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UK regulator still missing biggest insider dealers

Source: Reuters - Thu 15th Apr 2010

The UK financial watchdog's recent moves to stamp out insider dealing focus on relatively minor abuses and big league market corruption will be eliminated only by tackling the large banks and fund managers head on.

After years of being accused of doing little to fight insider dealing, the Financial Services Authority (FSA) has racked up a series of coups in the past month.

A former partner at Cazenove, the Queen's stockbroker and now part of JPMorgan Chase, was sentenced to 21 months for the crime, and seven others were charged in relation to leaks from the print rooms of Cazenove and rival UBS.

Seven men, including senior employees of investment bank Deutsche Bank, brokerage Exane, a unit of France's biggest listed bank, BNP Paribas, and Moore Capital, a $14 billion (9 billion pounds) hedge fund manager, were arrested in another probe which the FSA said was its biggest insider dealing case to date.

But all these cases involve suspects' trading relatively small volumes on their own personal accounts.

"The cases they've brought to court so far have actually been quite easy," said Jonathan Fisher, a barrister specialising in fraud and corporate crime.

The big trades which move markets and disadvantage investors who are out of the loop are likely conducted by institutions. The FSA needs a shift in culture and to become more aggressive towards investment banks and fund managers if it wants to tackle serious insider dealing, lawyers say.

"Insider dealing by individuals is not really what's at the centre of the problem. It's more the institutional, financial services sector engaging in insider dealing," said a partner at one big City of London law firm. 

FSA Chief Executive Hector Sants said last month that market abuse was "unacceptably high" in the UK. The regulator has calculated there were unusual share price movements - a potential indicator of market abuse - in just over 29 percent of takeover announcements in 2008.

These are "extremely conservative figures", said Paul Barnes, Professor of Fraud Risk Management at Nottingham Business School and reflect the fact the FSA only tracks moves 2 days or less ahead of announcements.


With the exception of a 750,000 pounds fine against hedge fund GLG Partners in 2006, the FSA has no track record of sanctioning big investment firms or banks for trading on privileged information.

No one alleges big fund managers and investment banks are conspiring to commit market abuse. However, with fund managers' bonuses and reputations being so closely tied to the fortunes of the funds they manage, an incentive for wrongdoing exists.

"There's immense pressure to deliver returns consistently," said one dealer. "If you get in ahead of a deal you could make 30 percent return overnight."

Similarly, there is an incentive for people to share privileged information.

The U.S. SEC is currently prosecuting a Deutsche Bank bond salesman for allegedly leaking non-public details of a planned bond issue to a fund manager.

The manager made a $1.2 million profit on the trade, while his broker earned commission for executing it. 

City dealers say the drive for commission was a motive for some brokers to leak insider information and that compliance cultures were not always strong enough to prevent it.

"I worked with a guy who kept five pay-as-you-go (untraceable) mobile phones on his desk. One for each client. Everyone on the floor knew about it," one sales-trader said.


One reason the FSA may take a less aggressive line with big players is due to UK law. Under this, a company can only be found criminally responsible if board members orchestrate an offence. In the U.S. any senior employee, such as a star fund manager or the head of a trading desk, can create liability.

"It's very difficult under English law to find a corporate liable," said Arnondo Chakrabarti, partner at Allen & Overy.

Even though the U.S. authorities rarely use criminal charges to sanction companies, the threat of a criminal prosecution is a big deterrent to corporates.

While the FSA can not realistically use criminal prosecutions against companies, it can impose civil sanctions - fines or removing companies' rights to operate.

In the United States, where an individual is believed to have committed insider dealing, civil action follows as a matter of course.

"The traditional fallout is that there's going to be a serious look at how management let that happen," said Evan Stewart, a senior partner at Zuckerman Spaeder in New York. 

However, in the UK, there is no evidence of a similar eagerness to punish companies for failing to spot what their employees were up to.

The employers of those involved in the recent FSA prosecutions are unlikely to face any sanction unless the firms themselves are deemed to have benefited from any wrongdoing, said Sidney Myers, regulatory lawyer at Berwin Leighton Paisner.

Since the FSA's current insider dealing drive is only focusing on trades on personal accounts, big City firms don't appear to have much to worry about.

The FSA declined to comment about the strategy behind its recent arrests. However, one insider said even though the arrests involved relatively small trades, they would set an example to those pondering bigger scale insider dealing.

"You need a change in culture," the FSA source said.

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