Illegal Cornering of The Capital Markets

The present-day conditions of the Covid-19 Pandemic thus not restrict or reduce the willingness to make investments, where the individuals must possessed some kind of savings and investment in shares, in such to be able to survive during inconsistency of the economy. In Indonesia, investment is not anything new, particularly the younger generation as well as the class of employees have during recent years are increasingly interested in some kind of investment in the capital markets.

However, there are certain events or efforts to illegally outwit the prevailing rules of the capital market and make illegal gains. Thus is called cornering the market. Thus article, contains the laws and regulation to avoid and sanction such illegal methods cornering the market.

The capital market is the market that buys and sells medium to long term financial instruments, including obligations, shares, mutual funds, derivatives as well as other papers of value. The capital market is also one of useful source a financing (for the government) as well as a facility for other investments.

Security broker companies play an important role in the buying and selling of such financial instruments in the capital market and is also an inseparable part of the transactions. In Indonesia, such security companies can only operate with a license issued by the Indonesian Financial Services Authority (OJK). Only with an OJK license can a securities company conduct the business activity to function as an intermediary, underwriter, or other activities pursuant to the rules as set out by the Capital Market Overseeing Authority. As an illustration, an individual shall be unable to buy or sell shares listed in the Indonesian Stock Exchange.

Article 2 Law Number 21/2011 on Financial Services Authority (“OJK”) also stipulates that the OJK is an independent institution in the implementation in its function and authority, without any influence from any other parties, with the exception of parties that is set out in the laws governing the financial market, Capital Market Law (“UUPM”). The OJK has the function of conducting the operating system to oversee the overall integration of financial services (article 5), as well as the role to arrange and oversee the activities of the financial market (article 6,7 and 8).

Stock exchange has a function to oversee the said trading in accordance of Decision Letter of the Board of Directors Num: Kep-00399/BEI/11-2012 as amended in the Decision Letter Num 00071/BEI/11-2013. The Exchange has the authority to monitor information on any securities relating to the following matters: fluctuations in price and volume; frequency; order. From thereon, the stock exchange is the trading place for the buying and selling of stocks of companies that have been registered.

The stock exchange also has the authority to oversee members of the stock exchange, but also has the authority to take action agains among others to inquire explanation directly or undirectly; request transparent information; publish Unusual Market Activities (UMA), such as trading activities and or unusual stock price fructuation within a certain time period as the exchange, that can be considered to potentially disrupt the process that is proper, fair, and efficient; apply suspension on the registered stock; apply suspension on the exchange member; conduct an examination of the securities exchange member.

Any individual conducting activities at the capital market will find three other parties which are the underwriter, investment manager and issuer. In the world of capital market a person can achieve gains or losses, dependent on the risks faced. The Blacks Law Dictionary defines “A "corner (cornering the market)" is a condition arising when a much greater quantity of any given commodity is sold for future delivery within a given period than can be purchased in the market.”  Examples of cornering the market are as follows:

1.     Marking the Close

The effort to engineer the stock price close to the closing of the trading section. With the intempt to have the opening price to be higher or lower and have certain parties have considerable gains.

2.     Wash Sale

The trader conduct the efforts to influence the price by making an inside trading. With the intempt to influence the price.

3.     Corner a Market

Market manipulation to monopolized a certain share, causing no other investor to be able to buy. Demand and Supply.

4.     Demand and Supply

Agreements between buyers and sellers of shares, placing buy and sell orders at the same time.

5.     Front Running

Manipulation of shares transaction before the time.

Based on the types of cornering examples above, the act of market manipulation certainly violates the provisions of Articles 91 and 92 UUPM. Article 91, contains an explanation of the meaning of market manipulation, while according to provision 92, it is explained that any party who violates market manipulation can be threatened with a maximum imprisonment of 10 (ten) years and a maximum fine of Rp. 15 billion.

The administrative sanction of cornering is set out in Article 102 of UUPM.  The capital market authority imposes administrative sanction, which is in the form of the written warning, payment of penalty, restriction of business activity, freezing of business activity, cancelation of license, termination of agreement, and revocation of registration.

An Example of Cornering

Company X issues mutual funds and shares operated by investment manager A and B. With the portofolio consisting of ABC, DEF and GHI shares where the price has been significantly increase. Prior thereto A and B have bad faith by colluding with the officers of Company X. In such way, where A and B should have been acting independently but have put aside their responsibility by not representing the interest of the customer or investors in the management of customer funds.

In thus example a market manipulation has occurred where the investment manager and the officer of Company X have conducted collusion by to take over shares of Company X, by giving some of the share to the intended victims, in such that at one point the victim will be unable to pay. The result will be that the victim will collateralize the shares the owned. This action is direct or indirect cornering that cannot be monitored by the overseeing authorities.

When the case is related or connected to the function of overseers, then the overseers will have the role and responsibility that is clear hold directly or indirectly. The abovementioned action is has potentially violated criminal has potentially conducted criminal acts which is under UUPM or has violated corruption as well as money laundering laws. (aaj/sas)

For further inquiries related this topic, please feel free to contact Mr. Aldi Andhika Jusuf at aldi.jusuf@kk-advocates.com.

(Tulisan di atas adalah merupakan artikel dan tidak dapat dianggap sebagai advis atau opini hukum dari penulis dan/atau kantor hukum K&K Advocates).

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