Market Abuse: Lessons from recent cases

Nick Gibson,

Head of Compliance Solutions

Chase Cooper Limited

Agenda

• Reviewing the cases

• Identifying the themes

• What went wrong?

• Are these representative of the industry?

Structure

Over the course of this session:

• We will talk about trends, themes and FSA’s perspectives

• We will talk about focus areas for FSA Enforcement and what went wrong at firms

• I will ask for your collective and individual views

• We will do a couple of exercises– Focusing on how you as an imaginary blackguard

would circumvent FSA requirements– To equip you to detect others doing so…

FSA pronouncements

• “It is worth re-emphasising that the FSA is not – and will not become – an enforcement-led regulator”

Callum McCarthy, July 2005

• Then “Credible deterrence” emerged as a new mantra in FSA speeches from 2006, and was introduced as a policy in 2007.

• “… we’ve got to use Enforcement as one of our major tools.  Our aim is to bring about real changes in behaviour to protect consumers and to guard against abuse in the markets.”

Margaret Cole, June 2008

FSA pronouncements

• “..we have clearly demonstrated that we are committed to taking on the tough challenges and risks that criminal prosecutions and other high-profile market abuse cases bring – and to using all the tools at our disposal and, where we don’t have the right tools, obtaining new ones.”

Margaret Cole, June 2010

FSA fines history

All fines, not just market abuse:

• 2010 to date  £84,257,536.

• 2009 £35,005,522.

• 2008 £22,706,526.

• 2007 £ 5,341,500

• 2006 £13,309,143

• 2005 £16,965,860

The convictions - 2010

10/12/2009

Matthew Uberoi 12 months

Neel Uberoi 24 months

Insider trading based on information acquired by Matthew whilst an intern at Hoare Govett and passed to his father.

The convictions - 2010

11/03/2010

Malcolm ‘Streaky’ Calvert 21 months

Insider trading based on information passed by an unidentified former colleague within JPM Cazenove. Queens evidence turned by a friend whose account was used for the dealing

The convictions - 201022/06/2010

Anjam Ahmad 10 months (suspended) 300 hours comm serv £ 50,000 fine

Insider trading in 19 different securities with an accomplice. Significant reduction in sentence due to guilty plea and extensive cooperation with FSA.

The acquittal - 2010

03/06/2010

McFall, Rimmington and King

Charged with insider trading in Neutec Pharma (King was a director). Jury found McFall and King not guilty, and case against Rimmington dismissed.

The fines - 2010

12/02/2010

Levent Akca £ 94,062Murat Ozgul £ 105,240Mehmet Sepil £ 967,005

For dealing in Heritage Oil plc shares on the basis of inside information. Sepil’s was the largest personal fine ever levied for market abuse

The fines - 2010

16/04/2010

Sameer Patel £ 95,000 + ban

Robin Chhabra £ 180,541 + ban

For using inside information acquired as a research analyst to carry out a series of profitable spread bets

The fines - 2010

22/04/2010

Jason Robins £ 50,000Stephen Sotiriou £ 200,000Winterflood Securities £ 4,000,000

For market abuse through a share ramping scheme relating to Fundamental-E Investments plc. The Courts acknowledged no intention to manipulate the market

The fines - 2010

20/05/2010

Simon Eagle £ 2,800,000 + ban

For a complex and prolonged abusive scheme that deliberately set out to ramp up the share price of Fundamental-E Investments plc for his own benefit. The new largest personal fine for market abuse.

The fines - 2010

02/06/2010

Andrew Charles Kerr £ 100,000 + ban

Deliberately manipulating the market in LIFFE traded coffee futures and the related coffee futures options, in order to benefit a client. Ultimately, the client did not make the intended profit.

The fines - 2010

21/06/2010

Photo-Me International plc £ 500,000

For failing to disclose inside information to the market as soon as possible. The delay led to a false market in Photo-Me's shares for 44 days.

The fines - 2010

29/06/2010

Steven Noel Perkins £ 72,000 + ban

For market manipulation of the Brent Crude Futures Market, running up an extremely large position with no authorisation whilst drunk

The fines - 2010

06/07/2010

Henry Cameron £ 350,000

As CEO, making misleading announcements to the market regarding payments made by Sibir (a large energy company that was quoted on AIM) to its major shareholder Chalva Tchigirinski

The fines - 2010

19/07/2010

Jeffery Burley £ 35,000

Jeremy Burley £ 144,200

For insider trading in relation to oil and gas shares

Impending prosecutions

May 2011 Bijal Shah Neten Shah

Pardip Saini Ali Mustafa

Paresh Shah Truptesh Patel Mitesh Shah

Project Saturn: Conspiracy to deal as insiders in price affected securities over 2 years yielding profits of c.£ 2.5mn.

Two UBS and Cazenove print room staff

Impending prosecutions

Date t.b.d. Neil Rollins

Dealing on his own behalf and encouraging Louise Rollins to deal in price-affected securities whilst in possession of inside information relating to PM Group plc

Impending prosecutions

Date t.b.d. Christian Littlewood

Angie Littlewood

Helmy Omar Sa’aid

Charged with 13 counts of insider trading between 2000 and 2009. Mr Sa’aid was arrested under a European Arrest Warrant in Mayotte (an island between Mozambique and Madagascar)

Yet to come…

The City Seven – alleged insider trading ringFSA/SOCA launched 16 simultaneous raids in March 2010, arresting six City professionals, with a further arrest made the following day.

Names cited by the media:

Deutsche Bank

Exane

Moore Capital

Aria Capital

Yet to come…

The Potters Bar One

On 10th September 2010 a 64 year old man was arrested in connection with suspected money laundering and providing false information in relation to an insider dealing investigation

Deterrence?

• Malcolm ‘Streaky’ Calvert

– Sentenced to 21 months inside

– Released after 7 months

Identifying the themes

It’s difficult….there is such variance

However:• Increasing focus on professionals rather than

amateurs• Spreading beyond equities into commodities• Almost automatic inclusion of money

laundering charges for dealing with the proceeds of market abuse

Identifying the themes

• Deployment of new tools– Plea bargaining for cooperation– Extra-territorial reach– Co-ordinated dawn raids/public profile– Serious fines for transaction reporting failures

(i.e. preventing detection)– Much higher fines across the piste for individuals

and firms

Identifying the themes

• Focus on Listed corporates’ announcements and misleading the markets

• Market abuse is effect-based, not intent-based (MAD and proved in Winterflood)

• Focus on conspirators, rather than just prime movers

• Abuse of the UK markets from overseas

What went wrong?

• People thought they’d get away with it…

• Still seen as a “victimless crime”?– Only illegal since 1980

• Opportunistic?– Possibly true for individuals, not true for rings

• History of poor detection/prosecution?

What went wrong?

• One degree of separation…– Relatives– Friends

• Who can be trusted with information?

• Ultimately, there is an inbuilt delay between the environment becoming harsher and the occupiers realising that the game has changed….

What went wrong?

• If people want to behave badly, they will..

• …..unless the disincentives outweigh the incentives

• The regulator plays a part

• Firms play a part

• What part do you play personally?

Are these representative of the industry?

• How many of you think that, yes, these cases are representative of the industry?

• Of those who thought no, what is your justification for that view?

• My view:– 99.9% wish to behave properly– 0.09% will take advantage of low risk

opportunity– 0.01% see the gravy train, take the risk

Are these representative of the industry?

• Regrettably, the rules are designed for the 0.1%, not for the 99.9%

• We all pay for it– Co-workers– Shareholders– Borrowers/depositors/investors– Society/taxpayers

• We put up with– Personal account dealing rules– Routine invasion of privacy– Idiocy?

And now for some work…

Before you criticise someone try walking a mile in their shoes

That way, if you do condemn them, you’re a mile away

and you have their shoes

Two exercises

In order to prevent or detect harm, you need to understand how it may occur

Poachers make the best gamekeepers

Burglars make the best security consultants

A reminder

• “..we have clearly demonstrated that we are committed to taking on the tough challenges and risks that criminal prosecutions and other high-profile market abuse cases bring – and to using all the tools at our disposal and, where we don’t have the right tools, obtaining new ones.”

Margaret Cole, June 2010

Mobile phone recording

• FSA CP 10/7 – Taping: removing the mobile phone exemption March 2010

• Taping rules are “..aimed mainly at combating market abuse..”

• Proposal requires firms “..to tape relevant communications on mobile phones issued by the firms for business use..”

• Also “.. to take reasonable steps to prevent employees … from using private communication equipment (which may not be recorded due to privacy laws) to make such communications”

Mobile phone recording

Your challenge is either:

• To establish what you, a front office staff member, will do if you wish to contravene this rule with maximum safety, or

• To describe three reasonable steps your firm will be taking to prevent employees from making relevant communications on personal equipment

Mobile phone recording

You have three minutes….

Time’s up…

Mobile phone recording

Your solutions,

please..

Leaks

Market Watch 37 September 2010

“We are particularly concerned about the suspected practice of core insiders strategically leaking inside information; we have stated we will increase our efforts into the causes of leaks in individual cases.”

Leaks – by the way..

• “..insiders who confirm information put to them by a journalist still potentially commit market abuse as they are in effect disclosing inside information through affirmation (even though the information was sourced first elsewhere).” MW37

• Wider implications?

• Regulation by newsletter?

Leaks – FSA approach

Series of recommendations:

• Dealing with media enquiries

• Handling leaks– 2½ pages of detailed process for investigating

leaks

• Training and communicating with staff

• Establishing a reporting culture

• Disciplinary action

Dealing with media enquiries

• All initial media enquiries received by staff must be directed to media relations team (MRT), regardless of seniority

• MRT then decides whether inside information may be involved

• If so, MRT decide whether non-MRT staff should be involved in responding

Dealing with media enquiries

• If non-MRT staff should be involved, this is only possible where – MRT member leads on or is present at

conversation, and makes contemporaneous note, or

– Conversation with journalist and non-MRT member is taped, and/or

– Any written communication (including e-mail) is simultaneously copied to MRT

– Text messages?

Media relations code

• FSA expectation is that…

“…in most cases where an enquiry is potentially related to inside information, enquiries will be solely handled by the regulated firm’s media relations team with standard protocol responses. It is unlikely to be necessary to involve non-media relations personnel.”

Dealing with media enquiries

Your challenge is either:

• To establish what you, as a journalist, will do to follow up on a rumoured merger with the target’s corporate broker, and your conclusions

• To establish what you, as a corporate financier, will do to circumvent the rules on media contact and maintain journalistic relationships

Mobile phone recording

You have seven minutes….

Time’s up…

Mobile phone recording

Your solutions,

please..

Why, oh why…?

• Do we need new requirements?

• What ever happened to enforcing the rules that currently exist?

Conclusions

• Use your imagination and intelligence – don’t just tick boxes

• Stay aware of current FSA cases, themes and trends

• Deal properly with exceptions when they arise

• Make sure that your firm’s requirements are clear to everyone

Thank you

nick.gibson@chasecooper.com