The FT has reported that the trial of five defendants facing insider trading charges (also known as ‘insider dealing’) has commenced eight years after investigations were initiated and over three years after charges against the defendants were brought.
The case is the UK’s largest and most complex of its kind and so may set a precedent for future prosecutions of this nature; as such the Financial Conduct Authority (FCA) may itself also be under the microscope.
What’s the background to this story?
The FSA (as it was then) mounted Operation Tabernula in late 2007 to investigate a suspected insider trading ring.
In the current case, the defendants are Martyn Dogson, a former managing director at Deutsche Bank; Andrew Harrison, who has worked at Panmure Gordon, Lloyds Banking Group and Altium Capital; day traders Ben Anderson and Iraj Parvizi and Andrew Hind, a director of Deskspace Offices. It is alleged that between 2006 and 2010, the defendants conspired together and with another, Richard Baldwin, to deal in securities that were price-affected in relation to inside information.
What is the legal basis for the FCA bringing the case?
The current legislation prohibiting insider dealing can be found in Part V of the Criminal Justice Act 1993 (CJA), which implemented the EU Insider Dealing Directive (89/592/EEC). Under section 402 Financial Services and Markets Act 2000 (“FSMA”), the FCA has the power to prosecute the criminal offence of insider dealing under Part V of the CJA.
What is the scope of ‘insider dealing’?
Under section 52 CJA, an offence of ‘insider dealing’ is committed if:
- An insider deals in price-affected securities when in possession of inside information;
- An insider encourages another to deal in price-affected securities when in possession of inside information; or
- An insider discloses inside information otherwise than in the proper performance of his employment, office or profession.
These offences can only be committed by an individual (i.e. not a company) and only if the individual holds “inside information” as an “insider”. These two terms are defined in sections 56(1) and 57(1) CJA respectively.
Although there is an element of ambiguity with these definitions, in broad terms, in a criminal prosecution for insider dealing, if it can be shown that (i) there is insider information from an inside source; (ii) the defendant knew both of those facts and (iii) there has been dealing, encouraging and/or improper disclosure, the onus of proof will shift to the defendant who must make out one of a number of defences to attempt to escape conviction.
What defences are available to the defendants?
The defendants may attempt to rely on general (S.53) and special defences (Schedule 1) under the CJA. For example, an individual defendant may argue that he would have traded anyway even had he not had the inside information (a general defence) or that the dealing was carried out in good faith in the course of his business or employment as a market maker (a special defence). The burden of proof in respect of all the available defences is on the defendants. It is unclear at this stage, what, if any, of the defences they will attempt to rely on.
What has been the conviction rate for insider trading crimes?
Historically, the UK has had a less than satisfactory record on insider dealing prosecutions, mainly because of the many composite parts of the offence that need to be proved. As with all insider dealing offences, the prosecution must prove guilt beyond reasonable doubt: a higher standard than the burden for civil prosecutions. The FCA has the option to pursue (and has previously pursued) cases through the FSMA civil market abuse regime under section 118 FSMA, where the standard of conviction is easier to meet.
However, having openly acknowledged that it should do more to tackle insider dealing, in line with its credible deterrence strategy, the FSA committed to an increased focus on using its powers as a criminal prosecutor. The FCA has continued the FSA’s policy and has committed to using its criminal prosecution powers where appropriate in the hope of creating a deterrent effect and preventing future market manipulation. Since 2009, there have been 27 convictions secured for the offence of insider dealing with only one failed prosecution in 2010.
What might happen next?
The trial is anticipated to run for 12 weeks, and the practitioner and student alike will follow with interest the defences that are run.
Having had a run of successful prosecutions, the FCA more recently has concentrated its enforcement resources on the FX and other major banking investigations. This prosecution may therefore herald a change of emphasis, and certainly if convictions are returned, the FCA is likely to be emboldened and may go after yet bigger fish at major financial institutions.
Alexander Vakil is a senior associate in the business crimes team at Osborne Clarke