The market abuse case brought by the FSA against David Einhorn and Greenlight Capital in which a financial penalty in excess of £7 million was announced last week has laid down a prominent marker for all those operating in the UK financial markets, wherever in the world they may be based. Local laws and the interpretation of those laws by overseas regulators may be very different to the regulatory approach in the UK so foreign market participants need to take particular heed of this case.
This was not a criminal case and the heavy fine was imposed despite the conduct being found to be neither deliberate nor reckless.
Compliance officers and brokers given instructions to trade by clients also need to exercise greater vigilance to avoid the serious sanctions imposed by the FSA. Two other individuals in this case were fined a total of £195,000: a compliance officer for failing to make due inquiries before executing a trade and a broker for failing to identify and act on a suspicious order. The compliance officer was also prohibited from performing compliance functions in future.
The Einhorn case involved the receipt of information on a telephone call to a broker with senior management of a company in which, at his request, Einhorn was not wall crossed. He received information on the call which the FSA found he should have realised was inside information and traded on it within minutes of the call ending. He thereby avoided a substantial loss on the shares. The FSA found that he took no legal or compliance advice before making the trade and did not check with the company management that the information he had obtained was not inside information. The failure to take such steps led to the adverse FSA market abuse finding.
Even if a market participant has an honest belief that they are not engaging in market abuse (which is a free standing defence), it will not always be enough to avoid liability where that belief is not backed up by objective evidence in the form of compliance or legal advice and/or specific clarification about the potential inside information received.
Compliance officers and brokers who may be involved in a trade based on inside information are expected to exercise their own due diligence and to report suspicious transactions. In some cases the suspicious nature of a transaction may only become apparent some time after it has occurred, for example in the light of a subsequent market announcement by a company. It is necessary therefore to scrutinise past transactions as well as current ones to satisfy the high standards required for all those working in the regulated financial sector. As the FSA’s Director of Enforcement put it: “Tackling market abuse and insider dealing is not just an issue for the regulator.”
The lesson from these recent FSA decisions is that market participants need to make sure they join the dots carefully and take account of all the available relevant information before deciding to trade or deciding whether a transaction should be reported as suspicious. In the Einhorn case there were three pieces of information that the FSA said would not, in isolation, have amounted to inside information. Failure to join the dots is going to be expensive and may involve harsh regulatory sanctions including prohibition from the markets.
Read the decision of the FSA on this case here. http://www.fsa.gov.uk/library/communication/pr/2012/005.shtml
Corker Binning is a law firm specialising in fraud, regulatory and general criminal work of all types. For more information about our expertise in insider dealing and market abuse cases, visit our FSA enforcement and investigation page or call us on 0207 353 6000.