No person shall engage in any action intended to create, or that could reasonably be expected to create, a false or misleading appearance of active trading or market conditions, or regarding the market or price of any securities listed on a licensed stock exchange.

This provision is outlined in Rule 12 of the SEC Rules, published in the Gazette Extraordinary No. 1215/2 dated 18th December 2001, titled ‘Acts Committed to Create a False or Misleading Appearance of an Active Share Market.’

Numerous criminal prosecutions are currently underway at Magistrate Courts in Colombo, as reported by the Securities Exchange Commission (SEC) on its website (https://www.sec.gov.lk/criminal-prosecution/). These cases primarily fall into two categories: insider dealings and market manipulation. Insider dealing (or insider trading) is generally considered a separate category of criminal offense from market manipulation, though both are related to unethical or illegal activities in financial markets. Here’s a clearer distinction:

Insider Dealing (Insider Trading): Insider dealing involves trading a public company’s stock or other securities, such as government bonds, by individuals with access to non-public, material information of such securities. This information could significantly impact the price of such securities once it becomes public. Examples: An executive buying or selling stock based on non-public information about the company’s upcoming earnings report, merger, or acquisition.

Market Manipulation: Market manipulation involves deliberate actions taken to deceive or mislead investors by artificially affecting the price or trading volume of a security. The goal is often to create a false market condition, benefiting the manipulator financially. Market manipulation includes various activities such as pump and dump, spoofing, wash trading, churning, and cornering the market.

Key Differences

Nature of the Offense: Insider trading is based on the misuse of non-public, material information. Market manipulation involves creating artificial or deceptive market conditions.

Mechanisms: Insider trading typically involves informed individuals acting on undisclosed information. Market manipulation uses a variety of tactics to distort market behavior and investor perceptions.

Relationship

While insider trading and market manipulation are distinct offenses, they both undermine market integrity and investor trust. In some cases, actions might overlap. For instance, an insider might manipulate the market by spreading false information to benefit from insider knowledge, blurring the lines between the two offenses. However, legally and conceptually, they are treated as separate categories with their own regulatory frameworks and penalties.

Types of stock market manipulations

Stock market manipulation can take various forms, typically aimed at creating artificial, false, or misleading appearances with respect to the price or market for a security. Common types of stock market manipulation include:

Pump and Dump (P & D): P&D is a form of securities fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements (pump), in order to sell the cheaply purchased stock at a higher price (dump). Once the operators of the scheme “dump” (sell) their overvalued shares, the price falls and investors lose their money.

Churning: Churning is the illegal and unethical practice by a broker of excessively trading assets in a client’s account in order to generate commissions. While there is no quantitative measure for churning, frequent buying and selling of stocks or any assets that do little to meet the client’s investment objectives may be evidence of churning.

Spoofing: Spoofing in stock trading is a disruptive algorithmic trading strategy where traders place large orders with the intention of canceling them before execution. This tactic creates a false impression of market demand or supply. In order-driven markets, spoofers typically post numerous limit orders (orders set at a specific target price rather than the current market price, executed only if the market price matches the target price) on one side of the order book—either bid (to buy) or offer (to sell)—creating the illusion of market pressure. This deceptive practice can lead to price changes as the market interprets the imbalance in orders as shifts in investor sentiment, causing prices to rise (more buyers) or fall (more sellers).

Wash Trading: Wash trading is an illegal practice where a single trader buys and sells the same financial instruments simultaneously. This deceptive activity creates misleading market information and artificial trading activity. Wash trading is commonly used to inflate the trading volume of a security artificially.

Bear Raiding: Attempting to push the price of a stock down by heavy selling or spreading false negative rumors. A bear raid is an illegal tactic where traders collude to drive down a stock’s price through coordinated short selling (selling stocks they do not own, intending to buy them back later at a lower price to cover their short position) and spreading negative rumors about the company. This strategy is often employed by unethical short sellers aiming to profit quickly from their short positions, using platforms like social media and online forums to amplify their impact. While individual short selling is legal in certain markets (not at the CSE), market manipulation and spreading rumors can constitute fraudulent activities.

Front Running: Front running, also known as tailgating, is the practice of trading securities based on advance knowledge of pending large transactions that will affect their prices. This involves executing personal trades ahead of client orders in the same securities. It’s considered market manipulation and can involve brokers or firms trading through undisclosed accounts or using inside information. This unethical practice is prohibited because it allows the front runner to profit unfairly from nonpublic information, potentially at the expense of clients or the broader market integrity.

Cornering the Market: Cornering the market in stock trading involves gaining significant control over a specific stock or commodity to manipulate its market price. One way of doing this is purchasing a substantial portion of the available supply in the spot market and holding onto it (hoarding). Another approach is where the cornerer buys a large number of securities to drive up prices and then sells them for profit once the price is inflated.

Painting the tape: Painting the tape is a form of market manipulation where traders engage in coordinated buying and selling of a security among themselves to create the appearance of active trading and artificially inflate the trading volume or price of the stock.

Marking the close: Marking the close involves manipulating the closing price of a stock by executing trades at or near the market close. The goal is to influence the official closing price to benefit positions or portfolios held by the manipulator.

The following show cause notices issued by the SEC can be quoted as examples of market manipulation.

There have been numerous cases in Sri Lanka involving individuals in criminal activities (see SEC website). However, only minor offenders have been charged, while major players often escape justice by cleverly using various tricks and powerful connections.

Conclusion

Rule 12 of the SEC Rules, published in the Gazette Extraordinary No. 1215/2 dated 18th December 2001, prohibits actions intended to create, or reasonably expected to create a false or misleading appearance of active trading or market conditions regarding securities listed on a licensed stock exchange. This provision aims to safeguard market integrity and investor trust by preventing fraudulent activities that distort market behavior. Despite numerous cases of market manipulation and insider trading reported in Sri Lanka, prosecutions have predominantly targeted minor offenders, while major perpetrators often evade justice through sophisticated means and powerful connections, as documented on the SEC website.

Insider trading involves trading based on non-public, material information that could impact security prices, whereas market manipulation involves deliberate actions to deceive investors and artificially affect security prices or trading volumes. Common forms of market manipulation include pump and dump schemes, churning, spoofing, wash trading, bear raiding, front running, cornering the market, painting the tape, and marking the close. These activities undermine market fairness and transparency, necessitating robust regulatory enforcement as demonstrated by the SEC’s ongoing prosecutions and show cause notices.

By distinguishing between insider trading and market manipulation, the SEC’s regulations provide a comprehensive framework to address various unethical practices, ensuring a fair and orderly market environment. However, the challenge remains to hold all offenders accountable, regardless of their influence or resources.

(The writer, a senior Chartered Accountant and professional banker, is Professor at SLIIT University, Malabe. He is also the author of the “Doing Social Research and Publishing Results”, a Springer publication (Singapore), and “Samaja Gaveshakaya (in Sinhala). The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of the institution he works for. He can be contacted at saliya.a@slit.lk and www.researcher.com)

BY SANJA DE SILVA JAYATILLEKA

Sirasa TV1’s Public Platform (anchored by Sonali Wanigabaduge) of 29th June is only the latest in a series of valuable, one might say crucial, civil society and independent media initiatives to bring more clarity on Sri Lanka’s debt crisis and the on-going negotiations believed to be rescuing us from it.

Despite government hype, experts with impeccable credentials that appeared on this and other programmes like it, are seriously worried about the on-going restructuring efforts which seem to be characterised by capitulation to creditor interests rather than responsible negotiations in order to achieve a fair deal for the people of Sri Lanka.

On this particular TV programme, Prof Jayati Ghosh, joined by Germany’s Christina Rehbein (member of the European Network on Debt and Development) threw a completely different light on what we are led to believe is the problem and its only solution. It appears that Sri Lanka’s negotiators’ understanding of “good news” was to settle for a creditor-friendly, shortsighted solution at the expense of its own citizenry.

The government’s recent self-congratulatory hype needs serious re-scrutiny.

Our Right to Sustainable Solutions

It was at an event at the SLFI, organized by Ahilan Kadirgamar and the newly-founded Yukthi, that first brought an alternative perspective on Sri Lanka’s debt crisis. The public event had Jayati Ghosh, Martin Guzman and Charles Abugre on their panel. Yukthi deserves our deepest gratitude for this initiative at which we came to know that the usual narrative of corruption and bad governance which had been fed to us, including by the populist Opposition, as the primary reason for our plight, was a lesser cause for the crisis.

These scholar-practitioners spoke about other, bigger systemic and structural reasons for this crisis, with the structure being the current international financial architecture as it is constituted today. This structure and its processes are being challenged and sought to be corrected at this moment, including through an initiative of Pope Francis as well as one by the Secretary-General of the UN. Jayati Ghosh was on an important advisory panel to the Secretary-General, the report of which seeks to reform the existing, flawed system.

At the Yukthi event, and reiterated later on TV1’s People’s Platform by Jayati Ghosh, it was pointed out that there have been successive debt cycles going back to the 1970s. After the 2008 financial crisis in the West, there was an excess of liquidity floating in the Western economies, which needed investing for profit. Thus began the untrammeled lending to emerging economies to the delight of the elites running those countries. As the experts pointed out, it takes two to manufacture debt, with responsibility on both sides for the risks. But the lenders, while recognizing the danger of lending to certain higher-risk countries, nevertheless weren’t deterred. They introduced a risk premium to cover that risk. The private money markets made it easy to borrow, and many countries did, including ours, at high interest rates.

However, when the risk actually came to pass and some countries defaulted, the lenders refused to take any responsibility for making a bad investment and demanded the full pound of flesh, while having made plenty of profit on the lending already. All the blame was put on the borrower country which then squeezed its citizens to extract the penalty for which they were not responsible.

This, we are told by the progressive experts, does not have to be the last word on the subject. Countries have the right, yes, the right, to negotiate a deal in which both parties to the contract take responsibility. This includes a substantial haircut on the borrowing; a cap on interest rates; debt standstill until new terms are negotiated so the interest doesn’t pile up while the creditors drag their feet; and critically questioning the IMF programmes which are meant to help with recovery.

17th Going On 18th?

It was on TV1’s Public Platform that it was revealed that the mandatory IMF programme, which is considered imperative for negotiations of debt restructuring, is not required by international law. It is only that creditors insist on it. From their perspective, it is probably seen as necessary to introduce some fiscal discipline to errant elites. However, this doesn’t mean that the programmes that the IMF proposes to countries as imperative for recovery aren’t full of holes. In fact, it was suggested that most of the IMF programmes have failed.

Jayati Ghosh pointed out that when the bulk of the ISBs were borrowed by Sri Lanka after 2014, the country was under an IMF programme. What, she asks, was the IMF doing, by allowing it? How could it be the case that the IMF has the answers to a problem it failed to prevent while on its watch and actually under its supervision?

The visiting experts said that while the IMF has the status of a UN institution, it primarily represents the interests of the creditors in rich capitalist countries due to the quota system that gives those countries dominance over IMF decisions. It is not a neutral umpire. Therefore, the IMF protects the creditors rather than the debtor countries and their citizens.

In Sri Lanka’s case, Prof Ghosh pointed out that while our crisis was a foreign exchange crisis, the IMF programme has lumped our local currency debt together with the foreign currency debt, which, according to her, is plain wrong. This unwarranted clubbing together then makes it possible to squeeze the already burdened citizens, as in the case of the pension funds. The visiting experts asserted that the Debt Sustainability Analysis (DSA) produced by the IMF cannot be trusted to be correct, and in fact, appears to be wrong. This is a serious matter considering our programmes for recovery are based on this DSA.

Verite Research has asked for transparency of the basis for the IMF’s assumptions included in their DSA, in order to verify that the conclusions are correct. The IMF will not reveal it, and those concerned for Sri Lanka fear that the IMF programme will inevitably fail because of its unrealistic assumptions on which our day-to-day existence depends. On TV1’s Public Platform, Christina Rehbein said that the 18th IMF programme is already almost an inevitability, given the flawed nature of the 17th programme we are in now.

The recent ludicrous suggestion by the IMF of taxing owner-occupied houses, which even this IMF-friendly government was quick to backtrack on, should be an indicator of the kind of economic expertise deployed to oversee our recovery. The government had no objections and indeed issued a gazette for its implementation until there was a spirited backlash from the public, including Opposition parliamentarians.

The nature of the government’s relationship with the IMF is certainly our business. Its mistakes, when meekly accepted by our governments, are eventually borne by us. Therefore, we need the negotiating teams of our government to be well-informed, self-confident men and women, not mice. If our government agrees to conditions without adequate forethought, the elites negotiating for the government are unlikely to suffer the consequences. They will simply pass it on to the majority of Sri Lankan citizens. Right now, it does look as if we have deployed mice, to the barely concealed disdain of foreign and local experts.

Elect wisely

The civil society discussions and seminars on the debt crisis such as the ones mentioned, and other interventions by local experts in the media, indicate that the perspective on the global financial system on the part of the governing elite is critical.

If the governing elite is intimidated by the hegemonic system and disinclined to or lack the courage to challenge the shortcomings of it, its institutions, its products and assessment of its personnel, we as citizens will pay.

It is imperative that as a nation in default, our elites have the imagination and the courage to think creatively, gather support from sympathetic, experienced international experts (like Prof Manuel Guzman, former Finance Minister of Argentina) and present a stronger, more favourable case.

Jayati Ghosh repeatedly advised that it is foolish to accept that “there is no alternative” to the proffered IMF programme or even to what the private creditors may be willing to offer. Scholars such as her who are now working with the world community to make the changes to the system, provide evidence that there is much that needs to change. They say Sri Lanka is in a good position to demand those changes and to negotiate a good deal for its citizens.

Since it’s election year, who and which group of politicians are more likely to re-evaluate the international system and ensure we are treated fairly? Which group regards the status quo as sacred, and invokes TINA (Maggie Thatcher’s “there is no alternative”) most regularly? Certainly, this government does. Its negotiators have also agreed to secrecy terms with the creditors, which prevents anyone from figuring out if the best deal is being negotiated for us. While they negotiate in the dark, we pay in plenty in the cold light of day.

But we need to ask this about the governments-in-waiting, too. Some in the Opposition think that the suggestion that one of the causes of the debt crises in non-Western states is the dumping of dollars in newly emerging markets, is a “conspiracy theory”. Fair enough, since it is during their time in power that most of the ISB dollar debt was obtained. However, when in office, had it regarded the private money markets with a little more skepticism if not downright suspicion, we may not have such a huge debt burden.

Sri Lanka has had the experience of successfully challenging the received wisdom with regard to the international system and winning the day, even at the UN. When it works in the interest of the country with good men and women, it can achieve much. And yet, even after that victory, a different Government, and different men and women capitulated at the UN with joint resolutions detrimental to the country, without offering any challenge whatsoever; and not making the effort to negotiate a fair position for all concerned. The men and women we choose to govern us will dictate our fate for years to come. In some cases, the agreements they bind us to may have very long-lasting deleterious consequences.

We need to choose wisely. The politicians need to make the effort to take enlightened positions. In this day and age, things are not so technical that an expert cannot be found who explains it clearly, lucidly. The people will strive to understand and make the choices accordingly. The more enlightened the legislator, the better they would discern the information they are given.

Debtor Coalitions

Prof Jayati Ghosh suggested that Sri Lanka’s best chance is building ‘debtor country coalitions’ in order to negotiate from strength. Some have already negotiated with brilliant results, obtaining 50% haircuts on their debts. This was confirmed at the Yukthi seminar by Finance Minister of Argentina, Manuel Guzman who negotiated his country’s foreign debt restructuring. By contrast, our government is apparently happy with 7%!

Dumping dollars cheaply in the emerging markets made our imports cheaper than manufacturing at home, Jayati Ghosh explains. Having made it so, the people are blamed for living beyond their means. The management of the national budget is in the hands of our legislature and the bureaucrats who advise them. They need to find the best strategies to reverse their own errors. Talking to other countries who have successfully managed the crises will throw up some valuable ideas for consideration.

The experts suggested that Sri Lanka can utilize local laws in creditor countries which protect debtors from unfair deals, such as in Germany (a creditor country of Sri Lanka), to get a better deal. This was suggested because, obviously, we have not done so already.

Prof Ghosh pointed out that there is a debtor conference in Spain next year and urged Sri Lanka to use the opportunity to present an effective case for a fair deal, together with a like-minded group of debtor countries. There is no better opportunity, and Sri Lanka is well placed to take advantage of this, she advised.

She was also firmly of the opinion that Sri Lanka’s solution was not to constrict the economy and the purchasing power of the people, but to “grow out of the crisis”.

With all these experts, who do give a damn about people like us who are being put through the ringer, why isn’t our own government doing better? We ought to be grateful to those who took it upon themselves to educate the Sri Lankan public in what was considered “too technical”, through shining a light on the crisis, its origins and purported solutions, so that we may be able to play a role in our own destiny. And that would be by challenging our governing elites on their lies, compelling our leaders to do better by us, and electing those who would be relatively more capable of standing up successfully for our interests.

It’s, indeed, encouraging to see our entertainers shining bright in the Middle East, as well.

A few weeks ago, I highlighted the band Seven Notes, performing in Dubai.

This week the spotlight is on The Exit, doing their thing in Doha, Qatar.

In fact, I’m told that the Qatar entertainment scene is packed with musicians from Sri Lankan.

Leel Perera, who is based in Doha, mentioned this to me: “I have chatted with you about Qatar and Sri Lankan entertainers. Even if you give one full page in The Island that will still not be enough to highlight everything that Sri Lankan entertainers are doing at this end.”

The band The Exit is a Sri Lankan pop/rock band, formed in 2017, in Doha Qatar.

On the dance floor…enjoying the music of The Exit

The seven-member band comprises Tiron Ismet (lead vocals), Isuru Santiago (rhythm guitar/vocals), Asanka Mihijaya (keyboards), Nuwan Chanaka (lead guitar), Iqbal Assan (bass), Nisala Perera (drums), and Rukvinda Madushan (percussion).

Their versatility is such that they even do folk segments at selected venues, such as pubs, cocktail events, corporate events and even dinner dances and concerts.

They have also provided the backing for many popular guest artistes, including JAYASRI, Atula Adikari, Indrachapa, Kasun Kalhara, Wasthi, Falen Andria, Raini Charuka and Amal Perera.

The challenging part for the band members, they say, is their regular day jobs, and that makes it tough for them to plan out their rehearsals.

According to Tiron Ismet, whether it’s local (Sri Lankan music) or western music, The Exit can do it all. Their music is not limited to one genre, he went on to say, but encompasses rap, hip-hop, rhythm and blues, country, Hindi, and pop and rock.

A recent video clip, on social media, of the band doing the Queen hit ‘I Want To Break Free’, was well received by viewers, with Russel Kleyn saying: “We’ve been entertained by these guys for a while now; they are super awesome and know how to draw a crowd.”

Dileepa Liyanage, a musician who performed in Qatar, said: “A well-known band in Qatar for years.”

The Exit setup