Investigations

The number of new market manipulation investigations launched in 2017 was virtually on a level with the previous year (see Figure 19 "Market manipulation investigations"). The investigations concentrated mainly on trade-based manipulation. Another focal area was the investigation of “short attacks”. This refers to natural or legal persons entering into short positions in an issuer's shares, for example, before then spreading negative reports on the issuer. The affected shares sometimes suffered price slumps of more than 30 percent within seconds of these reports being published. If specific conflicts of interest are not clearly pointed out in the reports published this is considered to be market manipulation.¹

Again, more than half of the formal investigations launched were based on referrals by the trading surveillance units in 2017. Most of the other investigations were launched in response to positive market manipulation analyses and requests from public prosecutors' offices and police authorities. There were significantly more requests than in 2016, especially from public prosecutors' offices.

International cooperation

BaFin again worked together with foreign financial supervisory authorities on cases of market manipulation in 2017. BaFin involved the supervisory authorities of a total of 27 countries (previous year: 23) in 95 cases (previous year: 113). BaFin was asked for international administrative assistance in 44 cases (previous year: 42). The requests for administrative assistance submitted to BaFin came from supervisory authorities in a total of 13 countries (previous year: 14).

The main focus in 2017 was again on dialogue with the supervisory authorities of other EU member states, such as Austria and the United Kingdom, although BaFin also cooperated successfully with other countries, such as Singapore, Mauritius or the Bahamas. BaFin increasingly also exchanged information with the supervisory authorities in Hong Kong, Canada and the United States – especially on alleged market manipulation in connection with the dissemination of reports on the shares of smaller companies. With regard to these "pump and dump" schemes, BaFin was able to benefit from the findings and experience of its foreign colleagues. Especially when investigating these types of, usually complex, cases, it is necessary to cooperate promptly and efficiently with supervisory authorities around the world in order to pool information and, if necessary, coordinate a joint approach.

BaFin found evidence of punishable market manipulation in 121 cases completed in 2017 (previous year: 106). It filed complaints against 197 suspects with the relevant public prosecutor's office (previous year: 275). In 6 other cases (previous year: 7) involving a total of 7 persons (previous year: 9), there was evidence that an administrative offence had been committed. In 56 cases, the investigation did not find any evidence of violations (previous year: 40). The number of investigations still pending at the end of 2017 was 441 (previous year: 398).

Table 19 Market manipulation investigations

Market manipulation investigations

* The difference between the number of referrals to the BaFin Administrative Fines Division and the number of administrative fine proceedings initiated by BaFin (see 7.1) is attributable to the use of different processes. BaFin

Sanctions

In 2017, 4 individuals were sentenced for market manipulation following a full public trial (previous year: 10) and 0 individuals were acquitted (previous year: 3; see Table 20 "Completed market manipulation proceedings"). Sentences were passed in 15 cases (previous year: 13).

The public prosecutors' offices discontinued a total of 373 investigations (previous year: 310). In 187 of these cases (previous year: 166), a conviction was not sufficiently probable to bring a charge in accordance with section 170 (2) of the German Code of Criminal Procedure (Strafprozessordnung). Another 24 investigations (previous year: 17) were provisionally discontinued in accordance with section 154f of the Code of Criminal Procedure because the defendant's place of abode was unknown. In addition, the public prosecutors' offices discontinued 71 cases (previous year: 49) in accordance with section 153 of the Code of Criminal Procedure, because they considered the perpetrator's degree of fault minor and there was no public interest in criminal prosecution. Another 56 investigations (previous year: 50) were discontinued in accordance with section 153a of the Code of Criminal Procedure, after the defendants had made payments as part of out-of-court settlements.

In a further 30 proceedings (previous year: 28), the public prosecutors' offices concentrated on pursuing violations of other prohibitions under criminal law committed in parallel and discontinued the market manipulation proceedings in favour of other allegations, such as fraud or breach of fiduciary duty, in accordance with section 154 or section 154a of the Code of Criminal Procedure.

Table 20 Completed market manipulation proceedings

Completed market manipulation proceedings

* The figures relate to decisions from previous years, but BaFin only came to know about them in the years specified in the left table column. BaFin

Selected cases

Asset manager

In January 2017, the Local Court (Amtsgericht) of Stuttgart handed down a sentence on the managing director of an asset management company, imposing a fine of 85 daily units, which became final in November 2017. The daily units amounted to €90, resulting in a total of €7,650. BaFin had filed a complaint with the public prosecutor's office in Stuttgart in December 2015. The asset manager had issued offsetting block orders in an illiquid warrant on shares in Bilfinger SE on behalf of client securities accounts. By choosing the number of units, specifying order limits, and timing the orders, he coordinated the orders in such a way that they could be executed directly against each other on the Stuttgart Stock Exchange. In this way, he achieved a stock exchange price fixing that was beneficial to himself and his clients. The defendant's manipulative trades in the warrant led to a significant price increase, which was not justified by the share price performance of the underlying.

Xing AG

In 2017, the public prosecutor's office in Frankfurt am Main discontinued proceedings against a securities trader against whom BaFin had filed a complaint with that office back in 2014. The complaint related to market manipulation by generating trading volumes in shares of Xing AG for which there was no economic justification. The proceedings were discontinued against payment of €25,000 as part of an out-of-court settlement in accordance with section 153a of the Code of Criminal Procedure.

In March 2013, the securities trader had acted as designated sponsor (see info box "Designated sponsor") and influenced the pricing of shares in Xing AG in order to boost the volume of shares traded. Each time a trade was executed at the quote he had determined, he changed the quote in such a way that there was a fresh incentive for the market to trade at the price he was quoting. In this process, he increased his prices on the buy-side above the previously quoted sell-side prices. From the counterparty's perspective, this provided a constant incentive to close positions at a profit as soon as they had been opened, while the designated sponsor systematically accepted losses.

Blue Cap AG

In 2017, the Munich I public prosecutor's office concluded an investigation by handing down a sentence of 160 daily units; the case had involved trading in shares of Blue Cap AG over a three-year period. The daily units amounted to €80, resulting in a total fine of €12,800. The proceedings had been triggered by a criminal complaint filed by BaFin in February 2017.

During the time the crime was committed between 2014 and 2017, the defendant had comprehensive powers of attorney for the company securities accounts of two subsidiaries. In addition, he traded through two securities accounts in his own name, although they were held at different credit institutions. He used these securities accounts over a period of several years to issue coordinated offsetting buy and sell orders on the Düsseldorf, Munich and Stuttgart stock exchanges in a total of 48 cases; these orders were executed immediately against each other. In this way, the defendant influenced the price and volume performance of the shares in Blue Cap AG.

BaFin's investigation was carried out in close cooperation with the trading surveillance units at the Düsseldorf, Munich and Stuttgart stock exchanges. The sentence handed down by the Local Court of Munich became final in November 2017.

Mologen AG

The fine imposed in proceedings triggered by a complaint filed by BaFin became final in April 2017. In March 2016, BaFin had filed a criminal complaint with the public prosecutor's office in Stuttgart because of market manipulation in the form of pre-arranged trades. The complaint involved five trades in shares of Mologen AG on the Stuttgart Stock Exchange. The defendant had entered into the trades by issuing offsetting securities orders for his securities account and his wife's securities account, over which he had power of attorney. The trades were executed on the last trading day of the 2013 calendar year. In his order instructions, the defendant chose to increase the buy and sell limits in stages. As a result of the manipulative trades, the price of the shares in question was pushed up gradually until the end of the year.

In June 2016, the Local Court of Stuttgart handed down a sentence, imposing a fine of €15,000 (150 daily units at €100). When the defendant appealed against the sentence, the Local Court of Stuttgart set a date for a full trial, for which the defendant failed to appear, however. The court ruled against the appeal. The defendant also appealed against this ruling, but the Regional Court (Landgericht) of Stuttgart dismissed this appeal. An appeal lodged by the defendant against the judgement of the Regional Court of Stuttgart was ultimately without success, so that the fine became final.

Grit International Inc.

In 2017, BaFin was informed by the public prosecutor's office in Düsseldorf that proceedings initiated by a complaint lodged by BaFin had ended with the imposition of a fine of €70,000 in accordance with section 153a of the Code of Criminal Procedure. Back in 2011, BaFin had filed a criminal complaint with the public prosecutor's office in Düsseldorf because of alleged market manipulation. It was alleged that a Canadian national, in cooperation with a distribution network, initially arranged for the shares of Grit International Inc. to be admitted to trading in Germany and then had them marketed.

However, the market letters he used for this purpose, which promised price increases of hundreds of percent within a matter of months, failed to point out the existing conflict of interests despite his obligation to do so. The investors therefore remained unaware that the defendant had his own financial interest in the performance of the shares. At the time of the marketing campaign, the defendant was holding several hundred thousand shares of the company in a securities account at a bank in Liechtenstein, which he was planning to sell.

Accordingly, the defendant took advantage of the demand generated by marketing the shares to sell the position he had previously acquired. In 2013, the public prosecutor's office in Düsseldorf brought charges before the Regional Court of Düsseldorf because of alleged market manipulation. The defendant was granted the right to be heard through mutual judicial assistance, and he was interviewed by police in Canada. Although the extradition of the Canadian national could not be considered, the imposition of the above-mentioned fine of €70,000 was achieved.

LetsBuyIt Group AG

In November 2017, the Local Court of Frankfurt am Main handed down a prison term of 10 months following summary proceedings initiated by a complaint filed by BaFin in December 2014. The sentence was imposed on a defendant resident in the United Arab Emirates. In addition, the court ordered the forfeiture of approximately €61,000. The sentence is final.

The public prosecutor's office in Frankfurt am Main charged the defendant with bringing about, through a large number of buy and sell orders for shares of LetsBuyIt Group AG, trades that were not intended to implement a legitimate trading strategy, but solely to generate trading volume in the stock. In more than 200 cases, the defendant sold shares in LetsBuyIt Group AG, only to repurchase them again immediately. In this process, the defendant also incurred losses, because he regularly sold the shares at a lower price than he had to pay to buy them back later.

The artificially boosted trading volume was intended to arouse interest among investors. The defendant was acting on behalf of individuals who wanted to benefit from the increased volume of trading in LetsBuyIt Group AG shares by selling their own positions.

Final administrative orders imposing fines

In 2017, BaFin imposed an administrative fine of €42,000 on the chief executive officer of a stock corporation, whose shares are admitted to trading on the regulated unofficial market (Freiverkehr) of the Frankfurt Stock Exchange, because he had provided incorrect price-relevant information about the company.²

At the end of 2014, the individual concerned had published information in a market letter about the expected net profit for the year, which could no longer be objectively justified at that time. The individual also repeated these comments in an interview with a local daily newspaper, which was subsequently published. Contrary to the assessment communicated by the individual concerned, according to which a profit in line with the previous year was expected, the company in fact suffered a 90 percent slump in profits compared with the previous financial year.

The claims about the expected amount of net profit for the year repeatedly made by the CEO were firstly of significant relevance to the company's valuation and secondly capable of influencing the share price of the company in question. However, as it turned out, they did not affect the share price of the company concerned. For this reason, the matter was not prosecuted as a criminal offence, but as an administrative offence.

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