Part II of our series of the 7 Deadly Sins of Market Abuse looks at the offence of Improper Disclosure. This is the case when an insider discloses inside information to another person other than in the proper course of the exercise of employment, profession or duties according to the Financial Services and Markets Act 2000 (see section 118 (3).
Remember the definition of inside information from our first post of the series? No? Well, the EU had defined it in its Market Abuse Directive of 2003 as “information of a precise nature which has not been made public, relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.” We also introduced a checklist of 4 questions that, if all could be answered with yes, information in question should be considered inside information:
- Is it precise information that is not generally available?
- Is it related to one or more issuers or investment?
- Would a reasonable investor use it to help them make a investment decisions in that issuer or security?
- And, if it were generally available, would it be likely to significantly affect the price of an investment?
The FSA provides for an example of such an offence: An employee finds out that his company is about to become the target of a takeover bid. Before the information is made public, he buys shares in his company because he knows a takeover bid may be imminent. He then discloses the information to a friend. This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover. The employee’s friend also has this information and could profit unfairly from it.
The FCA, the FSA’s successor, describes in its Handbook (see section MAR 1.4) what constitutes, in its humble opinion, market abuse in the form of improper disclosure:
(1) disclosure of inside information by the director of an issuer to another in a social context; and
(2) selective briefing of analysts by directors of issuers or others who are persons discharging managerial responsibilities.
Further down in the same section the FCA also gives two practical examples:
(1) X, a director at B PLC has lunch with a friend, Y, who has no connection with B PLC or its advisers. X tells Y that his company has received a takeover offer that is at a premium to the current share price at which it is trading.
(2) A, a person discharging managerial responsibilities (which is a director or senior executive of an issuer according to the FSMA 2000) in B PLC, asks C, a broker, to sell some or all of As shares in B PLC. C discloses to a potential buyer that A is a person discharging managerial responsibilities or discloses the identity of A, in circumstances where the fact that A is a person discharging managerial responsibilities or the identity of A, is inside information, other than in the circumstances set out in MAR 1.4.4A C.
Please keep in mind that it isn’t necessary for anyone to deal on the disclosed inside information to constitute market abuse, nor is an intention required to commit market abuse or even an awareness that the respective information should be considered inside information.
It might also be a good idea to say a word or two on the aspect of “not in the proper course”. The FCA provides some guidance regarding permitted behaviour and indications are that is was:
(1) accompanied by the imposition of confidentiality requirements upon the person who receives the information; or
(2) reasonable; or
(3) for the purpose of either seeking or giving advice on a transaction, facilitating any commercial, financial or investment transaction (including securing prospective placees), or obtaining support in relation to a takeover offer; or
(4) in fulfilment of a legal obligation.
A key topic in that respect is the practice of wall crossing. This is an extremely important part of the management of confidential information and will be subject to a detailed post on the topic, but we want to touch on it at least at this point, too:
Financial Institutions maintain information barriers, so-called “Chinese Walls”, in order to handle material non-public information and potential conflicts of interest. On one side of the wall you have people who, for example, know about an upcoming transaction, and on the other people don’t. Now, there may be cases where a valid business reason exists to disclose this information or bring someone over the wall. To continue with the above example, the corporate finance team knowing about the soon to happen deal would like to make the research analyst of the bank that covers the company of the transaction, so that the analyst can prepare himself and be able to speak about the implications of the deal once the news breaks. Each bank needs to have a wall crossing procedure that outlines what steps need to be taken and there are laws and regulation determining the requirements, not to speak of the several aspects that surround such situations that are subject to discussion, but that will be examined another time. Needless to say though that the person that has been brought over the wall is now subject to the same obligations regarding the handling of the sensitive information and can’t simply chat freely about. Just to conclude this section then, for our research analyst in the example this could mean that he would find it very difficult to do his job covering the company without raising suspicions, so the timing of the wall crossing is also essential.
Lastly, to round off this overview of the offence of improper disclosure, let’s have a look at some cases of convictions for market abuse in the form of improper disclosure:
- The Tax and Chancery Chamber of the Upper Tribunal upheld the decision of the Financial Conduct Authority (FCA) that Ian Hannam engaged in two instances of market abuse. The Tribunal found that Mr Hannam when working in a senior position for JP Morgan had engaged in two instances of market abuse by disclosing inside information other than in the proper course of his employment in two emails. In the Decision Notice, the Authority decided that it was appropriate to impose a financial penalty of £450,000. For more information, please see here.
- In a case brought by the Financial Services Authority (FSA), Paul Milsom, a senior equities trader, has today been sentenced at Southwark Crown Court to 2 years imprisonment for disclosing inside information between October 2008 and March 2010. A confiscation order was also made in the sum of £245,000. For more information, please see here.
- The Financial Services Authority (FSA) fined Nicholas Kyprios, Head of European Credit Sales at Credit Suisse in London, £210,000 for improper market conduct in disclosing client confidential information ahead of a significant bond issue in November 2009. For more information, please see here.
- Remember the famous Einhorn case from our last post? Obviously, the behavior of market participants doesn’t necessarily breach only one of the market abuse offences, but often fits two or more alternatives of market abuse behavior. So it’s not surprising that this case with its complex structure also falls into the bracket of improper disclosure, i.e. the Financial Services Authority (FSA) fined Andrew Osborne, former Managing Director in Corporate Broking at Merrill Lynch International (now Bank of America Merrill Lynch International) £350,000, for engaging in market abuse by improperly disclosing inside information ahead of a significant equity fundraising by Punch Taverns Plc (Punch) in June 2009. For more details, see here.
- Cross jurisdiction investigations slowly become more frequent and the joint FSA, SEC and DoJ investigation lead to two people being charged by the SEC with insider dealing in the U.S. In a parallel investigation by the Financial Services Authority (FSA), the Securities and Exchange Commission (SEC), Department of Justice (DoJ), and with assistance from the Federal Bureau of Investigation (FBI), a former Deloitte Tax LLP partner and his wife were yesterday charged by the SEC with insider trading in violation of the U.S. federal securities laws. For more information, please see here.
- The FSA fined Jay Rutland £30,000 and prohibited him from performing regulated activities for committing market abuse. At the relevant time Mr Rutland was a senior broker with Pacific Continental Securities (UK) Ltd who both improperly disclosed inside information and encouraged other brokers to disclose the same inside information when attempting to sell specific shares. For more information, please see here.
For more examples, have a look at the FCA’s Market Abuse Outcome page, where the FCA continues to publish information about action it has taken against market abuse and other related conduct: http://www.fca.org.uk/firms/markets/market-abuse/outcomes
Follow our series on the 7 deadly sins of Market Abuse in the next article on “Misuse of information” here.
And if you missed the previous post of the series, click here.