excessively large;
- trading on a certain market to influence inappropriately the price of a security on
another market.
c) Presume fictitious methods or any other type of fraud.
The material evidence in this category of capital market manipulation criminal offences
can be presented under the following forms:
- issuing an opinion on a security (or indirectly on its issuer) after it was adopted a
positions on this security obtaining profit from the impact of that opinion on the
course of that security without being made public in the same time, correctly and
efficiently, the conflict of interests in cause (scalping);
- trading in order to conceal the identity of the owner of a certain security
(concealing ownership);

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 - trading, introducing trading orders or disseminating information by the owner of
securities which has as result misleading the market participants and artificially
increasing the price of those securities (pump and dump);
- trading, introducing trading orders or disseminating information by a person
which carried out short sale operations resulting in misleading market participants
and artificially decreasing the price of those securities (trash and cash);
- trading short purchase or sale, announcing the position initiated and trading in the
opposite sense (closing position) right after it got to the knowledge of the public.

1.2 Dissemination of information through the media, including the internet or any other
method, which gives or might give false or misleading signals on securities, including
dissemination of rumors and false or misleading news

This form of the material evidence of the manipulation criminal offence can be
committed also by a person that doesn’t close trades on the capital market.
The material evidence of the capital market manipulation by dissemination of information
can be presented under these versions:
- actions of dissemination through the mass- media of false or misleading
information;
- activities which have as result transmission to the public false/delusive
information.

§2. Immediate pursuit of the capital market manipulation criminal offence

Carrying out the material evidence of the manipulation actions in one of its previously
mentioned forms produces effects on the social value protected by specific dispositions of the
capital market legislation in the matter of market abuse. Prejudicing this social value is the
immediate pursuit of the criminal offence 1 , result of the illicit action carried out by the action’s
author.
Immediate pursuit or result of the capital market manipulation action consists in the
change which the execution of forbidden by law action produced on the price, demand or
supply of securities.
Market manipulation criminal offence can be considered, in certain forms, a criminal
offence of danger and not of result. By committing the criminal offence of capital market
manipulation is created a state of danger for the social value protected by legal dispositions,
meaning operation of the capital market based on natural law of demand and supply. This
social value is threatened it its existence 2 by committing market manipulation actions.
At the beginning of this paper 3 , it was shown that in order for the illicit manipulation
action to exist there is necessary to be produced a result, mentioned in terminis in the legal
norm. This result consists in:
- issuing false or misleading signals of market participants regarding the demand,
supply and price of traded securities;

1
C. Buglai, A. Filipas, C-tin. Mitrache, Romanian Penal Law, 1997, Press Publishing, Bucharest, p. 15
2
C. Bulai, cited paper, p. 176
3
Chapter I, section 1, §2, p. 3-6

355
 - maintaining the course of securities at an artificial or abnormal level.
Also the version of market manipulation by using fictitious methods has as result,
immediate pursuit, managing the price towards artificial levels (“pump and dump”, “trash and
cash”, “scalping”) or misleading participants to the market (“concealing ownership”).

The result mentioned in the first chapter and previously is not produced in the material
world in all the versions of manipulations.
In the case of manipulation by “issuing false or misleading signals” regards a danger
criminal offence. The protected social value in the case of manipulation criminal offence does
not consist in the request for a person not to be misled, but in maintaining an ordered, regular
and efficient market. The simple misleading of a person is not a criminal offence in order to
consider that this is the result of the illicit conduct incriminated by the penal law norm.
According to the doctrine of penal law 1 , in case of result criminal offences the effect of the
actions consists in a material change over the actions object, while in the case of danger
criminal offences is not necessary to produce a change in the objective material world. This
judgment remains valid in the hypothesis of manipulation by “trades and trading orders” which
give false signals and in the situation of manipulation by dissemination of false information.
Manipulation which is manifested under the form of trades or trading orders which
“might give false signals” regarding the demand, supply and price of securities is explicitly a
danger criminal offence. It is true that in this hypothesis also its necessary to intervene a
concrete result of the activity developed by the alleged manipulator, in order to speak about the
illicit conduct. This result can consist either in determination of other market participants to
close trades at artificial prices, either to encumber them to transact because of maintaining an
abnormal course.
Treating market manipulation criminal offence as a danger criminal offence can not lead
to the conclusion that all trades or orders which might, theoretically, create a distorted
impression for certain market participants, might lead to unwanted and paradoxical effects for
the capital market have to be considered as illicit.
In principle, any trade made on the market leads to the alteration of previously registered
price. On the other hand, order of trading introduced in the system are executed when not
completing the operating parameters of that market (price protection, minimum volume object
of trading etc.) and only in the hypothesis in which meet contrary sense orders with the same
characteristics. Because of this, it might be considered that any order introduced in the system
and any trade closed has influence on investment decisions of market participants. The solution
which imposes treating as illicit any activity on the capital market that determines a course
evolution of a security beyond investor’s expectations and/or analysts estimations is not
acceptable.
In the same time, any trade can be considered as having the potential to issue false signals
for certain market participants. This is the main reason for which competent authorities
(administrative market authority, penal action bodies and trial court, if it’s the case) have to
carry out a critical exam of the situation created on the market of that security by the
investigated investment activity and to determine by an objective criterion if that market was
altered. From this perspective, criterion of the regular user, used in the British law system,
seems to be a solution worth considering.

1
C. Bulai, cited paper, p. 176

356
 Manipulation by maintaining an artificial price can be considered as a result criminal
offence, if we consider that is necessary, for the illicit conduct to exist, to create an artificial
course of manipulated securities. In the absence of this result, we can not speak about capital
market manipulation, only in the hypothesis in which there is committed the material evidence
under other forms, for example by issuing false signals or using fictitious methods.
Regarding this last form taken upon the material evidence of the manipulation criminal
offence, “using fictitious methods”, regards a danger criminal offence, because it can affect
maintaining an ordered market, where trades are closed at naturally established prices. In some
forms of this manipulation version, such as concealing the identity, we are dealing with a
situation clearly of danger created by misleading market participants.
The last consequence of the criminal offence of manipulating the capital market is not
always a prejudice created in the patrimony assets of market participants of the security on
which it was exerted the manipulation action. The protected social value is affected also in the
hypothesis in which good- faith participants on the market of a security could not exert the
right to dispositions on securities , either under the form of purchase, either under the form of
sale, because it has intervened the disturbing factor of manipulation. In a famous case of capital
market manipulation which took place in 1814, the London Appeal Court decided not
necessary producing a prejudice for the capital market manipulation to be considered fraud 1 .
This interpretation influenced also the later French legislation in this field and, as a
consequence, the entire vision and regulation of the European legislator of the XXI century,
which didn’t include in its definition regarding market manipulation the notion of prejudice,
assenting to the position of British jurisprudence two centuries old, which laid the accent on
creating a delusive image on the market, a false image in the mind of participants on the
demand, supply or price.
In conclusion, we appreciate that immediate pursuit of the illicit action of manipulation is
distorting the course of securities on the market where the action prohibited by legal regulation
is exerted. This consequence is manifested even in the hypothesis in which a person’s activity
has as result only misleading regarding the demand or supply of a title, because the final result
will still be closing trade at artificial prices, set outside the natural game of demand and supply.
Obtaining profit is an essential objective of the activity of any market participant. This
desideratum is transformed into practice by the attempt to purchase at a low price and sell at a
high price a security, no matter the order in which there are carried out these operations. The
central element of the entire trading activity on a capital market is represented by price. The
dangerous result from a social point of view of a manipulation action appears, in a concrete
way, when this fundamental element is illicitly influenced.

§3. Causal link

The causal link between the material evidence and immediate pursuit is a necessary factor
that needs to be present in the content of the criminal offence objective side. As the penal law

1
Rex versus De Berenger, in Association D& Economie Financiere, Association D’Economie Financiere
Staff “Money and Morals Worldwide: First Annual Report”, M.E. Sharp Publishing, 1996, p. 82. De
Berenger spread in 1814 the false information that Napoleon died and allies occupied Paris, counting on a
spectacular increase of British state bonds

357
doctrine has revealed 1 , the causal link is the connection between material evidence, which is
the cause, and immediate pursuit, which is the effect of wrongdoer’s action. In the absence of
proving the causal link there is considered that there are not meet the constitutive elements of
the criminal offence.
In the situation of capital market manipulation, it has to be outlined that the action’s
material evidence, action of the alleged wrongdoer, has to have a real capacity to produce the
dangerous social result.
In case the action of market manipulation is materialized by creating a danger state, in
the version in which the criminal offence activity has as result misleading or issuing false
signals or the potential to issue false signals, the causal link results ex re, by committing the
action, as to any danger criminal offence 2 .
When we are dealing with distortion of price of a security, it is about producing a
material result in the objective reality, so it will become necessary to prove the causal link
between material evidence- action of the suspected person and immediate pursuit- creating and
maintaining an artificial course. It will be impose, in these conditions, determining exactly the
real influence of exerted by the alleged manipulator on the market of the security in cause.
Then, will be established if in the person’s conduct can be distinguished elements from the
illicit sphere, because, as we have seen, any illicit trade closed in the trading system influences,
modifies the market price of securities.

Section 3

Subjective side

§1. Culpability

Culpability is the psychical attitude of a person that committed an action prohibited by

penal law towards the material evidence, immediate pursuit and causal link between them 3 .
In case of capital market manipulation the presence of guilt under the form of intent is
determined to attract the penal character of the action, even if it is about direct or indirect
intention. A similar solution regarding the character on which is realized the framing in the
sphere of penal of the manipulation actions exists also in the legislation of other stated inside
the European Union 4 .
In the version of direct intent, person in cause foresees its action’s result that consists in
issuing false signals or maintaining an artificial price, and even pursues its execution by
committing that action.
In some situations, author of the manipulation has in sight expressly distortion of price or
misleading the market participants. Necessarily, this result will be the only one useful in

1
C. Bulai, A. Filipas, C-tin Mitrache, cited paper, p. 22
2
Ibidem
3
C. Bulai, cited paper, p. 188
4
For example, in the Austrian, Greek, Hungarian, Maltese, Luxemburg ones, etc., according to the “Report
on Administrative Measures and Sanctions as well as the Criminal Sanctions available in Member States
under the Market Abuse Directive”, http://www.cesr-eu.org/index.php?page=groups&mac=0&id=22

358
reaching his goal, the one to obtain material benefits (even under the form of diminishing a
potential or actual loss).

In case of indirect intent, the wrongdoer foresees the result of his conduct on the market
and, although, he doesn’t pursue it, accepts the possibility of its execution.
Indirect intent is characterized by an indifferent attitude of the criminal offence author
towards the result of his action 1 . In most manipulation cases, the wrongdoer doesn’t
necessarily have in sight misleading the other market participants, but obtaining for himself
material benefits, but he accept this probability, as being the only way to reach his goal. In
other words, manipulator is indifferent if other market participants are registering losses
following his actions. Recent doctrine 2 has shown without any doubts that person’s negligence
is not a powerful enough argument for imposing penal sanction against him.
Establishing actual method of culpability with which the market manipulation action was
committed, in order to determine on which side of the border is found, the one of contravention
or the one of penal is a very difficult operation for competent bodies, penal action or trial. The
difficulty comes from very fragile differentiation between the simple culpability and indirect
intent. The principle matter in discussion here is determining if the investigated person foresees
result for her action, but doesn’t accept it, thinking without ground that the result will not be
produced (simple culpability) or foresees result for her action and, although doesn’t pursue it,
accepts the possibility of its execution.
The problem of accepting or not accepting the result of the manipulation action is the
Gordian not of juridical framing the action. Competent bodies should analyze carefully and
with precaution the whole complex of factors and circumstances in which took place the illicit
action of manipulation in order to set up internal resolution of the wrongdoer, meaning
accepting result execution or rejecting this probability.
Intentional element was considered to represent the pivot of the notion of market
manipulation, because only by establishing intention of the manipulator can be determined the
illicit or non-illicit character of a conduct 3 . Examples in this sense were offered like
manipulative practices called “pump and dump” (artificial increase of price through trading,
introduction of orders or false information dissemination) and “abusive squeeze” (exploiting
the dominant position on the demand and supply of a security), inside which executing
operations on the capital market doesn’t have an illicit character. In these situations, the cited
author mentions that the only element determining the illicit character is intention. This
judgment leads to the conclusion that “there is no involuntary manipulation, intention of
affecting the course (of securities- our note) being intrinsic linked with the notion of
manipulation” 4 .
This interpretation is opposite, in our opinion, to the European legislator’s philosophy in
the matter of market abuse and might lead to the incapacity to adopt fast administrative
measures, against certain actions of market manipulation, when it wouldn’t be possible proving
the wrongdoer’s intention by interpretation of his exterior manifestations. In case of “pump and
dump” method, for example, not proving the intention to manipulate draws the conduct’s illicit

1
Ibidem, p. 161
2
J. van Lancker, Listed in Belgium 2004: A Legal Guide for Euronext Companies, Intersentia Publishing,
2004, p. 199
3
S. Loyrette, cited paper, p. 277
4
Ibidem, p. 278

359
character, but proving the false character of spread information or proving the artificial nature
of trades by which it was increased artificially the course of the manipulated security. On the
other hand, in defining the institution of capital market manipulation the intentional element
couldn’t fit in, although, it is true, plays an important role in establishing the character of
operations enrolled on the capital market susceptible of entering the stock exchange illicit
sphere.

§2. Motive and purpose

Motive of the criminal offence is represented by “internal impulse of the wrongdoer when
committing a criminal offence, meaning that desire, tendency, passion that feeling which
makes to arise in his mind the idea of committing a certain activity oriented consciously in a
certain direction” 1 .
Motive of action can consist in hate, jealousy, greed, revenge, envy, material interest etc.
Absence of a motive of the action is “an indication of psychical abnormality of the
wrongdoer” 2 .
In case capital market manipulation, motive is represented by motivation that animates
that one trading, transmitting orders or disseminating information by an illegal and illegitimate
method. Most probable motive in case of market manipulation is greed and material interest.
Purpose of a criminal offence is “pursued finalization by committing the action which is
the material evidence of the criminal offence, proposed objective and represented by the
wrongdoer as result of his action or inaction” 3 .
In case of capital market manipulation, is not necessary for completing the subjective side
the existence of a qualified intention by the presence of a certain purpose. Of course, the
purpose of the manipulation action is obtaining material benefits, but not foreseeing this
finalization by the manipulator doesn’t eliminate the action’s penal character. Determining the
purpose pursued by the author of the manipulation action has special importance in
individualization of penal law sanctions” 4 .

Section 4

Punishment for the criminal offence of capital market manipulation

1
C. Bulai, cited paper, p. 192
2
C. Bulai, A. Filipas, C-tin Mitrache, cited paper, p. 27
3
C. Bulai, cited paper, p. 193
4
C. Bulai, A. Filipas, C-tin Mitrache, cited paper, p. 28

360
 The penal law norm that established punishments which can be applied in case of
committing capital market manipulation actions is included in article 279, paragraph (1) from
the Law of capital market no. 297/2004.
This criminal offence is punishable with incarceration from 6 months to 5 years or with a
fine, in the limits foreseen by article 276, line c) from Law no. 297/2004, meaning between the
half and total value of the trade realized with committing the manipulation action.
Penal trial court can apply also the incidental punishment of temporary interdiction to
develop activities and services which fall under the incidence of the capital market law, like
financial investment services, investment consultancy, investment administration etc.
Pecuniary punishments and incidental punishment can be applied to natural and juridical
persons.
In case of applying the punishment with a penal fine it needs to be remembered that
limitations on this sanction foreseen by the Law of capital market, meaning “between the half
and total value of the trade” can be situated above the general maximum stipulated in article
53, point 1, line c) Penal Code for the natural person and article 53, paragraph (2) Penal Code
for the juridical person. At present time, according to norms in the Penal Code in force, the
maximum limit of the penal fine for the natural person is 50.000 lei, and for the juridical
person is of 2.000.000 lei. In case the half of value of trade realized by committing the
manipulation action is situated above the general maximum of the fine, the trial court will be in
the situation of applying a punishment with fine in a larger quantum than the general
maximum. This solution will not represent a violation of dispositions of article 63, paragraph
(4) from Penal Code, because these have into consideration only the hypothesis of applying
serious circumstances and not the existence of a more sever disposition in a special law. This
character of special norm, derogatory from the common law of dispositions in article 279,
paragraph (1) from Law no, 297/2004 give the right to the penal trial court to apply, if finding
guilty the persons accused of market manipulation, a punishment with fine in a quantum
superior to the general maximum.
It needs to be shown also that, considering punishment with a fine, and punishment with
incarceration as having the status of principal punishments, applying the principle non bis in
idem stops the penal court to rule a punishment that privative of freedom and a punishment
with a fine.
The attempt of criminal offence of manipulation is not punished by the penal law, in the
virtue of dispositions of article 21, paragraph (2) Penal Code: “The attempt is punished only
when the law expressly foresees necessary”.
There is no serious form of the criminal offence of capital market manipulation foreseen
in the legal norms.

361
  

Chapter X 

Analysis of famous manipulation cases

Methods of market manipulation have evolved in time, a natural thing if we remember

that at the beginning of the XX century this action was not incriminated in the juridical norms
of the written right. As the stock exchange life has evolved, financial markets have developed,
sophisticated securities have appeared and laws have started more and more to limit the
possibilities of manifestation of the market participants in order to encumber the development
of manipulative activities that were more complex and hard to discover.
Great manipulations appeared in circumstances and proper moments. A corner, for
example, is hard to conceive nowadays in case of titles of a large size company with a
substantial stock exchange capitalization. There are requirements of reporting holdings which
contain enhanced exigencies, there are minimum free float conditions for maintaining at
trading an issuer, finally there are or should be supervision mechanisms of developed trading
that encumber creating “systemic risks” for maintaining an order market.
In this chapter there are presented a few market manipulation cases, not necessarily
capital markets that have become famous and generated significant lessons for previous eras,
sometimes they even situated on the causal chain to the origin of new juridical norms, destined
to cover the regulation void that had made possible those manipulations.

Section 1

Tulip Mania

In 1593, Flemish botanist Carol Clusius brought from Turkey to the Low Countries the
first bulbs of tulip. Tulip was very spread in Iran, Turkey and Afghanistan, being extremely
appreciated at the court of the ottoman sultan Soliman the Magnificent (1520-1566). Peoples
interest for this flower was very big from the start. Clusius noted that, in 1598, thieves stole in
one night 100 bulbs. In the following years, royal houses were fighting for more special kinds,
obtaining them becoming a large profit industry. Gradually, tulip had requests also from other
European countries.
The madness begun practically when the tulip was infested with a virus, called by
botanists “mosaic”, for the multicolor effect it had on the petals, obtaining special, unique
“kind”. In short time, all of Holland was seized with the frenzy of obtaining “unique” tulip
bulbs, these starting to be traded at the Amsterdam Stock Exchange, at higher and higher

362
prices. In modern terms, 1000 dollars invested in the bulb business would bring a profit of
2000 dollars a month 1 .
The demand for certain types of tulips increased very much. Because florists couldn’t
honor orders, a few entrepreneurs introduced futures contracts in which they would buy in
advance the tulip production. At that moment, the price of bulbs started increasing
exponentially. In the next 2 years, the “Gouda” kind, the most common, was worth as much as
the weekly salary of the smallest handicraftsman (3 florins); there were kinds were a bulb was
worth as much as a house, and the rarest kind, Semper Augustus, could be bough with an
amount equivalent today of over 500.000 dollars. Part of the speculators realized that it was
going too far and started to mark their profit. Investors started to ascertain that there wasn’t the
same increase of price as before and panic intervened 2 .
From the point of view of market manipulation uncontrolled increase of price of the tulip
bulbs was generated by the practice called in modern terms “pump and dump”.
It was said that invention of futures contracts on tulip bulbs has revolutionized the
financial and commodities markets of the world: “without the Dutch pioneering experimented
in futures contracts, our world would look different” 3 .

Section 2

South See Bubble

South Sea Trading Company was founded in 1711 by the British Government, by
decision of the chief of treasury, the finance minister, Lord Robert Harley. Even upon
establishing the company received the exclusive right to make commerce with Spanish
colonies from South America. Rights to make commerce in that area included a necessary
condition: closing favorably for the British government the succession war to the throne of
Spain 4 . This was, carried from 1701 to 1714, which opposed France an alliance formed mainly
between England and The Holy German Empire, had as objective encumbering by allies the
succession of Philippe, duke of Anjou, nephew of Louie the XIV to the throne of Spain,
situation which would have lead to a person union between France and Spain and would have
broken the power balance in Europe. The succession war for the throne of Spain was over by
the Utrecht treaty (1713) and Rastatt (1714). The main consequence of these peace treaties was
accepting Philippe de Anjou, from the Bourbon family, as king of Spain by the allies, which
anyway didn’t have a counter candidate to would invoke a certain legitimacy, in return of his
renunciation, became Filip the V of Spain, to the right of succession on the throne of France.
Utrecht treaty is considered by historians as the moment marking the end of the French
hegemony in Europe and the beginning of British influence on the continental policy.
South Sea Trading Company attracted investors from the start. Government proposed to
the holders of governmental bonds on short term to exchange them with South Sea stocks.

1
http://htdig.informatia.ro/adevarulonline/afisez.php?sid=340045&date=2008-02-03&afisez=local
2
http://www.bloombiz.ro/Print/baloane-de-sapun-la-bursa
3
Ch. C. Day Is there a tulip in your future. Ruminations on Tulip Mania and iNovative Dutch futures
market, Journal des Economistes et des Etudes Humaines, vol. 14, no.2, December 2004, p. 152
4
http://en.wikipedia.org/wiki/The_South_Sea_Company

363
Thereby, holders of state bonds worth approximately 10 million pounds were persuaded to
become shareholders of this company 1 .
By the Utrecht treaty, South Sea received the right to send a commercial ship a year to
South America (accompanied by to more ships), and the right to supply with slaves from
Africa the Spanish colonies in South America. The first trip of the commercial ship couldn’t be
done, but, according to the treaty, until 1717, and the following year, 1718, relations with
Spain deteriorated. Unfortunately, for investors, they couldn’t understand clearly that it was
about only one commercial ship a year, according to the Utrecht treaty, believing more rumors
which affirmed that this company has the unlimited right to use Spanish harbors from South
America 2 .
Things evolved and the company closed in 1717 an agreement with the government,
taking over state bonds worth 2 million pounds and converting it in stocks. In 1719 it was
developed another similar operation, but enhanced, converting state bonds worth 31 million
pounds. South Sea, becoming the Government’s creditor, promised better interest conditions
apart from the initial ones. Apparently, everybody would win. The Government (state) had to
pay a smaller interest, owners (shareholders) of South Sea has guaranteed a sure gain, and
holders of state bonds converted in South Sea titles had the perspective of spectacular gains
following the increase of market value of stocks 3 . Taking over the public debt realized at the
end of 1719 after a competition with Bank of England, rumors existing about officials being
bribed by the South Sea 4 .
News about application of this plan determined the increase of South Sea stock value
from 120 pounds in January 1720 to 175 in February, 330 in March, the month of accepting by
the Parliament the cession plan of public debt and to 550 pounds at the end of May 5 . In that
“bubble” period, South Sea stocks were sold and even offered for free to politicians, influential
persons from the court, by the company’s managers, in order to obtain political support. The
name of these elite shareholders was then made public in order to increase credibility to the
investors.

In June 1720 price of stocks reaches 895 pounds/stock (it was about a forward price, no
transactions were carried out at that moment, books were closed). In June 1720 the Parliament
votes the Bubble Act, a low that prohibits operation of commercial associations without an
authorization from the state authorities 6 . This normative act was in favor of South Sea, because
this company was already authorized. Also in June, starts to manifest a pressure upon sale,
because of the intent of investors to mark profit, but managers of the company intervene on the
market and stop decline at a course threshold of 750 pounds on a stock 7 . Managers of the
company developed in that time an intense activity of encouraging investors to purchase South
Sea titles 8 . There were rumors about the imminent peace closure with Spain, earnings made by
the unlimited access in Spanish harbors in South America (which it was false, as we have see,
according to the Utrecht Treaty).

1
Ibidem
2
http://www.historyhouse.com/in_history/south_sea/
3
http://en.wikipedia.org/wiki/The_South_Sea_Company
4
Ibidem
5
Ibidem
6
http://en.wikipedia.org/wiki/Bubble _Act
7
http://en.wikipedia.org/wiki/The_South_Sea_Company
8
http://www.historyhouse.com/in_history/south_sea

364
 At the beginning of August is it exceeded the threshold of 1000 pounds on a stock. That
month it was the first due date of the public debt, meaning of the bonds converted in stocks.
South Sea has been giving loans to investors, part of the support plan of sustaining course of
titles, in order to purchase company’s stocks. In August managers of South Sea aware that the
market value was not reflecting the company’s real value, started to sell their stocks. Rumors
started to appear about these transactions and panic started among the other shareholders 1 .
Those who have borrowed money to purchase South Sea titles suddenly sold everything to
cover their debts. At the end of September 1720 the value of South Sea stock reaches 150
pounds 2 . Isaac Newton, after obtaining a profit of 100% at the beginning of 1720 from trading
South Sea stocks, continued to purchase and lost then almost all the money he invested 3 .

The negative effects extended on to banks, while many investors, among which there
were also members of the aristocracy were ruined. In December 1720 the Parliament was
summoned and started an investigation, finalized in 1721 with the conclusion that there have
been actions of fraud committed by the company’s managers 4 .
Also in the case of the South Sea Company it was carried out a manipulative practice of
“pump and dump”, combined of course, with trading based on privilege information.
Regarding that there were involved information apparently true at the moment of dissemination
by the company’s managers it might be considered also a manipulation avant la letter by the
scalping method, because they owned South Sea stocks, before executing investment
recommendations.

Section 3

The savage American capitalism corners

§1. The famous corners of Constant “Commodore” Vanderbilt with Harlem

Railways titles

Cornelius Vanderbilt 5 (1794-1877) was one of the most significant American business
people of the XIX century. Descendent of a Dutch immigrant, who came to America around
1650, developed an impressive business in the field of naval transportation that set his name of
Commodore 6 .
In 1857 became chairman, and in 1863 president of the railway road New York &
Harlem company, operating a railway track between New York and Chatham Four Corners 7 .

1
http://www.investopedia.com/features/craches/crashes3/asp
2
http://en.wikipedia.org/wiki/The_South_Sea_Company
3
D. Stabile, Forerunners Of Modern Financial Economics, Edward Elgar Publishing, 2005, p. 21
4
http://en.wikipedia.org/wiki/The_South_Sea_Company
5
http://www.1911encyclopedia.org/Cornelius_Vanderbilt
6
Term derived from “commander”- used in the British navy to appoint the leader of a war ships
detachment, http://www.1911encyclopedia.org/Commodore
7
http://www.1911encyclopedia.org/Cornelius_Vanderbilt

365
 At the beginning of 1863, Vanderbilt purchased Harlem Railway stocks at a price of 8-9
USD per stock. Extension plans of the company lead to an increase of course up to 50
USD/stock. In April 1863 the city hall of New York approved to Harlem House Company, lead
now by Vanderbilt, the built of a street line of transportation on the entire length of Broadway,
and as result, the price “jumps” to 75 USD/stock. Many city hall counselors, among which also
a manager at Railway Harlem, Daniel Drew, closed a deal, based on the cancellation of decree
regarding the built of the city line of transportation and determining the price of stocks to
decrease. These conspirators start carrying out short sale operations of Harlem stocks.
Vanderbilt discovers the conspirator’s intentions and secretly purchases all the company’s
stock on sale. To close their positions, the conspirators have to buy stocks from Vanderbilt, on
his conditions, meaning at a huge price of 179 USD/stock 1 .
The second corner with Harlem Railway stocks took place in the following year.
Vanderbilt, feeling betrayed by the city counselors in New York, decide to obtain directly from
the legislator of the State of New York the extension of the railway road starting from New
York to Albany. Daniel Drew found out about the intention of Vanderbilt and tried to take
revenge. Along with other close persons and unadvised members of parliament of the state of
New York started spreading rumors about the legislative approval of the extension of the
railway. Upon these rumors the price of Harlem stocks increased. The, Drew and the persons
acting with him started to carry out short sales and to undertake measures for the law to be
rejected in the case of the railway extension. In two days the price of stocks decreased from
150 USD/stock to 100 USD/stock 2 . Vanderbilt and his allies purchased at that moment all they
could on the market, in fact they purchased from the short sellers many more stocks then there
existed in reality. At the end of April 1864 Vanderbilt and his associates owned 137.000
stocks, while the total number of Harlem Company’s stocks was of 110.000 stocks 3 . In these
conditions, Vanderbilt forced the short sellers to purchase Harlem titles at a price of 285
USD/stock, which bankrupted many of these, Drew loosing over 500.000 USD, a huge amount
for that period of time. Vanderbilt was so angry at the beginning of the cornering against the
group formed by Drew that he intended not to sell to them Harlem stocks to close their
positions at a smaller price than 1000 USD/stock. At this level, although, most brokerage
houses in New York would have been bankrupt 4 .
In March 1868 Vanderbilt tried a corner with Erie Railroad titles against Daniel Drew
and Jay Gould, but failed because Drew has learned from the Harlem Railway corners to
prevent these operations and purchased ahead of time convertible bonds which he threw at the
right moment in the market, causing a course decrease. A corner with Erie Railroad stocks
succeeded in November 1868, being completed by Jay Gould against Daniel Drew. Although
those two have been acting together in order to obtain profit from short sales to lower the price
of Erie stocks, creating a “bear market”, Gould changed his strategy on the course of the
operation and carried out a corner by purchasing the entire free float and forcing Drew to
purchase at a price increased with 50% in two days to close his short positions 5 .

1
F. Allen, L. Litov, J.P. Mei, cited paper, Large investors…, p. 675
2
Ibidem
3
Ibidem, p. 650
4
Ibidem, p. 675
5
Ibidem, p. 31

366
 §2. Northern Pacific Corner

In the spring of 1901, J.P. Morgan and a group of investors lead by Edward Harriman
fought to take over the control of Northern Pacific Railroad Company, which would have lead
to the control over the railway traffic to the coast of the Pacific. Harriman purchased stocks of
this company worth 40 million USD. Alarmed, J.P. Morgan quickly bought the rest of the
stocks to encumber Harriman’s group to take over the control. Following Morgan’s operations,
the price increased from 114 USD/stock to 147 USD/stock in five days. Seeing this intense
activity of trading many investors started to carry out short sales with Northern Pacific titles,
counting on lowering the price in the next period of time.
On May 9th, short sellers discovered that they are the victims of a non intentional corner,
all the Northern Pacific stocks being in the possession of J.P. Morgan and Harriman group,
neither of these being willing to sell, but only in extremely harsh conditions. On May 9th price
increased from 170 USD/stock up to 1000USD/stock, trading volume being that day of
3.336.000 stocks, level untouched since in 1925. J.P. Morgan and Harriman agreed the next
day to trade with most of the short sellers at a price of 150 USD/stock 1 .

Section 4

The great manipulations from the downs of the XXI century Enron,
World Com

§1. ENRON Case

1.1 Capital market manipulation

Enron was founded in 1931 under the name of Northern Natural Gas Company. In was
reorganized in 1979 as a leading subsidiary of a company called InterNorth. In 1985 purchased
a small size company Houston Natural Gas, an on the course of developing the acquisition
change the name in Enron.
Initially, Enron had as activity transmitting and distributing energy and gas in the Unites
States and developing, building and operating power plants, but also gas and water pipes.
Enron held a wide network of gas pipes all over the United States, operation through
companies like Northern Natural Gas, Florida Gas Transmission, Transwestern Pipeline and
having a partnership with Northern Border Pipeline in Canada. In 1998 entered in the water
distribution sector, purchasing Azurix Corporation, but the investment wasn’t profitable, Enron
announcing in June 2001 the intention of selling these actives 2 .

Enron played an essential role in commodities trades in the energy field. In 1989 started
to trade natural gas, becoming in the following years the largest dealer with natural gases in

1
Ibidem, p. 33
2
http://en.wikipedia.org/wiki/Enron

367
North America 1 . The company became the promoter of creating markets for new commodities
and securities, like bandwidth, having a special importance in data transmission, especially in
the internet field 2 (from a technical point of view, it means the distance between two
frequencies). Enron created also exotic instruments, such as derivatives in the weather status 3 .
In November 2005 was launched the trading system by internet Enron Online, the first
system that allows buyers and sellers to trade commodities globally. Users of this system could
close transactions only with Enron. In 1999, the system was perfected, market participants
being able to visualize on their computer screens the market prices for traded commodities.
The main traded commodities were natural gas and electricity, but there were sold also
derivatives on credit, paper, and steel or television advertising space. The Enron Online system
was used practically by any company in the energy field in the United States and by this
system Enron reached quarterly transactions worth 27 billion dollars 4 .
In 2001 signals started showing regarding the pecuniary financial situation of the
company. In August 2001, Jeffrey Skilling, CEO of Enron resigns from his position, was being
replaced by Kenneth Lay, former CEO of Houston Natural Gas and Enron. In October 2001 the
company reported a quarterly loss of 618 million USD, the first one in four years 5 . CFO
Andrew Fastow was replaced, and the Securities Exchange Commission started an
investigation regarding investments conducted under his management 6 .

A year before, in August 2000 Enron stock reached its maximum in all Enron’s history
of 90 USD/stock. Managers, members of the company’s board showed in that time that
potential of Enron Stocks is reaching the price of 130-140 USD/stock. In this time, these
executives were beginning the operations of “unloading” Enron stocks they had, selling
important packages because of privilege information they had which indicated the company’s
financial fragility 7 .
On the course of the year 2001 the course of Enron Stocks fluctuated, having a
descendent tendency. On 15 August 2001, the price of Enron stocks dropped to 42
dollars/stock 8 . In September 2001 although, CEO Kenneth Lay was telling Enron employees
on an internet forum that Enron stocks are an “incredible business” at those prices. Prosecutors
established that Lay purchased during that time Enron stocks worth 4 million USD, reselling
with approximately 24 millions 9 . Investors continued to purchase Enron stocks, counting on
Lay’s statements, but in October titles had a dramatic fall at 15 USD/stock.
Situation rapidly degenerated. On 9 November 2001, Enron admitted that during the
period 1997-2001 he reported untrue profits, higher with 600 million USD than the ones
actually registered 10 . On 3 December 2001 Enron laid down in court a demand regarding

1
C. Nicolae, Financiar Newspaper, 26.02.2004,
http://www.zf.ro/articol_39391/eu_nu_m_am_nascut_ca_sa_mi_pun_manecute.html
2
http://www.wired.com/techbiz/media/news/2001/11/48732
3
http://en.wikipedia.org/wiki/Enron
4
Ibidem
5
http://www.cbc.ca/money/story/2006/05/25/enron-bkgd.html
6
Ibidem
7
http://en.wikipedia.org/wiki/Enron
8
Ibidem
9
http://www.washingtonpost.com/wp-dyn/articles/A36129-2004Jul18.html
10
http://news.bbc.co.uk/2/hi/business/1645316.stm

368
opening the bankruptcy procedure for debts of 16 billion USD 1 . Enron Online, the Enron
internet division has a sudden fall. After in the two years time prior to bankruptcy this division
had registered incomes of 2, 5 billion dollars and has on line transactions of 880 billion dollars,
the end of 2001 was catastrophically 2 .

Because it is not the object of this paper we will not present all the aspect of the Enron
file, in which it was implicated the famous audit firm Arthur Anderesen, member of the select
group of financial auditing firms called “big 5”, that bankrupt because of the Enron crisis.
From the point of view of the capital manipulation, in the Enron case we dealt with an
application of the classic method of “pump and dump”. Of course it was a complex fraud,
which involved also making false financial statements, and insider dealing. Equally, it can be
affirmed that it was also about market manipulation actions such as disseminating false
information, to specify that, in certain situation, persons that disseminated these information
also have taken advantage from the effect created on the market, which determines including
these actions in the category of manipulations using fictitious methods.
The operation of concealing the real financial situation of the Enron Company has in
sight capital market manipulation, by artificially increasing price of stocks. Many members of
the executive management of Enron obtained substantial profits from trading company’s stocks
in its years of glory. Dissemination to the public of false financial information, which didn’t
represent the correct financial position of the company, was a method of applying the “pump
and dump” procedure. As example, it needs to be mentioned that Securities Exchange
Commission discovered that general manager Kenneth Lay obtained from 1998 to 2001 profits
of 217 million USD from transactions with Enron stocks 3 .
From the actions started by the Securities Exchange Commission against the principal
managers of Enron resulted that these “engaged in a fraudulent conduct with the purpose of
generating profits to reach the target in the annual budgets by artificially increasing the
accounting value of certain actives” 4 . This way, there were manipulated the company’s
financial results and artificially increased the stocks value, including in the reports sent to the
Securities Exchange Commission, according to the law 5 .
In this illicit procedure, the Enron leaders were supported by a series of banks, financial
institutions, audit and lawyers, from 2001 starting an interminable series of litigations initiated
by creditors and former shareholders against them. For example, Citigroup, accused by many
investors in Enron titles (stocks and bonds) that has been supporting this company in
concealing the actual financial results, closed a deal with them to solution one of the most
significant litigations “class action” in history, agreeing to pay approximately 2 billion dollars 6 .
The district court in Houston Texas ruled harsh punishments against the main actors of
the Enron business. Jeffrey Skilling, company’s CEO in 2001, considered to be the main leader
of this great manipulation was sentenced on 23 October 2006 at 24 years of prison and

1
http://news.bbc.co.uk/2/hi/business/1688550.stm
2
http://www.zf.ro/articol_380/recesiunea_pune_la_pamant_cea_mai_mare_bursa_online.html
3
http://www.washingtonpost.com/wp-dyn/articles/A36129-2004Jul18.html
4
http://www.sec.gov/litigation/complaints/comp18776.pdf
5
Ibidem
6
http://money.cnn.com/2005/06/10/news/fortune500/citigroup_enron/index.htm

369
compensation payments of 50 million dollars 1 to the prejudiced persons. Kenneth Lay, former
CEO from the time of declaring bankruptcy died in July 2006, before receiving his sentence 2 .
Andrew Fastow, the former financial director received 6 years, in consideration of the fact that
he cooperated with the justice 3 .

1.2 Manipulation of the energy market by Enron

From the name Enron is linked also the largest manipulation of the energy market.
The authority of supervision and control of the market of energy in United States, Federal
Energy Regulatory Commission opened in 2003 an investigation regarding the Enron company
activity on the market of energy starting with January 1997 4 . Accusations brought to Enron
Company were regarding violation of regulations allowing it to sell energy at a market price.
Starting with the 80’s the authority of market energy decided to allow companies to sell energy
at a market price, with the condition of not exerting in these operations a market abuse and not
to manifest an anti competitive conduct 5 .
By a decision pronounced on 21 June 2007, Federal Energy Regulatory Commission
established that Enron abused from the market position and obtained unjust profits worth
1.617.454.868, 50 USD starting with 17 January 1997, amount which was paid back as a
sanction 6 . This sanction intervened following the retroactive revocation (possibility present in
the regulations of the Federal Energy Regulatory Commission) of the authorization to sell
energy at a market price.
The solution adopted by the Federal Energy Regulatory Commission based on the
conclusion that Enron manipulated the energy market to increase artificially the market price,
obtaining this way spectacular profits but illicit.
Investigation began on 25 June 2003, by issuing two decrees by the Federal Energy
Regulatory Commission in which solicited to several participants on the energy market to
transmit information regarding an eventual implication individually or as a group in actions of
violating of price lists set by operators in the energy field in California- California Independent
System Operator and California Power Exchange.
On the course of the investigation the Federal Energy Regulatory Commission
established that Enron engaged in different illicit manipulative operations on the energy market
in California from 1998-2001. This way, the first violation of legal dispositions by Enron was
not making mandatory reports regarding the held market quota. This market quota extremely
increased, obtained by alliances and cartels, allowed the company in question to obtain a
control position on the offer of energy (mainly, the alliance closed with El Paso Electric
Company lead to obtaining the control on other facilities in the energy field).

http://money.cnn.com/2006/10/23/news/newsmakers/skilling_sentence/index.htm?postversion=200610240
9
2
http://www.wall-street.ro/articol/International/16312/Fostul-sef-al-Enron-Kenneth-Lay-a-decedat.html
3
Ibidem.
4
http://www.ferc.gov/industries/electric/indus-act/wec/gaming-initial-decision.pdf
5
http://www.ferc.gov/EventCalendar/Files/20040609074313-bare_essentials.pdf
6
http://www.ferc.gov/industries/electric/indus-act/wec/gaming-initial-decision.pdf

370
 Evidences regarding manipulation of the energy market on which the decision of the
Federal Energy Regulatory Commission grounded were registrations of traders and
commodities of the Enron managers that admitted their culpability.
The main method of manipulation was “wash trades”, prearranged transactions between
the same parties, which didn’t lead to the real change of ownership, carried out only with the
purpose of artificially increasing the price. Total value of “wash trades” transactions was
479.766.486 USD, including transactions of 367.495.070 USD carried out with affiliated
persons 1 . Another manipulative scheme was sale operations of energy at price lists practiced
for commercial associations of entities which didn’t have this quality.
In certain periods Enron applied the cornering manipulative practice, abusing of his
dominant position on the market and closing even certain power plants in the periods of crises
in order to create a disproportion between demand and offer 2 . This manipulation practice based
on the agreements closed with the power producers or even by obtaining control on some
producers. In the situation in which Enron would have completed its reporting obligations to
the market of energy authority and would have revealed the held market quota, it would have
entered under the incidence of prohibiting dispositions regarding the sale of energy at a market
price (manipulated price as we have seen), being obligated to respect regulated price lists by
the Federal Energy Regulatory Commission. This was the main reason for which the Federal
Energy Regulatory Commission decided with a retroactive character the annulment of the
authorization to sell energy on market price and the obligation to pay extremely high penalties.

§2. World Com case

The World Com case which took place approximately in the same time with Enron had in
sight committing a fraud with similar features, meaning carrying out untrue accounts reports in
order to increase artificially the market price of the World Com stock.
From the point of view of the manipulation technique used, the activity of culpable
persons fit also in the method of “pump and dump”, by disseminating information to the holder
of securities which has as result misleading market participants and artificially increasing the
price of those securities.
World Com, company which activated in the field of telecommunication, was founded in
1983 under the name of Long Distance Discount Services, Inc. (LDDS). In 1985 Bernard
Ebbers became the general manager of the company (CEO), and in 1989 the company was
listed on the capital market following the merger with Advantage Companies Inc. On 10
November 1997 World Com and MCI Communications announced their merger, creating a
new company MCI World Com. It was the largest merger in the history, the new founded
company being worth 37 billion USD. In 1999 MCI World Com and Sprint Corporation
announced their intention to merge, the company’s worth after the merger being 129 billion
USD, becoming the largest merger in history. With all that, because of the position expressed
by the Department of Justice and the European Union, fearing that a monopole could set on the
market of telecommunications, the merger failed3 .

1
Ibidem
2
Ibidem
3
http://en.wikipedia.org/wiki/MCI_Inc

371
 The market of telecommunication entered in a period of decline starting with 1999.
World Com managers, lead by Ebbers, owning important packages of company’s stocks started
to feel in their own patrimony assets the tendency of increase of the course of World Com
titles. Ebbers confronted with the risk of margin calls for long positions held on World Com
titles, on the course of 2001 requesting the administrative board to approve corporate loans of
approximately 400 million USD. This strategy failed and in April 2002, Ebbers resigned 1 .

The World Com case knew a rapid evolution. On 25 June 2002, the company transmitted
a report according to which it intents to restore financial situations for all the four quarters of
2001 and for the first quarter of 2002. The next day, the Securities Exchange Commission laid
down a complaint against the company to the District Court of New York for violation of
dispositions Section 17 (a) from Securities Act 1933 and Sections 13 (b) 2 (A) and 13 (b) 2 (B)
from Securities Exchange Act 1934. Later on, the complaint was supplemented with
allegations of misleading investors by false financial statements carried out from 1999-2001.
The Securities Exchange Commission established that World Com reported a fictitious profit
of approximately 9 billion dollars 2 . From the actual data resulted that from 2001-2002 World
Com company actually registered losses and not profits 3 .
Decrease of value of World Com stocks was continuous starting with 1999, with all the
manipulation actions of the company’s managers. In June 1999 it was registered the price
record of 64 USD/stock, at the beginning of 2002 World Com titles were traded at 15
USD/stock, following on the course of that year the stock had a permanent devaluation 4 . At the
end of June 2002, after announcing the report of fictitious profits, the course decreased with 92,
4% in one stock exchange session, coming to worth, on 1 July 2002, 83 cents/stock 5 .
World Com closed an agreement with the Securities Exchange Commission, agreeing to
pay a civil amount of 1.5 billion dollars6 .
Later on, JP Morgan Bank had to pay an amount of 2 billion USD towards the investor
that purchased World Com stocks subscribed by the bank and resold on the market to these
investors, without informing them regarding the false data made public 7 .

Also, Citigroup, another important subscriber of World Com titles agreed to pay investors
that purchased these stocks from April 1999 to June 2001, 2, 65 billion USD 8 . In total, 17
former subscribers of World Com titles emissions reached agreements with investors 9 , paying
substantial amounts of money to them for suffered prejudices following the financial fraud
resulted in market manipulation. On 13 July 2005, Ebbers was sentenced to 25 years in
prison 10 .

1
Ibidem
2
http://www.sec.gov/litigation/litreleases/lr17829.htm
3
http://www.forbes.com/home/2002/06/26/0626topnews.html
4
http://www.forbes.com/home/2002/06/26/0626topnews.html
5
http://news.com/2100-1033-940845.html
6
http://www.sec.gov/litigation/litreleases/lr18147.htm
7
http://www.bloomberg.com/apps/news?pid=10000103&sid=auybDoZIEQTg&refer=news_index
8
http://www.citigroup.com/citigroup/press/2004/040510a.htm
9
http://en.wikipedia.org/wiki/MCI_Inc
10
Ibidem

372
 Following the cases of Enron and World Com, the American Congress adopted Sarbanes
Oxley Act in 2002, normative act extremely explicit regarding the conduct of auditors and
management of the listed companies 1 .

1
To see Chapter II, section 3, §4, p, 57-59

373
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