Winterflood challenges FSA over market abuse fine

A marketmaker is challenging the City watchdog over a £4m fine, the biggest for market abuse yet handed out to a regulated institution.

The Financial Services Authority has levied the penalty on Winterflood, a broker specialising in smaller and mid-market stocks, for having failed to notice warning signs or to query particular trades in Fundamental-E Investments, a computer screen company, in 2004.

Winterflood, owned by Close Brothers, the investment bank, said yesterday that it had referred the case to the Financial Services and Market Tribunal, the independent body set up to review decisions made by the FSA.

The case could prove the first big test for the regulator before the tribunal since a Legal & General case in 2005, when a challenge by the insurance company ended in the tribunal almost halving a £1.1m fine.

“There have been other cases since then, but nothing of this size,” said Ian Mason, a partner at Barlow, Lyde and Gilbert and a former FSA enforcement lawyer. “It will be a test of the FSA’s resolve to clamp down on market abuse and it could be a hard case to prove.”

Winterflood was a market-maker in FEI in 2004 and executed many of the trades linked to the FSA’s investigation. There is no allegation that it or its brokers deliberately committed an offence.

The investigation centred on a series of small trades made through SP Bell, a regional stockbroker. SP Bell was placed into administration in 2004 after it emerged that dozens of its customers’ accounts had been used to buy about £10m worth of shares in FEI.

SP Bell was owned by Simon Eagle, a former commodities trader.

Close Brothers said the firm intended to fight its appeal vigorously. The company said yesterday that the £4m fine was provided for in its accounts and would not have an effect on its financial results.

Two Winterflood traders have also been fined and are also appealing to the tribunal. One of them faces a fine of between £150,000 and £200,000 and the other faces one of less than £75,000.

The regulator would not comment yesterday.

A £4m fine would be the fourth largest ever levied by the watchdog. The record was £17m against Shell for mis-stating its oil reserves.

There is no date yet set for the tribunal hearing.

The regulator has a patchy record in defending its decisions in front of the independent body and has been widely mocked for its failure to bring more market abuse cases, particularly those involving insider dealing.

Although the cases are notoriously hard to prove, the FSA has this year launched its first criminal prosecution for insider dealing. Details of two cases more are expected to be announced soon.