Opinion: a civil approach to insider dealing could reap dividends
12 January 2009
21 August 2013
10 June 2013
1 April 2013
5 March 2014
4 November 2013
The rarity of successful criminal insider dealing prosecutions has resulted in
some criticism of the Financial Services Authority (FSA) for its handling of the case of Richard Ralph.
Ralph had confessed to the FSA that he had bought shares in a company of which he was the chairman when it was on the verge of a takeover. He admitted acting on the basis of inside information. The FSA resorted to the market abuse provisions of the Financial Services and Markets Act 2000, and Ralph was fined a total of £117,691.
So was the treatment of Ralph soft? One analysis is that it was. Successful insider dealing prosecutions are scarce as the offence is, in the vast majority of cases, notoriously difficult to prove. Here, Ralph voluntarily came forward and made a full and frank confession to the FSA. That removed the main evidential hurdles that a criminal prosecution would need to have cleared. The custody threshold would have been passed for the purposes of sentencing.
So why did the FSA hold back? It has stated on many occasions that it is “prepared to bring more criminal prosecutions to achieve our goal of credible deterrence”. Would the FSA’s goal of “credible deterrence” in relation to all forms of market abuse not be served by taking a high-profile scalp? Ralph was, after all, in a position of trust as chairman and he disclosed inside information to an associate who also dealt. It would have been easy to prosecute. But it has never been the policy in this country to prosecute everything that moves – and the FSA has never said that it will always prosecute even where there is sufficient evidence.
In this instance, the FSA applied its public interest discretion to engage the civil rather than the criminal process on the basis that Ralph surrendered himself and had cooperated fully. But it goes deeper than that. The primary aim is to eradicate insider dealing. A relentless policy of prosecuting all cases but the minor ones could damage the fulfilment of that aim. Showing that it was prepared to consider a civil outcome is bound to encourage those in City circles who are in Ralph’s position. That can only be to the good. It was not a weak decision, but a wise one.
Was it lenient? Both processes damage beyond repair the reputation of the individual concerned. Both subject the individual to months of stress. Both involve the assumption of huge legal costs. There might (but not necessarily) be a custodial sentence. By contrast, it would have been unheard of for a Crown Court judge to impose on an individual for an offence such as this the scale of the financial penalty imposed by the FSA.
So leniency is the wrong word. But on that subject, the FSA has attempted to formalise its thinking on leniency in a recent consultation paper detailing how it proposes to enhance its chances of securing convictions in cases where insider dealers are less ready to cooperate. The FSA believes that two or more people acting together to engage in market misconduct is particularly serious and a powerful factor in favour of a criminal prosecution. This threat provides a “greater incentive to cooperate”.
The proposal is to show leniency to those prepared to provide evidence against others. This will not necessarily mean that informants automatically escape the criminal process, but it will certainly lead to an increase in the use of accomplice evidence. The FSA is already adducing accomplice evidence in at least one of the three current criminal insider dealing prosecutions.
The strategy is not, of course, risk-free. But the jury is out – so to speak – on how effective this will be. Which brings us back to the theme advanced earlier – that an intelligent use of the civil process in cases where there is sufficient evidence to pursue a criminal case might prove to be just (or at least) as effective in fulfilling the objective.
Tony Woodcock advised Richard Ralph