Securities and Investment Institute
Market misconduct: recent
developments & case studies
Dorian Drew
18 September 2007
Agenda
• The past
• The present
• The future
Enforcement action to date
The FSA’s approach will be “…to prioritise
rigorously, investigating only those cases which
are material and significant.”
Howard Davies, March 2002
Enforcement action to date
• Developing body of precedent:
– c.20 final notices
– 6 Tribunal decisions
– 1 criminal prosecution
• All actions under pre-MAD types of behaviour
Enforcement action to date
Misuse of information cases
• Bracken, Middlemiss, Hutchings, Smith, Isaacs, Malins,
Jabre and GLG, Davies, Parker, Mohammed
• Isaacs and Smith involved improper dissemination of
information
• Baldwin: FSA failed to establish telephone conversation
took place
• “Pre-existing trading strategy”: Parker and Jabre
Enforcement action to date
False or misleading impression cases
• Shell, Indigo Capital and Bonnier
Market distortion case
• EBG and Potts
Market misconduct under the Principles
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ABN AMRO
Hoodless Brennan
Deutsche
Citigroup
Jabre/GLG
Pignatelli and Casoni
Investments outside the scope of the market
abuse regime
Penalties
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Range from £1,000 to £17m
Tribunal’s comments in Parker
Davidson and Tatham
Aggravating/mitigating factors
Sean Pignatelli
• Statements of principle 2 & 3 - £20,000 penalty
• “Outsider trading” – passed on, and embellished,
information received in an email from an analyst
• Did not believe information to be inside
• Prin 2 – failed to address his mind to warning
signs and discuss with manager or compliance
• Prin 3 – relayed information in a way that gave
impression it was inside information
• Credit Suisse had appropriate procedures
Roberto Casoni
• Statement of principle 3 - £52,500 penalty (stage 1)
• Research analyst - disclosed views and proposed
valuation method to certain clients prior to
publication
• Citigroup had appropriate procedures
• Star analyst - market abuse?
Current problem
• Market cleanliness
– FTSE 350 trading statements: “marked
improvement”
– Public takeover announcements: “only the
slightest improvement”
– “More and tougher fines are required”
• “Sadly we can do sweet FSA about insider dealing”
Current solutions
• NAO recently reinforced the importance of
enforcement powers
• FSA has signalled push on enforcement,
particularly in relation to market misconduct and
TCF
• Enforcement staff overhaul
• Budget increase
• Greater international focus
Current solutions
• Market Watch 18 – STR Review 2006: 400 STRs
from 100 firms
– Most of “high quality”
– Most from small/medium firms
– Most relate to equities markets
– Insider dealing (not manipulation)
• SABRE update: £17m spend - real time monitoring
Current solutions
• “In partnership” – Sally Dewar
– Dialogue to agree priority areas
– Strengthening procedures and learning good
practices
– Reporting wrongdoing - STRs/self-reporting
– Each taking tough action when abuse
identified
Current solutions
• Plea bargaining/immunity agreements
• Smoother process - greater involvement of senior
management
• Search and seizure/freezing injunctions
• Criminal prosecutions – four on the go
• Gold plating – Margaret Cole reassures…
Future focus – on the up
• Information flows: (Market Watch 21: inside
information controls, Market Cleanliness Report)
• “Non-traditional” markets: Debt/credit/commodity
derivatives markets
• Large financial institutions
• Hedge funds/private equity: misuse of information
Future focus – on the up
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MTFs/systematic internalisers
Increased use of Principles
Senior management?
Financial crime (not just market abuse)
Future focus – On their way down
• Smaller market abuse cases
• Misuse of information
• Criminal investigations – “niche and easy”
Risk mitigation
• Appropriate procedures
– Ensure clear recording of product features,
external landscape and risks presented to firm
– Implement clear rules/guidance
– Undertake effective monitoring
– Ensure there is evidence for pre-existing
trading strategies
Risk mitigation
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Focus on FSA priority areas
Training: gaps often identified
Be proactive in identifying/reporting misconduct
Interact with FSA and contemporaries
Undertake robust disciplinary action
Case study
• You are the compliance officer for Brookwyn Bank which
makes a market in Tajikismurf, a mining company listed on
AIM.
• During an analysts’ conference call, the CFO of the company
lets slip that the main geologist’s report used to support the
IPO of the company contained significant errors.
• Whilst still on the call, your analyst calls you to ask whether
he can notify the market maker with a view to shorting the
stock.
 What further information would you want? Would you let him
do it? If so, what would you do to mitigate the risks?
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