April 9, 2009
The Financial Services Authority (FSA), the UK’s financial services regulator, has in the past month given three signals it is no light-touch enforcer. Following the Chief Executive of the FSA, Hector Sants’ quest for the FSA to be seen as a regulator which delivers ‘intensive supervision’ and ‘credible deterrence’, there has been the prosecution of three high-profile market-related offences in a matter of weeks. These cases which we address below send a powerful deterrent message: the FSA, in their quest to tackle market abuse, will use all their given statutory powers to prosecute.
Strong arm tactics – arrests at dawn
The FSA’s Enforcement division investigates firms and individuals alleged to have breached its rules and provisions. The Enforcement Division is empowered to take various courses of action including withdrawing authorisations of firms, disciplining firms and "approved persons", imposing penalties for market abuse, applying to the High Court for injunctions and orders and prosecuting various offences. The key supporting legislation (the Financial Services & Markets Act 2000) also gives the team powers to take action under insider dealing provisions of the Criminal Justice Act 1993 and the Money Laundering Regulations 2007. These enforcement tools, almost forgotten until recent events, include the power to interview people and require them to hand over documents and, in co-operation with the police, to exercise powers of arrest.
On 31 March 2009, 25 FSA staff assisted by 11 officers from the City of London Police arrested two people, including a senior corporate finance adviser at Shore Capital (who is an ex-Dresdner Kleinwort investment banker) in connection with an on-going investigation into suspected organised insider dealing.
The widely publicised arrests are a clear example of the changing landscape and approach to enforcement that the FSA is taking. The FSA is renowned for its proclaimed "risk-based" approach to regulation and in the context of financial crime, it has favoured negotiated but swifter and more "efficient" civil actions over criminal prosecutions. This is changing …
First successful insider dealing criminal prosecution
Mr. Christopher McQuoid, a solicitor, and his father-in-law, Mr. James William Melbourne, were found guilty of insider dealing on 27 March 2009. The case was heard in a London crown court and the jury found that Mr. McQuoid had passed inside information to his father-in-law who had traded and made a profit using the information. Mr. McQuoid was the General Counsel at TTP Communications (TTP) and whilst in that role, in May 2006, he was told in confidence that Motorola was planning to takeover TTP. Two days before the takeover was made public, his father-in-law bought TTP shares at 13 pence. The takeover was announced at an offer price of 45 pence. Mr. Melbourne made substantial profits through subsequent market disposal of TTP shares and under the offer.
This case is a landmark case in the arena of market abuse and insider dealing prosecutions in the UK. To date there have been no successful criminal prosecutions. R v McQuoid may well be the first in a line of successful insider dealing prosecutions – the FSA recently announced that it is prosecuting three other insider dealing criminal cases.
FSA wins market abuse case against largest market maker in AIM securities
Winterflood Securities is an FSA authorised market maker in AIM market securities. On 2 April 2009, the FSA announced it had won its market abuse case at the Financial Markets Tribunal (FMT) against Winterflood and two of its traders. The case involved Winterflood and its traders playing a pivotal role in an illegal share ramping scheme relating to Fundamental-E Investments Plc (FEIP). In particular it was found that Winterflood has misused rollovers and delayed rollovers thereby creating a distortion in the market for FEI shares and misleading the market for (an astonishingly long) six month period in 2004. The FEI share trades executed by Winterflood had a series of unusual features which the FMT found should have alerted Winterflood to the clear and substantial risks of market manipulation. However, rather than taking steps to ensure that the trades were genuine, Winterflood continued to trade. It made about £900,000 from trading in the FEI shares which was its single most profitable stock at the time. As a result of its conduct the FSA imposed fines of £4,000,000, and £200,000 and £50,000 on Winterflood and its two traders respectively.
This is a clear example of the FSA reinforcing its message to the market of its rules on market conduct and its expectation that market professionals have an obligation and role in ensuring orderly markets and that firms and individuals need always to be alert to obvious indications of wrongdoing.
The new face of the FSA – changes within
Whilst the recent global financial crisis has been a catalyst for changes at the FSA, the shift in its regulatory approach, particularly in the area of enforcement for market abuse offences, goes back to around late 2007, as the UK came under increasing scrutiny by global financial market participants who had started drawing unfavourable comparisons between the FSA and its more "successful", "tougher" sister regulator across the Atlantic, the SEC. The FSA recently announced its plan to increase its 35 person strong Enforcement Team and has budgeted for its increased investment in this area in its 2009/10 Business Plan. In March, the FSA announced the appointment of David Kirk as its Chief Criminal Counsel who is due to join the FSA in June. David is currently the director of the Fraud Prosecution Service. At the time of the announcement of his appointment, Margaret Cole, Director of Enforcement at the FSA, noted that "the FSA has made a firm commitment in bringing criminal prosecutions to support [its] objective of achieving clean and orderly markets through credible deterrence". Kirk himself has declared his excitement at "joining the FSA as it takes on more criminal prosecutions."
The FSA continues its enforcement actions in the area of market abuse and financial crime with pursuing civil prosecutions for market abuse offences. To date in 2009, it has already imposed 11 fines totalling approximately £6,300,000. Risk-based regulation is being traded in for "outcomes-focused" regulation meaning negotiated outcomes with market participants for market abuse offences now seem to be over. As Sants noted "it is crucial that the FSA has a strong and visible enforcement function".
As the year unfolds we will see more examples of this visible activity.
Gibson, Dunn & Crutcher LLP lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work or Selina Sagayam (+44 20 7071 4263, [email protected]) or Rachel Couter (+44 20 7071 4217, [email protected]) in the firm’s London office.
© 2009 Gibson, Dunn & Crutcher LLP
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