The recent market abuse cases around Greenlight’s trading in Punch Taverns plc should refocus minds firmly on market abuse risks. The FSA decision notices make it clear that there was no conspiracy or reckless intent to profit.
Instead lax controls, poorly informed conclusions, inaction and “failures to exercise due skill, care and diligence” all led to the prosecutions. Firms should take this opportunity to revisit their procedures and controls to determine how they would have fared in similar circumstances.
Ignorance is no defence
An interesting aspect of the cases is that key individuals either did not consider market abuse or unilaterally decided that there was no risk of market abuse arising. They were experienced professionals who had received regular compliance training but, in Einhorn’s case, decided “not to consult …compliance staff because he believed… there was nothing to consult about”.
Market abuse is a complex series of possible offences around the abuse of information and market manipulation. Training is vital to raise risk awareness but these cases exposed the limitations where non-specialist staff act as sole arbiters of that risk. The FSA has tried to make all market participants aware of market abuse risks. It seems only when it hurts their pockets, or reputations, are firms and individuals willing to listen.
In respect of good practice for market conduct controls, the FSA issued MarketWatch 24 following extensive thematic visits. The questions to ask yourself are – has your firm assessed its level of market abuse risk, where it arises, how it is mitigated? Does your firm’s culture actively encourage staff dialogue with legal and compliance? When was the last time a market abuse concern was raised with compliance? Have you implemented the MarketWatch 24 best practice controls? Do you undertake active monitoring in-house, and finally, can you evidence your good practice should you be subject to an investigation?
Notoriously, firms are poor at documenting procedures; assessing the sources of risk and mitigating controls; clarifying reporting lines and escalation procedures: in-house through to external regulatory consultants and legal counsel.
The FSA prosecuted Andrew Osborne, Managing Director Corporate Broking at Merrill Lynch International, for improper disclosure of inside information ahead of the Punch equity issue. The disclosure took place during a conversation between Einhorn, Osborne and Punch’s CEO before the Punch share offering and in full knowledge that Einhorn did not want to be an insider and had refused to sign a non disclosure agreement (“NDA”). This conversation was the crucial event from which all the related prosecutions flowed.
The FSA successfully argued that the information “was specific enough to enable a conclusion to be drawn as to the possible effect of the transaction in Punch shares”. Osborne had been involved in discussions with legal advisers prior to the call but the FSA found that “…he did not follow the (legal) advice. Further, he did not consult with any compliance or legal advisers following the call” despite knowing Greenlight had begun selling Punch shares following the call.
The critical issue here is substance over form. Firms must vigilantly assess whether information, however received, is specific, price sensitive and not generally available, and act accordingly.
The compliance officer has significant responsibilities
The FSA found that Greenlight Capital (UK) LLP’s Compliance Officer, Alexander Ten-Holter, who was also the firm’s trader, “failed to take any action at all, despite his knowledge of the suspicious circumstances surrounding Greenlight’s sales of its shares in Punch” (the eponymous “secret bad things” Greenlight would hear about Punch if it signed an NDA).
Ten-Holter was fined and banned from holding the CF10 Compliance Oversight function. This serves to reinforce the critical role of the Compliance Officer. Have you got the right person in the role; do they have the seniority, support and resources to act effectively? Do they know and monitor what the firm is trading?
Suspicious transaction reports (“STRs”)
Caspar Agnew, the JP Morgan Cazenove trader responsible for executing Greenlight’s orders, was fined £65,000 for failing to act with due skill, care and diligence by not recognising there were reasonable grounds for reporting a suspicious transaction. Agnew, who executed the trades before the Punch market announcement, failed to reappraise those trades once he became aware of the relevant market announcement. The FSA concluded “Agnew’s conduct was not deliberate or reckless” but, nevertheless, he failed to act as required.
Firms must reinforce the requirement for staff to report suspicious transactions initially to their Compliance Officer. Refer to the link below. http://www.fsa.gov.uk/pages/about/what/financial_crime/market_abuse/reporting/index.shtml
Zen and transaction reporting
The FSA’s new Zen system was implemented in 2011 and has enhanced its ability to review market activity based on 12-13 million transactions reports received daily. This represents around 70% of the total number of transaction reports collected by EEA authorities. Zen allows it to investigate trading around market announcements, price movements and increased activity. Zen captures details of who is party to each transaction, including client references, which can be cross-referenced to insider lists. The FSA can then follow the trail back, listen to tapes, interview relevant parties and build a successful case.
The FSA expects firms to ensure the integrity of their transaction reporting data. Fund managers may rely on their brokers to report in certain instances but they must consider their transaction reporting requirements when execution is performed by a non-UK broker in OTC derivatives or a non-EU broker in dual listed instruments?
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