Since 2008, the UK financial services regulator, the FSA, now the FCA, has waged war on criminals in the City of London through the courts; creating a ‘credible deterrent’ against market abuse. So far, the FCA’s enforcement division has notched up
32 convictions in relation to insider dealing.
This includes Operation Tabernula, the FCA’s largest and most complex investigation into insider dealing to date. The May 2016
case, which was eight years in the making, eventually secured five convictions. The stiffest penalty was handed out to ex-Deutsche Bank and Lehman Brothers investment banker Martyn Dodgson, who received a four-and-a-half year sentence, the longest for an insider dealing case brought by the FCA. Those convicted conspired to trade using inside information that Dodgson had gleaned from within the investment banks at which he worked.
Operation Tabernula cost the FCA an estimated £14m – double the defendants’ alleged profits – and involved 140 officers at the height of the
investigation. The trial itself ran for four months, with three other defendants eventually walking free from the courtroom. The case highlighted the challenges facing prosecutors over insider trading.
“This case and the investigation that preceded it has been a turning point in the fight against market crime because it has focused our attention on the need for different tactics, different approaches to detect and investigate organised corruption of our markets by sophisticated offenders,” said Mark Steward, the executive director of enforcement and market oversight at the FCA, in a speech to the Annual GLS Prosecutors’ Conference in November last year.
“More investigations into other groups who are suspected of systemic and organised criminal activity in our markets are under way and I expect this is a trend that will continue.”
Over the last financial year the number of criminal investigations into insider dealing increased by 175%Despite racking up nine successful convictions in 2016 for insider dealing, including five through Operation Tabernula, the FCA says there has been no discernible change to its approach. It puts the current spike down to a backlog of investigations, some of which can take many years to conclude, all entering the court arena at once.
32
The number of convictions carried out by the FCA's enforcement division in relation to insider dealing
However,
figures obtained by Michael Ruck, a senior associate and financial regulation expert at law firm Pinsent Masons, revealed that over the last financial year the number of criminal investigations into insider dealing increased by 175%.
A ‘twin-pronged attack’He believes that the FCA may now also be pursuing ‘low-level’ insider dealing by use of regulatory sanctions, which results in fines rather than prosecution.
“The FCA is possibly adopting a twin-pronged attack,” said Michael. “For the larger criminal investigations, they now have better tools in place to monitor trading patterns, and their experience and knowledge is also increasing. It means they are doing more investigations of this type.
“And it also seems that they are using regulatory actions as a tool to catch low-level insider dealing, which is less resource intensive and cheaper for the FCA.”
As examples, fines totalling £59,557 and £36,285 were handed out by the FCA last year to individuals
Gavin Breeze and
Mark Taylor respectively, in separate regulatory actions. In the claim against Taylor, the FCA’s Mark Steward warned: “There can be no let-up in tackling insider dealing and this case shows the consequences will be grave and serious ones for perpetrators, even in small cases like this one.”
Steward admitted at last year’s speech that cases with sufficient evidence and those in the public interest would still be prosecuted, while there was always the alternative for civil action.
Stamping out market abuseThis new clarity should help the FCA in its fight against stamping out market abuse.
“I can understand the FCA’s logic,” said Michael. “For more serious matters, criminal prosecution gets the message out there. But for smaller offences, where the kind of financial gain may be minimal, you can understand why regulatory action may be deemed a better alternative.”
For financial services firms, the key message is that the FCA is not walking away from any type of insider dealing investigation – large or small.
“Certainly, firms are seeing an increasing number of requests for information when trading patterns occur,” added Michael. “There have also been recent instances where police have knocked on doors and taken things like servers. There’s no suggestion that these firms have engaged in any wrongdoing, but potentially members of staff may have been.
“So, if you are a trading firm you need to be aware of what the FCA is up to and think about the controls you need to put in place based specifically on the risks of your firm. You also need to be aware of the reputational impact an investigation may have.”
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