And now for the grand finale, the last of the 7 market abuse offences: Distortion and misleading behaviour, which is where the behaviour:
(a) is likely to give a regular user of the market a false or misleading impression as to the supply of, demand for or price or value of, qualifying investments, or
(b) would be, or would be likely to be, regarded by a regular user of the market as behaviour that would distort, or would be likely to distort, the market in such an investment,
and the behaviour is likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position in relation to the market.
So, we’ve got ourselves another sweep up clause that covers everything that isn’t already subject to the other offences of market manipulation.
Once again a key requirement is the “regular user” test, whereas a regular user is effectively a reasonable person who deals regularly and understands the workings of the market concerned.
Remember the whole talk about how the UK Market Abuse Regime went further then the EU directive and how that created the two additional offences were called super equivalents? You might also remember that the first of the two, Misuse of Information, expired at the end of 2014, while the second was granted a lifeline (If you don’t recall any of this, why not have a look at our previous post on the topic here). The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2014 extended the expiry date of the prohibition of a category of market manipulation in section 118(8) of Financial Services and Markets Act 2000 (FSMA) and associated provisions to 3 July 2016. That is when the EU’s Market Abuse Regulation will become applicable and replace it.
In the FCA Handbook the offence is covered under MAR 1.9, where the regulator also describes what it considers to be relevant behaviour under this section:
(1) the movement of physical commodity stocks, which might create a misleading impression as to the supply of, or demand for, or price or value of, a commodity subject to a commodity futures contract; and
(2) the movement of an empty cargo ship, which might create a similar false or misleading impression
With regard to false and misleading impression the Handbook also lists factors that are to be taken into account in determining whether or not the behaviour constitutes market abuse:
(1) the experience and knowledge of the users of the market or auction platform in question;
(2) the structure of the market or auction platform, including its reporting, notification and transparency requirements;
(3) the legal and regulatory requirements of the market or auction platform concerned;
(4) the identity and position of the person responsible for the behaviour which has been observed (if known); and
(5) the extent and nature of the visibility or disclosure of the person’s activity.
Furthermore, the FCA gives examples of factors to be taken into account: standards of behaviour:
(1) if the transaction is pursuant to a prior legal or regulatory obligation owed to a third party;
(2) if the transaction is executed in a way which takes into account the need for the market or auction platform as a whole to operate fairly and efficiently; or
(3) the characteristics of the market or auction platform in question, including the users and applicable rules and codes of conduct;
(4) the position of the person in question and the standards reasonably to be expected of him in light of his experience, skill and knowledge;
(5) if the transaction complied with the rules of the relevant prescribed markets or prescribed auction platform about how transactions are to be executed in a proper way (for example, rules on reporting and executing cross-transactions); and
(6) if an organisation has created a false or misleading impression, whether the individuals responsible could only know they were likely to create a false or misleading impression if they had access to other information that was being held behind a Chinese wall or similarly effective arrangements.
Concerns regarding short selling were a key driver for the amendments of the market abuse regime in the FCA Handbook in particular to MAR 1.9.
As always, we want to conclude this post with a look at relevant cases for this type of market abuse behaviour:
– Welcome Financial Services Limited
The FSA censured Welcome Financial Services Ltd for engaging in market abuse, which involved publishing false and misleading information relating to its loan book in its Annual Report for 2007. Welcome Financial Services was at the time the principal subsidiary of Cattles plc. For the more information on the case, have a look here.
– Evolution Beeson Gregory
Penalties were imposed for market abuse as a result of short selling by EBG and Mr Potts, during the period from 25 September 2003 to 21 October 2003, of the shares of Room Service Group plc. EBG was fined £500,000 for market distortion and Potts, the financial services group’s head of market making, received a fine for £75,000. EBG had sold more than twice of the share capital of the AIM listed company without having a reasonable plan how to deliver the shares it had sold, according to the FSA. Investors failed to receive the shares they thought they had bought and the trading in shares of Room Service Group had to be suspended. EBG also had to pay investors £150,000 in compensation. For more on the case, please click 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
That’s all for today, but if you’ve missed the previous posts of this series or for more information on everything about Market Abuse, why don’t you have a look here.