Update
This article by Jacob Ghanty was published in the May issue of Compliance Monthly and is reproduced with their kind permission.
May 2009
Corporate
The FSA gets tough on market abuse
Two recent cases have demonstrated the FSA's tougher approach to insider dealing and its
willingness to crack down on market abuse.
McQuoid
The FSA recently secured its first criminal prosecution
for insider dealing. The case involved a solicitor,
Christopher McQuoid, being jailed for eight months for
tipping off his father-in-law and profiting from a
takeover deal. The case related to plans by
telecommunications firm Motorola in 2006 to take
over McQuoid's firm, TTP Communications, where
McQuoid was general counsel. The jury found that
McQuoid had passed inside information to his fatherin-law, who in turn traded, and made a profit, using the
information. The FSA also obtained an order freezing
the profits made from the trade, which McQuoid and
his father-in-law had split equally between them.
Winterflood
In another recent development, the FSA won a market
abuse case at the Financial Services and Markets
Tribunal ("Tribunal") against Winterflood, the largest
market maker in AIM securities, and two of its traders.
Last June the FSA found that Winterflood and its
traders had, in 2004, played a pivotal role in a share
ramping scheme, whereby the price of shares in
Fundamental-E Investments Plc ("FEI"), an AIM listed
company, was inflated using a mechanism of rollover
trades, where unsettled positions of one client are
effectively rolled over to the account of another client,
before settlement is due, giving the impression that
demand is greater than it actually is.
The FEI share trades executed by Winterflood had a
series of unusual features which should have alerted
Winterflood to the substantial risks of market
manipulation. Rather than taking steps to ensure that
the trades were genuine, Winterflood continued the
highly profitable trading. As a result, the FSA imposed
fines of £4 million, on Winterflood, and smaller fines
on two of its traders.
Winterflood did not challenge the FSA's findings of fact
but referred the matter to the Tribunal on a point of
legal interpretation. They argued that carrying out acts
which satisfy the criteria of market abuse under the
Financial Services and Markets Act 2000 (FSMA) is not
in itself sufficient to commit market abuse, but rather
it is necessary for them to have had the intention to
mislead the market. The FSA argued, and the Tribunal
agreed, that under FSMA there does not need to be
any intention to mislead the market. Winterflood and
its two traders are now seeking permission to appeal
the decision to the Court of Appeal.
This case indicates the requirements that the FSA
expects market professionals to adhere to.
Winterflood's failure to properly carry out its duties led
to damaged confidence in the market. The FSA wanted
continued on reverse
to make clear that it is determined to tackle abusive
behaviour and to deter participants from threatening
the integrity of the markets.
Relevant legislation
While in the past the FSA has focused on pursuing
market abuse through the civil regime, as in
Winterflood, it now considers criminal investigations
and penalties under the Criminal Justice Act 1993 to be
equally appropriate. It is likely that these recent cases
will assist in dispelling the FSA's image as being
ineffective in dealing with inappropriate market
behavior and the FSA has hinted that there is a steady
flow of cases to follow in this area.
Part V of the Criminal Justice Act 1993, provides for the
offence of insider dealing. The Act prohibits dealing in price
affected securities on the basis of inside information,
prohibits the encouragement of another person to deal in
price affected securities on the basis of inside information
and prohibits knowing disclosure of inside information to
another person.
The Financial Services and Markets Act 2000 contains
provisions for dealing with market abuse. Part VIII of FSMA
gives the FSA power to impose civil penalties on any
person who has engaged in market abuse or has required
or encouraged another person to do so.
Jacob Ghanty is a Financial Services Partner at Pinsent Masons
© Pinsent Masons LLP 2009
Should you have any questions please contact Jacob Ghanty ( jacob.ghanty@pinsentmasons.com) or your usual Pinsent Masons adviser
who will be able to assist you further.
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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