LPP shorts, or share price manipulation

On 15 March 2024, the share price of LPP S.A. (“LPP”) fell sharply. The price collapsed after a report by Hindenburg Research (“Hindenburg”), a US-based investment firm specialising in financial investigations, was made public.

According to Hindenburg, LPP’s withdrawal from the Russian market was a sham, which has a price-forming value. Forecasting a decline in the price of LPP’s shares, the intelligence firm took a short position on LPP shares.

LPP, in turn, stated that the Hindenburg report was an element of an organised disinformation attack, which had been prepared for five months and was calculated to decrease the price of its shares.

The following is my legal assessment, which relates to facts that are common knowledge, without the possibility of verifying their veracity and with the assumption of their speculative nature.

The starting point for the analysis is the qualification of certain circumstances as inside information.

Under Article 7(1) of MAR, this is information that has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the prices of related derivative financial instruments.

The decline in the price of LPP shares may be due to the existence or disclosure of various insider information.

First, according to the report, it is possible that LPP concealed or did not provide all information regarding the divestment of assets in Russia. In such a case, it would need to be verified whether the company had engaged in manipulation of financial instruments, which may also consist of disseminating false or misleading information. According to recital 47 of the MAR preamble, dissemination of false or misleading information may include the creation of manifestly false information, but also the deliberate omission of material facts, as well as knowingly inaccurate information.

Therefore, it is important to verify whether the issuer has presented information regarding the divestment in Russia in a misleading or selective manner, leading to the creation of a misconception among investors regarding the material terms of the divestment of assets, including the possibility for persons with personal or capital links to the issuer to continue to exercise control or act as the beneficial owner.

Possible manipulation by the company will be reflected in the breach of disclosure obligations regarding the publication of inside information in current reports and in the distortion of periodic reports.

The MAR regulations also sanction cases where persons operating in the financial markets freely express information contrary to their own opinion or common sense, which they know or should know to be false or misleading, to the detriment of investors and issuers.

At present, it is difficult to forecast which entity (the company or Hindenburg) may incur liability pursuant to this prohibition.

In my view, it is not impossible to qualify as inside information firstly the information regarding the imminent publication of the Hindenburg report and secondly the information about the apparent extinction of LPP’s business in the Russian market contained in that study.

Hindenburg drew data on the issuer primarily from publicly available sources and from the whistleblower. Nevertheless, the juxtaposition of this information into a coherent and precise whole, which is price sensitive in nature, may determine the classification of the data contained in the report as inside information within the meaning of MAR. This classification of the content of the publication is a prerequisite for Hindenburg to be deemed to have disclosed inside information.

Under Article 10(1) of MAR, an unlawful disclosure of confidential information occurs where a person is in possession of confidential information and discloses that information to another person, except where the disclosure is made in the normal course of his employment, profession or duties.

It can be assumed that the publication of the Hindenburg report led to the disclosure of confidential information in the normal course of the intelligence community’s professional activities and was partly related to the need to disclose the alleged dysfunctions on the part of the LPP.

Under Article 21 of MAR, if information is disclosed or disseminated for the purposes of journalism or for other forms of expression in the media, such disclosure or dissemination of information shall be assessed taking into account the principles governing freedom of the press and freedom of expression in other media and the rules or codes governing the journalistic profession, unless:

• the persons concerned or persons closely associated with them derive, directly or indirectly, an advantage or profits from the disclosure or dissemination of the information in question; or
• the disclosure or dissemination is made with the intention of misleading the market as to the supply of, demand for or price of financial instruments.

In my view, the publication of the Hindenburg report would be lawful, assuming that: the information contained in the study is factually correct, and Hindenburg does not benefit or profit from the disclosure of the report. Nonetheless, the intelligence agency explicitly indicated that it had made a short sale on LPP shares, reasonably hoping for a reduction in the share price, which may give rise to its liability for unlawful disclosure of inside information.

As regards the classification of the data relating to the forthcoming publication of the Hindenburg report as confidential information, relevant interpretative guidance for the relevant classification can be sought from the CJEU judgment of 15 March 2022 (C-302/20).

The nature of the information regarding the impending publication of the report is directly related to the characteristics of the information to be disclosed. Since the information to be published is precise, the information relating to that publication will allow conclusions to be drawn as to its possible impact on the company’s share price.

Referring to the aforementioned guidelines, I am of the opinion that confidential information may also constitute news concerning the imminent publication of a report on the sham divestment of LPP in Russia. Presumably, this is information that LPP could reasonably expect for several months, which gave rise to the need for a current report referring to the anticipated publication of the Hindenburg study. In order to assess the “precision” premise, the following elements are relevant:

• the fact that the report deals with price-sensitive parameters, assessed ex ante (which is confirmed in terms of price-sensitivity in this case ex post);
• the identity, reputation and credibility of the intelligence agency that produced the said study; and
• the actual impact of that publication on LPP's share price.

This reasoning is supported in particular by Article 1(1) of Directive 2003/124, according to which information is deemed to be “precise” if, in particular, it relates to an event that can reasonably be expected to occur and if it is sufficiently detailed to enable conclusions to be drawn as to the possible impact of that event on the prices of the financial instruments concerned.

According to CJEU case law, the exception in Article 10(1) MAR, establishes - in order to justify the disclosure of confidential information - the requirement that there is a direct link between the disclosure of such data and the exercise of activities in the course of employment, profession or duties. The said condition must be interpreted restrictively, as the disclosure of confidential information is lawful only if it is strictly necessary for the performance of such activities and in compliance with the principle of proportionality (CJEU judgment of 22 November 2005, C-384/02).

When assessing the lawfulness (including proportionality) of a possible disclosure of confidential information by an intelligence agency, consideration must be given to:

• whether the restriction on freedom of expression and information (protected by Article 11 of the EU Charter of Fundamental Rights), that the prohibition of such disclosure would cause, would be excessive in relation to the harm that such disclosure would cause to the integrity of the financial markets;
• the potentially deterrent effect of such a ban on the conduct of investigative activities for the preparation of a publication exposing possible wrongdoing on the part of the issuer;
• whether the intelligence community acted ethically in making such disclosure (which should be examined in the context of short selling);
• the negative effects of the disclosure of inside information on the integrity of the financial markets, including whether the use of inside information (e.g. through short selling) may cause financial losses on the part of other investors and, in the medium term, a loss of confidence in the financial markets.

The short-selling case concerning LPP instruments is probably a prelude to a long battle, the epilogue of which may play out internationally (including at the CJEU). It is an unprecedented case, the resolution of which is part of a patchwork of legal, ethical, business, investment and political problems. Their resolution already requires the immediate involvement of the WSE, the supervisor and other state authorities, who may have short deadlines for far-reaching moves.