Open-Market Manipulation under SEC Rule 10b-5 and its Analogues

August 26, 2011Articles
Thomson Reuters’ (WEST Group) Securities Regulation Law Journal
Maxwell Multer, an associate in Dinsmore’s Natural Resources Practice Group, recently wrote an article published in the Summer 2011 edition of the Securities Regulation Law Journal. The article examines the increasingly common phenomenon of “open market manipulation” and discusses how courts have analyzed allegations of open market manipulation within the framework of SEC Rule 10b-5 and the Federal Energy Regulatory Commission’s anti-manipulation rule. Maxwell ultimately argues that while the distinction between “open market” manipulations and “traditional” ones is valid as a matter of taxonomy, courts should treat all alleged manipulations within the same analytical framework.

Open market manipulations are manipulative schemes accomplished entirely using facially legitimate open market transactions. In the article, Maxwell discusses several ways these manipulations can be accomplished, and points out some of their more troubling implications. In the past, the forces of supply and demand made it difficult to accomplish a profitable market manipulation without engaging in certain behaviors which are objectively recognizable as being illegal, such as wash sales or fictitious transactions. However, with modern advances in trade execution, market platforms and, most importantly, derivatives, such objectively bad behavior is no longer necessary. The question is: how will courts analyze claims of this new class of potentially manipulative behavior?

Because open market manipulations are comprised entirely of seemingly legitimate transactions, some courts have categorically refused to impose liability under SEC Rule 10b-5. The reality, however, is that if such behavior is not captured by Rule 10b-5, another rule will be created. In the article, Maxwell discusses how courts have analyzed open market manipulations so far, and argues that Rule 10b-5 is the appropriate framework for examining this behavior. Click HERE to read the full article.