Injunction success: a demonstration of the 'FCA’s ability and determination to stamp out abusive market practice' says the regulator
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Last week the High Court granted permanent injunctions restraining market abuse and imposed penalties on the defendants in The FCA v Da Vinci Invest Limited and Others. This was the first successful application by the FCA for these particular remedies and illustrates that the pursuit of market abuse cases remains a priority for the regulator, as stated in this year’s Business Plan.
As we reported earlier this week, successful market abuse outcomes have become increasingly rare for the FCA over the past few years.
The FCA’s powers
The FCA has the power to apply for an injunction in relation to market abuse under section 381 of the Financial Services and Markets Act 2000 (FSMA). When making such an application, the FCA can also request that the court considers imposing a penalty (under section 129 FSMA).
So what are the key points from the judgment?
Behaviour constituting market abuse
The judge held that he could take into account the matters set out in the FCA’s Code of Market Conduct when determining whether behaviour constitutes market abuse. He reasoned that this was required to ensure consistency between the FCA and the court in the application of the market abuse regime
The imposition of a penalty under section 129 FSMA
- The court held that it was not an abuse of process for the FCA to apply to the court to impose a financial penalty without having first issued a warning and decision notice under the regulatory regime. The court’s power under section 129 FSMA was completely separate from the requirements for the exercise of the FCA’s own power to impose penalties for market abuse under section 123 FSMA.
- The court also held that section 129 FSMA could be interpreted as though the same restriction applies as to the FCA’s power to impose a penalty under section 123 FSMA, namely that a penalty cannot be imposed if a person 'believed, on reasonable grounds, that his behaviour did not [constitute engaging in market abuse]' or 'took all reasonable precautions and exercised all due diligence to avoid behaving in a way which [constituted engaging in market abuse]'.
- The FCA’s penalty framework as set out in DEPP was the appropriate starting point for the court. However, the judge pointed out that the court was not bound by this framework. In this case the judge generally followed the provisions of DEPP, save for a few minor deviations. Interestingly, the judge imposed higher fines on the individuals, Szabolcs Banya, Gyorgy Szabolcs Brad and Tamas Pornye (the Traders), than the FCA said it might have imposed. The judge considered that the penalties he imposed (£410,000 for Mr Banya and Mr Pornye and £290,000 upon Mr Brad) 'accurately reflect[ed] the true position…that it was the three individuals who were primarily responsible for the wrongdoing in this case'.
Injunction under section 381 FSMA
- The relevant question for the court when considering whether to grant an injunction under section 381 FSMA was whether there was a 'reasonable likelihood' that the market abuse would be repeated and whether it was appropriate to grant an injunction in all the circumstances. In the judge’s opinion, the degree of potential harm caused by market abuse was sufficiently high that an injunction could be granted under section 381 FSMA if the risk of repetition of market abuse was 'a real possibility that cannot sensibly be ignored'.
- In this case, four of the five defendants were based abroad. The trading at issue involved ‘layering’, which created a false impression of supply and demand for the relevant shares contrary to section 118(5) FSMA. There were two periods of trading at issue, the first of which ended due to the termination of an agreement by a bank which provided custodian services necessary to facilitate the Traders’ trading. Notwithstanding this, a replacement for the bank was found and the abusive trading recommenced, only to cease when the court granted the FCA’s application for interim injunctions. Further, the accounts of each of the Traders had been suspended by Swift Trade in July 2007 amidst an investigation into suspected manipulative trading which resulted in the FSA imposing a (although it must be noted that none of the Traders were defendants to the FSA’s proceedings).
- As a result, the judge held that there was a 'reasonable likelihood' that the market abuse would be repeated and granted a final injunction against each of the Defendants. However, he held that each Defendant would be allowed to apply to the court, on written notice to the FCA, to vary or discharge the order should there be a material change in circumstances rendering the continuation of the injunction unnecessary or inappropriate.
The regulator has tended to apply for market abuse injunctions in relation to individuals rather than firms in the past (see FSA v Kahn and FSA v Barnett Michael Alexander), but this case demonstrates that it is equally ready to use these powers against firms. However, in this case the judge found that DVI 'wholly failed to take any adequate steps to ensure that market abuse was not being committed…[and] was reckless in that regard' and it is likely that the FCA will only apply for injunctions against firms in extreme circumstances where there is evidence to suggest reckless behaviour. The court’s desire to ensure that the individuals behind the abusive behaviour were penalised and subject to a penalty higher than that proposed by the FCA suggests that it is individuals, rather than firms, who have most to fear from the use of the FCA’s powers under sections 381 and 129 FSMA.