The first-instance criminal Judgment of the notorious market manipulation case, with the Bureau of Labor Funds involved, was rendered on August 19, 2022, i.e. Taipei District Court Criminal Judgment 110-Jing-Zhong-Su-Zi No.10 ("Judgment").  The CEO and the investment director of PJ Asset Management Co. Ltd. (with its affiliate Chia Yuan Ltd., collectively as “PJ Group")were both sentenced to eight years in prison.  They were found guilty of manipulating the stock price of Far Eastern Department Stores Co. Ltd. ("Far Eastern") through continuous trading, matching orders, spreading rumors, and other indirect means that manipulate the stock price.  Meanwhile, the head of the investment section of the Bureau of Labor Funds, who conspired with the investment director of the PJ Group to have the Bureau of Labor Funds acquire shares held by the PJ Group, was sentenced to nine years in prison for the crime of indirect stock price manipulation.

The reason why this case gained significant attention from the public was probably due to the intricate arrangements made by the head of the investment section of the Bureau of Labor Funds, which resulted in multimillion-dollar losses to the Bureau of Labor Funds.  Nonetheless, the Judgment surprisingly spent half of its passage to discuss whether and why PJ Group's substantial purchases of Far Eastern shares between 2019 and 2020 should constitute continuous trading under Article 155, Paragraph 1, Subparagraph 4 of the Securities and Exchange Act.  The Judgment opined that, when determining whether the defendant has the intent to manipulate the stock price through continuous trading, the court should consider the following key factors: (1) during defendant’s transaction period, whether the price and trading volume of the said stock deviated from the market trend or the trend of other similar stocks; (2) whether the defendant has purchased the said stock at a price that is  higher than the average price or close to the highest bid price, with a limit up price order, or by high close; (3) whether the defendant has made a substantial profit by selling the said stock after artificially raising the stock price, and (4) the defendant’s "control over market chips."

Notably, most of the aforementioned factors are consistent with former court rulings and administrative interpretations, but the fourth factor, i.e. "control over market chips," was originally created and repeatedly emphasized by the Judgment.  The Judgment held that PJ Group's has misled the incumbents of the Far Eastern to believe that there might be a hostile takeover. In that way, not only would those incumbents keep their shares in the short term, they may buy more shares to increase their holdings. Consequently, even though the PJ Group only held 10% of the Far Eastern's shares, it had sufficient “control over market chips” to influence Far Eastern's stock price.

Based on this premise, the Judgment tended to conclude that the defendants' conduct constituted continuous trading and matching orders.  For instance, in this case,  trading mere four 4,000 shares during a specific period of time is also considered continuously trading.  The defendants argued that most of the PJ Group’s trading  were within the best five bids and asks, and thus they didn't purchase the stocks at a higher price. However, the Judgment held that "even if the defendants placed orders within the best five bids and asks, as long as each buy order is at a price higher than or equal to the best sell price...and a sufficient number of orders are placed within a short period of time, the defendants would have the ability to manipulate the price, making it spike or plunge." This differs from the past rulings in which the court usually considered whether the defendant was buying stocks near the limit up price.  Furthermore, the Judgment rejected the defendants’ defenses that they had never used dummy accounts and there were no conversations records between the defendants regarding the matched orders in the case files. The Judgement held that it was inconceivable that the matched orders were the result of mere coincidences or some employees’ mistakes.  This suggests that in comparison to past stock manipulation cases, which typically involved using dummy accounts to "fake trading volume" and buying stocks near the limit up price to "fake price," the Judgment exhibits a tendency to loosen the criteria on continuous trading and matching orders.

Of course, whether the Judgment’s ruling should be supported is subject to discussion.  Nevertheless, after this case, enterprises (especially those already held a certain proportion of shares of the target company) should pay extra attention to preserve the written evidence in their favor when trading stocks, e.g. the stock investment analysis report, so as to avoid inadvertently crossing the red line of the Securities and Exchange Act.

(The article is originally in Chinese which can be found here.)