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Switzerland

Swiss regulator will not tolerate dummy transactionsWenger Vieli Belser

Last year (October 28 1999) the Federal Banking Commission (FBC) announced that dummy transactions opposing the aim of transparent securities trading and infringing the principle of good faith in business transactions will not be tolerated.

The FBC's decision was based on the following facts: Bank A was instructed by the financial department of one of its corporate clients, X Ltd, to buy and sell the same number of X Ltd's shares at a price fixed by X Ltd. The price was then fixed at a level of 0.75% above the latest paid stock exchange price. The transactions were spaced in such way as to increase the stock exchange price regularly, but at different times. Therefore, the stock exchange price changed only slightly. In the supervisory proceedings, X Ltd explained to the Federal Banking Commission that they only intended to ensure the marketability of the shares in the interest of the shareholders.

The FBC stated by way of a supervisory measure that the behaviour of the bank was opposed to the practice of proper business. Banks and securities traders have to guarantee proper business activities at any time. The transactions done by the bank involved have to be deemed to be dummy transactions (wash sales). These transactions are of no commercial relevance. Purchases and sales were made for account of the same economic beneficiary. Furthermore, X Ltd acted legally as purchaser and seller at the same time. However, such transactions are void because no party can contract with itself. Dummy transactions can also constitute stock jobbing subject to penal law, if the other elements of its statutory definition are fulfilled. Dummy transactions are reported to the public by the trade system of SWX as seemingly genuine purchases and sales, thereby practically deceiving the market participants. As a matter of principle, dummy transactions are inconsistent with the objectives of a transparent stock exchange trading, as explicitly stipulated in the relevant article of the stock exchange law. In particular, these transactions cannot qualify as price nursing which is permitted up to a certain extent in Switzerland. However, even such transactions have to correspond to real purchases and sales with effective economic relevance and consequences.

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