Market Abuse 2011 Review – What Next?
Market abuse and insider dealing featured heavily in the 2011 press headlines following a series
of high-profile enforcement actions. The recent £7.2m fine involving David Einhorn and his fund
Greenlight Capital highlights the increasing reputational risk to firms if individuals are found to have
committed market abuse or failed to play their part in preventing and detecting market abuse. There
is a risk for Boards, senior management and firms that the FSA will look to make examples of firms
who are unable to demonstrate robust policies, procedures, culture and training. Promontory is
exceptionally qualified to enable firms to manage these risks with a senior and highly experienced
team that includes Ruth Gevers who until very recently was involved at the FSA in devising its market
abuse strategy.
Promontory’s detailed review of 2011, which this briefing draws upon, highlights key issues from FSA case and thematic
activities in 2011 and looks ahead to likely trends in 2012. Our analysis aims to assist firms in reviewing and, where
necessary, strengthening their existing controls.
2011 OVERVIEW
The FSA announced civil market abuse findings against 9 individuals with total fines of £16m up from £9.4m in 2010. The
FSA is continuing its campaign to bring criminal cases with 2011 seeing guilty verdicts for 5 individuals and charges laid
against a further 3 in the UK Courts.
The FSA’s top priority remains making headlines with cases involving high-profile market professionals. Cases in 2011
included investment bankers, a research analyst, a corporate finance advisor, a commodities trader, hedge fund employees,
a senior manager of a listed company and private investors.
Market Abuse Civil Fines
Market Abuse Outcomes
20
£20M
18
£18M
16
£16M
14
£14M
12
£12M
10
£10M
8
£8M
6
£6M
4
£4M
2
£2M
0
£2007
2008
Number of Firms/
Individuals
2009
2010
Criminal Convictions
(Number of Individuals)
2011
2012*
Prohibitions
2007
Total Fines
2008
2009
Highest Fine:
Individual
2010
2011
Highest Fine:
Company
*
2012 criminal convictions is the number of individuals currently
awaiting trial
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The FSA has continued to impose larger civil market abuse fines. It now targets a minimum of £100,000 (or 40% of salary +
bonus if higher) for serious cases of market abuse and, for cases involving Approved Persons, it seeks a prohibition order.
The highest fine against an individual was set in 2011: £4m for Mr. Goenka, a private investor. We also saw a £2m fine for
Mr. Visser, a hedge fund CEO.
The FSA has secured 11 criminal insider dealing convictions since 2009 with 16 individuals are currently awaiting trial.
In 2011, 5 individuals received custodial sentences, including the longest sentence to date of 3 years and 4 months for
Christian Littlewood, a former investment banker. Charges were laid against 3 other individuals in 2011 and a further
individual in January 2012. High Court Injunctions were used 3 times in 2011 to prevent ongoing market abuse. Plea
bargaining was also used for the first time in a criminal trial.
KEY TRENDS AND DEVELOPMENTS IN 2011
Promontory’s detailed review of the FSA’s caseload highlights a number of issues and trends likely to be of interest to firms
reviewing the adequacy of their controls:
• The FSA’s ability to bring cases under its Principles
makes keeping to the letter of the rules insufficient in
the FSA’s eyes. It looks to hold market professionals
to account for keeping to the spirit as well as the
letter of the requirements. Examples include the
FSA setting out its view that market professionals are
expected to recognise inside or relevant information
even if they are not formally made insiders and that they
must think broadly about the impact their behaviour
might have on the market rather than focus solely on
the technical definitions. The Greenlight and Gower
cases is a good examples with the latter finding against
Mr. Gower, a research analyst, based on his suggestion
to the market that he had inside information when he
didn’t, which resulted in a disorderly market.
• The FSA is prioritising market manipulation cases,
including Order Book Layering. The FSA has likely been
reviewing the monitoring controls in firms to evaluate if
they are sufficiently robust to detect and prevent such
abuse such as whether firms are able to identify a large
volume of repeated small orders or patterns of trading
across a number of accounts.
• The FSA had its first criminal insider dealing trial
involving front running where a hedge fund trader
provided inside information to a private investor about
forthcoming large transactions by his firm. The FSA
may have reviewed whether firms’ monitoring identifies
which of their own trades might be sufficiently large to
be classified as “inside information” and considers how
to monitor for any misuse of this information by insiders
(for example sampling email/messaging/telephone
records).
• The FSA considers Suspicious Transaction Reports
key to its efforts to take action on market abuse. As the
FSA sees more STR reports, its expectations of what is
good practice and what firms are capable of identifying
are increasing. The 2011 cases give a number of
indicators to firms on where they might review their own
controls to ask if they would identify similar suspicions
and whether they have suitable MI in this area.
• There was a higher focus on fund managers than
prior years and, generally, the FSA has indicated
hedge fund managers can expect to see more of the
regulator.
LIKELY TRENDS IN 2012
The FSA will move towards implementing its new regulatory structure in 2012. Market abuse will be an FCA responsibility.
The FSA has indicated that the market should expect “more of the same” in terms of market abuse remaining a priority in
2012. It is likely that its success in bringing cases will lead to the FSA looking to continue to take on higher profile cases
and be more forceful where it can by intervening earlier, for example through the use of High Court injunctions or where it
has concerns about the strength of firms’ controls.
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A key driver, which will help to shape the FCA’s approach over the next few years, is the outcome of the draft EU Market
Abuse Regulation (MAR), issued following publication of the EU’s review of the Market Abuse Directive (MAD) published
on 20 October 2011. As currently drafted, MAR significantly extends the scope of the market abuse regime to cover, for
example, instruments traded on MTFs and OTFs as well as on regulated markets and to amend the definition of inside
information.
Some of the specific areas of FSA focus in 2012 are likely to include:
• STR reporting. The regulator is likely to challenge
firms who have submitted less STRs than their natural
market share might suggest. Within its preliminary case
investigations, the FSA now routinely checks whether
market professionals played their part to help identify
the suspicious behaviour and is taking action if they did
not, such as in the Greenlight case where it fined an
individual £65,000 for failing to submit a STR.
• The quality of systems and controls in firms,
including the effectiveness of the oversight of the
control environment by senior management and
ultimately the Board. This has been a focus of FSA
work in other areas.
• Wall-crossing procedures (both buy side and sell
side), including compliance monitoring and training.
• The responsibilities of market professionals,
particularly regarding the risks from non recognition of
inside or relevant information by recipients.
• Order Book Layering: the FSA is likely to follow up
with firms on their controls to mitigate the risk of this
form of market abuse together with a broader review
of market abuse controls at Direct Market Access
(DMA) providers. They may look for evidence the firm
has reviewed the risk areas previously highlighted
by the FSA in its Marketwatch article (August 2009)
and implemented appropriate controls compliance
monitoring.
• Transaction Reporting: despite a number of
enforcement cases over recent years, the FSA remains
concerned that firms are not taking this seriously
enough. It will consider further cases and higher fines
to reinforce its message.
• Expert Networks may feature in FSA’s questioning
to firms given the higher number of case results
that touched on fund managers and the high profile
SEC “Galleon” prosecution that highlighted the role of
so called “Expert Networks”.
• The quality of compliance monitoring and training
to test the effectiveness of controls, particularly where
few or no questions or queries are being escalated to
compliance.
WHAT SHOULD YOU BE CONSIDERING?
Many firms have taken steps to review, and where necessary strengthen, their systems and controls and point to evidence
that they have considered how and where the regime applies to their business.
Some of the key areas considered include:
• The overall systems and control framework
including, at Board level, and management information
and other processes to enable management to be sure
the control environment is working as intended.
• The training in place for front line staff to ensure new
staff are properly trained at induction and that top-up
and refresher training takes place, particularly for the
greyer areas of the regime.
• Ensuring
effective
compliance
monitoring
arrangements are in place including arrangements
to capture key events (e.g. key client meetings) and
associated monitoring procedures.
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PROMONTORY FINANCIAL GROUP (UK) LTD.
Promontory Financial Group (UK) Ltd. is part of Promontory Financial Group, LLC, a leading global consulting firm with
14 offices in 11 countries. Our international team includes former senior leadership from the Office of the Comptroller of
the Currency, the Federal Reserve Board, the Australian Prudential Regulation Authority, Japan FSA, the Bank of Canada,
and the US Securities and Exchange Commission.
This update, and the research behind it, has been produced by Ruth Gevers – who prior to joining Promontory played a
key role in developing the FSA’s market abuse strategy. If you would like to discuss further the issues in this note, our more
detailed analysis of FSA activity in 2011 or the issues it will raise for your business and how Promontory can help support
you, please contact Ruth Gevers or Stuart King.
CONTACT
RUTH GEVERS | Director
Former Manager of Markets Division,
Market Monitoring and Major Retail Groups
Departments, Financial Services Authority
STUART KING | Managing Director
Former Head of Major Insurance Groups
Regulation, Financial Services Authority
PROMONTORY FINANCIAL GROUP (UK) LIMITED
14 Devonshire Square, London, UK EC2M 4YT
T +44 20 7377 2360 F +44 20 7377 2361
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