Out-Law Guide 2 min. read
18 Jul 2007, 10:06 am
This article is based on UK law as at 1st February 2010, unless otherwise stated.
The following are real-life examples of the FSA taking action against market abuse, showing the risks that companies and individuals can face. (See: OUT-LAW's guide to Market abuse.) They cannot be taken as definitive statements of the law in the same way as a case decided by a court. But they do show the view taken by the FSA of certain conduct and illustrate the penalties that can be imposed.
A simple, and blatant, example of misuse of information market abuse is seen in the case of James Parker. He was the financial controller at Pace Micro Technology, and the facts of the case revolve around the problems described on page 97. With the benefit of inside information and in clear breach of the company’s share dealing rules, Parker not only sold shares ahead of a profit warning that led to a dramatic fall in the company’s share price, but 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 was not believed, and in August 2006 he was fined £250,000.
A civil case of insider dealing was brought against two traders at Dresdner Kleinwort. They managed a portfolio that held $65m of a Barclays floating rate note (FRN) issue. In March 2007, they were given inside information about a possible new issue of Barclays FRNs on more favourable terms and immediately offloaded their existing holding to other investors who were unaware of the Barclays proposal. That afternoon, the new issue was announced, and the purchasers made losses of $66,000. The traders argued that, in the debt markets they dealt in, what they had done was acceptable practice. They escaped with a censure and no fine – in recognition, perhaps, that there was some basis for their claim.
The £17m fine levied against Shell in August 2004 for market abuse and breach of the Listing Rules set a new FSA record. In early 2004, Shell announced that it was writing down 25 per cent of its hydrocarbon reserves, causing a £2.9bn drop in its market capitalisation. The FSA found that the company had not onlydisseminated information likely to give a false or misleading impression in relation to its reserves since 1998 but also failed to act when evidence of irregularities first came to light. Executives had been aware of the problems at least four years previously. Nonetheless, the FSA’s fine appeared puny compared with the $120m (£66m) settlement agreed with the SEC, its US equivalent. Having ruled against Shell, the FSA continued its enquiries into the conduct of a number of individuals in the senior management at the company, most notably the former chairman, Sir Philip Watts. But in November 2005 it announced that no further action would be taken. The company may have been at fault, but no one individual was found to have committed market abuse.
Market distortion led to a fine of £500,000 for Evolution Beeson Gregory (EBG), the financial services group, and of £75,000 for its head of market making. EBG also paid £150,000 in compensation to investors. In autumn 2003, the company had short sold more than twice the entire issued share capital of ann AIM listed company with, in the FSA’s view, no reasonable plan for ensuring it would be able to deliver the shares it had sold. An expected issue of new shares did not materialise; 250 investors failed to get the shares they thought they had bought. EBG’s trading led to a serious distortion of the market, resulting in the suspension of the shares on AIM.