Market abuse penalties and restitution

Posted on 26 September 2016

Elizabeth Metliss Considers the Judicial View of Law Firms

15 July 2016

The FCA has issued a Final Notice in the case of Gavin Breeze. Breeze was fined £59,557 (reduced from £85,057 because of a stage 1 settlement discount) and received a public censure.  In many respects, Breeze's case is unremarkable.  However, there are a number of features that are interesting from an enforcement perspective and worth considering in more detail.

Factual Background

Breeze was an experienced director of non-regulated companies.  He had received training on the obligations of those receiving inside information and had been made an insider on a number of previous occasions.  Breeze was a seed investor in MoPowered Group plc, an AIM listed mobile payment software designer, having invested over £800,000 in it.  The following events occurred some years later:

  • On 12 September 2014, Breeze was contacted by the CEO of MoPowered, who informed him that the company intended a private placement at a discount.   After the call, the CEO instructed MoPowered's NOMAD to place Breeze on the insider list. 
  • Also on 12 September, the CEO sent Breeze a presentation regarding the private placement which also included details of MoPowered's (as yet unpublished) interim financial results, showing an increased pre-tax loss.  The presentation stated clearly that in agreeing to receive the slides the reader was agreeing to be an insider and that dealing before the information became public might result in criminal or civil sanction. 
  • Finally on 12 September, Breeze forwarded the presentation onto another shareholder who was not yet an insider. 
  • On 18 September, Breeze was emailed by the CEO who told him that there was a risk of the private placement taking place at an even greater discount (at 5p per share, rather than at 10p per share) unless a further £40,000 could be obtained.  The CEO asked Mr Breeze to provide that additional funding.
  • Shortly after receiving the email, Breeze contacted his broker and told him "Please sell all my MoPowered at any price". He then sent an email to the CEO expressing frustration at the share placing and stating that he would not be participating. 
  • Later in the day, in response to the broker updating him that there was limited liquidity, Breeze said "I would like to sell as much as I can as soon as I can"
  • Ultimately, by 19 November, the broker was only able to sell 10,000 shares of Breeze's 1,273,500 shareholding at 26p per share. 
  • Also on 19 September, MoPowered announced its interim financial results and noted that it proposed a share placement.  MoPowered's share price closed that day at close to 20p per share.
  • On 22 September, MoPowered announced that it had raised around £3.5m through a private placement at 5p per share.   Following this announcement the share price fell from around 20p to around 8p.  Following a call from his broker, Breeze cancelled his order.  The price closed at 7p. 

The FCA determined that Breeze had fallen foul of both s.118(2) and (3) of FSMA (now repealed and replaced by the Market Abuse Regulation) in that he had committed market abuse (inside information) and made an improper disclosure by sending the presentation to another shareholder without checking whether he was an insider.

It appears that Breeze fully co-operated with the FCA from the outset and made a number of key admissions.   Although he did not accept that he traded on the basis of the inside information (rather he said his sell decision was based upon his frustration at his treatment during the placement), he told the FCA in interview that he knew and understood at the time that he had received inside information and that he knew what his obligations were.  He also accepted that whilst he assumed the other shareholder would also be contacted by the CEO in relation to the proposed placement, he should have taken positive steps to establish whether this was the case.  Unusually, he also indicated that he would be willing to pay restitution to the purchaser of the MoPowered shares that he traded. 


There are two points particularly worthy of comment:

  • In its Final Notice, the FCA noted that it considered it "just" that Breeze pay restitution. As noted, this was something that Breeze had volunteered to do.  Whilst the FCA has power to require restitution in certain circumstances (see s.384 FSMA and the Enforcement Guide), the overall justice of the situation is not specifically mentioned in the statute or the guidance.  In fact, the justice of restitution in this case is not obvious.   Whilst it is not clear when the buyer of Breeze's 10,000 shares purchased the stock, it was presumably a commercial decision based on information that was then available to the market.  Whilst the impact of Breeze's selling on the share price is not clear, on both 18 and 19 September 2014 there was liquidity in MoPowered, of which 10,000 shares would have constituted only 13-15% so it is likely that the buyer would always have been able to buy (and suffered from the announcement of the private placement at a discount) had Breeze not sold. 
  • Co-operation Discount - In relation to penalty, as is well known, the FCA adopts a "5-stage" approach, and this is what was applied to Breeze.   Of interest was the FCA's response to Breeze's apparent co-operation.  It took this into account in step 3 and applied a significant 15% discount to the figure at that stage.  This sets a potentially interesting benchmark for future enforcement cases. 

You can read the Final Notice here.

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