December 09, 2015 Articles

D.C. Circuit Clarifies that SEC Need Not Show Market Impact in Manipulation Cases

A road map to how the commission will evaluate trading activity to prove intent in manipulation cases in future administrative actions

By Dayrel S. Sewell and Amulya Appalaraju

Recent appellate review of the Securities and Exchange Commission’s prosecution of market manipulation cases provides a road map to how the commission will evaluate trading activity to prove intent in manipulation cases in future administrative actions.

In Securities & Exchange Commission v. Donald L. Koch & Koch Asset Management, LLC, No. 14-1134 (D.C. Cir. 2015), the D.C. Circuit reviewed the SEC’s decision in an administrative action against an investment advisor who was found to have “marked the close”—i.e., entered uneconomic trades at the end of the trading day to attempt to bias or influence the “mark”—in three small bank stocks. It clarified its interpretation of Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1997), stating that the Court in that case described manipulation as practices “intended to mislead investors by artificially affecting market activity” but “did not, by this language, require the SEC to prove actual market impact, as opposed to intent to affect the market, before finding liability for manipulative trading practices.” Koch, slip op. at 13 (citing Santa Fe Indus., Inc. v. Green, 430 U.S. at 476).

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