Examples of market abuse: case studies
The following are real-life examples of FSA actions for market
abuse, showing the risks that companies and individuals can face.
They cannot be taken as definitive statements of the law in the
same way as a case decided by a court. But they do show the view
taken by the FSA of certain conduct and illustrate the penalties
that can be imposed.
A simple example of misuse of information market abuse is seen
in the case of Jonathan Malins, the finance director of AIM company
Cambrian Mining. Having chaired a meeting to approve a share
placing at a premium to the current market price, Malins bought
shares for his own account that afternoon, less than an hour before
the share placing was publicly announced. He pulled the same trick
a week later, buying shares immediately ahead of the announcement
of better than expected results. These flagrant examples of abuse,
which also breached the company’s internal rules, netted Malins
immediate profits of £6,000 and £400. He was fined £25,000 in
December 2005.
A further blatant example is provided by James Parker. He was
the financial controller at Pace Micro Technology, and the facts of
the case revolve around the problems described in our Breach of disclosure obligations: case
studies. With the benefit of inside information and in clear
breach of the company’s share dealing rules, Parker not only sold
shares ahead of the announcement, which led to a dramatic fall in
the company’s share price, but 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 strategy
uninfluenced by his inside information was not believed, and in
August 2006 he was fined £250,000.
The £17.m fine levied against Shell in August 2004 for market
abuse and breach of the Listing Rules set a new FSA record. In
early 2004, Shell announced that it was writing down 25 per cent of
its hydrocarbon reserves, causing a £2.9bn drop in its market
capitalisation.
The FSA found that the company had not only made false or
misleading announcements in relation to its reserves since 1998 but
also failed to act when evidence of irregularities first came to
light. In a 17-page document based on internal memoranda, the
regulator showed how executives were aware of the problems at least
four years previously. Given the FSA’s stated view that timely and
accurate disclosure to shareholders and markets is fundamental to
the maintenance of the integrity of the UK’s financial markets, the
breach could hardly have been worse. Nonetheless, the FSA fine
appeared puny compared with the $120m (£66m) settlement agreed with
the SEC. Having ruled against Shell, the FSA continued its
enquiries into the conduct of a number of individuals in the senior
management at the company, most notably the former chairman, Sir
Philip Watts. But in November 2005 it announced that no further
action would be taken. The company may have been at fault, but no
one individual was found to have committed market abuse.
Distorting the market led to a fine of £500,000 for Evolution
Beeson Gregory (EBG), the financial services group, and of £75,000
for its head of market making. EBG also paid £150,000 in
compensation to investors. In autumn 2003, the company had short
sold more than twice the entire issued share capital of an AIM
listed company with, in the FSA’s view, no reasonable plan for
ensuring its ability to deliver the shares it had sold. An expected
issue of new shares did not materialise; 250 investors failed to
get the shares they thought they had bought. EBG’s trading led to a
serious distortion of the market, resulting in the suspension of
the shares on AIM.
