results will justify that investment.
Those who think that, since the commencement of the Financial ;Services ;and Markets Act (the act) in 2003, the ;Financial ;Services Authority (FSA) has been paying lip service to its statutory objective to reduce financial crime have had to sit up and take note.
Recent developments demonstrate that the FSA is beginning to get tough. While the process has not happened overnight, the writing has been on the wall for some time and is now becoming publicly visible.
In January 2008 the general counsel of TTP Communications, Christopher McQuoid, and an alleged accomplice, were sent for Crown Court trial in relation to the purchase of shares in their employer. In July 2008 former Cazenove partner Malcolm Calvert appeared at City Magistrates Court in relation to 12 allegations of insider dealing relating to six different companies. And most recently, on 29 July this year in a series of dawn raids (and in conjunction with the police), the FSA executed search warrants and arrested individuals across London and the South East in connection with a major ongoing investigation into insider dealing.
The FSA’s flurry of recent public activity to criminally investigate and prosecute individuals it suspects have committed insider dealing marks a dramatic change of direction. Until recently it was widely felt that insider dealing was a difficult offence to prosecute, with too many hurdles for the prosecuting authorities to overcome and too many potential defences available to a person charged. It was for this reason that the act specifically created a new civil offence of market abuse, encapsulating in part the behaviour of insider dealing and being specially designed to enable the FSA to fine offenders based on a civil standard balance of probabilities.
However, in reality the market abuse regime has not been the quick-fix the FSA or the Government would have liked. The FSA is publicly committed to prosecute criminally allegations of insider dealing, where there is sufficient evidence and where it is in the public interest to do so. Therefore, all market abuse investigations begin as criminal cases, with all the additional safeguards and due processes which that entails.
Furthermore, the FSA Code of Market Conduct provides as many hurdles and potential defences to a person accused of market abuse as the insider dealing legislation does to a person being criminally prosecuted. The result is that the FSA’s record before the Financial Services and Markets Tribunal (the independent body that adjudicates on contested cases of market abuse) is littered with embarrassing defeats. Not getting alleged offenders jail sentences is one thing; not getting them fined, named and shamed is another.
As a result, and following the appointment of Margaret Cole as director of enforcement in 2005, the division changed radically its emphasis and its personnel. Gone are a lot of the FSA’s old enforcement staff from the days of the Bank of England and Securities and Investment Board, to be replaced by a mix of experienced investigators and prosecutors from the police, the Serious Fraud Office, the Revenue and Customs Protection Office and the Crown Prosecution Service, together with junior barristers with criminal trial experience and lawyers from magic circle law firms. The message is clear – in market abuse, criminal enforcement is now the FSA’s tool of choice, and the City had better take note. As Cole said at the FSA Enforcement Conference in June this year: “Our aim is to clean the market to change behaviour… if people have to go to prison to achieve that aim, that’s what we’re prepared to do.”
There is no doubt the threat of a dawn raid, arrest and a Police and Criminal Evidence Act 1984 interview should act as deterrents. Clean, orderly, fair and transparent markets are in all our interests, and if this spate of activity by the regulator discourages would-be offenders, then the initiative is to be welcomed.
So where does that leave market abuse? For now, on the relative sidelines. Success before the tribunal is – despite the reduced burden of proof – no more likely and the consequences of guilt (namely a public fine and negative press) are far less newsworthy than loss of liberty.
For the FSA the real test is results and it will be judged by the convictions it obtains. The offence of insider dealing has not become any easier to prosecute and would-be defendants are likely to instruct some of the best legal brains around. Sufficient resources must be allocated to ensure an even playing field – and even then success is not assured.
The FSA’s task is not easy and the stakes could not be higher. The FSA has invested heavily in strengthening its enforcement arm and on being seen to act firmly and decisively. In the next 12 months or so we will see whether that investment pays off.
Jason Mansell is a barrister at 7 Bedford Row