Stock Market Manipulation in Turkey and Legal Remedies Available to Aggrieved Investors
Author: Servet Cetin
Practices: Litigation, Capital Markets
The Crime of Manipulation in Capital Markets in Turkey is regulated under Article 107 of Law No. 6362. According to this provision, those who buy or sell, place, cancel, or modify orders, or perform account transactions with the intent to create false or misleading impressions regarding the prices, price changes, supply, or demand of capital market instruments shall be punished with imprisonment from three to five years and a judicial fine ranging from five thousand to ten thousand days. However, the amount of the judicial fine imposed for this offense cannot be less than the benefit obtained from the commission of the crime.
In Turkey, manipulators typically operate in groups of five to ten individuals over a certain period. Their aim is to act in concert on a particular stock to artificially and gradually increase its price, create the impression of an active market, and once a certain price increase or a certain influx of new investors has been achieved and volume increased, they sell the shares they purchased at low prices to new investors, thereby gaining unfair profits. Consequently, the artificially inflated price causes losses to good-faith investors.
Although there are various types of manipulation, this article focuses on the most commonly encountered types of manipulation in Turkey and those practiced by the capital market institution.
A. Criteria of the Capital Markets Board and the Court of Cassation regarding the existence of manipulation
1- The presence of abnormal price and volume fluctuations in the market of the stock under suspicion, diverging from the general trend of the BIST index during the review period, constitutes a criterion in the assessment of potential market manipulation.
...It was observed that the Weighted Average Price of Company A's shares generally moved in parallel with the index; however, on April 11, 2019, the Weighted Average Price, which stood at 0.75 TL, increased by 69.33% to reach 1.27 TL as of May 3, 2019, while during the same period, the index declined by 2.22%…
"...During the period in question, there was also an increase in the trading volume of the stock under suspicion, with the average daily number of transactions rising from 104,042 in the previous period to 989,110 during the relevant period—approximately nine times higher."
…while an average of 98 investors conducted transactions in Company A shares per day during the period from April 1, 2019, to April 11, 2019, an average of 655 investors conducted transactions during the review period..
2- The execution of volume-increasing transactions among manipulators forming a group during the review period, which do not result in an actual change of ownership, constitutes a criterion for establishing manipulation.
...During the review period, group member S1 conducted purchase transactions totaling 21,774,017 units, representing 19.08% of total purchases, and an equal amount of sales; S2 carried out 14,456,939 units of purchases (12.67%) and 14,500,686 units of sales (12.70%); S3 executed purchases of 8,423,336 units (7.38%) and sales of 8,416,249 units (7.37%); S4 made purchases of 3,909,944 units (3.43%) and an equal amount of sales; and S5 performed purchases of 2,586,438 units (2.27%) along with an equal amount of sales. The purchase transactions from group accounts accounted for 44.87% of total purchases, while sales from these accounts represented 44.76% of total sales."
“…During the review period, the volume of self-trading and mutual transactions conducted by the group of investors consisting of the defendants amounted to 12,732,349 units, representing 41.17% of the total trading volume on the Istanbul Stock Exchange (IMKB)..."
"Although the volume and quantity of transactions conducted individually by the defendants were at low percentages, it was determined that the total purchase and sale volume of the five-person investor group composed of all the defendants accounted for approximately 63% of the total market purchase and sale volume. Therefore, it was concluded that the group of defendants exercised market dominance and that there was a causal link between the unusual price fluctuations in the stock market and the transactions carried out by the investor group."
3- The execution of transactions among manipulators forming a group during the review period that artificially increase or decrease the stock price constitutes a criterion for market manipulation.
"...During the review period, the total number of transactions executed at the upper price level was 6,576,238 units, while the number of price-increasing purchase transactions carried out by the group members was 2,825,033 units, accounting for 42.95% of all price-increasing transactions. On June 29, 2011, August 1, 2011, and September 7, 2011, the price-increasing transactions conducted by the group members reached rates of 91.05%, 99.92%, and 96.45%, respectively.”
"...With 24,342,399 units, they executed 60.90% of the price-increasing purchase transactions, making them the largest contributors to price-increasing trades, and with 685 contracts, they accounted for 14.24% of the price-increasing contracts, making them the largest contributors to price-increasing contracts…"
4- The simultaneous placement of opposite-direction orders by manipulators forming a group to create the impression of an active market and/or the cancellation of such orders for the purpose of price manipulation also constitutes a criterion for manipulation.
"...There were 1,119 instances of orders transmitted from group accounts at the same price level that changed direction within a one-minute period. These orders facilitated the transfer of shares between the investor group’s accounts, creating the impression of an active market. However, the transactions resulting from these orders did not lead to an actual change in ownership, as the shares involved remained within the accounts of the investor group.”
"...Within one-minute periods, a total of 73 instances of orders changing direction were recorded, with 1,699 orders placed in total, of which 33.43% were canceled. Most of the canceled orders occurred during periods when the price was declining.”
"...Energy transmitted orders at a level sufficient to establish market dominance. During the review period in the stock market, 66.70% of passive buy orders placed at the best buy price level and approximately 26.17% of sell orders belonged to the Energy account. Regarding the first five price levels on the buy side, 62.22% of passive buy orders and approximately 26.12% of passive sell orders sent to these price levels originated from the Energy account. The orders placed at the first five passive price levels constituted approximately 45.41% of the total orders transmitted to the market from the Energy account."
5- The failure of Public Disclosure Platform (KAP) announcements to adequately explain the abnormal increase in the share price, or the issuance of KAP announcements that exaggerate the truth, constitutes one of the criteria for manipulation.
"...the special situation disclosures made were examined, and it was noted that during the period there were news items containing positive elements such as the acquisition of a machine to increase the Company’s production capacity and the annulment by the Council of State of the Competition Authority’s decision dated 04.12.2001 to issue a warning to the Company; however, these news items were not sufficient to explain the increase in the share price."
"...although there were disclosures during the review period that could affect the share price, there was no special situation disclosure sufficient to explain the approximately 69.33% increase in price."
6- The provision of necessary financing for the purchase and sale of shares by manipulators forming a group from a single source is also a criterion of manipulation.
"...the financing of the transactions carried out from the defendants’ accounts was largely provided by cash deposits made into accounts opened in the names of these individuals at F8 Ankara and Ankara Commercial Branch. The amounts deposited into these bank accounts were transferred to brokerage firms on the same day, and from the brokerage firms, the stock transactions were conducted. The balances resulting from the sale of shares in these accounts were transferred back to the bank accounts on the same day, and from there, through cash withdrawal and deposit transactions, funds were transferred to ... and other ... group companies. It was noted that the vast majority of cash withdrawal and deposit transactions related to the investor group accounts were carried out by a person named K2 working at ... Foreign Trade. Considering these facts, it indicates that the accounts were controlled by a single entity…"
7- The existence of manipulation is also indicated by factors such as the manipulators knowing each other, being relatives, having phone conversations among themselves, working at the same workplace, having the same address and/or phone number registered in their accounts at the brokerage firm, sending faxes to the brokerage from the same location, different manipulators contacting the brokerage from a phone number registered to a certain company, the same voice placing orders for different investors during phone calls with the brokerage, manipulators granting power of attorney to each other, transferring money or shares among themselves, placing buy and sell orders from the same IP address, executing high-volume buy and sell transactions during the investigation period in accounts of suspects that had no significant prior activity in previous years, and opening accounts at different brokerage firms by the suspects to create the impression of multiple investor groups trading the stock among different investors.
B. Legal Remedies Available to Investors Suffering Losses Due to Manipulation
1- If there is already a criminal case filed against the manipulators or if it has been stated in the Capital Markets Board bulletin that a criminal complaint has been lodged against them;
Investors who believe they have suffered losses may apply to the criminal court to join the case until a verdict is rendered by the court of first instance. Additionally, they may file a civil lawsuit for compensation against the individuals concerned. In our opinion, whether the burden of proof for the loss should be based on the provisions of tort law or contractual liability will depend on whether a direct transaction took place between the manipulators and the victims on the stock exchange.
2. If there is no ongoing criminal case against the manipulators, or if it has not been stated in the Capital Markets Board (CMB) bulletin that a criminal complaint will be or has been filed against them:
It is possible for an ordinary investor to suspect that manipulation has occurred in a particular stock. However, only the Capital Markets Board has the authority to determine who is responsible for the manipulation. Indeed, the criminal complaint regarding the manipulation offense, as regulated under Article 107 of Law No. 6362, is exclusively reserved for the Capital Markets Board pursuant to Article 115 of the same law.
Nevertheless, in practice, investors who suspect manipulation in the stock market where they trade may apply to the Istanbul Public Prosecutor’s Office. The prosecutor’s office typically issues a decision of non-jurisdiction and refers the complaint to the Capital Markets Board as a notice. Similarly, investors may also apply directly to the Capital Markets Board to request an investigation if the criteria we have outlined above are met.
However, a compensation lawsuit can only be filed against individuals once they have been identified as manipulators by the Capital Markets Board.
For further information, please contact us at info@cetin.av.tr.
Çetin Attorneys at Law
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