International Financial Regulation Review
ISSN 2047-4733
Source: International Financial Regulation Review: News Archive > 2012 > Latest Developments >
Analysis >
The FSA's “Scary” Approach to Market Abuse
By Adrian Brown, Partner, and Bradley Rice, Associate, Nabarro LLP
The UK's Financial Services Authority (FSA) has repeatedly threatened to become more of a “scary
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regulator” . With fines this year already totalling over £ 9m, 20 criminal prosecutions before the courts,
and signs the FSA is pushing the boundaries of the market abuse regime, one can hardly argue that it
has not achieved this aim.
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See eg “’Be afraid’ warns regulator Sants” (BBC News, March 12, 2009)
http://news.bbc.co.uk/1/hi/business/7939619.stm ; “FSA Chief Hector Sants blames financial sector for
global crisis” (Telegraph, April 24, 2012)
http://www.telegraph.co.uk/finance/financialcrisis/9224451/FSA-chief-Hector-Sants-blames-financial-sector
-for-global-crisis.html
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This article looks at the FSA's recent enforcement actions in the cases of Greenlight Capital Inc. and Ian
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Hannam and the similarities between them.
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Greenlight Capital Inc, Decision Notice (January 12, 2012)
http://www.fsa.gov.uk/static/pubs/decisions/dn-greenlight-capital.pdf
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Ian Hannam Decision Notice (February 24, 2012) http://www.fsa.gov.uk/static/pubs/final/ian-hannam.pdf .
This has been referred to the Upper Tribunal
http://www.fsa.gov.uk/library/communication/pr/2012/036.shtml
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Summary and implications
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The FSA's credible deterrence policy is clearly in full swing and is here to stay. The new Financial
Conduct Authority (FCA) takes over the reins of conduct supervision early next year and “will
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carry forward the enforcement work of the FSA” . Firms should expect even greater scrutiny,
even greater fines and even more life bans.
•
Market participants are concerned about what they can and cannot say. Whether or not you have
brought somebody over the wall and made them an insider is now a question at the forefront of
people's minds. Save in the case of flagrant abuse, there is rarely a simple answer to this
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question. It is ultimately dependant on the facts of each case. Ian Hannam's decision to refer the
FSA's decision to the Upper Tribunal could offer some clarity in this area, but the Tribunal's
judgement could be some time off.
•
Firms should be reviewing their internal policies, systems and controls in light of the FSA's
increased scrutiny to ensure compliance. Senior management must be aware of these
procedures and be provided with regular updates. At the far end of the spectrum, firms should
consider and prepare for dawn raids and the subsequent reputational effect these will have. Staff
training on these issues is something that has been widely received in recent months and has
provoked lively debates.
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An update on the FSA's investigations and enforcement regime (FSA, Feb 23, 2012)
http://www.fsa.gov.uk/library/communication/speeches/2012/0223-tm.shtml
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The FSA's recent approach
The reform of the regulatory regime in the UK is seen as a chance to change the culture of the industry.
This is a prominent and recurring message coming from the FSA, which hopes its credible deterrence
policy will improve behaviour and restore the integrity of the market. In a recent speech, Tracey
McDermott, acting director of the Enforcement and Financial Crime Division (EFCD), warned that “the
industry is not learning its lessons” and that “where we do not see improvements... we will be willing to
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take tougher action” .
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Ibid.
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The FSA broke a number of records in 2011: the highest fine on an individual (£ 6m) : the highest fine for
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retail failings (£ 10.5m) ; and the highest fine for failing to maintain financial crime systems and controls
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(£ 7m) . There were probably others and 2012 does not show signs of letting up. There are currently 20
people awaiting criminal trial for insider dealing or misleading the market. We are increasingly seeing the
FSA work alongside the police or the Serious Organised Crime Agency (SOCA) to investigate organised
insider dealing rings. The FSA has successfully secured 11 criminal convictions to date, with the longest
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sentence standing at three years and four months . Suffice to say, credible deterrence is here to stay and
the regulator is clearly getting much “scarier”.
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“FSA fines Dubai based investor US$ 9.6 million for market abuse” (FSA/PN/094/2011 November 9,
2011) http://www.fsa.gov.uk/library/communication/pr/2011/094.shtml
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“FSA fines HSBC £ 10.5million for mis-selling products to elderly customers” (FSA/PN/105/2011
December 5, 2011) http://www.fsa.gov.uk/library/communication/pr/2011/105.shtml
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“FSA fines Willis Limited £ 6.895 million for anti-bribery and corruption systems and controls failings”
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(FSA/PN/066/2011 July 21, 2011) http://www.fsa.gov.uk/library/communication/pr/2011/066.shtml
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“Investment banker, his wife and family friend sentenced for insider dealing” (FSA/PN/018/2011 February
2, 2011) http://www.fsa.gov.uk/library/communication/pr/2011/018.shtml
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Greenlight Capital
On 15 February 2012, the FSA issued final notices to Greenlight Capital, Inc., a US hedge fund, and its
owner David Einhorn, fining them £ 7.2m for market abuse.
Mr Einhorn allegedly received inside information relating to an equity raising by Punch Taverns Plc,
before instructing Greenlight to sell some of its holding in Punch Taverns. Despite Mr Einhorn requesting
not to be “wall-crossed”, the FSA still found that he had received inside information. The FSA stated that
in isolation the separate aspects of the information disclosed to Mr Einhorn would not amount to inside
information. However, taken together, they did constitute inside information particularly because they
disclosed to Mr Einhorn the purpose and anticipated size and timing of the issuance.
The senior broker acting for Punch was also fined £ 350,000 for disclosing the inside information. The
FSA stated that he had considerable experience and understood that it is an offence to disclose inside
information. The FSA was also critical of the broker's lack of action. He did not consult with his legal or
compliance teams before organising the call with Greenlight; nor did he take any action, after he became
aware that Greenlight had sold a significant stake in Punch Taverns, to address the risk that Greenlight
was selling on the basis of the information gleaned from the telephone call.
Greenlight's former trader and compliance officer was also fined £ 130,000 and banned from acting as a
compliance officer for failing to question and make reasonable enquiries before selling the shares in
Punch Taverns. According to the FSA, he had been told that Greenlight had around a week before the
stock “plummets” and that Punch's management would have told them “secret bad things” if they signed a
confidentiality agreement. The FSA say this should have alerted the trader to the risk that the order may
have been based on inside information, and made him take steps to satisfy himself that this was not the
case or make a suspicious transaction report to the FSA.
Completing the FSA's action, a trading desk director at JP Morgan was also fined £ 65,000 for failing to
identify and act on a suspicious order from Greenlight. The FSA were critical of the fact that he failed to
identify and alert JP Morgan to the possibility that the trade was based on inside information and,
therefore, no suspicious transaction report was submitted to the FSA.
Suspicious transaction reporting has recently gained increased attention. Firms have an obligation to
report suspicious transactions to the FSA. These reports assist the regulator to detect market abuse. The
FSA has its own internal systems and controls to monitor suspicious transactions and, quite often, it will
already know a lot more than the person making the report. The FSA is likely to take action against any
“dog that doesn't bark”, or people who put their relationship with potential wrongdoers above their
regulatory obligations and, consequently, let suspicions slip through the net. We are already aware of the
FSA's increased scrutiny of firms' suspicious transaction reporting systems and controls. It is likely this is
another area on the FSA's radar.
Ian Hannam
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Hot on the heels of the Greenlight saga, in February 2012 the FSA sought to fine Ian Hannam, former
Global Co-Head of UK Capital Markets at JP Morgan, £450,000 for market abuse. Mr Hannam has
referred the decision to the Upper Tribunal.
The FSA states that Mr Hannam sent two emails to clients in late 2008 which contained inside information
concerning Heritage Oil plc, another client. No trades were carried out on the back of this information and
Mr Hannam's honesty and integrity were not in question.
Mr Hannam argued that the information was not sufficiently precise to be price-sensitive and, therefore,
was not inside information. As such, and in addition, he was authorised to disclose the information as he
was acting in his client's best interests, and according to their instructions, by trying to “facilitate a
‘substantial’ corporate transaction”. Hannam also argued that the information had already been disclosed
by Heritage's CEO to Hannam's client. The FSA rejected this argument and said that, by repeating what
the CEO had said, Hannam had still disclosed inside information, and that his repetition could have added
credence and weight to the information. This in turn could have influenced his client's decision to trade.
Similarities in the information disclosed
Information
Event
Timing
Amount
Contextual
Greenlight
Equity issuance
“within less than a... week”
£ 350 million
At an advanced stage and “mostly all the
shareholders are supportive”
Purpose of the equity issuance
Hannam
Potential takeover
“Thursday of next week”
“£ 3.50–£ 4.00 per share”
“very excited about the recent drilling
results of Heritage Oil”
“just found oil and it is looking good”
The table suggests that disclosing information concerning the event, the timing and the amount together
is likely to be enough to cross the line. Add to this certain contextual information and it becomes harder to
argue that you have not disclosed inside information.
In Greenlight the FSA read all the information together. It is possible that they adopted the same thinking
in Hannam's case. As such, you should think carefully about the information you can disclose and its
effect when read together. Unhelpfully, each case will depend on its facts and the context will be crucial.
Admittedly, this is an easier task for the FSA with the benefit of hindsight, rather than the broker who is
under pressure to secure the best deal for his client. Nonetheless, the FSA have made their approach
clear.
Points to remember
Recent enforcement actions have forced the industry to take note and review their procedures. It would
be hard to argue now that the FSA is not a “scary” regulator, and it shows no signs of letting up.
That said, there is very little guidance or clarity for firms. Save for the obvious cases of market abuse,
brokers can rightly feel concerned about what information they can legitimately disclose in the proper
course of their work. Unfortunately, this depends almost entirely on the context, although the Greenlight
and Hannam cases do have similarities. Brokers who are considering disclosing the type of transaction,
the price and timing should be extra vigilant. Any information which is precise enough to enable another
to draw a conclusion on, broadly, whether to trade or not, will be inside information.
The wall-crossing procedure is rather in a state of confusion at present. Hopefully the Upper Tribunal will
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International Financial Regulation Review
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offer some guidance when it decides Mr Hannam's case. In the meantime, internal procedures should be
reviewed with a view to minimising the number of people who are wall-crossed and, even then, ensuring
that information is only disclosed when it is truly necessary.
Adrian Brown is a partner and head of the financial services regulatory practice at Nabarro LLP.
He advises investment banks, broker dealers, fund managers and corporate finance houses on all
aspects of financial services regulation. Telephone: +44 (0) 20 7524 6400; Email:
aj.brown@nabarro.com.
Bradley Rice is an associate in the financial services regulatory practice at Nabarro LLP. He
advises a broad range of clients on all aspects of financial services regulation, including
FSA-authorisations and permissions, application of the FSA's rules, investigations and
enforcement actions and anti-money laundering advice. Telephone +44 (0) 20 7524 6990; Email:
b.rice@nabarro.com.
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