TRUTH IS the first casualty of war. And in volatile financial markets truth may also become the first casualty of illegal trading activity, where unscrupulous investors first spread false rumours about companies and later trade on the mis-information for profit. Such market abuse is financial fraud. The crime, however, is hard to detect and even harder to prove in court.
For some weeks financial regulators in Dublin, London and New York have been investigating claims that some manipulation of share prices occurred in March at the height of the global stock market turmoil. This week Irish regulator Patrick Neary, who is examining suspicious trading activity in financial stocks at that time, notably in Anglo Irish Bank, reported progress in his close scrutiny of thousands of share deals. That, for now, is encouraging news.
March 17th became yet another Black Monday on the Irish stock market when financial shares lost some 7 per cent of their value. At one point in the trading da,Anglo Irish Bank's share price had fallen by 23 per cent. Nothing has emerged to justify such a sudden fall in the company's market value. Irish banks are well capitalised. They appear to have little exposure to the sub-prime market and have not faced funding difficulties.
Undoubtedly, the takeover of Bear Stearns, the US investment bank, by J.P. Morgan Chase, had created some general investor nervousness about financial stocks. It may have made some financial institutions vulnerable to a speculative attack. But what happened in the Dublin market on St Patrick's day was largely replicated in the London stock exchange some 48 hours later. There, Britain's largest mortgage lender, HBOS, was hit by unsubstantiated rumours that it was short of cash, and had sought financial support from the Bank of England. The rumours were denied by the company and dismissed by the Bank of England as "utter rubbish". Britain's financial regulator launched an investigation into "false rumours" maliciously spread about troubles at UK banks. The Irish regulator, sharing a similar concern, began his examination and both regulatory authorities have co-operated in their investigations.
The spreading of false rumours in a bid to manipulate share prices for an illegal gain presents both the companies affected and the regulatory authority with a dilemma. To deny market rumours is to set a dangerous precedent. A silent response to rumours may suggest some confirmation of their veracity. But where rumours are plainly false and clearly designed to precipitate a market panic from which unscrupulous traders aim to profit, the only response may be a public statement by the affected company and resolute investigative action by the market regulator.
Undoubtedly, the best way of ensuring that rumour mongers cannot manipulate financial markets for their own ends is for the current investigations by the Irish and British regulators to succeed. Failure will result in a loss in investor confidence in financial markets.