This article is written by  Bikramjit Chaterji pursuing a Diploma in Law Firm Practice: Research, Drafting, Briefing, and Client Management.  This article has been edited by Ruchika Mohapatra (Associate, Lawsikho). 

This article has been published by Sneha Mahawar.

Introduction

In June 2018, ANZ, Deutsche Bank and CitiGroup were prosecuted for knowingly being concerned in cartel conduct. This case began when ANZ decided to raise 2.5 billion dollars’ worth of shares through institutional investors in August 2015. Senior Executives of CitiGroup, Deutsche Bank and JP Morgan had a discussion about what to do with the remaining unsold shares. There were about 790 million dollars’ worth of shares or 1/3^rd shares which managed to stay unsold which was highly unlikely. However, it was only ANZ, Deutsche Bank and CitiGroup who were prosecuted because JP Morgan was the one who blew the whistle against this case of insider tradingThis case seemed like a really important case in the history of Australia because this was the first time an Australian Bank was involved in criminal cartel charges. This was Australia’s biggest white collar criminal case and the Australian Competition and Consumer Commission (ACCC) is the one who has brought charges against these financial giants, their clients and their current and former executives. This matter led to a two-year investigation by the Australian Competition and Consumer Commission (ACCC). This article talks about the various ways in which market manipulations take place and how they can be prevented. It also highlights the ways in which India can prevent something like this happening in their soil.  

Brief History about the banks  

History of ANZ

ANZ is one of the four major banks in Australia with the likes of the Commonwealth Bank, National Australia Bank (NAB) and Westpac sharing the same mantle. The ANZ Bank had actually been founded in 1951 after two banks: Bank of Australasia and the Union Bank of Australia, which were established in the year: 1835 and 1837 respectively decided to merge with each other. However, the current corporate entity of ANZ was established on 1st October, 1970 when ANZ merged with the English, Scottish and Australian Bank (ES&A) and it was the biggest bank merger at that time. As of this moment, Australian operations make up most of ANZ’s business, with it dominating in commercial and retail banking. ANZ along with its subsidiaries provides employment to about 51,000 employees and serves around 9 million customers worldwide. In Australia alone, the bank serves around six million customers operating out of their 570 branches. 

History of Deutsche bank

Deutsche Bank was founded in Berlin in the year 1870 as a specialist bank that mainly concentrated on financing foreign trade and promoting German exports. It actually played a huge part in developing Germany’s industries as their business model focused on providing finance to mostly industrial customers. The bank’s statute was adopted on 22nd January, 1970 and on the 10th of March, 1870, the Prussian Government granted Deutsche Bank their banking license. 

History of CitiGroup

CitiGroup or earlier known as City Bank of New York was actually chartered by the state of New York on 16th of June, 1812 with 2 million dollars in capital. Initially serving a group of only New York merchants, the bank opened for business on 14th September of that same year. Later, the name of the bank was changed to The National City Bank of New York after it joined the new U.S National Banking System in the year 1865. Subsequently, it became the largest American bank by the year 1895 and it also became the contributor of the Federal Reserve Bank of New York in the year 1913 and the very next year, it opened its first overseas branch in Buenos Aires, Argentina. 

What is a Cartel

A cartel is an organization created by either formal or informal agreement between a group of investors or traders from the stock market to regulate the supply of a specific security or stock or asset to manipulate the price for their own benefit. A cartel is mostly formed to eliminate competition and control the price to churn bigger profits in the future. Tactics used by cartels mostly include: 

1. Reduction of Supply – Decreasing the supply of a specific asset or security to control and manipulate its price of it on a later date. 
2. Price Fixing – Fixing the price of an asset or security by controlling major shares of that asset. 
3. Collusive Bidding – Jointly bidding against or for a security or asset. 
4. Market Carving – Cartel members may collectively agree to break up a market into regions or territories and not compete in each other’s territory.  

Facts about the case

This case began when ANZ decided to raise 2.5 billion dollars’ worth of shares through institutional investors in August 2015. Senior Executives of CitiGroup, Deutsche Bank and JP Morgan had a discussion about what to do with the remaining unsold shares. There were about 790 million dollars’ worth of shares or 1/3rd shares which managed to stay unsold which was highly unlikely. However, it was only ANZ, Deutsche Bank and CitiGroup who were prosecuted because JP Morgan was the one who blew the whistle against this case of insider trading. However, this case seemed like a really important case in the history of Australia because this was the first time an Australian Bank was involved in criminal cartel charges.

This was Australia’s biggest white-collar criminal case and the Australian Competition and Consumer Commission (ACCC) is the one who has brought charges against these financial giants, their clients and their current and former executives. They have been accused of flooding the market with new shares and stopping the price from falling at the same time. This is a classic case of market manipulation because as the number of shares increases, the price of the shares must go down. This happens due to simple economics where if the demand is lower than the supply, then the price of the product/service must fall. 

But what these three banks did jointly is, they decided to buy up all the shares and make sure that the price of the shares don’t go down creating a delusion for investors to invest in the stock. Their end game was to sell the stocks on a later date when they would have successfully made a profit on their initial investment leading to a huge cash out with the banks walking away with millions in profit and a substantial drop in the share prices resulting in the average retail investor to lose out on their invested amount, life savings or worse.    

Charges against the companies

The charges for companies involved in criminal cartel charges is a maximum of 10 million dollars or three times the total benefits that have been earned, whichever is higher and these are reasonably attributable for the commission of the offense. However, the ones who were prosecuted were former ANZ senior executive Richard Moscati who was one of the six high-profile bankers who were charged for allegedly forming a cartel which they did to manipulate the share prices of the four banks in 2015. On the other hand, Citigroup Global Markets Australia and Deutsche Bank AG were also facing a combined 12 criminal charges on the basis of anti-cartel laws. ANZ was also facing three charges for aiding and abetting the contravention of the anti-cartel laws. However later, the charges against Richard Moscati and ANZ were dropped and it’s not clear as to why it happened. After the charges were dropped, the focus of the case shifted on John McLean and Itay Tuchman of Citigroup Global Markets Australia and Michael Ormaechea and Michael Richardson of Deutsche Bank AG.

For individuals, the maximum sentence is up to 10 years in prison or a fine up to $420,000 or both.    

Effects of the case

After this case came to light, several countries and financial experts started following this case very closely as a scam of this scale was the first to happen, especially with three banks involved in the scam. However, this was not the first time CitiGroup was involved in a scandal or manipulating the financial market for their own benefit. CitiGroup had been caught up in several scandals in the past.

What is Market Manipulation

Market Manipulation refers to the method with which the price of securities and assets can be artificially increased or decreased. The reason why it is artificial is because the manipulators try to skew the supply and demand to change the price of the securities for their benefit. While supply and demand of an asset can change at any point of time because of other fundamental analysis factors, including news announcements, earning reports and investors decision process, manipulation of the securities market mostly involves illegal means such as spreading false news, trying to influence price quotes or posting fake orders. Market manipulation can be explained with the help of a case law: Montgomery Street Research Wash Trading Lawsuit where in late 2014, the Securities and Exchange Commission (SEC) brought an enforcement action against an equity firm Montgomery Street Research. The firm’s owner allegedly manipulated the market for a publicly-traded stock for which he was soliciting investors. After a company hired Montgomery to assist in two private placement offerings, the firm owner allegedly engaged in wash trading, which involves the near-simultaneous purchase and sale of a security to make it appear actively traded, without any actual change in ownership of the securities. 

The SEC alleged that Montgomery conducted approximately 100 wash trades where the sell order came within 90 seconds of the buy order for the securities. The price and quantity of securities bought and sold were nearly identical for all buys and sells, says the SEC. The stock was otherwise rarely traded. Thomas Krysa, an Associate Director of Enforcement at the SEC, explains that wash trading obscures whether there is truly market interest in the stock: “Wash trading is an abusive practice that misleads the market about the genuine supply and demand for a stock.” Utilizing wash trading, the SEC says that Montgomery Street Research raised more than $2.5 million from investors. 

Examples of Market Manipulation 

1. Churning – Churning refers to the practice where a trader places a buy and sell order at the same time. This is done so that the trade volume goes up and it looks like more people are buying the stock. This increases the interest of the other investors, making them want to buy the stock, in turn increasing the price. 
2. Painting the Tape – Painting the Tape refers to a practice where a group of traders creates activities or rumors to increase the price of the stocks. 
3. Wash Trading – Wash Trading refers to the practice of selling and reselling the same security to generate false activity and in turn, increase the price. 
4. Bear Raiding – Bear Raiding refers to the practice of selling or short selling a stock heavily to decrease the price of the stock.  
5. Cornering – Cornering refers to a practice where a single trader or a group of traders buy the majority of the stocks of a particular company to control the supply of that stock which in turn helps them to set the price of the stock as and when they desire. 
6. Insider Trading – Insider Trading refers to the illegal practice of insiders of a company who have access to confidential information misusing it to buy or sell stocks of their own company to avoid losses or make quick profits. Often they even sell this information to people looking to buy insider information for a good sum of money to help them make a quick profit or avoid heavy losses.  

What can India do to prevent this from happening in India

So how can India prevent a scam of this scale in its financial market? To battle this, in 2019, the Reserve Bank of India (RBI) came out with guidelines to prevent misuse of price sensitive information by participants. The Reserve Bank of India made sure that no one is able to undertake any action so as to manipulate the calculation of a benchmark rate or reference rate. However, if any party is caught misusing price sensitive information, they will be denied access to the markets in one or more instruments for a period that may not exceed 1 month at a time.  The Reserve Bank of India also said that this new guideline would not apply to banks or the Central Government if it is for the furtherance of monetary policies, fiscal policies or public policy objectives. This can lead to market manipulation and banks getting away with financial frauds as they can disguise their wrongdoings as policies for furtherance of monetary policies, fiscal policies or public policy objectives. However, this can be avoided by the Securities Exchange Board of India by:

1.  Regulating stock exchanges and other intermediaries in the stock market such as brokers, sub-brokers, merchant bankers, venture funds, mutual funds, FII, etc.
2.  Educating the investors about malpractices in the market and making them aware of their rights and duties.
3. Ensuring that the market has systems and practices that make transactions safe and this they have achieved through a screen-based trading system, dematerialization of securities, T+2 rolling settlement and framed various regulations to regulate intermediaries, issue and trading of securities, corporate restructuring, etc., to protect the interests of investors in securities. 
4.  Grievance Redressal Mechanism which answers to the grievances of investors against intermediaries and listed companies.

But even after so many policies and checks and balances, there will always be someone or a group of people who will be able to outsmart SEBI. For those situations, the regulatory body will have to be prompt and quick on their toes to identify and take action when such discrepancies come to light.

Conclusion

Finally, Australian authorities had withdrawn the cartel lawsuit against Citigroup, Deutsche Bank, ANZ and several former executives over a $1.8 billion share issue, a staggering amount that could have resulted in this case being the biggest white-collar criminal trial in India. After nearly fighting in packed courtrooms for 4 years, the federal prosecutors said that there was no evidence leading to a reason for conviction. But the fate of several top executives hangs in the balance with the former treasurer of ANZ being sacked. On the other hand, Citigroup Global Markets Australia and Deutsche Bank AG were also facing a combined 12 criminal charges on the basis of anti-cartel laws. ANZ was also facing three charges for aiding and abetting the contravention of the anti-cartel laws. However later, the charges against Richard Moscati and ANZ were dropped and it’s not clear why it happened. After the charges were dropped, the focus of the case shifted on John McLean and Itay Tuchman of Citigroup Global Markets Australia and Michael Ormaechea and Michael Richardson of Deutsche Bank AG. For individuals, the maximum sentence is up to 10 years in prison or a fine up to $420,000 or both. To make sure that such a thing doesn’t happen on Indian soil, in 2019, the Reserve Bank of India (RBI) came out with guidelines to prevent misuse of price-sensitive information by participants. The Reserve Bank of India made sure that no one is able to undertake any action so as to manipulate the calculation of a benchmark rate or reference rate. However, if any party is caught misusing price-sensitive information, they will be denied access to the markets in one or more instruments for a period that may not exceed 1 month at a time. However, the Reserve Bank of India also said that this new guideline would not apply to banks or the Central Government if it is for the furtherance of monetary policies, fiscal policies or public policy objectives. This can lead to market manipulation and banks getting away with financial frauds as they can disguise their wrongdoings as policies for the furtherance of monetary policies, fiscal policies or public policy objectives.  

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