Article Post on 22 May 2020

Episode 9 - COVID-19 Webcast - Focus on Market Abuse During the COVID-19 Pandemic

_This is the ninth episode of our COVID-19 webcast series. In this episode Partner Mark Shaw wants to talk more about market abuse during the COVID-19 pandemicWhile, on the whole, markets are very much down as a result of COVID-19, there are a number of companies in the biotech sector looking at vaccines against the SARS-CoV-2 virus and cures for COVID-19 that have the potential to make investors extremely rich. As such, there has probably never been a greater incentive to commit market abuse.

Transcription of the video:

Let’s start with a quick reminder of what we are looking at under the Market Abuse Regulation (or “MAR”). 

Three market abuse behaviours are specifically prohibited: 

  • Insider dealing; 
  • Unlawful disclosure of inside information; and 
  • Market manipulation. 

And the key subject matter is what is considered as “inside information”, which is information:

  • Of a precise nature;
  • Which has not been made public;
  • Relating directly or indirectly to one or more issuers or to one or more financial instruments;
  • Which, if made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.

As we know, the rules apply in different ways to issuers and other market participants. 

While issuers will be more concerned with the rules on control and release of material price sensitive information and trading by related parties, market participants should be sensitive to suspicious transaction monitoring in relation to sectors or companies that are either extremely hot or extremely cold (the regulations apply equally to firms in distress, of course); and from a fund manager perspective, persons producing or providing investment recommendations must ensure information is objectively presented, and disclose any conflicts of interest.

Before we look further, just a reminder that on 11 March, ESMA recommended that issuers should disclose as soon as possible any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation in accordance with their transparency obligations under MAR. I’ve discussed this previously from the perspective of issuers in financial distress, but what we are seeing in the biotech sector is more interesting, and more challenging from a regulatory perspective.

I want to use the example of a company called Moderna, which is NASDAQ listed with the ticker “MRNA”. A neat ticker, because in their own words, their “approach is to use mRNA medicines to instruct a patient’s own cells to produce proteins that could prevent, treat, or cure disease”.

The reasons for me using a US example will become clear. 

Moderna has had an interesting week! It issued a press release on Monday the 18th of May about the promising results of its Phase I clinical trial for a coronavirus vaccine, this was picked up by a number of news outlets and story that went viral on Twitter. Moderna’s share price shot up over 25 percent; such was the hope that is pinned on a vaccine, it moved the entire US market… and this is despite the fact that very limited and trial data was released for just 8 patients, from a company with no track record in bringing a drug to market, using an unproven technology. 

This type of market mania is precisely what the CSSF was referring to when it highlighted insider trading and market manipulation as an emerging money laundering threat from COVID-19 in its recent circular 20/740. Somewhat prophetically, the CSSF said “The threats of market abuse are particularly relevant in the sectors linked directly to COVID-19, such as the pharmaceutical sector (which has reacted with large price swings to information relating to potential vaccines).”

I should stress at this point that I am by no means alleging that Moderna is a fraud or that it -or its related parties- are engaging in market abuse. I am simply using it to illustrate the way that the markets are pinning so much hope on a vaccine. Particularly in the US, where the number of retail brokerage accounts has increased by about a million since the start of lock-down, with more retail money betting emotionally on the slightest news relating to potential vaccines and treatments.

Where such issuers fall under MAR, they will have to be extremely careful about the content, timing and manner of delivery of inside information, and other market participants also need to be extremely cautious in trading in these instruments.

Now, I mentioned earlier why I wanted to use a US company as an example; and that is to illustrate that the MAR regime is wider in scope than the Market Abuse Directive which it replaced, and covers more trading venues and financial instruments, giving it a much greater extra-territorial effect.

The MAR regime applies to third country issuers with financial instruments, such as debt securities, admitted to trading on a multilateral trading facility (MTF) or traded on an organised trading facility (OTF). For example, the Luxembourg Stock Exchange’s Euro MTF lists the euro-denominated debt of a number of U.S. issuers, and therefore subjects them to the EU market abuse regime. 

US issuers need to be even more careful when their securities are captured by virtue of them being admitted to trading on an EU trading venue by a third party without the consent of the issuer.

Only once the dust settles from the COVID-19 pandemic, will we be able to see these issues for what they really were at the time with the benefit of hindsight. Market hysteria and overreaction to a stock does not necessarily mean that there is some sort of malfeasance, but it will of course bring share trading activity under the scrutiny of regulators, and issuers and market participants need to be vigilant against market abuse behaviours.

If you are in any doubt as to how to handle the legal issues arising out of the COVID-19 pandemic, please do use our helpline or visit our COVID-19 toolkit.

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