A few years up until 2012, Deutsche Börse's Frankfurt Stock Exchange (FSE), and more precisely its Open Market segment, was the stage for innumerous cases of fraudulent listings and pump and dump.
The Open Market, which used to be described by the Deutsche Börse (DB) as a Regulated Unofficial Market, is a FSE market segment for the listing and trading of shares issued by foreign companies and German SME. "Unofficial" stands for the fact that it operates under its own specific rules.
The structure and scope of the Open Market changed throughout time since it was created in 1987. However, between 2008 and 2012, it had three sub-segments: the Entry Standard, the First Quotation Board (FQB), and the Second Quotation Board (SQB).
According to BaFin's 2011 Annual Report, the Open Market had admission and post-admission requirements that were much more lenient than FSE's Regulated Market, and such requirements were the least stringent for the FQB subsegment. BaFin also presented a brief description of such requirements:
- Admission was granted on application by a trading member firm, and it was not required for the issuer to be involved in the process;
- As for accounting audit requirements, it would suffice having an auditor confirming that the issuer had equity of at least 500,000 EUR and each share had a par value of at least 0.10 EUR;
- There were no post-admission publication requirements.
The lenient listing requirements pave the way for fraudulent listings in the Open Market. Thereafter, the nature of the issuers (small, and frequently foreign) and of the ongoing requirements (lenient, and thus providing little and questionable information about the issuers) led to many of the securities listed in the FQB to be illiquid, which is a crucial ingredient for this form of market manipulation.
Several cases of fraudulent listings and pump and dump (alongside with other forms of market manipulation) started to be seen in the First Quotation Board.
BaFin, in its 2010 Annual Report, stated that it frequently observed the following behavior in relation to stocks traded in the Open Market: "Customers received aggressive, unsolicited buy recommendations by phone or fax for infrequently traded shares of foreign issuers traded on the regulated unofficial market in Germany. The reasons tipsters gave for their recommendations included fictitious impending share buy-backs or takeovers at significantly higher prices. In many cases, they supported their actions by entering into collusive transactions that gave the impression of trading activity and liquidity. As a result, the previous shareholders were able to sell large volumes of shares at a considerable profit. When the prices of the shares concerned subsequently collapsed, the purchasers who had been duped into buying the stocks experienced substantial losses, not infrequently having to write off their investments completely. The companies whose shares are marketed in this way often come from abroad; recently, there have been a growing number from Switzerland and the United Kingdom. In all cases, they are listed on the regulated unofficial markets of German stock exchanges. BaFin has reported a number of such offences and is working."
In the presence of such cases, Deutsche Börse started taking decisions regarding the FBQ: i) it tightened the
admission requirements over the years; ii) in November 2011, it suspend the trading of securities issued by 174 entities; and iii) in December 2011, it decided to stop admitting new securities.
In February 2012, after a joint investigation with BaFin and the Hesse Stock Exchange Supervisory Authority on the manipulative behaviors seen at the FQB, the Deutsche Börse announced that this segment would be terminated. Issuers that were unable
to retrospectively meet the increased transparency requirements
of the Open Market, which continues to exist, were delisted - according to BaFin's 2012 Annual Report, the shares and share certificates of 700 issuers were delisted.
Example of a pump and dump case in the Open Market: De Beira Goldfields Inc.
BaFin's Annual Report 2012 presents a pump and dump case that occurred in the Open Market (before the creation of FQB and SQB):
- In February 2006, the shares of De Beira Goldfields Inc. were admitted to the Open Market;
- There was hardly any turnover at first;
- The shares were recommended for purchase on a massive scale in a total of 62 publications, including market letters, and advertisements in major national daily newspapers in Germany and abroad;
- The responsible persons for this concerted push campaign did not disclose that they themselves held considerable amounts of the shares;
- In May and June 2006, the price went significantly upwards, namely from 1.90 EUR in the middle of May 2006 to a high of 18.50 EUR in the middle of June 2006 (+875% in only one month), while the trading volume also increased significantly;
- From the middle of 2006 onward, both the turnover and the price of the share declined sharply, until the shares were left without any significant trading volume and a price close to zero;
- This manipulation generated gross proceeds totaling approximately 38 Mln Eur.
In October 2012, the Regional Court in Stuttgart sentenced:
- A financial professional to a jail term of 3 years and 2 months;
- A market letter publisher with a similar previous conviction to a suspended jail term of 1 year and 10 months, and to pay 350,000 EUR to charitable organisations;
- The former editor of a news magazine to a suspended jail term of 1 year and 9 months for collusive market manipulation, and to pay 200,000 EUR to charitable organisations.
Comments
Post a Comment