Market Misconduct and Improper Trading Practices
The SFO attacks market abuse through a dual civil and criminal regime aimed at the same six forms of market misconduct: insider dealing, false trading, price rigging, stock-market manipulation, disclosure of information about prohibited transactions, and disclosure of false or misleading information inducing transactions. This topic identifies each form, explains the Market Misconduct Tribunal, and sets out the consequences and defences.
The six forms of market misconduct
Part XIII (civil) and Part XIV (criminal) of the SFO cover the same six forms of market misconduct: (1) insider dealing; (2) false trading; (3) price rigging; (4) stock-market manipulation; (5) disclosure of information about prohibited transactions; and (6) disclosure of false or misleading information inducing transactions. A common exam question asks how many forms there are (six) or which listed item is NOT one of them—so learn the closed list. The two Parts are mirror images: the conduct is identical, but Part XIII leads to civil determination by the Market Misconduct Tribunal, while Part XIV leads to criminal prosecution in the courts.
Insider dealing in detail
Insider dealing is the most tested form. In essence it occurs when a person connected with a listed corporation, who has information they know to be relevant, specific and price-sensitive and not generally known to the market, deals in that corporation's listed securities (or their derivatives), or counsels or procures another to deal, or passes the information on (a 'tip') knowing or having reason to believe the recipient will deal. A 'connected person' includes directors, employees and substantial shareholders of the corporation and those with access to inside information through a professional or business relationship; a person remains treated as connected for six months after ceasing to hold the connecting position. A tippee who receives the inside information and trades on it also commits insider dealing. Recognised defences exist—for example that the person would have dealt anyway irrespective of the information, or dealt only to facilitate a transaction without the purpose of making a profit or avoiding a loss from the information.
False trading, price rigging and manipulation
The remaining trading forms are about creating false impressions or distorting prices. False trading is conduct that creates a false or misleading appearance of active trading, or of the market or price, in securities or futures; classic examples are wash sales (a transaction that involves no genuine change in beneficial ownership) and matched orders (two parties arranging offsetting buy and sell orders at the same price, time and size to inflate apparent activity). Price rigging involves wash sales or matched orders (or other fictitious transactions) that maintain, raise, lower or stabilise the price. Stock-market manipulation is distinguished by a series of real transactions intended to move the price and thereby induce others to deal—the trades are genuine, but done to manipulate. The two disclosure-based forms punish spreading information about prohibited transactions, and disseminating false or misleading information likely to induce dealing (or maintain/affect the price).
The Market Misconduct Tribunal (MMT)
The MMT is the civil forum under Part XIII. It is constituted by a chairman who is a serving or former judge, sitting with two other members drawn from outside the judiciary. Because the MMT is a civil body, it decides whether market misconduct has occurred on the civil standard of proof—the balance of probabilities—which is lower than the criminal 'beyond reasonable doubt' standard that applies to a Part XIV prosecution. This difference in standard is a favourite exam point and part of why the SFC may choose the civil route.
Consequences: civil orders versus criminal penalties
The MMT's powers are civil, not penal in the criminal sense: it can make a disgorgement order (stripping the profit gained or loss avoided), a disqualification order (barring a person from being a company director or manager for up to five years), a 'cold-shoulder' order (denying access to market facilities for a period), a 'cease and desist' order, and orders for costs and for the person to undergo training. Crucially, the MMT cannot impose imprisonment or a criminal fine—those follow only from a criminal conviction under Part XIV. On indictment, a Part XIV market-misconduct offence carries a substantial maximum fine and a maximum term of imprisonment of up to ten years. For a single course of conduct the SFC must elect one route: civil MMT proceedings or criminal prosecution, but not both.
How Paper 1 tests market misconduct
Expect: recall of the number and identity of the six forms (and 'which is NOT'); the elements of insider dealing (connected person, price-sensitive non-public information, the six-month rule, tippees, and the recognised defences); distinguishing false trading, price rigging and manipulation by their defining feature (false appearance versus price effect versus a series of genuine trades to induce dealing); the MMT's constitution (judge plus two members) and civil standard of proof; the MMT's available orders and its inability to imprison or fine criminally; and the rule against pursuing both civil and criminal routes for the same conduct. These are stable, statute-based facts; the maximum criminal penalties are set by the SFO and can be amended, so verify precise figures against the current ordinance.
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