Sun. Dec 15th, 2019

Planet Compliance

Innovation & Regulation in Finance

The 7 Deadly Sins of Market Abuse (Part III): Misuse of information

4 min read

Welcome to Part III of our series on the seven market abuse offences as we know them in the regulatory regime of the UK. This one is a tricky one as it deals with the offence of Misuse of Information. Tricky because it is one of the two super equivalents of the seven offences (the other one being Misleading Behaviour & Distortion, which we will cover in the last post of this series. Remember also that the UK has chosen a stricter and more specific set of types of behaviour that can potentially constitute Market Abuse? There you go!) , i.e. it tries to mop up what isn’t already covered by the first two offences in relation to inside information. In more technical terms it captures any other behaviour on information not generally available, which the regular user would regard as being relevant, and the regular user would regard as a failure to observe a reasonable standard of behaviour.

Another thing about the offence of Misuse of Information in accordance with section 118 (4) that as such it is that is not valid anymore. The two super equivalents derive from the UK market abuse regime that existed before the implementation of the EU Market Abuse Directive and were given an extended lifespan, which was then extended until in December 2014 the FSMA 2000 (Market Abuse) Regulations 2014 came into force. Whilst the other super equivalent has been given an extension, the legislator chose to let section 118 (4) expire.

Why should you know about it then? Well, first of all to fully understand the market abuse regime it is always helpful to know its evolution. Secondly, the reason it was not extended was based on the development that it more recent case law the threshold of what exactly constitutes inside information under the first two market abuse offences was lowered significantly, so that the sweep up clause of misuse of information became less relevant. Thus, it is technically not in force anymore, but the behaviour is still covered by the current regulation and therefore still very relevant.

To conclude our little tour on Misuse of Information, why don’t we have a look at some of the most significant cases:

 

James Parker – A financial penalty of £250,000 is imposed to Mr Parker pursuant to section 123 of the Financial Services and Markets Act 2000 (“the Act”). Parker was a financial controller at Pace Micro Technology and sold shares ahead of a profit warning. He also carried out an active programme of spread bets on the share price, making an aggregate profit of £121,742. His claim that this was part of an existing trading strategy uninfluenced by his inside information, however, was not believed, and he was fined. For more information on this case, please click here.

http://www.fsa.gov.uk/pubs/final/parker_6oct06.pdf

Malins – A financial penalty of £25,000 in relation to his purchases of ordinary shares in Cambrian Mining plc ahead of two announcements concerning Cambrian’s Placing of shares and its Interim Results, made by the Company on 23 March 2005 and 31 March 2005 respectively. The full case is available here.

http://www.fsa.gov.uk/pubs/final/jonathan_malins.pdf

GLG Partners and Philippe JabreThe Financial Services Authority fined hedge fund manager GLG Partners LP (GLG) and Mr Philippe Jabre, a former managing director of the firm, £750,000 each for market abuse and breaching FSA principles. On 11 February 2003 Mr Jabre was ‘wall crossed’ by Goldman Sachs International as part of the pre-marketing of a new issue of convertible preference shares in Sumitomo Mitsui Financial Group Inc (SMFG). Mr Jabre was given confidential information and agreed to be restricted from dealing SMFG securities until the issue was announced. Mr Jabre breached this restriction by short selling around $16 million of SMFG ordinary shares on 12-14 February 2003. When the new issue was announced on 17 February 2003, Mr Jabre made a substantial profit for the GLG Market Neutral Fund. For more information on this case, please click here.

http://www.fsa.gov.uk/library/communication/pr/2006/077.shtml

 

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 “Manipulating transactions”.

If you missed the previous posts in this series, click here for Insider Dealing and Improper Disclosure or find everything about Market Abuse here.

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