19781
COMMENTS – COMMENTAIRES
Misinformation and Security Markets
Prosecution for trading violations caused by the exploitation of
misinformation’ is a problem of great concern to most Canadian
regulatory authorities? Law enforcement agencies have estimated
that approximately twenty to thirty percent of the mines and local
junior industrial stocks listed on the Vancouver Stock Exchange are
manipulated.3 The problem, especially for instances of stock price
in both
manipulation, arises from the difficulties encountered
operationally defining4 and in prosecuting such violations.’
In
addition, while the effect of information on the security market has
been well documented in the important works of Demsetz, Fama
and Laffer, Friend, Hirshleifer, Manne and Marshall, the effect of
misinformation on stock prices has not been extensively researched.
Given these difficulties, the primary objectives of this paper are
to discuss the types of manipulative techniques employed, and then
to inquire into the non-controllable constraints encountered by
manipulators (with specific emphasis on regulatory and legal ac-
tions). However, it is first necessary to formulate a definition of stock
price manipulation.
‘Misinformation
is defined here as any information that is untrue, false,
misleading, deceitful or fraudulent.
2 “Squad goes after high class crime”, The Montreal Star, April 13, 1974,
A-1 and A-8.
3 Coordinated Law Enforcement Unit, Initial Report on Organized Crime
in B.C., Dept. of A.G. of B.C., Oct., 1974, 26.
4″At what point is ‘maintaining an orderly market’ a ‘manipulation’?”,
The Financial Post, July 29, 1972, 24.
5 “Behind the stock scandals: weird web of odd deals”, The Financial Post,
Feb. 19, 1972, 1, 5, 8, and 9.
0 Demsetz, Information and Efficiency: Another Viewpoint (1969)
12 J. of
L. and Econ. 1; and “Perfect Competition, Regulation, and the Stock Market”
in Manne (ed.), Economic Policy and the Regulation of Corporate Securities
(1969), 1; Fama and Laffer, Information and Capital Markets (1971) 44 1. of
Bus. of U. of Chi. 289; Friend, “Discussion and Comments on Papers by
Professor Demsetz and Professor Benston: Discussion and Questions from
the floor”, in Manne, ibid., 115; Hirshleifer, The Private and Social Value of
Information and the Reward to Inventive Activity (1971) 61 Amer.Econ.Rev.
561; Manne, Insider Trading and the Stock Market (1966); and Marshall,
Private Incentives and Public Information (1971), unpublished manuscript,
Vanderbilt University.
McGILL LAW JOURNAL
[Vol. 24
In an economic sense, manipulation of a stock’s price entails the
intended dissemination of misinformation by a disseminator(s) in
order to create abnormal profits for the disseminator(s) or ab-
normal losses for others. In this definition, an abnormal profit is
one which is in excess of the competitive rate of return. However, it
should be noted that the earning of abnormal profits by individuals
does not by itself imply that manipulation has taken place, for
abnormal profits can be earned in an uninfluenced security market
by individuals exploiting superior trading acumen.
Manipulative techniques7
The dissemination of misinformation by a manipulator is intend-
ed to change investor expectations about the manipulated security
in a desired direction. Since supply can be taken to be fixed in the
short run, these changed expectations will be reflected in a shift in
demand (and, in turn, price) for the manipulated security.
Some effective manipulative techniques include: market trading
techniques such as “wash sales” and “matched orders” that are
designed to deceive tape watchers; the employment of a network of
misinformation disseminators whose task is to induce investors to
buy securities; and manipulation of the generation and release of
information on company activity.
“Wash sales” and “matched orders”8
In the standard “wash sale” the manipulator arranges for an
associate to “purchase” a given number of board lots at increasing
prices above the present market price. By agreement, no change of
ownership takes place. Therefore, the buyer incurs no financial
obligation to the seller and the transaction is purely fictitious.
“Matched orders” take place when a manipulator enters an order
with a broker for the purchase (or sale) of a security, knowing that
an order of substantially the same size, time and price for the sale
(or purchase) of the security has been or will be entered with
another broker by or for the same or different persons. Each broker,
not knowing that the other broker has an offsetting order from the
same principal, executes his order upon the floor of the exchange.
7Fraudulent manipulation in the stock market has been described as
involving “payment of secret commissions to create a demand for a security;
pre-arranged sales so the promoter can receive the benefits, and trades
between parties involved in the conspiracy to create an illusion of active
public trading”. See. “R.C.M.P. tracks swindles”, The Montreal Star, Nov. 26,
1974, B-2.
8For an early discussion of these concepts, see Dice, The Stock Market
(1926), 421-22.
19781
COMMENTS – COMMENTAIRES
According to Friend and Herman, “[T]here are both theoretical
and empirical grounds for believing that the demand schedule of
investors in the stock market is greatly influenced by price move-
ments”.9 If their statement is true, manipulators can earn abnormal
profits by artificially generating increased trading activity and
price movement. For example, if manipulators trade a security using
“wash sales” or “matched orders” during a period when its price
has risen moderately as a result of the dissemination of misin-
formation,,a the added trading activity and increase in price may
entice other investors to buy the stock at artificially higher prices.
This, in turn, may force the price of the security much highef
than it would otherwise have gone. As long as the manipulators
dispose of their holdings before the price declines, their activity
will be profitable.
Thus, manipulative activity can influence the “equilibrium”
prices of individual securities. For example, on July 10, 1964, a
certain Viola MacMillan asked her broker to effect a sale through
an exchange of 244,000 shares of Consolidated Golden Arrow at
25 cents a share. As the shares were to be bought for certain ac-
counts directed by her, the broker advised her that a $3,660 com-
mission could be avoided by concluding the transaction off the
exchange. Despite these potential cost savings, the broker was
instructed to proceed, and did so by effecting a series of large
“put through” transactions. When these transactions appeared on
the ticker, they represented an extraordinary increase in the daily
trading volume, and the market price increased rapidly. Later that
day, Viola MacMillan ordered sales from her accounts at 65 cents
per share.’
Although prohibited by section 340 of the Criminal Code,” it
is doubtful if legislation can curtail the use of “wash sales” or
9 Friend and Herman, The SEC Through a Glass Darkly (1964) 37 J. of
Bus. of U. of Chi. 382.
Da To be discussed in the following section, infra, p.126.
10 See Report of the Royal Commission to Investigate Trading in the
Shares of Windfall Oils and Mines Limited (1965), Prov.of Ont., 85-86 (Kelly J.,
commissioner).
11 R.S.C. 1970, c.C-34. S.340 provides:
“Every one who, through the facility of a stock exchange, curb market
or other market, with intent to create a false or misleading appearance
of active public trading in a security or with intent to create a false or
misleading appearance with respect to the market price of a security,
(a) effects a transaction in the security that involves no change in the
beneficial ownership thereof,
(b) enters an order for the purchase of the security, knowing that an
order of substantially the same size at substantially the same time
McGILL LAW JOURNAL
[Vol. 24
“matched orders”. Not only do brokers and regulators find it
extremely difficult to distinguish between such orders and legitim-
ate buy or sell orders but successful criminal prosecution requires
the Crown to prove beyond a reasonable doubt that correspond-
ing purchase and sale orders were entered with intent to create a
false or misleading appearance of active public trading.12 Thus,
proof of a clear and prolonged matching of specific orders
in
amount, time and price is essential. It is evident that such a strict
interpretation covers few instances of actual stock price mani-
pulation and will therefore result in few convictions under section
340.
Misinformation disseminators
Misinformation disseminators used by manipulators
include
“distributors”, “touts”, and some members of the printed media.
Distributors are account executives (registered representatives)
who are remunerated by the manipulator to “favourably bias” the
expectations of potential clients so that these clients will buy
shares of the manipulated security. Distributors are remunerated
secretly by the manipulator whenever they initiate and conclude a
purchase transaction for the manipulated security. Generally, this
remuneration (“bribe”), which can be in the form of cash, free
stock or a fixed-price option on stock, is paid to the distributor only
if the stock is held by the distributor’s clients for a specific period
of time (such as six months). This minimum holding period re-
quirement is designed to restrict the “true” number of potential
future sellers of the manipulated stock.
Some distributors have been prosecuted. For example, in the
Somed Mines case, the Crown alleged that between January 1 and
and a substantially the same price for the purchase of the security
has been or will be entered by or for the same or different persons,
or
(c) enters an order for the sale of the security, knowing that an order
of substantially the same size at substantially the same time and at
substantially the same price for the purchase of the security has
been or will be entered by or for the same or different persons,
is guilty of an indictable offence and is liable to imprisonment for
five years.”
12R. v. Jay [1966] 1 C.C.C. 70, 71
(Ont.C.A.). Roach J., speaking for the
Court, pointed out that “[in order to succeed the Crown would have to
prove, with respect to each of those purchase orders, that a substantially
corresponding sale order had been entered by the accused at substantially
the same time so that when the purchase and sale of the quantity specified
would be completed they would offset one another with no profit to the
accused”, ibid.
19781
COMMENTS – COMMENTAIRES
September 30, 1974, nine persons conspired to pay secret commis-
sions to account executives (distributors) in order to promote sales
of Somed shares. The group was also accused of conspiring to raise
the market price of Somed shares through pre-arranged sales to
create an illusion of market strength and of buying and selling
Somed shares through controlled accounts in order to present the
appearance of active public trading.”
Touts are individuals who induce people to buy but cannot
process transactions because they are unlicensed. 14 Generally, at
the outset, the tout is given a secret option on a certain quantity
of stock which is exercisable at a price that is less than the current
market price. The tout’s gross remuneration for services rendered
is the difference between the market and call prices at the time he
sells his call stock. Touts generally are not paid in cash because the
manipulator finds it difficult to accurately identify the amount of
buying which they generate.
In the Buffalo Gas and Oil trial, a Crown witness indicated that
he was involved in a plan to increase a security’s market price from
$2 to approximately $5 a share by creating a market. The witness
claimed that he and an associate were to receive a fixed fee of $2000
plus a 20 percent commission on any business they initiated. An
integral part of the plan involved the promotion of the stock through
bribes to stock salesmen. He stated that in one week the price of
the stock increased from $2 to $3.30 a share due to the efficacy
of the scheme.”5
Some members of the print media participate in dispersing
misinformation for manipulators. For example, by means of “tip-
sheets” the manipulator can gain wider circulation and credence for
the misinformation that he wants dispersed to the public.
In 1974, a former executive editor for Value Line, an investment
advisory service, was indicted in connection with receiving a $15,000
bribe from two former securities dealers for touting a stock. The
accused allegedly accepted the bribe to write a bullish article on
Power Conversion Inc., then a high-flying over-the-counter issue.
The article was published in Value Line Selection and Opinion in
1′ “Kott charged again”, The Montreal Star, Oct.17, 1974, D-10.
14Individuals who tout stock without being remunerated are referred
to as “pooches”. For a more extensive discussion of “pooches”, see Schaffer,
The Stock Promotion Business: The Inside Story of Canadian Mining Deals
and the People Behind Them (1967).
15 “Former ‘con man’ insists telling truth”, The Gazette, Montreal, Nov.12,
1974, 25. See, also, “Kirsch is guilty on Buffalo count”, The Montreal Star,
Nov. 26, 1974, B-5.
McGILL LAW JOURNAL
[Vol. 24
1972. Power Conversion stock, issued at $5 a share in March 1972,
had reached $38 by the date of publication and its market price
quickly rose to $45.25 before plummeting to $5 in two days of
frantic selling.16
Notwithstanding the prohibition under section 358 of the Crimi-
nal Code,’7 it is extremely difficult to prosecute a paid misinforma-
tion disseminator. Successful prosecution depends to a large extent
upon the testimony of one or more of the participants in the disse-
mination process, or upon. wire tap evidence. The regulatory task
becomes even more difficult when the dissemination of misinform-
ation occurs outside of Canada. The regulation of touters and
tipsheets in Europe has proven to be extremely difficult.’8
Control of information
The manipulator who can control the generation and dissemin-
ation of the nature and quality of news concerning company activity
will use such information as a focal point for manipulative en-
deavours.
For example, in the case of mining companies, the manipulator
often resorts to one or more of the following five company activities.
The first company activity is a “location” play which occurs
when the firm obtains a mining or oil prospect that is in close
proximity to a major discovery. The prospect is interesting because
the ore body on the discovery may extend onto the company’s hold-
ing.
‘ 6 “Former Editor for Value Line Is Charged With Concealing Bribe to
Tout Stock”, Wall Street Journal, Oct. 25, 1974, 10.
17R.S.C. 1970, c.C-34. S.358(1) provides:
“(1) Every one who makes, circulates or publishes a prospectus, state-
ment or account, whether written or oral, that he knows is false
in a material particular, with intent
(a) to induce persons, whether ascertained or not, to become share-
holders or partners in a company,
(b) to deceive or defraud the members, shareholders or creditors,
whether ascertained or not, of a company,
(c) to induce any person to entrust or advance anything to a com-
pany, or
(d) to enter into any security for the benefit of a company,
is guilty of an indictable offence and is liable to imprisonment for ten
years.”
1sFor a list of stocks that were promoted in Germany during 1972, see
“Some Canadian Stocks promoted in Germany”, The Financial Post, July 29,
1972, 9. See also, “Europeans are stung by another Canadian stock promo-
tion”, The Financial Post, June 8, 1974, E-1 and E-9; and “Controlling tip-
sheet publishers is difficult”, The Financial Post, July 29, 1972, 9.
19781
COMMENTS – COMMENTAIRES
The second company activity involves the entering of a “hot”
area, that is, an area with high exploratory activity.’ 9
The third activity is the commencement of drilling. When drill-
ing begins on the property, investor interest heightens because the
investor’s uncertainty about the prospect will soon be resolved.
While a negative drill result does not rule out the possibility of
a favourable outcome, a drill core exhibiting high percentages of
metal over a substantial length is sufficient to generate frenzied
buying at rising prices.
The fourth activity is the location of drilling within a property
which has better a priori prospects, thus resulting in the inflation
of investor expectations. As well, altering the timing of the public
release o*f core results can affect investor expectations.
The fifth company activity involves “salting”, that is, adding (or
removing) anything from an existing mine, mining claim or oil
well with a fraudulent intent to affect the result of an assay, test or
valuation.
If any of the first four company activities are used as focal
points for false, deceitful, or fraudulent statements, section 358 of
the Criminal Code is infringed. The fifth company activity is a
violation of section 354 of the Criminal Code.1 9a
19 A measure of activity in a new area is the number of claims recorded.
A measure of activity in a well-staked area is the number of exploration
dollars to be spent during the year.
19a R.S.C. 1970, c.C-34. S.354 provides:
“(1) Every one who
(a) adds anything to or removes anything from an existing or pros-
pective mine, mining claim or oil well with a fraudulent intent to
affect the result of an assay, test or valuation that has been made
or is to be made with respect to the mine, mining claim or oil
well, or
(b) adds anything to, removes anything from or tampers with a sample
or material that has been taken or is being or is about to be
taken from an existing or prospective mine, mining claim or oil
well for the purpose of being assayed, tested or otherwise valued,
with a fraudulent intent to affect the result of the assay, test or
valuation,
is guilty of an indictable offence and is liable to imprisonment for ten years.
(2) For the purposes of proceedings under subsection (1), evidence that’
(a) something has been added to or removed from anything to which
subsection (1) applies, or
(b) anything
to which subsection
with,
(1) applies has been
tampered
is, in the absence of any evidence to the contrary, proof of a fraudulent intent
to affect the result of an assay, test or valuation.”
McGILL LAW JOURNAL
[Vol. 24
In the Windfall affair-9b manipulative activity centred on two
company activities. Specifically, the manipulation of Windfall shares
from the 40 to 50 cent range in April of 1964 to a high of $4.75 in
July depended upon the purchase of mining claims near those on
which Texas Gulf had found significant mineralization, and market
deception, that is, letting the market believe that the results of
drill core assays were favourable. The public release of unfavour-
able results late in July brought about an immediate decline in
price to the 80 cent level.2
For industrial and commercial companies, the manipulator uses
periodic corporate releases, for example, earnings reports, as a
focal point for manipulative effort. If the manipulator can induce
an officer of a company to “leak” inflated (or deflated) earnings
estimates to the public when earnings are increasing (or decreas-
ing), the price of the stock should respond accordingly. By this
technique the manipulator may create fluctuations of sufficient
magnitude to generate abnormal profits.
Non-controllable operational constraints
The distortion in valuation, or “manipulation bubble”, caused by
manipulative activities generally continues for anywhere from three
or four weeks to twelve months. 21 At some point in time, one or
more of the non-controllable operational constraints will restrict,
or even eliminate, the market effects of the manipulator’s activities.
The “manipulation bubble” will then begin to deflate. The rate of
deflation will depend upon both the strength of the following five
non-controllable operational constraints, and on whether deflation
is consistent with the manipulator’s self-interest.
Limited financial resources
Most manipulations must be financed at their initiation and
during their gestation period. Consequently, as the manipulation
develops, the manipulator must expend funds at an increasing rate
so as to conclude “wash sales” and “matched orders”, to remuner-
ate misinformation disseminators and to provide market support
for the manipulated stock during periods when investor support is
lacking or when investors or shorting groups short the incorrectly
priced manipulated stock.
19b Supra, note 10.
2oIbid.
21This conclusion
is derved from observation and various private dis-
cussions with a number of regulators.
19783
COMMENTS – COMMENTAIRES
In addition to the personal capital which the manipulator is both
willing and able to risk, most manipulators raise additional working
capital in the following manner: a vendor will sell a property (or
process) to a company for as much money and “free” stock as
allowed by a provincial securities commission or exchange.22 The
vendor is then required by prior agreement to “kick back” a sizeable
portion of the money and “free” stock to the manipulator.
In general, other sources of funds such as “margin” 22 are not
available to a manipulator since a stock trading at a market price
less than one dollar cannot by law be margined. Therefore, the total
amount of capital available to most manipulators for perpetuating
a manipulation is constrained to a small fixed sum (perhaps in the
twenty to one hundred thousand dollar range).
Short sales and professional shorting groups
If either the market support for the manipulated stock begins
to appear weak or the manipulated stock becomes grossly over-
valued, investors will short sell the stock (that is, they will sell
borrowed shares now with the expectation of covering the short
position later at a lower market price). Since short sales have a
depressing effect upon both market overvaluation and the activities
of misinformation disseminators if there is no concurrent increase
in market demand, the manipulator must offset the unfavourable
price effects of the short sales by either buying for his own account
or by generating sufficient additional public demand.
If the short sales are being made by a professional shorting
group, then the group may continue to short the stock and generate
additional public supply (either short or long sales) and the mani-
pulator may continue to buy for his own account and generate
additional public demand until one of the opponents depletes its
allocated financial resources.
“Back dooring” or “leaking”
Distributors are remunerated for distributing stock to investors
who will hold the stock for a specified period of time. Sometimes,
however, distributors will circumvent the distribution process by
using a practice called “back dooring” or “leaking”. Here, the
22The stock is “free” in the sense that no restrictions are imposed on the
transferability of the stock.
22a Buying on margin involves borrowing part (typically 50 per cent) of the
purchase price (usually from a brokerage house). By partly financing the
purchase with borrowed money, the purchaser can purchase an increased
number of securities with a given investment of his own. Lusztig and Schwab,
Managerial Finance in a Canadian Setting (1977), 223.
McGILL LAW JOURNAL
[Vol. 24
distributor will buy shares for a nominee account, resell the shares
in the manipulator-supported market through the same or a differ-
ent nominee account, inform the manipulator that the shares have
been distributed and then collect the distributor’s fee. The practice
undermines the manipulator’s operation because it depletes his
capital resources without adequately “placing” any shares.
To detect “leaking”, a manipulator will maintain a detailed list
of the certificate numbers of all certificates held by investors of the
manipulated stock. By checking the certificate number of each sell
transaction against his list, the manipulator can easily determine
if the transaction is of the “leaking” variety.23
Regulatory action
The primary regulatory actions are moral suasion, discriminate
(or selective)
interruptions of the regular trading privileges of
designated individuals or brokerage firms, indiscriminate (or gene-
ral) interruptions of all regular floor trading, and fines levied
against individuals or brokerage houses. Regulatory action can cause
the prices of allegedly manipulated stocks to deflate through pub-
lication of such information during a trading suspension.
The discriminate interruption of the regular floor trading privi-
lege of a broker can be highly effective in deflating alleged manipul-
ation. For example, on January 8, 1973, Astra Securities Corp. Ltd
had its broker-dealer registration suspended. The removal of the
professional bid behind such stocks as Kallio Iron Mines, Flint
Rock Mines and North Rock Mines, and the resultant drop in
market prices revealed to the German shareholders how little was
the public support behind these companies.
The Kallio stock closed on Friday at $2.05 bid and $2.15 asked.
On Monday (the day of the suspension) and for most of the week
there was no bid or offer (some stock was offered at 80 cents on
Tuesday). Flint Rock also fared badly. The stock closed Friday at
$1.10 to $1.15 and on Monday at the close it was quoted at no bid,
80 cents asked. At week’s end it was selling at 30 cents. North Rock
was selling at $1.15 on Friday and on Monday fell to 90 cents. By
Thursday it was selling at 65 cents.2 5
23Most manipulators (like many market-makers) can correctly identify over
95 percent of the participants.
24Kryzanowski, Some Tests of the Efficacy of Security Regulation in
Canadian Capital Markets, unpublished Ph.D. dissertation, University of
British Columbia, 1976, 133.
25 “Sudden disaster for four stocks”, The Gazette (Montreal), Jan. 13,
1973, 21.
19781
COMMENTS – COMMENTAIRES
A number of detection mechanisms are available to and are used
by the regulatory bodies. These include surveillance over the activi-
ties of firms in the brokerage industry by the use of stringent
reporting procedures, direct supervision of house accounts and
firm accountability for the actions of both their members and
clients; and surveillance of the market behaviour of securities by
the use of informers and simple mechanical methods, referred to as
“stock-watch” programs, in order to flag situations that require
more intensive investigation and possible punitive action.2 6
The tremendous number of market participants and individual
transactions makes the detection of a conspiracy to manipulate the
price of a stock an extremely difficult task.17 The regulatory task
is further complicated because the market effects of manipulative
activity may be camouflaged by the market effects of other market
actions that are not legally classified as being manipulative.
One such activity is the earning of abnormal profits by indivi-
duals through market actions taken merely to stabilize the market
price of shares. For example, during and after a share distribution,
an underwriter may transact for his own account in order to ensure
the success of the new issue distribution and the liquidity of the
post-issue market. The courts have ruled that an offence has not
been committed under section 340 if the purpose of such trans-
actions was merely to stabilize the market price2 8
Legal action
The investigation of alleged manipulation is undertaken by the
commercial crime section of the R.C.M.P. and the fraud squads of
the municipal police departments. Generally, since security re-
gulation is under provincial jurisdiction, such an investigation is
initiated by a provincial attorney-general. This does not, however,
restrict the R.C.M.P. or the municipal police from independently
initiating an investigation if they have reasonable cause for believing
a crime has been committed.
To date, both the number of attempted and successful pro-
secutions has been small. Six reasons for this situation are suggest-
ed.
26 “Stock Watch, Protecting Investor and Broker”, Toronto Stock Exchange
Review, Sept., 1970, 6.
iveness of detection techniques.
2 The author is presently conducting a preliminary study on the effect-
28 Supra, note 12, 72.
McGILL LAW JOURNAL
(Vol. 24
First, the investigating units seem to lack the necessary man-
power, resources and sophistication to conduct such investigations.
As of August 1977, the R.C.M.P. commercial crime section consisted
of only 492 officers to police all areas of corporate and bureaucratic
fraud and corruption such as stock market manipulation, stolen
securities, counterfeit securities and money, loan sharking, and
bankruptcy fraud. Furthermore, the complexity of such financial
investigations generally requires the expenditure of many man-days
per case. For example, eighteen months were expended by two
R.C.M.P. officers and various personnel from a Provincial Securities
Commission for the prosecution of a single case.29
Second, there appears to be a shortage of judges and prosecut-
ing attorneys that both comprehend and have experience in dealing
with cases of stock price manipulation.
Third, opposing viewpoints exist among members of the judi-
ciary and the public on the desired relation between law and stock
price manipulation. At one extreme are those individuals who
believe that the victims of a manipulation are both sophisticated
and avaricious and therefore should receive little or no protection
from the courts. Others assert that the victims of a manipulation
are naive but not avaricious and therefore should receive the full
protection of the courts.
Fourth, the procedure for obtaining a criminal prosecution is
often extremely protracted and costly. For example, the two major
Crown witnesses in Buffalo Gas and Oil,30 along with their families,
were kept under separate R.C.M.P. protective custody at public ex-
pense for almost three years. A conservative estimate of the cost
incurred by the public for this protective custody is one million
dollars.3 ‘
Fifth, jurisdictional disputes hamper both the investigation and
prosecution of manipulations perpetrated from foreign jurisdictions.
In particular, the Crown has legal jurisdiction to prosecute only if
the manipulation or the conspiracy to manipulate was perpetrated
in Canada. Also, few foreign financial institutions are willing to
testify in Canada on matters relating to manipulative activities.
The lack of such testimony can prevent determination of the con-
29 “White-collar crime pays too well”, The Montreal Star, Sept. 20, 1975, H-1.
30 Supra, note 15.
31 It should also be noted that a protracted prosecution period tends to
decrease the probability of successful prosecution since elapsed time and
the accurate recollection of specific events in detail by witnesses seems to
be inversely related.
19781
COMMENTS – COMMENTAIRES
tinuity of related events which is generally necessary to obtain a
conviction.
Sixth, the relevant sections of the Criminal Code have remained
constant and unaltered. In the last decade we have seen neither
the introduction of new provisions nor the modification of old
sections. For example, no clear differentiation exists in the Code
between market stabilization actions and instances of actual stock
price manipulation.
Conclusion
The numerous regulatory actions available to control manipu-
lation, when employed, have generally been effective in deflating
instances of stock price manipulation. Unfortunately, the extent
and duration of manipulations identified in this paper would seem
to indicate that the detection mechanisms utilized by the regulatory
bodies are clearly inadequate. Such agencies should therefore strive
to devise, verify and then employ more efficient market surveillance
techniques.
The basic legal weapon used by law enforcement agencies is
prosecution under-the Criminal Code. However, it seems that legal
action has not been effective. Changes that could be made in order
to broaden the role of the legal process include: provision of in-
creased manpower and resources, and greater sophistication of in-
vestigating units; education of judges, prosecuting attorneys and
the public as to the nature and severity of the offences; encourage-
ment of greater co-operation between Canadian law enforcement
agencies and those in foreign jurisdictions; and modernization of
the relevant sections of the Criminal Code.
Lawrence Kryzanowski*
* Director of Research and Associate Professor of Finance, Concordia
University, Montreal.
