The FSA’s campaign to stamp out abuse of the financial markets has gathered momentum as it secures its first criminal conviction and custodial sentence for insider dealing. Christopher McQuoid, former general counsel of TTP Communications and James Melbourne, his father in law, have each been sentenced to 8 months imprisonment. Melbourne’s sentence was suspended for one year.
This case demonstrates serious intent on the part of the FSA to aggressively enforce the rules against insider dealing and market abuse. It is also a timely reminder in the current economic downturn that widespread market volatility and fluctuating share prices provide those in trusted positions with information that, if used in an abusive way, can be financially lucrative. The FSA has resolved to bring all its powers to bear to protect the integrity of the UK’s financial markets and will take three further cases before the courts this year. A “senior corporate adviser” has also been arrested within the last week in the first of six further investigations.
The Facts
Mr McQuoid was the general counsel at TTP Communications (TTP) from August 2000 to March 2007. In May 2006, he received confidential information that Motorola was planning to acquire TTP. Prior to public confirmation of the acquisition McQuoid’s father-in-law, Mr Melbourne, bought 153,824 TTP shares at 13 pence per share. Mr Melbourne had not recently dealt in any shares and had never previously bought TTP shares. The acquisition was later announced at an agreed share price of 45 pence. This price increase meant that Mr Melbourne made a profit of £48,919.20. Three months later, he gave Mr McQuoid a cheque for £24,459.60, which was exactly half of the profit made from the TTP shares trade. The suspicious trading was reported to the FSA.
Insider Dealing: The Rules
Under Part V of the Criminal Justice Act 1983 it is a criminal offence for an individual who has information as an insider to:
· deal in price-affected securities in relation to inside information;
· encourage another person to so deal; or
· disclose inside information to another person otherwise than in the proper performance of the functions of his employment, office or profession.
Securities are price-affected securities in relation to inside information if the information would, if made public, be likely to have a significant effect on the price of the securities. The dealing and encouraging offences relate to dealings in the UK in various types of securities (including shares and debt securities) on a regulated market or through a professional intermediary, but the disclosure offence does not necessarily entail any dealings.
For the purposes of the CJA inside information means information which:
· relates to particular securities or to a particular issuer of securities or to particular issues of securities and not to securities generally or to issuers of securities generally;
· is specific or precise;
· has not been made public; and
· if it were made public, would be likely to have a significant effect on the price (price being defined as including the value) of any securities;
Examples of inside information would include details of the Company’s annual or interim results, the intention to make a significant acquisition or disposal, or the intention to carry out a capital-raising exercise.
For the purposes of insider dealing, the person accused of committing the offence must have the relevant information as an insider from an inside source whom he knows is an inside source and that information must be, and he must know that it is, inside information. A person will be treated as having information from an inside source if (and only if):
· he has it through being a director, employee or shareholder of an issuer of securities;
· he has it through having access to the information by virtue of his employment, office or profession; or
· the direct or indirect source of his information is any such person.
A person deals in securities if he acquires or disposes (or agrees to acquire or dispose) of the securities (whether as principal or agent) or if he procures, directly or indirectly, an acquisition or disposal of the securities by any other person.
The CJA applies to dealing in a wide range of securities. It includes shares of a company (whether incorporated in the UK or not), debt securities issued by a company and options to acquire or dispose of any securities.
The maximum punishment for the offences is seven years imprisonment and an unlimited fine.
The market abuse regime sits alongside the criminal penalties for insider dealing but, although the offence has been held to be criminal in nature, it is subject to the lower burden of proof for establishing civil liability. The regime was introduced in 2001 in response to concerns that it was too difficult to secure a conviction for insider dealing under the CJA. Under the regime the FSA has the power to impose penalties in cases where it is satisfied a person has engaged in or encouraged others to engage in market abuse (section 118 -131A FSMA). The penalty could be a fine of an amount deemed appropriate by the FSA, or the publication of a statement confirming that a particular person has engaged in market abuse. The imposition of a penalty does not render any “insider transaction void” or unenforceable but the FSA might seek an order that the person who has committed the market abuse take steps to remedy the contravention, such as making restitution.
Conclusion
The offences of insider dealing and market abuse apply not only to members of a company’s board of directors. They apply to anyone who has access to inside information, inter alia through their employment, profession or advisory duties.
Since 2001, most abuses of the market have been dealt with under FSMA. The FSA has now indicated that it intends to seek criminal convictions and custodial sentences in the most serious cases of insider dealing. Notwithstanding that the sentences handed down to Mr McQuoid and Mr Melbourne appear lenient - perhaps a reflection of the relatively modest amounts of money involved - their convictions have nevertheless been heralded as being of “symbolic importance”. They appear to indicate and pre-empt an era of much more aggressive and active regulator enforcement.
This article was researched and written by Nick Moore, a solicitor in the Insurance and Reinsurance Group, with assistance from Simon Chandler.
