THE LAW OF MARKET MANIPULATION IN SAUDI ARABIA

289 Pages·2017·1.99 MB·English

THE LAW OF MARKET MANIPULATION IN SAUDI ARABIA:
A CASE FOR REFORM

A Thesis Submitted for the Degree of Doctor of Philosophy in Law

By
Saad Ali Aljloud
LLM Westminster University
LLM Imam University
LLB Imam University

School of Law
Brunel University

2016
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DECLARATION
I declare that the work presented in this thesis is my own except where it is stated
otherwise.

The copyright of this thesis rests with the author. No quotation from it should be
published without his prior written consent and information derived from it should
be acknowledged.

Saad Aljloud
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ABSTRACT
The integrity of financial markets is threatened by a number of harmful practices.
These are often generally described as ‘market abuse’. Market abuse comprises two
practices: insider dealing and market manipulation. This thesis mainly explores
market manipulation and the relevant Saudi law. Market manipulation was first
regulated in 2003.1 It is therefore possible and useful for the purposes of this thesis,
to distinguish between the pre- and post- enactment periods.
This study has four main objectives. First, it will define market manipulation and
describe its most common forms. Secondly, it will assess the application of Saudi
civil and criminal law to market manipulation prior to the enactment of the Capital
Market Law 2003. Thirdly, it will critically evaluate the application of this law to the
different forms of market manipulation. Finally, it will assess how well the 2003 law
is enforced. Different methodologies have been used to achieve these objectives with
a focus on critical analysis and comparative study. The author has used the well-
established US Securities Exchange Commission (SEC) and the UK Financial
Services and Markets Act 2000 to evaluate the Capital Market Law 2003. Prior to
the enactment of this law, there were almost no regulations dealing with market
manipulation.
The 2003 law is applicable to most forms of market manipulation with the exception
of security price stabilization and forms manipulation. Penalties under Saudi civil
law tend to be more lenient compared to the US and the UK and this may inhibit its
deterrent effect. Also, Saudi judges generally tend to lack the necessary
understanding of manipulative practices to enforce the law effectively. Therefore, the
success of the 2003 law in deterring and punishing manipulative practices should be
reassessed in a few years’ time, when there is more data to make an accurate
evaluation.

Keywords: Insider dealing, Islamic law, Market abuse, Market manipulation,
Regulation.

1 Capital Market Authority, ‘Annual Report 2007’ (Capital Market Authority 2007) 16.
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TABLE OF CONTENTS

DECLARATION ........................................................................................................ I
ABSTRACT ............................................................................................................. III
ACKNOWLEDGEMENTS .................................................................................... IX
LIST OF ABBREVIATIONS .................................................................................. X
GLOSARY .............................................................................................................. XII
TABLE OF CASES .............................................................................................. XVI
LEGISLATION .................................................................................................... XIX
LIST OF FIGURES ............................................................................................. XXI
LIST OF TABLE ................................................................................................. XXI

CHAPTER 1: GENERAL INTRODUCTION TO THE LAW OF MARKET
MANIPULATION IN SAUDI ARABIA: A CASE FOR REFORM ..................... 1
1.1 Introduction ............................................................................................................ 1
1.2 Research Method .................................................................................................... 1
1.3 Research Problem................................................................................................... 3
1.4 Research Objectives ............................................................................................... 4
1.5 Literature Review: Establishing the Originality of this Thesis .............................. 5
1.6 Research Significance ............................................................................................ 7
1.7 Research Structure ................................................................................................. 9

CHAPTER 2: THE SAUDI ARABIAN LAW OF MARKET MANIPULATION
.................................................................................................................................... 11
2.1 Introduction .......................................................................................................... 11
2.2 The Historical Development of the Saudi Capital Market Law ........................... 11
2.2.1 The First Stage (1935–1982) .................................................................... 12
2.2.2 The Second Stage (1983–2002) ................................................................ 13
2.2.3 The Modern Stage (2003–Present) ........................................................... 15
2.2.4 The Active Capital Market ....................................................................... 16
2.3 The Current Operational Structure ....................................................................... 17
2.3.1 The Electronic Securities Information System (ESIS) ....................................... 17
2.4 The position of Islamic Law in Saudi Arabia ...................................................... 18
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2.4.1 Nature of legislative system ..................................................................... 19
2.5 The Legal Structure of Judicial system in Saudi Arabia; and its subsequent
development. ........................................................................................................ 20
2.5.1 Judicial Bodies in Saudi Arabia ................................................................ 21
2.5.1.1 The Ministry of Justice………………………………………….21
2.5.2 The Current Judicial and Court System .................................................... 22
2.5.2.1 The Supreme Judicial Council……………………………………....22
2.5.2.2 The Courts of Appeal (Courts of Cassation)…...………………..….23
2.5.2.3 First-Instance courts (General and Summary Courts)……..………..23
2.5.2.4 The Board of Grievances……….………………………………..….24
2.5.2.5 Quasi- Judicial Commission and Administrative Committees….….25
2.5.2.6 Characteristics of judicial commissions……...…………….…….....25
2.5.2.7 Types of Judicial commissions………………………………………..25
2.6 Principles of crime and punishment in the system ……………….…………….26
2.6.1 Examples of crimes regarding which legislation has been issued and used
in courts………………………………………………………………..26
2.6.2 New procedure under the criminal law of capital market authority ......... 27
2.7 Market Manipulation ............................................................................................ 28
2.7.1 Market manipulation by provision of false information……...………….…29
2.7.2 Market manipulation by misleading transactions………...…………………29
2.7.3 Market manipulation by practices/actions which lead to a false impression.30
2.8 Importance of the Stock Exchange ..................................................................... 30
2.8.1 The Saudi Stock Market and its Regulation ............................................. 31
2.8.2 Insider Trading ........................................................................................ 32
2.9 Select Decisions of the Committee for Resolution of Security Disputes............. 35
2.10 Conclusion ......................................................................................................... 56

CHAPTER 3: THE ISLAMIC LAW OF MARKET MANIPULATION .......... 57
3.1 Introduction .......................................................................................................... 57
3.2 The Legislation System in Islamic Law ............................................................... 57
3.3 The Fundamental Principles of Islamic Law ....................................................... 58
3.3.1 Civilian Rights (Transactions) .................................................................. 58
3.3.2 Commercial Contracts in Islamic Finance................................................ 59
3.3.3 Criminal Law (Crime and Punishment) .................................................... 60
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3.4. Sources and Methods of Islamic law .................................................................. 61
3.4.1 The Holy Qur’an as a Primary Source ...................................................... 61
3.4.2 The Sunnah as a Primary Source .............................................................. 65
3.4.3 Ijma (Juristic Consensus) as a Primary Source ........................................ 71
3.4.4 Qiyas ......................................................................................................... 72
3.5 Subsequent Sources of Islamic Law: Approbation .............................................. 73
3.5.1 The First Source of Guidance ................................................................... 73
3.5.2 Sadd al-dhara'i' ( Blocking the means) ................................................... 73
3.5.3 Al-Masalah Al-Morslah ............................................................................ 74
3.6 The value of the different Schools in Islamic Law .............................................. 75
3.7 Ijtihad and Ikhtilaf ................................................................................................ 78
3.8 Islamic Objective ................................................................................................. 82
3.8.1 Good Faith ................................................................................................ 82
3.8.2 The Necessity of Knowing the Rules of Selling and Buying ................... 85
3.9 Market Manipulation in Islamic Law ................................................................... 86
3.9.1 Financial Market in Islam……………………………………………….89
3.9.2 Jurisprudential Legislation for Manipulation in the Financial Markets ... 90
3.9.3 The Effects of Manipulation on the Financial Market ............................. 91
3.9.4 The Relationship between the Buyer and Seller ....................................... 92
3.9.5 The Relationship between the Buyer or Seller and the Manipulator in the
Market (among the Traders) ................................................................... 93
3.9.6 Jurisprudence Cases Ruling on the Relationship between all Parties in the
case of Manipulations in Prices or the Existence of Blemish ................ 95
3.9.7 Islamic Ruling on Manipulations ............................................................. 99
3.10 Al Hisbah………..……………………………………………………………101
3.10.13.10.1 Tools of Market Regulation in the Private Sector……..………..103
3.11 Conclusion ....................................................................................................... 106

CHAPTER 4: THE US LAW OF MARKET MANIPULATION ..................... 108
4.1 Introduction ........................................................................................................ 108
4.2 The Background to Market Manipulation in the US .......................................... 108
4.3 Manipulation in the Historical Commodity Futures Markets ............................ 111
4.4 Early Manipulations ........................................................................................... 114
4.5 The Definition of Market Manipulation ............................................................. 116
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4.6 The Dangers of Market Manipulation ................................................................ 118
4.7 Types of Manipulative Conduct and Deceptive Practices ................................. 119
4.7.1 Concepts of Manipulative Practices ....................................................... 119
4.8 The Federal Trade Commission (FTC) .............................................................. 134
4.9 The SEC’s Anti-Manipulation Role after Dodd–Frank ..................................... 137
4.10 Conclusion ....................................................................................................... 139

CHAPTER 5: THE UK LAW OF MARKET MANIPULATION .................... 141
5.1 Introduction ........................................................................................................ 141
5.2 The Legislative Framework in the UK............................................................... 141
5.3 Provisions of Criminal Law ............................................................................... 143
5.3.1 Criminal Justice Act 1993 ...................................................................... 143
5.3.2 Fraud Act 2006 ....................................................................................... 145
5.3.3 Financial Services Act 2012 ................................................................... 145
5.4 Civil Regulatory Provisions ............................................................................... 148
5.4.1 Financial Services Act 2012 ................................................................... 148
5.4.2 Companies Act 1985 .............................................................................. 157
5.4.3 London Stock Exchange Rules ............................................................... 160
5.5 The Tribunal ....................................................................................................... 161
5.5.1 History of the Tribunal and Other Specialized Courts ........................... 161
5.5.2 The Upper Tribunal (Tax and Chancery Chamber) ................................ 162
5.5.3 Appeals ................................................................................................... 164
5.6 European Union Law ......................................................................................... 164
5.6.1 Insider Dealing Directive........................................................................ 165
5.6.2 Market Abuse Directive .......................................................................... 166
5.6.3 The Market Abuse Regulation ................................................................ 168
5.7 Notable Incidents of Market Abuse ................................................................... 170
5.7.1 Ian Hannam............................................................................................. 171
5.7.2 LIBOR Scandal....................................................................................... 172
5.7.3 Gold Price Fixing (Barclays and Plunkett) ............................................. 175
5.7.4 Operation Tabernula ............................................................................... 177
5.7.5 Damian Clarke ........................................................................................ 178
5.8 Conclusion ......................................................................................................... 178
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CHAPTER 6: COMPARING THE LAW RELATED TO MARKET
MANIPULATION IN US, UK, SAUDI ARABIA AND ISLAMIC LAW ........ 180
6.1 Introduction ........................................................................................................ 180
6.2 Saudi Arabia ....................................................................................................... 180
6.4 The US ............................................................................................................... 185
6.5 The UK ............................................................................................................... 188
6.6 Overview ............................................................................................................ 190
6.7 Who Can Sue? .................................................................................................... 192
6.8 Role of ‘Mens Rea’ and ‘Requirement of Intent’............................................... 196
6.9 Defences ............................................................................................................. 199
6.10 Regulatory Authorities and their Powers ......................................................... 200
6.11 Criminal Regime .............................................................................................. 205
6.12 Conclusion ....................................................................................................... 208

CHAPTER 7: CONCLUSION AND RECOMMENDATIONS ........................ 210
7.1 Conclusion ......................................................................................................... 210
7.2 Recommendations for the Reform and Improvement of Saudi Market
Manipulation ..................................................................................................... 213
7.3 Future Research Avenues ................................................................................ 215
7.4 Contribution to Knowledge ............................................................................. 216
Appendices 1 ........................................................................................................... 253
Appendices 2 ........................................................................................................... 261
Publications ............................................................................................................. 267

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ACKNOWLEDGEMENTS
First and foremost, all praise and thanks be to Allah, the Almighty God, without his
help and guidance the completion of this work would not have been possible.
Second, I would like to acknowledge and thank my supervisor. Dr. Mohammed
Korotana. His willingness to take me on half way through my PhD was, I believe, a
significant turning point in the long journey that it has been. I would not be in the
position I am today without his support and advice. I am also obliged to thank all
other faculty staff and my college at the Department of Law at Brunel University
their strong support. I am honoured to be supported by so many people in my life. I
am truly blessed.
I would like to record my gratitude and appreciation to H.E Sheikh Abdullah bin
Maneea, a member of Senior Scholars Board and Advisor at the Royal Court for his
strong support and advice.
In addition, I dedicate this study to my parents Ali , Maitha for all their support and
love, whose raised me up and gave me both the determination and confidence to
pursue a path that led me to achieve my goals in life. My sincere gratitude to my
brothers and my sisters for their encouragement and support.
I am also grateful to my loving wife Nashmyah, in particular, for her love, patience
and overall support. My love, naturally, also extends to my sons, Ali, Saleh, Azam
and Alhomam, for their reciprocity of affection and for their respect.

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LIST OF ABBREVIATIONS
ADR Alternative Dispute Resolution
AML Anti-Money Laundering
CCFI Consulting Centre for Finance and Investment
CFTC Commodity Futures Trading Commission
CMA Capital Market Authority
CML Capital Market Law
CSA Central Share Account
DTI Department of Trade and Industry
ECHR European Convention of Human Rights
ESIS Electronic Securities Information System
FCA Financial Conduct Authority
FERC Federal Regulatory Commission
FIU Financial Intelligence Unit
FSA Financial Services Act
FSMA Financial Services and Markets Act
FTC Federal Trade Commission
GCC Gulf Cooperation Council
IFRS International Financial Reporting Standards
IPO Initial Public Offering
LIBOR London Interbank Offered Rate
LSE London Stock Exchange
MAD Market Abuse Directive
MAR Market Abuse Regulation
MCR Market Conduct Regulations
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