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The 7 deadly sins of Market Abuse

 

The 7 deadly sins of Market Abuse

- An introduction to the Market Abuse Regime -

© 2016 PlanetCompliance.com

Table of Contents

Foreword 3

Prolog: What is Market Abuse? 4

Insider Dealing 7

Improper Disclosure 11

Misuse of information 15

Manipulating transactions 17

Manipulating devices 27

Dissemination 31

Distortion and misleading behaviour 34

More Case Law 37

Outlook 39

About PlanetCompliance 40

Foreword

This book has been first written three years ago when the upcoming Market Abuse Regulation had not been drafted yet and the European Parliament only had endorsed the political agreement on new European rules for Market Abuse. How time flies! So one could think that in the fast moving world of regulation (which might be a bit of an overstatement given how long it actually takes from the beginning of a regulatory initiative to its implementation) the content of this book might be out-dated and no longer relevant, but we beg to differ: MAR will extend the scope of the existing Market Abuse framework to new markets, new platforms and new behaviours to deal with regulatory challenges that have materialised over the last couple of years such as benchmark manipulation and algorithmic trading; the underlying principles remain the same though. Furthermore, we believe it can’t hurt to have a good understanding of the historical development of legislation.

We will, of course, aim to produce an updated version in due course, but in the meantime, we hope you find this book helpful and enjoy reading it.

If you have any thoughts or comments on this book, we are always grateful for feedback, so visit us and leave a note at:

PlanetCompliance.com

Spring 2016

Prolog: What is Market Abuse?

What is Market Abuse? Everyone seems to have an idea of what it is supposed to be, but what does it really mean? Well, it depends. It depends on the jurisdiction, since most jurisdictions globally consider it generally illegal, but rules vary from country to country. But before this creates even more confusion, we will give an overview on Market Abuse and its different forms (always with a view to the UK regime though). The next chapters will then try to explain in more detail its various aspects.

Definition

In its recent Market Abuse Regulation (“MAR”), the European Union defines market abuse as “a concept that encompasses unlawful behaviour in the financial markets”. With regard to MAR, the legislator elaborates further that “it should be understood to consist of insider dealing, unlawful disclosure of inside information and market manipulation. Such behaviour prevents full and proper market transparency, which is a prerequisite for trading for all economic actors in integrated financial markets”.

The EU has set with its previous Market Abuse legislation in 2005 and the current set of new rules in the form of the second Market Abuse Directive and the Market Abuse Regulation a framework for a EU-wide Market Abuse regime. The new rules will apply from 3 July 2016. However, as said above though, legislation varies from country to country, and despite this general framework, this also applies within the EU. Why? On one hand, because of differences in the implementation of EU directives as, for example, the UK regulator had chosen to go beyond the minimum standards of the first Market Abuse Directive and continue with a stricter set of rules; on the other hand, because some countries like the UK have chosen to opt out of the second Market Abuse Directive. The Market Abuse Regulation will apply in the UK as well though.

Types of Market Abuse

In principal, the behaviour that can amount to Market Abuse can be divided into either a form of insider dealing or market manipulation.

Insider dealing can be defined as where a person has information that is not publicly available and makes use of such information for a personal gain.

Market manipulation can be defined as a situation where a person gives out knowingly false or misleading information to influence the price of a stock for a personal gain.

As said before, the UK has chosen a stricter and more specific set of types of behaviour that can potentially constitute Market Abuse. The seven types are briefly described below with the first three kinds of behaviour basically constituting a form of insider dealing, while the other four could be defined as a form of market manipulation.

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p<>{color:#000;}. Insider dealing – when an insider deals, or tries to deal, on the basis of inside information. 


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p<>{color:#000;}. Improper disclosure – where an insider improperly discloses inside information to another person.

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p<>{color:#000;}. Misuse of information – behaviour based on information that is not generally available but would affect an investor’s decision about the terms on which to deal.^^1^^

Editor’s note: The offense of Misuse of Information is no longer in force, but we decided to keep it since is still relevant and you will see why in the chapter below.

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p<>{color:#000;}. Manipulating transactions – trading, or placing orders to trade, that gives a false or misleading impression of the supply of, or demand for, one or more investments, raising the price of the investment to an abnormal or artificial level. 


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p<>{color:#000;}. Manipulating devices – trading, or placing orders to trade, which employs fictitious devices or any other form of deception or contrivance. 


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p<>{color:#000;}. Dissemination – giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading. 


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p<>{color:#000;}. Distortion and misleading behaviour – behaviour that gives a false or misleading impression of either the supply of, or demand for, an investment; or behaviour that otherwise distorts the market in 
an investment. 


These descriptions are taken from the FCA’s factsheet on Market Abuse, which can be found [+ here+].

Inside Information

What all types of behaviour have in common is that they require the individual that abuses the markets to have inside information. For information to qualify as inside information it has to be

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p<>{color:#000;}. precise information;

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p<>{color:#000;}. not generally available;

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p<>{color:#000;}. information a reasonable investor would use to make an investment decision; and

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p<>{color:#000;}. information, that if generally available, would likely have a significant impact on the price of an investment.

Insider Dealing

As described above and based on the regulatory framework in the UK, the behaviour that constitutes Market Abuse can be classified in two categories, abuse of information or market manipulation. These in turn have three respectively four sub-categories of behaviour, making it 7 categories, hence the name of this books: the 7 deadly sins of Market Abuse. This and the following chapters will look at each of the 7 forms of punishable behaviour under the Market Abuse Regime in more detail and provide practical examples and cases. We will start with Insider Dealing.

Insider Dealing

Insider dealing is dealing or attempting to deal on the basis of inside information. This definition is in line with the first Market Abuse Directive and the FSA, the then regulatory authority in the UK, adaption of it in the Code of Market Conduct as for example in the FSA’s factsheet (see here) mentioned above.

The first question that springs to mind is what is inside information? The EU in its Market Abuse Directive of 2003 (see here) had defined it as “information of a precise nature which has not been made public, relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.”

Based on this, one can determine whether information would be considered inside information by asking the following questions:

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p<>{color:#000;}. Is it precise information that is not generally available?

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p<>{color:#000;}. Is it related to one or more issuers or investment?

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p<>{color:#000;}. Would a reasonable investor use it to help them make a investment decisions in that issuer or security?

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p<>{color:#000;}. And, if it were generally available, would it be likely to significantly affect the price of an investment?

All answers YES? Inside information!

So far so good and if that sounded simple, the FCA has provided further detail in MAR 1.3 of the FCA Handbook (see here) on what behaviours the regulator considers to be insider dealing:

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p<>{color:#000;}. dealing on the basis of inside information which is not trading information;

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p<>{color:#000;}. front running/pre-positioning – that is, a transaction for a person’s own benefit, on the basis of and ahead of an order (including an order relating to a bid) which he is to carry out with or for another (in respect of which information concerning the order is inside information), which takes advantage of the anticipated impact of the order on the market or auction clearing price;

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p<>{color:#000;}. in the context of a takeover, an offeror or potential offeror entering into a transaction in a qualifying investment, on the basis of inside information concerning the proposed bid, that provides merely an economic exposure to movements in the price of the target company’s shares (for example, a spread bet on the target company’s share price); and

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p<>{color:#000;}. in the context of a takeover, a person who acts for the offeror or potential offeror dealing for his own benefit in a qualifying investment or related investments on the basis of information concerning the proposed bid which is inside information.

The FCA Handbook carries on to explain in further detail more factors that can help to determine whether a behaviour constitutes market abuse in the form of insider dealing, for example in particular situations like the making a market or executing client orders, takeover and merger activity. Thus, it is very useful and at times necessary to go through the single sections, but for the sake of this article and in order to not overcomplicate things, we will focus on the general aspects.

One such aspect is to keep in mind that the offence of insider dealing isn’t limited to dealing or attempting to deal on inside information; it also includes encouraging others to deal based on the inside information for example selective briefing at ours by directors or managers of issuers.

The FCA Handbook provides two examples (and several more all related to commodity derivatives though) for insider dealing:

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p<>{color:#000;}. X, a director at B PLC has lunch with a friend, Y. X tells Y that his company has received a takeover offer that is at a premium to the current share price at which it is trading. Y enters into a spread bet priced or valued by reference to the share price of B PLC based on his expectation that the price in B PLC will increase once the take over offer is announced.

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p<>{color:#000;}. An employee at B PLC obtains the information that B PLC has just lost a significant contract with its main customer. Before the information is announced over the regulatory information service the employee, whilst being under no obligation to do so, sells his shares in B PLC based on the information about the loss of the contract.

However, to put it into practical terms and real life cases, which might be more memorable and give an idea of the stakes, i.e. the fees and consequences of dealing on inside information and getting caught are, have a look the following cases:

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p<>{color:#000;}. The Financial Conduct Authority (FCA) fine of Kenneth Carver for £35k for insider dealing. Carver, a retired accountant, purchased 62,000 shares in Logica Plc (Logica) on the basis of information Ryan Willmott, a family friend, provided to him. Mr Willmott held inside information relating to a potential takeover of Logica through his employment at the group. See the FCA’s press release here: http://www.fca.org.uk/news/kenneth-carver-fined-for-insider-dealing

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p<>{color:#000;}. The sentencing of Ryan Willmott to 10 months imprisonment for insider dealing. Willmott admitted dealing on the basis of inside information he obtained during the course of his employment relating to the takeover of Logica PLC by CGI Group, as publicly announced on 31 May 2012. Willmott set up a trading account in the name of a former girlfriend, without her knowledge, to carry out the trading. He also admitted disclosing inside information to a family friend, who then went on to deal on behalf of Willmott and himself. See the FCA’s press release here: [+ http://www.fca.org.uk/news/ryan-willmott-sentenced-to-imprisonment-for-insider-dealing+]

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p<>{color:#000;}. The final case of the FCA’s Operation Tabernula that led to the sentencing of Julian Rifat – a former senior execution trader and portfolio strategist at Moore Europe Capital Management LLC – by the Southwark Crown Court to 19 months imprisonment and a fine of £100k plus costs of £159k. Rifat had passed inside information, obtained during the course of his employment, to an associate, Graeme Shelley, who then traded for their joint benefit.  Graeme Shelley, previously a broker at Novum Securities, pleaded guilty to insider dealing with Rifat and with another associate, Paul Milsom, in March 2014; Paul Milsom, an execution trader at Legal and General Insurance Management Ltd, pleaded guilty to insider dealing in March 2013. See this and the related cases here: [+ http://www.fca.org.uk/news/former-senior-trader-sentenced-for-insider-dealing+]

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p<>{color:#000;}. With regard to offence in encouraging others, see the FCA’s Final Notice in relation to Mr Rahul Shah. Shah had encouraged another person to engage in behaviour that would have amounted to market abuse, if it had been engaged in by Mr Shah. But for Mr Shah’s financial position he would have been fined £125,000. Mr Shah was prohibited from performing regulated activities: [+ http://www.fca.org.uk/your-fca/documents/final-notices/2013/mr-rahul-shah+]

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p<>{color:#000;}. Rajat Gupta, who had been managing partner of McKinsey & Co. and a director at Goldman Sachs Group Inc. and Procter & Gamble Co., was convicted by a federal jury in 2012 of leaking inside information to hedge fund manager Raj Rajaratnam, the founder-owner of Galleon. To see the full ruling of the United States District Court, see here (http://www.nysd.uscourts.gov/cases/show.php?db=special&id=234 )

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p<>{color:#000;}. The FSA fine for Greenlight Capital and its owner David Einhorn for £7.2 million for engaging in market abuse in relation to an anticipated significant equity fundraising by Punch Taverns Plc (Punch). See the FSA statement for more information on the case: http://www.fsa.gov.uk/library/communication/pr/2012/005.shtml

Improper Disclosure

In this chapter on the 7 Deadly Sins of Market Abuse we look at the offence of Improper Disclosure. This is the case when an insider discloses inside information to another person other than in the proper course of the exercise of employment, profession or duties according to the Financial Services and Markets Act 2000 (see section 118 (3).

Remember the definition of inside information from our first post of the series? No? Well, the EU had defined it in its Market Abuse Directive of 2003 as “information of a precise nature which has not been made public, relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.” We also introduced a checklist of 4 questions that, if all could be answered with yes, information in question should be considered inside information:

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p<>{color:#000;}. Is it precise information that is not generally available?

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p<>{color:#000;}. Is it related to one or more issuers or investment?

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p<>{color:#000;}. Would a reasonable investor use it to help them make a investment decisions in that issuer or security?

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p<>{color:#000;}. And, if it were generally available, would it be likely to significantly affect the price of an investment?

The FSA provides for an example of such an offence: An employee finds out that his company is about to become the target of a takeover bid. Before the information is made public, he buys shares in his company because he knows a takeover bid may be imminent. He then discloses the information to a friend. This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover. The employee’s friend also has this information and could profit unfairly from it.

The FCA, the FSA’s successor, describes in its Handbook (see section MAR 1.4: https://www.handbook.fca.org.uk/handbook/MAR/1/4.html) what constitutes, in its humble opinion, market abuse in the form of improper disclosure:

(1) disclosure of inside information by the director of an issuer to another in a social context; and

(2) selective briefing of analysts by directors of issuers or others who are persons discharging managerial responsibilities.

Further down in the same section the FCA also gives two practical examples:

(1) X, a director at B PLC has lunch with a friend, Y, who has no connection with B PLC or its advisers. X tells Y that his company has received a takeover offer that is at a premium to the current share price at which it is trading.

(2) A, a person discharging managerial responsibilities (which is a director or senior executive of an issuer according to the FSMA 2000) in B PLC, asks C, a broker, to sell some or all of As shares in B PLC. C discloses to a potential buyer that A is a person discharging managerial responsibilities or discloses the identity of A, in circumstances where the fact that A is a person discharging managerial responsibilities or the identity of A, is inside information, other than in the circumstances set out in MAR 1.4.4A C.

Please keep in mind that it isn’t necessary for anyone to deal on the disclosed inside information to constitute market abuse, nor is an intention required to commit market abuse or even an awareness that the respective information should be considered inside information.

It might also be a good idea to say a word or two on the aspect of “not in the proper course”. The FCA provides some guidance regarding permitted behaviour and indications are that is was:

(1) accompanied by the imposition of confidentiality requirements upon the person who receives the information; or

(2) reasonable; or

(3) for the purpose of either seeking or giving advice on a transaction, facilitating any commercial, financial or investment transaction (including securing prospective placees), or obtaining support in relation to a takeover offer; or

(4) in fulfilment of a legal obligation.

A key topic in that respect is the practice of wall crossing. This is an extremely important part of the management of confidential information and will be subject to a detailed post on the topic, but we want to touch on it at least at this point, too:

Financial Institutions maintain information barriers, so-called “Chinese Walls”, in order to handle material non-public information and potential conflicts of interest. On one side of the wall you have people who, for example, know about an upcoming transaction, and on the other people don’t. Now, there may be cases where a valid business reason exists to disclose this information or bring someone over the wall. To continue with the above example, the corporate finance team knowing about the soon to happen deal would like to make the research analyst of the bank that covers the company of the transaction, so that the analyst can prepare himself and be able to speak about the implications of the deal once the news breaks. Each bank needs to have a wall crossing procedure that outlines what steps need to be taken and there are laws and regulation determining the requirements, not to speak of the several aspects that surround such situations that are subject to discussion, but that will be examined another time. Needless to say though that the person that has been brought over the wall is now subject to the same obligations regarding the handling of the sensitive information and can’t simply chat freely about. Just to conclude this section then, for our research analyst in the example this could mean that he would find it very difficult to do his job covering the company without raising suspicions, so the timing of the wall crossing is also essential.

Lastly, to round off this overview of the offence of improper disclosure, let’s have a look at some cases of convictions for market abuse in the form of improper disclosure:

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p<>{color:#000;}. The Tax and Chancery Chamber of the Upper Tribunal upheld the decision of the Financial Conduct Authority (FCA) that Ian Hannam engaged in two instances of market abuse. The Tribunal found that Mr Hannam when working in a senior position for JP Morgan had engaged in two instances of market abuse by disclosing inside information other than in the proper course of his employment in two emails. In the Decision Notice, the Authority decided that it was appropriate to impose a financial penalty of £450,000. For more information, please see here. [+ http://www.fca.org.uk/news/ian-hannam-guilty-of-market-abuse+]

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p<>{color:#000;}. In a case brought by the Financial Services Authority (FSA), Paul Milsom, a senior equities trader, has today been sentenced at Southwark Crown Court to 2 years imprisonment for disclosing inside information between October 2008 and March 2010. A confiscation order was also made in the sum of £245,000. For more information, please see here. [+ http://www.fca.org.uk/news/press-releases/equities-trader-sentenced-for-insider-dealing+]

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p<>{color:#000;}. The Financial Services Authority (FSA) fined Nicholas Kyprios, Head of European Credit Sales at Credit Suisse in London, £210,000 for improper market conduct in disclosing client confidential information ahead of a significant bond issue in November 2009. For more information, please see here: [+ http://www.fsa.gov.uk/library/communication/pr/2012/026.shtml+]

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p<>{color:#000;}. Remember the famous Einhorn in the last chapter? Obviously, the behavior of market participants doesn’t necessarily breach only one of the market abuse offences, but often fits two or more alternatives of market abuse behavior. So it’s not surprising that this case with its complex structure also falls into the bracket of improper disclosure, i.e. the Financial Services Authority (FSA) fined Andrew Osborne, former Managing Director in Corporate Broking at Merrill Lynch International (now Bank of America Merrill Lynch International) £350,000, for engaging in market abuse by improperly disclosing inside information ahead of a significant equity fundraising by Punch Taverns Plc (Punch) in June 2009. For more details, see here : [+ http://www.fsa.gov.uk/einhorn+]

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p<>{color:#000;}. Cross jurisdiction investigations slowly become more frequent and the joint FSA, SEC and DoJ investigation lead to two people being charged by the SEC with insider dealing in the U.S. In a parallel investigation by the Financial Services Authority (FSA), the Securities and Exchange Commission (SEC), Department of Justice (DoJ), and with assistance from the Federal Bureau of Investigation (FBI), a former Deloitte Tax LLP partner and his wife were yesterday charged by the SEC with insider trading in violation of the U.S. federal securities laws. For more information, please see here. [+ http://www.fsa.gov.uk/library/communication/pr/2010/169.shtml+]

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p<>{color:#000;}. The FSA fined Jay Rutland £30,000 and prohibited him from performing regulated activities for committing market abuse.  At the relevant time Mr Rutland was a senior broker with Pacific Continental Securities (UK) Ltd who both improperly disclosed inside information and encouraged other brokers to disclose the same inside information when attempting to sell specific shares. For more information, please see here. [+ http://www.fsa.gov.uk/static/pubs/final/jay-rutland.pdf+]

Misuse of information

Welcome to the third offence in our series on the seven market abuse offences as we know them in the regulatory regime of the UK. This one is a tricky one as it deals with the offence of Misuse of Information. Tricky because it is one of the two super equivalents of the seven offences (the other one being Misleading Behaviour & Distortion, which we will cover in the last post of this series. Remember also that the UK has chosen a stricter and more specific set of types of behaviour that can potentially constitute Market Abuse? There you go!) , i.e. it tries to mop up what isn’t already covered by the first two offences in relation to inside information. In more technical terms it captures any other behaviour on information not generally available, which the regular user would regard as being relevant, and the regular user would regard as a failure to observe a reasonable standard of behaviour.

Another thing about the offence of Misuse of Information in accordance with section 118 (4) that as such it is that is not valid anymore. The two super equivalents derive from the UK market abuse regime that existed before the implementation of the EU Market Abuse Directive and were given an extended lifespan, which was then extended until in December 2014 the FSMA 2000 (Market Abuse) Regulations 2014 came into force. Whilst the other super equivalent has been given an extension, the legislator to let section 118 (4) expire.

Why should you know about it then? Well, first of all to fully understand the market abuse regime it is always helpful to know its evolution. Secondly, the reason it was not extended was based on the development that it more recent case law the threshold of what exactly constitutes inside information under the first two market abuse offences was lowered significantly, so that the sweep up clause of misuse of information became less relevant. Thus, it is technically not in force anymore, but the behaviour is still covered by the current regulation and therefore still very relevant.

To conclude our little tour on Misuse of Information, why don’t we have a look at some of the most significant cases:

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p<>{color:#000;}. James Parker – A financial penalty of £250,000 is imposed to Mr Parker pursuant to section 123 of the Financial Services and Markets Act 2000 (“the Act”). Parker was a financial controller at Pace Micro Technology and sold shares ahead of a profit warning. He also carried out an active programme of spread bets on the share price, making an aggregate profit of £121,742. His claim that this was part of an existing trading strategy uninfluenced by his inside information, however, was not believed, and he was fined. For more information on this case, please see here: http://www.fsa.gov.uk/pubs/final/parker_6oct06.pdf

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p<>{color:#000;}. Malins – A financial penalty of £25,000 in relation to his purchases of ordinary shares in Cambrian Mining plc ahead of two announcements concerning Cambrian’s Placing of shares and its Interim Results, made by the Company on 23 March 2005 and 31 March 2005 respectively. The full case is available here: http://www.fsa.gov.uk/pubs/final/jonathan_malins.pdf

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p<>{color:#000;}. GLG Partners and Philippe Jabre The Financial Services Authority fined hedge fund manager GLG Partners LP (GLG) and Mr Philippe Jabre, a former managing director of the firm, £750,000 each for market abuse and breaching FSA principles. On 11 February 2003 Mr Jabre was ‘wall crossed’ by Goldman Sachs International as part of the pre-marketing of a new issue of convertible preference shares in Sumitomo Mitsui Financial Group Inc (SMFG). Mr Jabre was given confidential information and agreed to be restricted from dealing SMFG securities until the issue was announced. Mr Jabre breached this restriction by short selling around $16 million of SMFG ordinary shares on 12-14 February 2003. When the new issue was announced on 17 February 2003, Mr Jabre made a substantial profit for the GLG Market Neutral Fund. For more information on this case, please see here: http://www.fsa.gov.uk/library/communication/pr/2006/077.shtml

Manipulating transactions

 

This chapter is a true highlight as the offence of Market Abuse in the form of Manipulating Transactions has it all: Fancy jargon, hefty fines and plenty of case law, so hold tight to your seats.

 

Curb your enthusiasm for a minute though as we first need to have a look at the definition: The FSMA 2000 sets out manipulating transactions in section 118 (5) as behaviour that consists of effecting transactions or orders to trade (otherwise than for legitimate reasons and in conformity with accepted market practices on the relevant market) which:

(a) give, or are likely to give, a false or misleading impression as to the supply of, or demand for, or as to the price of, one or more qualifying investments; or

(b) secure the price of one or more such investments at any abnormal or artificial level.

This is represented in MAR 1.6 of the FCA Handbook, and there the FCA also gives an overview of behaviours, which, in the regulator’s opinion, are manipulating transactions involving false or misleading impressions:

(1) “Marking the close”, i.e. buying or selling qualifying investments at the close of the market with the effect of misleading investors who act on the basis of closing prices, other than for legitimate reasons;

(2) wash trades – that is, a sale or purchase of a qualifying investment where there is no change in beneficial interest or market risk, or where the transfer of beneficial interest or market risk is only between parties acting in concert or collusion, other than for legitimate reasons;

(3) painting the tape – that is, entering into a series of transactions that are shown on a public display for the purpose of giving the impression of activity or price movement in a qualifying investment;

(4) entering orders into an electronic trading system, at prices which are higher than the previous bid or lower than the previous offer, and withdrawing them before they are executed, in order to give a misleading impression that there is demand for or supply of the qualifying investment at that price, and

(5) buying or selling on the secondary market of qualifying investments or related derivatives prior to the auction with the effect of fixing the auction clearing price for the auctioned products at an abnormal or artificial level or misleading bidders in the auctions, other than for legitimate reasons.

At that point maybe a quick word on Wash Trades: The FCA points out that for the avoidance of doubt a stock lending/borrowing or repo/reverse repo transaction, or another transaction involving the provision of collateral, do not constitute a wash trade. However, another practical aspect in particular from the perspective of trade surveillance is the practice of moving stocks from one account to another or for the purpose of pricing especially for investment funds who need to assign a value to their holdings even if they are not trading; this can distort the view from the pure data perspective, so obviously a good surveillance officer should know the business quite well.

The FCA also lists a number of market related factors in the Handbook that should be taken into account whether a person’s behaviour amounts to market abuse in the form of manipulating transactions:

(1) the extent to which orders to trade given, bids submitted or transactions undertaken represent a significant proportion of the daily volume of transactions in the relevant qualifying investment on the regulated market or prescribed auction platform concerned, in particular when these activities lead to a significant change in the price of the qualifying investment;

(2) the extent to which orders to trade given, bids submitted or transactions undertaken by persons with a significant buying or selling position in a qualifying investment lead to significant changes in the price of the qualifying investment or related derivative or underlying asset admitted to trading on a regulated market;

(3) whether transactions undertaken lead to no change in beneficial ownership of a qualifying investment admitted to trading on a regulated market;

(4) the extent to which orders to trade given or transactions undertaken include position reversals in a short period and represent a significant proportion of the daily volume of transactions in the relevant qualifying investment on the regulated market concerned, and might be associated with significant changes in the price of a qualifying investment admitted to trading on a regulated market;

(5) the extent to which orders to trade given or transactions undertaken are concentrated within a short time span in the trading session and lead to a price change which is subsequently reversed;

(6) the extent to which orders to trade given change the representation of the best bid or offer prices in a financial instrument admitted to trading on a regulated market, or more generally the representation of the order book available to market participants, and are removed before they are executed; and

(7) the extent to which orders to trade are given or transactions are undertaken at or around a specific time when reference prices, settlement prices and valuations are calculated and lead to price changes which have an effect on such prices and valuations.

Furthermore, in the opinion of the FCA, the following factors are to be taken into account in determining whether or not a person’s behaviour amounts to market abuse:

(1) the extent to which the person had a direct or indirect interest in the price or value of the qualifying investment or related investment;

(2) the extent to which price, rate or option volatility movements, and the volatility of these factors for the investment in question, are outside their normal intra-day, daily, weekly or monthly range; and

(3) whether a person has successively and consistently increased or decreased his bid, offer or the price he has paid for a qualifying investment or related investment.

With regard to the second alternative under section 118 (5), price positioning, the FCA again provides with a useful description of behaviours it considers to be market abuse involving securing the price of a qualifying investment:

(1) transactions or orders to trade by a person, or persons acting in collusion, that secure a dominant position over the supply of or demand for a qualifying investment and which have the effect of fixing, directly or indirectly, purchase or sale prices or creating other unfair trading conditions, other than for legitimate reasons;

(2) transactions where both buy and sell orders are entered at, or nearly at, the same time, with the same price and quantity by the same party, or different but colluding parties, other than for legitimate reasons, unless the transactions are legitimate trades carried out in accordance with the rules of the relevant trading platform (such as crossing trades);

(3) entering small orders into an electronic trading system, at prices which are higher than the previous bid or lower than the previous offer, in order to move the price of the qualifying investment, other than for legitimate reasons;

(4) an abusive squeeze – that is, a situation in which a person:

(a) has a significant influence over the supply of, or demand for, or delivery mechanisms for a qualifying investment or related investment or the underlying product of a derivative contract;

(b) has a position (directly or indirectly) in an investment under which quantities of the qualifying investment, related investment, or product in question are deliverable; and

© engages in behaviour with the purpose of positioning at a distorted level the price at which others have to deliver, take delivery or defer delivery to satisfy their obligations in relation to a qualifying investment (the purpose need not be the sole purpose of entering into the transaction or transactions, but must be an actuating purpose);

(5) parties, who have been allocated qualifying investments in a primary offering, colluding to purchase further tranches of those qualifying investments when trading begins, in order to force the price of the qualifying investments to an artificial level and generate interest from other investors, and then sell the qualifying investments;

(6) transactions or orders to trade employed so as to create obstacles to the price falling below a certain level, in order to avoid negative consequences for the issuer, for example a downgrading of its credit rating;

(7) trading on one market or trading platform with a view to improperly influencing the price of the same or a related qualifying investment that is traded on another prescribed market, and

(8) conduct by a person, or persons acting in collusion, that secure a dominant position over the demand for a qualifying investment which has the effect of fixing, directly or indirectly, auction clearing prices or creating other unfair trading conditions, other than for legitimate reasons.

The importance of manipulating transactions through abusive squeezes is highlighted by the additional guidance the FCA provides in the Handbook on the topic.

MAR 1.6.11 to MAR 1.6.13 provider further clarification on factors that need to be taken into account:

(1) the extent to which a person is willing to relax his control or other influence in order to help maintain an orderly market, and the price at which he is willing to do so; for example, behaviour is less likely to amount to an abusive squeeze if a person is willing to lend the investment in question;

(2) the extent to which the person’s activity causes, or risks causing, settlement default by other market users on a multilateral basis and not just a bilateral basis. The more widespread the risk of multilateral settlement default, the more likely that an abusive squeeze has been effected;

(3) the extent to which prices under the delivery mechanisms of the market diverge from the prices for delivery of the investment or its equivalent outside those mechanisms. The greater the divergence beyond that to be reasonably expected, the more likely that an abusive squeeze has been effected; and

(4) the extent to which the spot or immediate market compared to the forward market is unusually expensive or inexpensive or the extent to which borrowing rates are unusually expensive or inexpensive.

MAR 1.6.12 emphasises that market tightness doesn’t necessarily be itself abusive, nor does having a significant influence over the supply of or demand for an investment, whilst MAR 1.6.13 points to the overall market behaviour in relation to the effects of an abusive squeeze.

With so much guidance and clarification already provided in the rules, the FCA naturally gives a couple of examples in the Handbook for manipulating transactions:

(1) a trader simultaneously buys and sells the same qualifying investment (that is, trades with himself) to give the appearance of a legitimate transfer of title or risk (or both) at a price outside the normal trading range for the qualifying investment . The price of the qualifying investment is relevant to the calculation of the settlement value of an option. He does this while holding a position in the option . His purpose is to position the price of the qualifying investment at a false, misleading, abnormal or artificial level, making him a profit or avoiding a loss from the option ;

(2) a trader buys a large volume of commodity futures, which are qualifying investments, (whose price will be relevant to the calculation of the settlement value of a derivatives position he holds) just before the close of trading. His purpose is to position the price of the commodity futures at a false, misleading, abnormal or artificial level so as to make a profit from his derivatives position;

(3) a trader holds a short position that will show a profit if a particular qualifying investment, which is currently a component of an index, falls out of that index. The question of whether the qualifying investment will fall out of the index depends on the closing price of the qualifying investment. He places a large sell order in this qualifying investment just before the close of trading. His purpose is to position the price of the qualifying investment at a false, misleading, abnormal or artificial level so that the qualifying investment will drop out of the index so as to make a profit;

(4) a fund manager’s quarterly performance will improve if the valuation of his portfolio at the end of the quarter in question is higher rather than lower. He places a large order to buy relatively illiquid shares, which are also components of his portfolio, to be executed at or just before the close. His purpose is to position the price of the shares at a false, misleading, abnormal or artificial level;

(5) and lastly an example of an abusive squeeze: A trader with a long position in bond futures buys or borrows a large amount of the cheapest to deliver bonds and either refuses to re-lend these bonds or will only lend them to parties he believes will not re-lend to the market. His purpose is to position the price at which those with short positions have to deliver to satisfy their obligations at a materially higher level, making him a profit from his original position.

In 2009 the FSA was so concerned about the manipulation of the order book in the form of layering or spoofing, it focused on the subject as part of its periodical publication Market Watch (http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter33.pdf). With firms offering clients direct market access (DMA), the FSA was worried about the controls of such access since it had seen a rise in intentional patterns of behaviour to mislead markets through layering or spoofing when clients:

(1) layer the order book, in which multiple orders are submitted at different prices on one side of the order book slightly away from the touch;

(2) submitted an order to the other side of the order book (which reflected the client’s true intention to trade); and

(3) following the execution of the latter order, rapidly removing the multiple initial orders from the book

 

As a result all exchanges and MTFs were advised to introduce procedures to prevent this activity from taking place.

Though this guidance might seem out-dated, it is actually particularly relevant with regard to new trading technologies and the potential for market abuse through high frequency trading (HFT). HFT is a key focus for regulators around the globe and certain kinds of HFT or algorithmic trading will be forbidden under the EU Market Abuse Regulation. We tackle this topic in a separate post, but it is a good example for the evolution of market abuse.

As promised, we conclude this article with a large selection of cases of market abuse in the form of manipulating transactions:

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p<>{color:#000;}. FCA fines compliance officer and broker whose actions enabled market abuse to be committed in October 2010

The Financial Conduct Authority (FCA) has fined David Davis, senior partner and compliance officer of Paul E Schweder Miller & Co, £70,258, and Vandana Parikh, a broker at the same firm, £45,673, for failing to act with due skill, care and diligence in the period leading up to the illegal manipulation of the closing price of securities traded on the London Stock Exchange (LSE) by Rameshkumar Goenka, a Dubai based private investor, in October 2010. For more information on the case, see here: [+ http://www.fca.org.uk/news/fca-fines-compliance-officer-and-broker+]

 

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p<>{color:#000;}. FSA fines Dubai based investor US$ 9.6 million for market abuse

The Financial Services Authority (FSA) has fined Rameshkumar Goenka, a Dubai based private investor, $9,621,240 (approximately £6 million) for manipulating the closing price of Reliance Industries (Reliance) securities on the London Stock Exchange (LSE). For more information on the case, see here: http://www.fsa.gov.uk/library/communication/pr/2011/094.shtml

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p<>{color:#000;}. FCA fines US based oil trader US $903K for market manipulation

The Financial Conduct Authority (FCA) has fined US based High Frequency Trader, Michael Coscia, US $903,176 (£597,993) for deliberate manipulation of commodities markets. For more information on the case, see here: http://www.fca.org.uk/news/fca-fines-us-based-oil-trader

 

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p<>{color:#000;}. FCA bans and fines trader £662,700 for manipulating gilt price during QE

Mark Stevenson, a bond trader with nearly 30 years’ experience, has been banned from the industry and fined £662,700 for deliberately manipulating a UK government bond (gilt) on 10 October 2011. Stevenson intended to sell his holding, worth £1.2 billion, to the Bank of England (the Bank) for an artificially high price during quantitative easing (QE) operations that day. His unusual trading was reported within 40 minutes and the Bank decided not to buy that gilt as part of QE. For more information on the case, see here: [+ http://www.fca.org.uk/news/fca-bans-and-fines-trader-660k-for-manipulating-gilt-price-during-qe+]

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p<>{color:#000;}. FCA secures High Court Judgment awarding injunction and over £7 million in penalties against five defendants for market abuse

The High Court today held that the Financial Conduct Authority (FCA) is entitled to permanent injunctions and penalties totalling £7,570,000 against Da Vinci Invest Ltd, Mineworld Ltd, Mr Szabolcs Banya, Mr Gyorgy Szabolcs Brad and Mr Tamas Pornye for committing market abuse.  The defendants were found to have committed market abuse in relation to 186 UK-listed shares using a manipulative trading strategy known as “layering”. For more information on the case, see here: [+ http://www.fca.org.uk/news/fca-secures-high-court-judgment-awarding-injunction-and-over-7-million-in-penalties+]

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p<>{color:#000;}. Tribunal upholds FSA decision to fine firm £8m for market abuse

The Upper Tribunal (Tax and Chancery Chamber) has directed the Financial Services Authority (FSA) to fine Swift Trade, a non-FSA authorised Canadian company with global operations, £8m for market abuse. The Tribunal described this as being “as serious a case of market abuse of its kind as might be imagined”.

In 2011 British regulators fined Swift Trade £8 million for using the technique and the firm went out of business. The case drew a lot of attention as Swift Trade was a Canadian firm and it was one of the first cases of the FSA (Financial Services Authority) fining foreign firms. For more information on the case, see here:

[+ http://www.fca.org.uk/news/press-releases/tribunal-upholds-fsa-decision+]

[+ http://www.fca.org.uk/your-fca/documents/final-notices/2014/7722656-canada-inc+]

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p<>{color:#000;}. Tribunal upholds FSA decision to ban and fine hedge fund CEO and CFO £2.1m for deceiving investors and market abuse

The Upper Tribunal (Tax and Chancery Chamber) has directed the Financial Services Authority (FSA) to fine Michiel Weiger Visser £2 million and Oluwole Modupe Fagbulu £100,000 and ban them both from performing any role in regulated financial services for breaching Principle 1 of the FSA’s Statements of Principle for Approved Persons and for engaging in market abuse. For more information on the case, see here: http://www.fsa.gov.uk/library/communication/pr/2011/071.shtml

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p<>{color:#000;}. FSA bans and fines self employed trader £700,000 for market abuse

The Financial Services Authority (FSA) has obtained a court order preventing Barnett Michael Alexander, a self employed trader, from committing market abuse and ordering him to pay a £700,000 fine and £322,818 in restitution to firms which experienced a loss as a result of his actions. For more information on the case, see here: http://www.fsa.gov.uk/library/communication/pr/2011/053.shtml

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p<>{color:#000;}. FSA fines individual £1m and secures first final High Court injunction to prevent market abuse

The Financial Services Authority (FSA) has fined Samuel Kahn £1,094,900 and obtained a High Court injunction restraining him from committing market abuse. This is the first time the FSA has secured a final injunction from the High Court to prevent market abuse and also the first fine calculated under the new penalties system. For more information on the case, see here: http://www.fsa.gov.uk/library/communication/pr/2011/044.shtml

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p<>{color:#000;}. FSA bans Graham Betton for market abuse

The Financial Services Authority (FSA) has banned Graham Betton from working in financial services, following his role in a scheme that set out to ramp up the share price of Fundamental-E Investments (FEI). The Upper Tribunal (Tax and Chancery Chamber, (the Tribunal)) is considering the fine that is appropriate for his actions and will announce this at a later date. For more information on the case, see here: http://www.fsa.gov.uk/library/communication/pr/2010/171.shtml

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p<>{color:#000;}. FSA fines Stefan Chaligné and Patrick Sejean

The FSA fined Stefan Chaligné and prohibited him from performing regulated activities for undertaking market manipulation in conjunction with Patrick Sejean.  The fine consisted of a disgorgement element of €362,950 and a separate penalty of £900,000.  Mr Chaligné was a hedge fund manager who engaged in ‘window-dressing the close’, deliberately manipulating the market in certain securities so as to increase their closing prices. For more information on the case, see here: [+ http://www.fca.org.uk/your-fca/documents/final-notices/2013/fsa-final-notice-2013-stefan-chaligne+]

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p<>{color:#000;}. FSA imposes fines of £4.25m on Winterflood and two traders for market abuse following success in Court of Appeal

The Financial Services Authority (FSA) won its market abuse case in the Court of Appeal against Winterflood and two of its traders, Stephen Sotiriou and Jason Robins. The appeal hearing follows an earlier finding of market abuse by the Financial Services and Markets Tribunal (the Tribunal). For more information on the case, see here: http://www.fsa.gov.uk/library/communication/pr/2010/071.shtml

Manipulating devices

How do you follow an act like Manipulating Transactions from the last chapter? Especially when Manipulating Devices can be considered an extension of the latter? A tough one, but definitely worth a read, particularly as we continue to use interesting market abuse jargon like “pump and dump” or “trash and cash” and see some more examples of foul behaviour.

First, the rules though: The Financial Services and Markets Act 2000 defines the fifth market abuse offence as where the behaviour consists of effecting transactions or orders to trade which employ fictitious devices or any other form of deception or contrivance. This is reflected in the FCA Handbook under MAR 1.7.1 and amended by the Recognised Auction Platforms Regulations 2011 adding “bids”, thus extending the scope of the offence further.

Further down in the same section of the Handbook, the FCA describes behaviour that amounts to market abuse through manipulating devices:

(1) taking advantage of occasional or regular access to the traditional or electronic media by voicing an opinion about a qualifying investment (or indirectly about its issuer, if applicable) while having previously taken positions on, or submitted bids in relation to, that qualifying investment and profiting subsequently from the impact of the opinions voiced on the price of that instrument, without having simultaneously disclosed that conflict of interest to the public in a proper and effective way;

(2) a transaction or series of transactions that are designed to conceal the ownership of a qualifying investment, so that disclosure requirements are circumvented by the holding of the qualifying investment in the name of a colluding party, such that disclosures are misleading in respect of the true underlying holding. These transactions are often structured so that market risk remains with the seller. This does not include nominee holdings;

(3) pump and dump – that is, taking a long position in a qualifying investment and then disseminating misleading positive information about the qualifying investment with a view to increasing its price;

(4) trash and cash – that is, taking a short position in a qualifying investment and then disseminating misleading negative information about the qualifying investment, with a view to driving down its price.

The FCA also provide guidance in the form of factors that should be taken into account in determining whether or not a fictitious device or other form of deception or contrivance has been used, and are indications that it has:

(1) if orders to trade given, bids submitted or transactions undertaken in qualifying investments by persons are preceded or followed by dissemination of false or misleading information by the same persons or persons linked to them;

(2) if orders to trade are given, bids submitted or transactions are undertaken in qualifying investments by persons before or after the same persons or persons linked to them produce or disseminate research or investment recommendations which are erroneous or biased or demonstrably influenced by material interest.

The FCA’s predecessor, the Financial Services Authority (FSA), had issued some useful guidance on how stake building could involve the market abuse offence of manipulating devices (see here http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter20.pdf ). While stake building itself isn’t abusive in the opinion of the FSA, the regulator uses the example of several participants acquiring shares independently in order to avoid any market disclosures to demonstrate how such behaviour might be considered market manipulation under MAR 1.7.

The FSA also produced a good example for the offence: Buying shares and then spreading misleading information with a view to increasing the price. This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions.

Generally, since it isn’t easy to build a case on misleading statement like unfounded rumours, unless you have, for example, a nice e-mail trail, but let’s have a look at some of the cases:

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p<>{color:#000;}. The Wolf of Wall Street

No, we haven’t turned into a movie critic, but the Wolf of Wall Street is a key example for “pump and dump” fraud schemes. Jordan Belfort and others ran Stratton Oakmond, a firm that on several occasions involved artificially inflating the price of owned stocks through false and misleading positive statements, so that they could sell the cheaply purchased stock at a higher price. Martin Scorsese and Leonardo DiCaprio made a rather interesting movie out of the story, but if you rather indulge in the regulatory history, here is a good starting point: [+ http://www.finra.org/newsroom/1996/nasd-regulation-expels-stratton-oakmont-principals-also-barred+]

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p<>{color:#000;}. Crown Corporation/Langbar International

Started as Crown Corporation, Langbar was the biggest pump and dump fraud on the Alternative Investment Market, part of the London Stock Exchange. The company was at one point valued greater than $1 billion, based on supposed bank deposits in Brazil, which did not exist. Only Stuart Pearson has been sentenced to 12 months in jail and banned from being a company director for five years, though some believe he was only a scapegoat, while none of the chief conspirators were convicted.

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p<>{color:#000;}. Stock promoters and conspirators indicted for $290 million “Pump and Dump” stock fraud scheme

Three stock promoters and five co-conspirators were indicted by the Manhattan DA for participating in stock market manipulation schemes, commonly referred to as “pump-and-dump” schemes, in which thousands of investors in penny stocks were defrauded of approximately $290 million. The defendants are charged in an 85-count indictment in New York State Supreme Court with Criminal Possession of Stolen Property in the First and Second Degrees, Grand Larceny in the Second, Third, and Fourth Degrees, Scheme to Defraud in the First Degree, and Securities Fraud. Read more on the case here: [+ http://manhattanda.org/press-release/da-vance-stock-promoters+]

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p<>{color:#000;}. Penny stock promoter Allen Wolfson convicted in “pump and dump” case

Wolfson, a penny stock promoter, artificially inflated the prices of certain thinly-traded securities in which he had amassed a substantial interest, and then unloaded those holdings on unsuspecting investors. Of particular relevance to Wolfson’s conviction, the scheme relied on corrupt stock brokers who sold the securities for prices far above their actual value. In exchange, Wolfson rewarded the brokers with exorbitant commissions. Some of the brokers failed to disclose the fact of the commissions to their customers. Others made affirmative misrepresentations about the size of these commissions. Wolfson appealed against his convictions, but was rejected and you can find the case here: [+ https://www.gpo.gov/fdsys/pkg/USCOURTS-ca2-10-02878/pdf/USCOURTS-ca2-10-02878-0.pdf+]

Further cases of Market Abuse in the form of Manipulating Devices include the rumours surrounding HBOS during the financial crisis when the FSA launched an investigation that didn’t turn out any results or the takeover of Bear Stearns in March 2008, when reports swirled that short sellers were spreading rumors to drive down Bear Stearns’ share price.

Dissemination

The sixth chapter of this series looks at the offence of Dissemination. Dissemination is defined as giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading. 


The FCA deals with this offence in section MAR 1.8 of its Handbook, where the regulator also describes behaviour that amounts to market abuse in the form of dissemination:

(1) knowingly or recklessly spreading false or misleading information about a qualifying investment through the media, including in particular through an RIS or similar information channel;

(2) undertaking a course of conduct in order to give a false or misleading impression about a qualifying investment.

The regulator also specifies factors that should be taken into account in determining whether or not behaviour amounts to dissemination:

(1) if a normal and reasonable person would know or should have known in all the circumstances that the information was false or misleading, that indicates that the person disseminating the information knew or could reasonably be expected to have known that it was false or misleading;

(2) if the individuals responsible for dissemination of information within an organisation could only know that the information was false or misleading if they had access to other information that was being held behind a Chinese wall or similarly effective arrangements, that indicates that the person disseminating did not know and could not reasonably be expected to have known that the information was false or misleading.

Lastly, the FCA gives in this section also two examples of relevant behaviour:

(1) a person posts information on an Internet bulletin board or chat room which contains false or misleading statements about the takeover of a company whose shares are qualifying investments and the person knows that the information is false or misleading;

(2) a person responsible for the content of information submitted to a regulatory information service submits information which is false or misleading as to qualifying investments and that person is reckless as to whether the information is false or misleading.

Talking about examples, the FSA, the FCA’s predecessor, had produced a factsheet on market abuse offences, where they too gave an example for dissemination that shows that the line to other offences (in this case Manipulating Devices) can be thin: A person uses an internet bulletin board or chat room to post information about the takeover of a company. The person knows the information to be false or misleading. This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions.

As always, we would like to round the chapter off with some real life examples:

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p<>{color:#000;}. FSA bans and fines directors a total of £600,000 for publishing misleading information about Cattles plc

The Financial Services Authority (FSA) has fined and banned two former directors of Cattles plc (Cattles) and its subsidiary Welcome Financial Services Limited (Welcome) for publishing misleading information to investors about the credit quality of Welcome’s loan book and acting without integrity in discharging their responsibilities. The FSA has also publicly censured Cattles and Welcome for publishing misleading information. For more information on the case see here: http://www.fsa.gov.uk/library/communication/pr/2012/034.shtml

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p<>{color:#000;}. FSA fines former CEO of Sibir £350,000 for market abuse

The Financial Services Authority (FSA) fined Henry Cameron £350,000 for making misleading announcements to the market regarding payments from Sibir, a large energy company that was quoted on AIM, to its major shareholder. For more information on the case see here: http://www.fsa.gov.uk/pubs/final/henry_cameron.pdf

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p<>{color:#000;}. FSA fines and bans oil futures broker for market abuse

The Financial Services Authority (FSA) has fined Steven Noel Perkins, a former oil futures broker, £72,000 for market abuse. The FSA has also banned Perkins from working in the financial services industry on the grounds that he is not a fit and proper person. A significant amount of the unauthorised trading carried out by Mr Perkins constituted market abuse in that it gave a false and misleading impression as to the supply, demand and price of ICE August 2009 Brent Crude Futures contract (“Brent”) and, further, in that it secured the price of Brent at an abnormal and artificial level. The trading records show that Mr Perkins’ trading had the direct effect of increasing the price of Brent. For more information on the case see here: http://www.fsa.gov.uk/pubs/final/steven_perkins.pdf

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p<>{color:#000;}. FSA fines Shell £17,000,000 for market abuse

The FSA has today fined the Shell Transport and Trading Company (“STT”), Royal Dutch Petroleum Company (“RDP”) and the Royal Dutch/Shell Group of Companies (“Shell”) 17 million for committing market abuse and breaching the listing rules.

This fine was imposed on Shell as a result of unprecedented misconduct in relation to misstatements of its proved reserves. When Shell first publicly revealed on 9 January 2004 that it had misstated its reserves, STT’s share price fell from 401p to 371p (7.5%) reducing its market capitalisation on that day by approximately 2.9 billion. For more information on the case click here.

Distortion and misleading behaviour

And now for the grand finale, the last of the 7 market abuse offences: Distortion and misleading behaviour, which is where the behaviour

(a) is likely to give a regular user of the market a false or misleading impression as to the supply of, demand for or price or value of, qualifying investments, or

(b) would be, or would be likely to be, regarded by a regular user of the market as behaviour that would distort, or would be likely to distort, the market in such an investment,

and the behaviour is likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position in relation to the market.

So, we’ve got ourselves another sweep up clause that covers everything that isn’t already subject to the other offences of market manipulation.

Once again a key requirement is the “regular user” test, whereas a regular user is effectively a reasonable person who deals regularly and understands the workings of the market concerned.

Remember the whole talk about how the UK Market Abuse Regime went further then the EU directive and how that created the two additional offences were called super equivalents? You might also remember that the first of the two, Misuse of Information, expired at the end of 2014, while the second was granted a lifeline (If you don’t recall any of this, why not have a look at our previous post on the topic here). The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2014 extended the expiry date of the prohibition of a category of market manipulation in section 118(8) of Financial Services and Markets Act 2000 (FSMA) and associated provisions to 3 July 2016. That is when the EU’s Market Abuse Regulation will become applicable and replace it.

In the FCA Handbook the offence is covered under MAR 1.9, where the regulator also describes what it considers to be relevant behaviour under this section:

(1) the movement of physical commodity stocks, which might create a misleading impression as to the supply of, or demand for, or price or value of, a commodity subject to a commodity futures contract; and

(2) the movement of an empty cargo ship, which might create a similar false or misleading impression

With regard to false and misleading impression the Handbook also lists factors that are to be taken into account in determining whether or not the behaviour constitutes market abuse:

(1) the experience and knowledge of the users of the market or auction platform in question;

(2) the structure of the market or auction platform, including its reporting, notification and transparency requirements;

(3) the legal and regulatory requirements of the market or auction platform concerned;

(4) the identity and position of the person responsible for the behaviour which has been observed (if known); and

(5) the extent and nature of the visibility or disclosure of the person’s activity.

Furthermore, the FCA gives examples of factors to be taken into account: standards of behaviour:

(1) if the transaction is pursuant to a prior legal or regulatory obligation owed to a third party;

(2) if the transaction is executed in a way which takes into account the need for the market or auction platform as a whole to operate fairly and efficiently; or

(3) the characteristics of the market or auction platform in question, including the users and applicable rules and codes of conduct;

(4) the position of the person in question and the standards reasonably to be expected of him in light of his experience, skill and knowledge;

(5) if the transaction complied with the rules of the relevant prescribed markets or prescribed auction platform about how transactions are to be executed in a proper way (for example, rules on reporting and executing cross-transactions); and

(6) if an organisation has created a false or misleading impression, whether the individuals responsible could only know they were likely to create a false or misleading impression if they had access to other information that was being held behind a Chinese wall or similarly effective arrangements.

Concerns regarding short selling were a key driver for the amendments of the market abuse regime in the FCA Handbook in particular to MAR 1.9.

As before, we conclude this chapter with a look at relevant cases for this type of market abuse behaviour:

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p<>{color:#000;}. Welcome Financial Services Limited

The FSA censured Welcome Financial Services Ltd for engaging in market abuse, which involved publishing false and misleading information relating to its loan book in its Annual Report for 2007.  Welcome Financial Services was at the time the principal subsidiary of Cattles plc. For the more information on the case, have a look here: [+ http://www.fsa.gov.uk/static/pubs/final/welcome-financial-service.pdf+]

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p<>{color:#000;}. Evolution Beeson Gregory

Penalties were imposed for market abuse as a result of short selling by EBG and Mr Potts, during the period from 25 September 2003 to 21 October 2003, of the shares of Room Service Group plc. EBG was fined £500,000 for market distortion and Potts, the financial services group’s head of market making, received a fine for £75,000. EBG had sold more than twice of the share capital of the AIM listed company without having a reasonable plan how to deliver the shares it had sold, according to the FSA. Investors failed to receive the shares they thought they had bought and the trading in shares of Room Service Group had to be suspended. EBG also had to pay investors £150,000 in compensation. For more on the case, please see here: http://www.fsa.gov.uk/pubs/final/evolution_12nov04.pdf

More Case Law

For more examples, have a look at the FCA’s Market Abuse Outcome page, where the FCA continues to publish information about action it has taken against market abuse and other related conduct: http://www.fca.org.uk/firms/markets/market-abuse/outcomes

Also, have a look at the following cases that do not focus on one specific form of Market Abuse as such, but are very relevant from a more general perspective on committing Market Abuse and resulting in enforcement action:

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p<>{color:#000;}. FCA fines and restricts W H Ireland Limited for market abuse risks

The FCA found that between 1 January and 19 June 2013, WHI failed to ensure it had the proper systems and controls in place to prevent market abuse being detected or occurring. WHI’s failings, which amounted to a breach of Principle 3, included: deficient controls to ensure inside information did not leak from the private to the public side of its business or in ensuring disclosure to external parties was conducted in a controlled manner with proper safeguards in place; inadequate personal account dealing rules for employees; failures to maintain an effective written conflicts of interest policy, and inadequate recording of the kinds of service or activity carried out by WHI in which a conflict of interest had arisen or may arise; and deficient compliance oversight, including the absence of formal risk management framework for market abuse and inadequate post-trade surveillance systems, in which parameters did not match WHI’s specific business activities or the full breadth of its market abuse risks, were set too narrowly to be effective and produced exceptions that were not reviewed in a timely and consistent manner. For more information see here: [+ http://www.fca.org.uk/news/press-releases/fca-fines-and-restricts-wh-ireland+]

 

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p<>{color:#000;}. Tribunal partly upholds the Financial Conduct Authority’s decision to fine Tariq Carrimjee for assisting a client to commit market abuse

The case of a Compliance officer not escalating a suspicious transaction, the Upper Tribunal’s decision in relation to Tariq Carrimjee of Somerset Asset Management LLP (Somerset).  The Tribunal upheld the FCA’s decision to impose a penalty of £89,004 and found that Carrimjee’s failings were serious and that a significant financial penalty was appropriate. For more information see here: [+ http://www.fca.org.uk/news/tribunal-partly-upholds-the-fca-decision-to-fine-tariq-carrimjee+]

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p<>{color:#000;}. Former compliance officer at Greenlight Capital and JP Morgan Cazenove trader fined

The Financial Services Authority (FSA) has fined Alexander Ten-Holter, trader and former compliance officer at Greenlight Capital (UK) LLP (Greenlight) £130,000 for failing to question and make reasonable enquiries before selling Greenlight’s shareholding in Punch Taverns plc (Punch) ahead of an anticipated significant equity fundraising by Punch in June 2009, and prohibited him from performing Compliance Oversight and Money Laundering reporting functions. For more information see here: http://www.fsa.gov.uk/library/communication/pr/2012/007.shtml

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p<>{color:#000;}. FSA gives Caspar Jonathan William Agnew final notice about a requirement to pay a financial penalty of £65,000:

The FSA gave Mr Agnew a Decision Notice on 19 August 2011, which notified him that for the reasons given below and pursuant to section 66(1) of the Financial Services and Markets Act 2000, the FSA had decided to impose on Mr Agnew a financial penalty of £65,000 on the grounds that Mr Agnew has failed to exercise due skill, care and diligence in breach of Principle 2 of the FSA’s Statement of Principle and Code of Practice for Approved Persons. For more information see here: http://www.fsa.gov.uk/static/pubs/final/caspar-agnew.pdf

Outlook

That’s all on our overview of the 7 (or 6 if you will) Market Abuse offences in the UK. As you might know, the regulatory regime will soon undergo significant changes thanks to the EU Market Abuse Regulation. MAR is part of the European Union’s new rules to update and strengthen the existing framework to ensure market integrity and investor protection provided by the existing Market Abuse Directive (2003/6/EC), which will be repealed. The EU has therefore introduced alongside the regulation a new directive (Directive 2014/57/EU), but the UK has chosen to opt out of it (though it doesn’t mean it will have no effect in the UK since Individuals based in the UK who are conducting cross-border trading or trading in instruments in other EU jurisdictions could still incur criminal liability in those jurisdictions).

The Market Abuse Regulation aims to ensure regulation keeps pace with market developments such as the growth of new trading platforms, over the counter (OTC) trading and new technology such as high frequency trading (HFT), strengthens the fight against market abuse across commodity and related derivative markets, explicitly bans the manipulation of benchmarks (such as LIBOR), reinforces the investigative and administrative sanctioning powers of regulators and ensures a single rulebook while reducing, where possible, the administrative burdens on SME issuers. The Directive on criminal sanctions for market abuse (Market Abuse Directive) complements the Market Abuse Regulation by requiring all Member States to provide for harmonised criminal offences of insider dealing and market manipulation, and to impose maximum criminal penalties of not less than 4 and 2 years imprisonment for the most serious market abuse offences. Member States will have to make sure that such behaviour, including the manipulation of benchmarks, is a criminal offence, punishable with effective sanctions everywhere in Europe.

MAR will be applicable from 3 July 2016 and comes with so called Level 2 measures, which are documents drafted by the European Supervisory Authorities, in particular the European Securities and Markets Authority (ESMA).

For more on MAR, the legislative procedure in the EU or many other regulatory topics, visit us on www.PlanetCompliance.com.

About PlanetCompliance

PlanetCompliance is a platform that provides news and resources to anyone who works in the financial industry or has an interest in regulation and compliance.

While most of the information is freely available in one form or the other on the Internet, our aim is to present you everything relevant in one place. PlanetCompliance does not claim to be exhaustive, instead we are helpful for any contribution from our readers. We take all reasonable care to ensure that the materials and information on this web site are accurate and complete. However they are provided for general information purposes only. They are not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified lawyer on any specific legal matter.

1 Editor’s note: The offense of Misuse of Information is no longer in force, but we decided to keep it since is still relevant and you will see why in the chapter below.

 

 


The 7 deadly sins of Market Abuse

  • ISBN: 9781310221767
  • Author: PlanetCompliance
  • Published: 2016-05-08 11:35:10
  • Words: 11782
The 7 deadly sins of Market Abuse The 7 deadly sins of Market Abuse