Analysis of the Legal Status of Sham Transactions (Wash Trades) in the Stock Exchanges of Iran and the United States

Abstract

Sham transactions, commonly referred to as wash trades, constitute a significant threat to the integrity and efficiency of capital markets by creating artificial trading activity without genuine transfer of beneficial ownership. This study provides a comparative legal and economic analysis of the regulation of sham transactions in Iran and the United States. The research examines the theoretical foundations of competition and securities regulation, evaluates the doctrinal classification of wash trades as market manipulation, fraud, and anti-competitive conduct, and analyzes the effectiveness of enforcement mechanisms in both jurisdictions. The Iranian legal framework, grounded in the Capital Market Law and the Law on Implementation of Article 44 policies, addresses manipulative conduct through general provisions but lacks an explicit statutory definition of wash trades and a structured disgorgement mechanism. In contrast, U.S. law, particularly under the Securities Exchange Act of 1934 and Rule 10b-5, provides a more detailed regulatory structure supported by established judicial precedent, strong disgorgement practices, and advanced surveillance technologies. The study further compares institutional capacities, detection mechanisms, sanction severity, and restitution approaches, demonstrating that enforcement effectiveness is closely linked to market maturity, technological infrastructure, and procedural clarity. Economically, sham transactions distort price discovery, generate artificial liquidity, increase systemic risk, and erode investor confidence, thereby raising the cost of capital. The findings indicate that while both jurisdictions recognize the harmful nature of sham transactions, differences in institutional coordination, statutory specificity, and remedial design significantly influence deterrence outcomes. The study concludes by proposing reforms aimed at enhancing regulatory coherence, strengthening restitution mechanisms, and modernizing supervisory tools, particularly within the Iranian capital market context.