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Appeal against sentence in first FSA insider dealing case

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Christopher McQuoid and James Melbourne were the first individuals to be prosecuted by the FSA since it gained powers to prosecute in 2000.

Christopher McQuoid was convicted after trial at Southwark Crown Court of a single count of insider dealing.  He was convicted alongside his father-in-law, James Melbourne.  Christopher McQuoid is a solicitor and was the former General Counsel of TTP Communications Plc.  During the course of his employment, he became aware of insider information about a proposed takeover by Motorola Plc.  He was convicted for having passed the information which came to him on 11 May 2006 to James Melbourne.  James Melbourne purchased just under 154,000 shares in the company at 13 pence per share on 30 May 2006.  The sum paid in total was £20,310.60.  On 1 June 2006, the takeover bid became known to the market.  The price rose to 45 pence per share.  The profit on the purchase of the shares was £48,919.20.  On 1 September 2006, a blank cheque for £24,459.60 (precisely half the amount of the profit) was given to Christopher McQuoid by James Melbourne.  Christopher McQuoid then filled in his own name as the payee and the cheque was paid into his bank account.

Christopher McQuoid was sentenced to eight months imprisonment. He was ordered to pay £30,000 towards the cost of the prosecution and was subject to a £35,000 confiscation order.  James Melbourne was sentenced to eight months imprisonment suspended for 12 months on grounds of age and ill-health. 

Christopher McQuoid appealed against his sentence. The appeal was heard by the Lord Chief Justice who set out guideline principles for sentencing insider dealing. 

Insider dealing

Insider dealing has been an offence in England and Wales since 1980.  The current offence is created in Part V of the Criminal Justice Act 1993 which replaced the earlier offence under the Company Securities (Insider Dealing) Act 1985 which, in turn, replaced similar provisions in sections 63 to 68 of the Companies Act 1980.  The maximum sentence on conviction for this offence is seven years imprisonment.

The appropriacy of an immediate custodial sentence

The Court of Appeal (Court) held that the Judge was right to say that an immediate custodial sentence was necessary, and also that he was right to conclude that there needed to be an element of deterrence in such sentences. 

Prosecution as opposed to regulatory sanction

Christopher McQuoid submitted that his sentence should be reduced because this happened to be a case under consideration by the Financial Services Authority (FSA) when it decided to change policy in relation to whether to proceed by way of prosecution rather than, as before, regulatory enforcement for market abuse.  The appellant was the first; and others, no less culpable than he, were not prosecuted but were dealt with through the regulatory system.  The Court commented:

"those involved in the earlier investigations when a different policy was apparently adopted (and assuming that a different policy was adopted) may have been very fortunate.  But their good fortune cannot immure to the benefit of anyone else."

The Court emphasised that this kind of conduct does not merely contravene regulatory rules. The fact that new legislation enables some insider dealing to be dealt with by means of regulatory or disciplinary process does not mean that the activity ceases to be a criminal offence which is likely to be prosecuted and, if prosecuted, likely in appropriate cases to be met by substantial sentences of imprisonment:

"If there ever was a feeling that insider dealing was a matter to be covered by regulation, that impression should be rapidly dissipated.  The message must be clear: when it is done deliberately, insider dealing is a species of fraud; it is cheating.  Prosecution in open and public court will often and perhaps much more so now than in the past, be appropriate.  Although those who perpetrate the offence may hope, if caught, to escape with regulatory proceedings, they can have no legitimate expectation of avoiding prosecution and sentence."

Relevance of the previous good character of the defendant

Whilst acknowledging that good character is relevant to sentencing, the Court emphasised that individuals are often only in possession of inside information because they are in positions of trust and responsibility. Positions which, because of the high level of trust placed upon the individuals who occupy them, would only be offered to persons of previous good character:

"Those who are entrusted with advance knowledge are entrusted with that knowledge precisely because it is believed that they can be trusted.  When they seek to make a profit out of the knowledge and trust reposed in them or indeed when they do so recklessly, their criminality is not reduced or diminished merely because they are individuals of good character."

Insider dealing as a breach of trust

The approach taken by the Court was to emphasise the breach of trust as the key aggravating factor in Christopher McQuoid's conduct and reference was made to the decision of the Court of Appeal in R v Clark [1998] 2 Cr App R (S)157 (allowing for inflation) and also the Sentencing Guideline Councils' Definitive Guideline: "Theft in Breach of Trust" as being particularly relevant. 

General guidance as to other considerations which may be relevant to the sentencing decisions

The Court identified the following considerations as relevant:

  1. The nature of defendant's employment or retainer, or involvement in the arrangements which enabled him to participate in the insider dealing of which he is guilty.
  2. The circumstances in which he came into possession of confidential information and the use he made of it.
  3. Whether he behaved recklessly or acted deliberately, and almost inevitably therefore, dishonestly.
  4. The level of planning and sophistication involving his activity, as well as the period of trading and the number of individual trades.
  5. Whether he acted alone or with others and, if so his relatively culpability.
  6. The amount of anticipated or intended financial benefit or (as sometimes happens) loss avoided, as well as the actual benefit (or loss avoided).
  7. Although the absence of any identified victim is not normally a matter giving rise to mitigation, the impact (if any), where proved, on any individual victim.
  8. The impact of the offence on overall public confidence in the integrity of the market; because of its impact on public confidence it is likely that an offence committed jointly by more than one person trusted with confidential information will be more damaging to public confidence than an offence committed in isolation by one person acting on his own.
  9. Age and a guilty plea will always be relevant.  So, to, will good character. 

Conclusion and comment

The Court has emphasised that where there is the availability of regulatory sanction as an alternative to criminal prosecution, there is no legitimate expectation that a regulator will not prosecute in appropriate circumstances. It is very common for the FSA to appoint investigators to investigate conduct that falls both within the criminal offence of insider dealing and market abuse (which is a civil or regulatory contravention, and for which the maximum penalty is a financial penalty and in the case of an approved person, prohibition). Individuals will often offer to cooperate with an investigation in the hope that the FSA will accept the imposition of a regulatory sanction.

This decision is an endorsement of the FSA's policy to pursue criminal prosecution in cases of a serious breach of trust.  However, the analogy of insider dealing with fraud in breach of trust will make it more difficult for the FSA to justify regulatory sanctions where an individual is in a position of trust and confidence.

Reproduced from PLC Financial Services with the permission of the publishers.  For further information contact Arnondo Chakrabarti or visit or call 0207 202 1200.