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High Court imposes a financial penalty for market abuse for the first time

High Court imposes a financial penalty for market abuse for the first time

12 August 2015

In August, the High Court for the first time utilised its powers under FSMA, not only to grant an injunction, but also to issue a financial penalty in respect of market abuse.

The application was brought by the FCA against Da Vinci Invest Limited (an independent asset manager), three traders and Mineworld Limited (a company used by the three traders to trade derivatives and share profits).

The Court found that the traders had used funds provided by Da Vinci to engage in a form of market manipulation known as “layering” or “spoofing” in respect of Contracts for Differences (CFDs). The traders would issue large orders on one side of the exchange (without intending for them to be executed) in order to move the price of the relevant share and then took advantage of this move by executing a trade on the opposite side of the exchange. The original large order would then be rapidly deleted and the behaviour repeated in reverse.

The Court found that such activity gave or was likely to have given “a false or misleading impression as to the supply of, or demand for, or as to the price of, one or more qualifying investments” and thus constituted market abuse contrary to section 118(5) FSMA.

The Court imposed a fine of £1.46 million on Da Vinci, £5 million on Mineworld and £410,000, £410,000 and £290,000 on the three traders respectively. The Court further granted an injunction against all Defendants. The injunction was made up of a general “obey the law” paragraph in the terms of section 118(5) and specific prohibitions in respect of layering and spoofing.

You can read the judgment here.

Comment

The case is interesting as it is the first case in which the High Court has been asked to impose a penalty for market abuse[1]. The FCA’s action was premised on sections 381 and 129 of FSMA:

  • Section 381(1) provides that, on the application of the FCA, the Court may make an order restraining market abuse if it is satisfied that either (a) “there is a reasonable likelihood that any person will engage in market abuse” or (b) “any person is or has engaged in market abuse and that there is a reasonable likelihood that the market abuse will continue or be repeated".
     
  • Section 129 provides simply that under section 381 (or section 383, which relates to restitution orders), the FCA may "request the Court to consider whether the circumstances are such that a penalty should be imposed." The Court may if it considers it appropriate "make an order requiring the person concerned to pay [the FCA] a penalty of such amount as it considers appropriate”.

The case resolved a number of issues in respect of the use of these two powers, some more interesting than others:

  • While s129 does not specify the “circumstances” in which a penalty may be imposed, the Court found that it was “obvious that the intention is that the Court’s jurisdiction to impose a penalty under section 129 FSMA is not engaged at all unless the Court is satisfied that the person concerned has engaged in market abuse” [80]
     
  • Unlike the FCA’s own power to impose financial penalties for market abuse under section 123, there is no requirement under section 129 for the FCA to issue a warning notice or decision notice prior to the application being sought [82].
     
  • While not stated specifically in section 129, the defences available to those accused of market abuse under section 123 (that the individual believed, on reasonable grounds, that his behaviour did not constitute market abuse, or 
that he took all reasonable steps to avoid engaging in market abuse) were also applicable to the power of the Court under section 129. As with section 123, the burden is on the individual concerned to satisfy the Court of those defences [88] to [94].
     
  • The defence under section 123(2)(a) FSMA (the first of those set out above) requires some positive knowledge and consideration by the party in question of whether the behaviour in issue was, or was not, market abuse. The defence is not available if the party is simply unaware of the relevant behaviour, or if he has made an unquestioning assumption that all is well in the absence of any indication to the contrary [181].
     
  • The power to impose a penalty under section 129 arises simply on the application for an injunction (or restitution order) and is available to the Court even if the relevant order is not granted [97] to [98].
     
  • The question of whether a person’s “behaviour” constituted market abuse under section 118 required no enquiry into the state of mind of that person. Further, the question of whether a corporate actor had engaged in such behaviour was an objective question to be resolved by reference to the law relating to attribution in respect of companies and, in particular, the law of agency. As such a company could not escape liability simply on the basis that the trading was not part of the “governing mind and will” of the company [104] to [114]. The Court pointed out that a different approach could of course apply to other questions that might arise under the statutory scheme eg the section 123(2) defence above which expressly requires consideration of a defendant's state of mind.
     
  • In determining any penalty under section 129, the starting point for the Court should be to consider the relevant DEPP penalty framework that was in existence at the time of commission of the market abuse in question [201]. In this case, the Court followed the staged process in DEPP closely in determining the penalties imposed.
     
  • That the test for granting an injunction under section 381 – that of “reasonable likelihood” - should be interpreted to mean “the risk of repetition of market abuse is a real possibility that cannot sensibly be ignored” [262]. The Court specifically rejected the submission from the Defendants that the test should be the balance of probabilities.
     
  • In determining whether behaviour constitutes market abuse, the Court found that it should take into consideration the FCA's Code of Market Conduct (MAR) in order to ensure consistency between the FCA's and the Court’s approach [132].

 

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