16 February, 2019
Since 2017, the Anti Money Laundering Office (AMLO), the Securities and Exchange Commission (SEC), and the Stock Exchange of Thailand (SET) have been engaged in an active drive to monitor and pursue many charges related to stock manipulation against high-level executives of security-issuing companies. These authorities, particularly the SEC, have the duties to regulate, monitor, and sanction any traders who act in contravention of the Securities and Exchange Act B.E. 2535 (1992) (the Act), which prohibits, among other things, insider trading and stock manipulation. Executives charged by the SEC for engaging in such conduct could be required to pay substantial civil fines, and could also be barred from holding an executive position in securities-issuing companies. Investors who suffer losses from such manipulations also have the right to file a claim against the stock manipulators to seek compensation.
Stock Manipulation
Stock manipulations occur when a person with inside information causes stock to behave abnormally in order to manipulate its price or value. Principally, the Act prohibits anyone with inside information related to the securities-issuing company from purchasing or selling securities, or entering into a derivative contract with respect to the securities, for themselves or for others, except as allowed by law. The disclosure of inside information to another person, directly or indirectly, is also prohibited under the Act.
Certain groups of people are presumed under the Act to have inside information by the nature of their roles or positions in the company, including directors, executives, auditors, advisors, and employees who are responsible for or capable of accessing inside information. Any such persons found to have traded securities, or entered into derivatives contracts, in a different manner from their normal practice, are presumed to have known or possessed inside information.
The impact of insider trading can be substantial, and cautionary tales abound. In one very recent high-profile case, executives of a securities-issuing airline manipulated stocks by jointly trading shares with the public while trading shares among themselves by matching orders. The transaction appeared to the public to be a bid, thereby masking the true price and volume of securities being traded. This trading scheme caused the price and the volume of the shares to behave abnormally in the market, with the prices ultimately rising 22.5 percent.
The SEC charged the executives who participated in this scheme with offences under the Act, ordered them to pay massive civil fines (nearly USD 16 million in total), and barred them from becoming executives or directors of listed companies and securities-issuing companies.
Rights of Injured Investors to Claim through Class Actions
The fines and penalties in the case above are an example of the robust protections against unscrupulous trading practices in the arsenal of the SEC. However, the risks of insider trading no longer end with SEC sanctions. Recent legislation has also empowered affected investors to recover their losses from such practices directly.
In stock manipulation cases, even when vast sums have been unlawfully procured by a stock manipulator, the individual traders that have been misled may only have suffered comparatively small amounts of individual loss. This means that claim amounts have often been too small for investors to justify the cost of litigation.
Thailand’s recently enacted class action legislation, chiefly the Act to Amend the Civil Procedure Code (No.26) B.E. 2558 (2015), changes that, by allowing plaintiffs in cases related to securities and stock exchanges, including stock manipulation, to apply for class proceedings.
This means that a representative of a large group (or “class”) of injured parties can file a claim against the same defendant or defendants, on behalf of the group, in a single lawsuit. In a stock manipulation case for example, a class may include all those who purchased stock at an artificially inflated price. If the claim is successful, the damages awarded by the court can then be calculated based on the number of members of that class (if appropriate).
Strengthening that protection further, Thailand’s class action regime is an “opt-out” system, which allows for passive participation by class members. Class action cases are initiated and driven by lawyers and representatives of the class members who suffered similar losses, based on the same legal violations and other facts. When the parameters of such a class are fixed by the court, it will issue notices of proceedings to the class members. These notices include essential information such as a summary of claims, the details of claimants and lawyers, the rights of the class members, the binding effect of any court decision on those class members, and, crucially, the period for opting out from the proceedings. Those who do not do so are included in the plaintiff class, will be bound by the court’s decision, and will may be included in the multiplier for calculating the award of damages.
Once the class is fixed, the plaintiff benefits from all the tools of civil litigation, including a document discovery process, in which parties are required to disclose their documentary evidence and witnesses to the opposing party. Uniquely among Thai civil proceedings, class action legislation enhances this discovery process by granting the court powers to interrogate the parties prior to witness hearings, and to search for additional facts beyond what has been disclosed by the parties.
This means that in addition to facing substantial fines by the SEC, and being prevented from holding future executive positions, those involved in unscrupulous trading activities may also find themselves facing an enhanced civil litigation process culminating in an award of damages based on the losses of hundreds, or even thousands, of defendants.
This powerful advantage for wronged investors should encourage companies to be even more cautious in their approach to preventing insider trading. More importantly, this protection should increase the confidence of traders, large and small, seeking to trade in Thailand free from the fear of unrecoverable losses caused by shady dealings.
For further information, please contact:
Thawat Damsa-ard, Partner, Tilleke & Gibbins
thawat.d@tilleke.com
