GameStop mania could be illegal in Singapore
Retail investors need to exercise discretion, participate responsibly in online discussions without infringing the SFA, and not fall prey to dishonest traders.
WALL Street began the new year with a David and Goliath act when video game retailer GameStop's share price rallied amid an anti-establishment movement brought on by retail traders on Reddit page WallStreetBets.
To force establishment investors, who were selling short on GameStop stocks, to cease support of bearish bets against GameStop by driving up its share price and at the same time profit from the short squeeze.
It is indeed an incredible story that has caught the imagination of many retail investors and inspired similar attempts to coordinate trading on discussion forums in other markets.
While Singapore has its own SGXBets Reddit page, are local retail investors aware that such mob rule could be illegal in Singapore?
SINGAPORE'S OWN GAMESTOP?
Against the backdrop of the GameStop saga and to preempt the Singapore stock market, the Monetary Authority of Singapore (MAS) and SGX RegCo released a joint statement on Feb 2, 2021 to advise the investing public to be on heightened alert on the risks related to trading in securities incited by online discussion forums and social media chat groups.
This was preluded by a SGX RegCo warning to the public on Dec 10, 2020 of "pump-and-dump" activities exploiting Telegram chats and other social media channels. The warning was accompanied with an illustration of how irregular trading activities behave correspondingly with Telegram chat posts in a "pump-and-dump" scheme.
It is apparent that MAS and SGX RegCo are monitoring market activities closely, including discussions on online websites and platforms, for signs of similar speculative activities and misconduct in the Singapore stock market.
It was also alluded that such misconduct could infringe the Securities and Futures Act (SFA), specifically any conduct that intentionally, knowingly, or recklessly creates a false or misleading appearance regarding the active trading, market or price of securities. Restrictions may be placed on the trading accounts of those suspected of such misconduct and the relevant securities may be placed under designation or suspension.
Market watchers observed that the US stock market frenzy is unlikely to be mirrored here in the Singapore market, given the size of the local stock market and low short-selling interest, as critical mass is necessary to execute a short squeeze effectively. Yet shares of Oceanus Group briefly hit 6.9 cents on Feb 3, 2021, which was the highest level they have traded since 2012, amid SGXBets speculation.
Although WallStreetBets' millions of members dwarf that of SGXBets, it is no less pertinent for local retail investors to be keenly aware of how such market conduct can infringe on the SFA and tread with care in such forums amid the ongoing hype.
The primary objective of MAS' regulatory framework for capital markets is to safeguard the interests of retail investors.
The Securities and Futures (Amendment) Act 2017 implemented changes which came into effect on Oct 8, 2018 to enhance regulatory safeguards for retail investors, enhance credibility and transparency of the capital markets and strengthen the enforcement regime against market misconduct.
Among the many changes, the disclosure and reporting requirements of short selling and measures to strengthen the enforcement regime against market misconduct were implemented.
Generally, false trading and market rigging is covered by section 197 of the SFA. It prohibits a person from intentionally, knowingly or recklessly creating a false or misleading appearance of active trading in, or with respect to the market for or price of, any capital markets product traded on an organised market in Singapore. This ensures that the supply and demand is a true reflection of the market.
Section 199 of the SFA prohibits a person from knowingly or recklessly making a statement, or disseminating information, that is false or misleading in a material particular and is likely to induce subscription of or the sale or purchase of securities, among other capital markets products, or which are likely to affect the market price of these capital markets products.
Following changes effected on Oct 8, 2018, the amended prohibition under this section had departed from case law which ruled that a significant price effect is required for liability to be established against a person with respect to false or misleading statements under section 199 of the SFA. This means that the prohibition under section 199 of the SFA applies regardless of the price effect and its enforcement would not be constrained by the requirement of a significant price effect.
Section 201 of the SFA is the catch-all provision which prohibits the employment of any device, scheme or artifice to defraud, engaging in any act, practice or course of business which operate as a fraud or deception or is likely to, making any statement known to be false in material particular or omitting to state a material fact necessary in order to make the statements made not misleading, in connection with the subscription, purchase or sale of any capital markets product.
In light of the above prohibitions, retail investors are treading on a very thin line posting comments on discussion forums which in the process may incite fellow retail investors to rally up or down a share, whether in price or volume.
It does not take a "pump-and-dump" scheme to be effected for the authorities to bring order to online discussions as long as it is hurting the market. Such online platforms should take ownership to regulate their platform and ensure its compliance with the regulations and to nip it in the bud when undesirable and non-compliant exchanges start to populate their platforms. It is onerous but may be necessary before the authorities step in.
CRIMINAL AND CIVIL LIABILITY
Section 204 of the SFA provides that contravention of these provisions carries penalty of a fine up to S$250,000 or to imprisonment for a term up to seven years or to both. Alternatively, section 232 of the SFA provides that the MAS may obtain a civil penalty of a sum not exceeding the greater of three times the amount of profit gained or loss avoided by the contravening person or S$2 million.
Regulatory safeguards are necessary for retail investors so that less-informed retail investors do not become collateral damage in such mob behaviour in the stock market. It would be paradoxical that the ones whom the regulators seek to protect are the ones who fall prey to irresponsible conduct of their own making.
When restrictions are placed on trading accounts or relevant securities are suspended, there will be no one to bail out the last person standing with the highest-prized stock in such a seemingly Ponzi scheme.
Further, not curbing irresponsible conduct on online platforms risk such mob behaviour being institutionalised which will stigmatise the stock market.
PROTECTING RETAIL INVESTORS' NEEDS
While awaiting regulatory safeguards to play catchup with how stock market influencers have evolved, more needs to be done to safeguard the interests of retail investors.
The GameStop saga reflects deep frustrations over a perceived inequality between the person in the street and the professionals on Wall Street in access to information.
An example of this is the many private meetings between major investors and the C-suite or investor relations team which happen behind closed doors on the pretext of discussion over investments, investor updates and interviews.
Retail investors are not privy to important information exchanged in such meetings where major investors take guidance on the companies' earnings, outlook and corporate exercises which give major investors an advantage over retail investors.
In line with enhancing credibility and transparency of the capital markets, disclosure of such private meetings and, possibly, the information shared, should be mandatory. This would help give retail investors access to adequate information to make informed decisions on their investments and, at the same time, ensure that listed companies deal with them fairly.
However, formalising disclosure on the information shared in such private meetings may be laborious for listed companies. This would entail more reporting requirements and more enforcement efforts. Whilst it benefits retail investors to a certain extent, it may encourage more informal investor relations activities to be held over "coffee chats".
A balanced and measured approach is necessary to safeguard the interests of retail investors without overly regulating the stock market and stifling stock market forces of supply and demand.
Ultimately, retail investors need to exercise discretion, participate responsibly in online discussions without infringing the SFA, and not fall prey to dishonest traders masking themselves online to instigate trading interest for their own benefit.
It pays for retail investors to hold fast to the fundamentals of investment and not be clouded by crowd wisdom and be led by herd instinct. David slayed Goliath with a sling and a stone, not a mob squad.
- The writer is senior partner, RHTLaw Asia LLP, and non-executive chairman of RHT Group of Companies
Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.