Congress passed the Securities Act and the Exchange Act largely in response to the manipulative practices of the early 20th century that lead to the stock market crash. Congress passed these securities laws to stamp out intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities. However, these crimes were not limited to deceitful practices. They also covered the effecting of transactions to give the false impression that certain market activity was occurring, when in fact such activity was unrelated to actual demand.
With the federal securities laws, however, Congress did not intend to derogate the common law. The purpose of the statutes was to simply borrow from the common law fraud theories in order to give a greater degree of definiteness to the concept of manipulation and to supply an enforcement and preventative mechanism.
The basic anti-fraud provisions, 17(a) of the Securities Act and sections 10(b) and 15(c) of the Exchange Act, were passed to combat certain of these manipulative practices. For instance, section 10(b), which supplements section 9 of the Exchange Act, makes it unlawful to use or employ any manipulative or deceptive device or contrivance or contravention of such rules and regulation as the SEC may prescribe as necessary or appropriate in the public interest or for the protection of investors. Section 10(b) is generally known as the catchall provision, which allows the SEC to deal with any new manipulative practices.
Section 9 effectively criminalizes manipulative practices that give appearances of bona fide transactions such as wash sales and pools. Section 9 (a)(2) offers the broadest prohibition against market manipulation by making it unlawful for any person to affect a series of transactions in any security registered on a national securities exchange in order to create actual or apparent active trading in such a security, or raising or depressing the price of such security for the purpose of inducing the purchase or sale of such security by others.
Section 9(a)(2) is another catchall provision designed to prohibit devices used to persuade the public that activity in a security is the reflection of a genuine demand instead of a mirage. In essence, manipulation is a form of deception because a person who purchases or sells securities for the purpose of inducing other person to trade is necessarily deceiving those persons into believing that the manipulator’s purchases or sales are a bona fide expression of supply and demand in the market.
Section 9(a)(4) also prohibits the use of false or misleading [statements] with respect to any material fact, by brokers, dealers, or other persons in order to induce others to purchase or sell securities. The practice of spreading false rumors or bribing someone to hype a stock when a broker, dealer or other offeror is trying to unload it has, as its only objective, the goal of fueling investor enthusiasm. The practice of bribing in such situations is also unlawful under a separate section, 9(a)(5).
However, the section 9 provisions do not cover the manipulation of unregistered securities. The only statutory basis for attacking over-the-counter stocks are the general anti-fraud provisions of the Exchange Act, together with section 17 of the Act. Nonetheless, the SEC has enforced manipulation of unregistered stocks on the same level as registered securities because, as the SEC concluded, there is no reasonable distinction between manipulation of over-the-counter prices and manipulation of prices on a national securities exchange.