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Financial Times: FSA ability to pin blame for insider trading under question

By Barney Jopson and Tony Tassell
Published: March 20 2006 02:00 | Last updated: March 20 2006 02:00
The Financial Services Authority will find it difficult to attribute blame for market abuse to City staff even after uncovering apparently widespread insider trading, say lawyers.
The City regulator reported last Friday that 29 per cent of takeover bids in 2004 were preceded by likely insider trading on the stock market and signalled a re-invigorated drive to crack down on market abuse.
Lawyers praised the FSA for producing a new measure of “market cleanliness”, which will be updated periodically and is the first of its kind from a regulator.
But in spite of one recent success for the regulator's enforcement arm, they were sceptical of its longer-term ability to establish deterrents by nailing high-profile market participants.
The regulator has pledged to bear down on abuse by secretive hedge funds, investment banks and their employees, as opposed to corporate wrongdoers, and to dish out bigger fines.
It took a big scalp this month when it fined GLG, a hedge fund, and Philippe Jabre, its former star trader, £750,000 apiece for market abuse and violating market conduct over a convertible bond issue.
The fines, set by the FSA's independent Regulatory Decisions Committee, were lower than the regulator had wanted. GLG and Mr Jabre have the right to appeal.
In 2004-05, most FSA market abuse cases were against smaller fry, involving five-figure fines for a finance director, a company secretary, a head of communications and an auditor among others.
“It tends to be easier to pin the blame on company people because the audit trail is easier to get hold of,” said Ian Mason, a partner at law firm Barlow Lyde & Gilbert and a former FSA head of wholesale enforcement.
“Institutional cases are difficult to prove because you need expert evidence on technical matters and it's hard to find witnesses who will put their heads above the parapet,” he said.
Another complication is that participants swim in streams of new data daily, making it hard to identify who had access to non-public information, when and whether they acted on it.
Insider traders buy or sell shares to profit from price-sensitive information about a company that has not been made public. Takeover activity is one of the main drivers of share price movements.
Hector Sants, the FSA's managing director in charge of wholesale and institutional markets, has said the growing volume of hedge fund trading has caused a structural change in the market and increased the risk of market abuse.
Acknowledging that the FSA's first small-scale enforcement cases in 2004 did not appear to have deterred insider trading, he said: “This suggests that visible enforcement action may be the key tool in our work to reduce market abuse.”
According to the FSA's cleanliness indicator, suspected insider dealing had become more prevalent since the regulator assumed new powers, up from 21 per cent of takeover bid cases in 2000 to 29 per cent in 2004.
Martyn Hopper, a partner at Herbert Smith, said: “I suspect the FSA is trying to dispel any concerns that it will lay off the enforcement process following setbacks last year.” Mr Hopper represented Sir Philip Watts, the former chairman of Royal Dutch Shell, who faced a market abuse case that the FSA eventually dropped last year.
But Mr Sants, who has long said that regulation is about more than just enforcement, emphasised the importance of the indicator. “Our future success . . .should be measured not by gut feel or fines levied but by using a robust analytical tool that will stand the test of time,” he said.
Market participants said many abnormal share price movements before takeover announcements were attributable to legitimate analysis and supposition.
David Blundell, chairman of the UK Shareholders' Association, said: “I don't think that insider dealing will ever go away however much the FSA bangs on about it.”

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