Sir Howard Davies promised that his successors would bring a ‘dirty dozen’ of insider dealing and market abuse cases. But how come it’s taken so long? By Jon Robins

It’s been a long time coming, but finally the Financial Services Authority (FSA) appears to be about to show the market a flash of its teeth. In Sir Howard Davies’ swansong interview a couple of weeks ago, the former FSA chairman promised that the watchdog would deliver its “dirty dozen” of insider dealing and market abuse cases over the next three months. That is 12 cases coming before the courts or the watchdog’s own Regulatory Decisions Committee. “The pipeline is going to disgorge soon and there’ll be some fun for my successor,” Sir Howard said, before handing over the reins to Callum McCarthy last week. It might sound like fighting talk, but despite last week’s £1.9m fine of Lloyds TSB for mis-selling, the response of many in the City is a somewhat bemused, “What took you so long?”

It has been more than 20 months since the FSA took over from the Department of Trade and Industry (DTI) to police insider dealing. So far, there has been little to justify the fears of a draconian crackdown as envisaged by many commentators in the run-up to the N2 big bang on 1 December 2001. In fact, many have been wondering just what has been going on at FSA HQ at Canary Wharf.

“It’s staggering that these cases have taken this long to work their way through,” reflects Simon Gleeson, a partner at Allen & Overy who was seconded to the FSA to assist in the preparation of the new market abuse regime.

Rod Fletcher, head of the national criminal disciplinary and business investigations department at Russell Jones & Walker, flags up the woeful track record of the DTI at insider dealing prosecutions. For example, there were a meagre four prosecutions in 2000, two of which failed. Hence the new market abuse provisions under the Financial Service and Markets Act 2000 (FSMA), which were designed to bear down on the misuse of financial information, the creation of false impressions and distortion of false markets. However, it has taken this long to get so much as a whiff of a sanction under the new regime.

“The FSA needed more by way of obvious results as far as insider dealing was concerned,” Fletcher says. “It was all the more surprising that nothing has happened in the first 20-odd months of the new provisions given the very clear political imperative to clean up the financial markets.”

But as Gleeson notes, there was “a certain amount of inevitability” about the sluggish start. “When we first had the FSMA [which gave the FSA its sweeping new powers], there were a number of obstacles, as I suspect the FSA think of them, or safeguards as the industry regards them, placed between the FSA and publicly bringing any sort of prosecution or enforcement action,” he says. “It’s taken until now to fight their way through those procedural safeguards and get these cases into the public eye.”

In recent history, the only successful conviction has been of former financial journalist Tim Blackstone at the start of the year. He bought shares in a client knowing that it was to receive a takeover bid. He sold the shares after the announcement was made and took a £3,000 profit. It was, as one lawyer points out, “successful, but small fry”. Then there was the FSA investigation into Paul Davidson, the stock market trader known as ‘the plumber’, who has been threatened with a £750,000 fine. He placed a £5m spread bet on the share price of a small biotechnology firm he was floating named Cyprotex. “This is interesting because spread bets weren’t covered by the legislation and, arguably, that should have been spotted. But to expect utter perfection from the draftsmen is an art not given even to solicitors,” says Gleeson.

Otherwise, peace reigns. So what should we expect of the ‘dirty dozen’? For a start, Sir Howard apparently did not come up with the Lee Marvin movie-inspired nickname for the forthcoming actions. In fact, according to one lawyer, the press reports have prompted “something of a kerfuffle” at FSA HQ, where some are upset at the presumption of guilt that the moniker implies. More significantly, Sir Howard has been keen to dampen down expectations of high-profile scalps. He told The Sunday Times that most of the actions involve “people at the margin of the market… we’re not talking about major industrial fraud”.

Peter Bibby, the former head of enforcement at the FSA and now a regulatory partner at DLA, believes that Davies’ successor will be looking to find examples of the different types of behaviour that amount to market abuse. “They’ll try and find examples that cut across the whole of the market abuse regime perhaps, rather than going for a lot of one type,” he says. “The key thing for the FSA at the moment is to try and interpret the boundaries of the Code of Market Conduct and they only do that by bringing cases and seeing how successful they can be.” Bibby left the watchdog last February after four years and was joined this month at DLA by Helen Marshall, who was head of forensic investigation at the FSA. The firm already has barrister Graham O’Connell, who joined from the authority last October.

According to James Perry, head of the financial services regulatory department at Ashurst Morris Crisp: “These are going to be cases that are important and make a point to the investment community. Having said that, my personal feeling is these are likely to be the type of cases that probably would’ve been either actually or arguably against the law before the FSMA came into force.” He believes that the cases are unlikely to be on “grey areas” of the law, but “may be black and white in terms of good old-fashioned insider dealing conduct”.

According to Bibby, it is wrong to characterise the FSA as having got off to a slow start. “In many cases it’s not slow at all, but the real problem is that nobody’s interested in what the FSA does to prevent problems happening in the first place and it gets no plaudits for that,” he says. “The only thing people focus on is when matters go wrong.”

And, he points out, it is FSA policy not to disclose investigations and, consequently, an impression is created that little is done, although the current director of enforcement Andrew Procter has recently been reported as having been impressed by the approach of New York attorney general Eliot Spitzer, who launched an outspoken attack on conflicts of interest on Wall Street.

There is an obvious tension between keeping the confidence of the City and appearing robust to the outside world, as Bibby points out. “It’s a difficult balancing exercise between providing information to the public and to the market so that the public feels comfortable that business is being properly regulated, while at the same time ensuring it doesn’t breach human rights and the expectations of people subject to what are significant investigatory and disciplinary procedures,” he says. “Frankly, it’s difficult for the FSA to win one way or the other.”

The enforcement budget has recently been upped by 10 per cent, leaving Procter with £19m to spend on enforcement this year and some 200 staff at his disposal. However, to put this in context, the FSA regulates 11,500 companies and 180,000 individuals.

“There’s a real feeling that last year the FSA was just gearing up and this year it is geared up,” says Andrew Hart, a regulatory partner at Freshfields Bruckhaus Deringer. Other lawyers report that the ‘gearing up’ has been less noticeable. Ashursts’ Perry believes that the watchdog was “very noticeably underweight” in discrete areas, particularly in both the supervision and enforcement of insurance. He has not noticed a significant surge in FSA investigations, nor did he expect to, given the increase in the FSA jurisdiction as sole regulator of financial services. Another lawyer points out that 60 staff in the enforcement department are tied up in the massive Split Caps investigation (in which as many as 50,000 people lost money in supposedly ‘low risk’ funds) and, as an indication of tight resources, some work has been outsourced. There has also been talk of defections, as FSA lawyers jump ship back to private practice and better money.

Bibby agrees that a dozen cases might not appear to be a massive number, but he points out that the upcoming cases are all post-N2. “The fact that it’s taken 20 months to get to the first market abuse case suggests businesses and individuals caught up in allegations of market abuse have not been prepared to settle the case at an early stage and have put the FSA to proof in relation to their allegations,” he says. “In normal disciplinary cases you’ll get so far and a firm will look at it and say ‘Yes, you have me bang to rights’, but they’ve not given the FSA an easy ride on market abuse.”

To rewind back to pre-N2 days, there were frequent clashes between lawyers and Sir Howard about the perceived failings of his Rod Fletcher, Russell Jones & Walker

new regime. “It’s like Lenin’s 1922 Civil Code,” quipped Paul Nelson, a financial regulation and capital markets partner at Linklaters, last year. “Everything’s prohibited unless expressly permitted.” In turn, Sir Howard attacked lawyers for stoking up concerns in the business community about the new regime and the “high-priced, high-octane nonsense emanating from well-paid lawyers”.

Last year, Gleeson told The Lawyer that the main problem was “actually a failure of basic intelligence by the draftsmen, who wrote the legislation on the proposition that it would be possible to establish ordinary market practice without giving any thought as to how that trick might actually be done”.

As a result, compliance-conscious companies have sought the advice of lawyers and in the absence of a clear steer from the FSA, have felt obliged to do what lawyers do when in doubt and err on the side of caution. As Sir Howard said last year, this has led to “overblown fears of inadvertent market abuse”.

Gleeson believes that one reason for the FSA’s slow start is that the regulator and the industry have managed to plunge themselves into “a vicious spiral”. Industry was arguing that the commencement of proceedings by the FSA would, if publicised, be taken as a finding of guilt. “This is correct and therefore they wanted to make representations at the stage before the proceedings were to be commenced,” he says. “Then the FSA decided what they had to do was move one stage back further still, to the point at which they had to decide whether or not to bring pre-proceedings. And so the industry thought if they were going to do that, they wanted to make representations there.

“So what they got into at one point was the vicious cycle, and as fast as the industry got the power to make representations, the FSA had to set up a procedure that had to happen before that,” Gleeson adds. It is these procedural hurdles that could well have held things up for the FSA. He says that it is difficult to criticise the FSA for the length of time for the first batch of cases, but what will be more interesting will be how long subsequent cases take to go through. “If it’s still taking two years this time next year that will be very troubling,” he says.

Charles Evans, a partner in Norton Rose‘s commercial litigation department, was sceptical about the new regime prior to N2. “Anxious was probably a nice way of putting it,” he says. “I’m not sure that those anxieties have come to pass, but, of course, they are yet to be tested and maybe the ‘dirty dozen’ will be an indication.”

Gleeson observes that the watchdog cannot afford to lose too many of the forthcoming legal actions. “If they do anything else other than win, the danger is that their exciting and cherished market abuse regime will go the way of the old insider dealing regime,” he says. As Fletcher points out, it remains to be seen whether all 12 of the forthcoming cases will go public. “Depending on the nature of the investigations, they could actually settle or not go public,” he says. “It might not be the ‘dirty dozen’, so much as the ‘terrible trio'”. And that does not have quite the same ring.