The ‘Inside’ Story: Market Abuse Trends

Katten recently hosted an interesting and insightful panel discussion on the latest market abuse trends in the UK and US. The session was presented Katten Financial Markets Regulatory Partner Neil Robson alongside RQC Group’s CEO, Robert Quinn and featured the renowned speaker Tom Hardin, also known as “Tipper X”. Mr. Hardin was an insider dealer that turned star witness and informant for the FBI, and has become one of the most prolific informants in securities fraud history. Mr. Hardin discussed the “Inside story of Tipper X”, providing a fascinating insight into the challenges and pitfalls of his experience cooperating with the US government to build criminal cases in insider trading investigations in the financial services industry.

Some key takeaways from the session include:

• Financial Conduct Authority (“FCA”) enforcement. Neil explained that the FCA’s tone on its UK enforcement activities has become increasingly assertive since the COVID-19 pandemic. This is exemplified through its most recent description of its enforcement function, which now states that “there are real and meaningful consequences for firms and individuals” with an “aim… to detect serious misconduct early so that we can intervene and prevent harm from happening or continuing”. The assertiveness follows through to the FCA’s recent enforcement numbers, with the FCA opening 194 new enforcement cases in the last year, an increase of 55% compared with the previous financial year. Although the majority of new cases concerned suspected unauthorised business, the FCA opened a significant number of new enforcement cases in other areas including insider dealing, with 33 insider dealing cases opened during the last year, and a 5-defendant criminal case which is still ongoing currently.
  
  
• Market abuse in the UK versus the US. Market abuse and insider dealing are the related concepts by which individuals or companies use market sensitive inside information to manipulate or gain an unfair advantage over the market. In the UK, there is both a civil and criminal offence of insider dealing. The maximum punishment for anyone found guilty of the crime of insider dealing is 10 years imprisonment. No one can be imprisoned for breaching civil law, but anyone found liable of market abuse offences can face unlimited fines. While “inside information” under the civil definition covers a variety of categories of information, the criminal law definition covers just one category of information: that which relates to particular securities or to a particular issuer(s). However, in the US it is not just trading while in possession of inside information, instead the trader has to have a fiduciary duty arising out of their relationship to the issuer of the security such that they cannot use the information, so that trading using it is a breach of that duty.
  
  
• Wall-crossing or market sounding. Being wall-crossed and receiving inside information essentially means the issuer in question goes onto your restricted list and you cannot trade until it is public knowledge or the information is no longer specific and precise so cannot be inside information. The broker will have an insider list of all persons receiving information, date/time of sounding and any follow-up and contact details, and the FCA will access this if they are concerned as to market conduct. Neil and Robert both emphasised that it is best practice to ensure that all market soundings are vetted and overseen by the legal team, and to restrict the recipients receiving the inside information.
  
  
• David Einhorn and Greenlight Capital (“Greenlight”) case. The Greenlight case is one of the UK’s most prominent insider dealing cases. In Greenlight, the then Financial Services Authority (“FSA”), which is now called the FCA, imposed a fine of £3.651 million on Greenlight, a US hedge fund manager, as well as a personal fine of £3.638 million on Mr. Einhorn, Greenlight’s owner, as well as a further fine of £350,000 on the broker. The fines were charged in connection with Greenlight’s trading in the shares of Punch Taverns Plc (“Punch”) ahead of a planned equity offering. The FSA concluded that Greenlight traded on inside information conveyed to Mr. Einhorn during a conference call with Punch’s CEO and its broker. Although Greenlight specifically declined to be made an insider and Mr. Einhorn refused to be wall-crossed, the FSA determined that the information he had received amounted to inside information, trading on such information was prohibited by the UK’s market abuse regime and that Greenlight, Mr. Einhorn and the broker should have known this. That said, given the differences between UK and US insider dealing legislation, it is unlikely that this case would have constituted a violation of the US federal securities laws if the same fact pattern and trading had happened with a US issuer, as there was no fiduciary duty.