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Upper Tribunal overturns FCA decision that fund manager acted without integrity by recklessly assisting a client to commit market abuse

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Sarah Hitchins

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20 April 2015

In Tariq Carrimjee v The Financial Conduct Authority [2015] UKUT 0079 (TCC), 4 March 2015, the Upper Tribunal overturned an FCA decision that a fund manager acted without integrity by recklessly assisting a client to commit market abuse. Instead, the Upper Tribunal concluded that the fund manager acted without due skill, care and diligence.

Mr Carrimjee, an investment adviser, introduced one of his clients, Mr Goenka, to a broker, so that Mr Goenka could trade in the closing auction operated by the London Stock Exchange for certain Global Despositary Receipts (GDRs). Mr Carrimjee made that introduction, participated in discussions about trading and assisted with arrangements for trading, despite suspecting and speculating to others that Mr Goenka may be intending to manipulate the closing prices of certain GDRs.

Mr Goenka abandoned his proposed trading strategy. However, on a later date he did effect orders to trade (through the broker Mr Carrimjee had introduced him to) which artificially inflated the closing price of certain GDRs on that day. The FSA (as it then was) found that Mr Goenka’s trading amounted to market abuse and that it had allowed him to avoid a trading loss of just over USD 3 million under the terms of a separate structured product he held.

FSA findings

The FSA found that, as a result of his conduct in relation to Mr Goenka, Mr Carrimjee had failed to act with integrity in breach of Principle 1 of the Statements of Principle and Code of Practice for Approved Persons (APER). The FSA also proposed to withdraw Mr Carrimjee’s approved person status, impose a prohibition order on him and fine him GBP 89,004 Reference to the Upper Tribunal

Mr Carrimjee disputed the FSA’s findings and referred his case to the Upper Tribunal (Tax and Chancery Chamber). In considering this case, the Upper Tribunal decided that it needed to determine the following four issues.

Issue 1: Did Mr Carrimjee’s conduct demonstrate a lack of integrity?

The conduct and evidence that led to the FSA alleging that Mr Carrimjee had acted without integrity in breach of APER Principle 1 was broadly the same as the conduct that formed the basis of the FSA’s case against the broker who, in a separate investigation, the FSA found had acted without due skill, care and diligence in breach of APER Principle 2.

Mr Carrimjee argued before the Upper Tribunal that the FCA (as it had become) has a public law duty to act rationally. He submitted that the FCA should treat like cases alike, meaning that it should apply the same disciplinary approach consistently to all whom it regulates and it could not advance inconsistent factual positions in different proceedings. As such, Mr Carrimjee submitted that the FCA’s case against him directly conflicted with the findings it had made in relation to the broker and that this was untenable as a matter of evidence.

The Upper Tribunal emphasised that it had to assess Mr Carrimjee’s conduct and state of mind according to the evidence presented to it in this case. On the facts, the Upper Tribunal found that Mr Carrimjee was not aware of, and did not suspect, an intention on the part of Mr Goenka to manipulate the price of certain GDRs. As a result, the Upper Tribunal found that Mr Carrimjee had not failed to act without integrity in breach of APER Principle 1.

Issue 2: Did Mr Carrimjee’s conduct demonstrate a failure to act with due skill, care and diligence?

The Upper Tribunal then turned to consider whether Mr Carrimjee’s conduct had demonstrated a failure to act with due skill, care and diligence in breach of APER Principle 2.

The Upper Tribunal found that Mr Carrimjee had breached APER Principle 2 on the basis that he did not react appropriately to various factors and warning signs that were apparent to him during his dealings with Mr Goenka, specifically the risk that was apparent from his dealings with Mr Goenka that he might have been intending to engage in market manipulation.

Issue 3: What financial penalty should be imposed on Mr Carrimjee?

The Upper Tribunal emphasised that a significant financial penalty should be imposed on Mr Carrimjee so as to act as a deterrent to both Mr Carimjee from committing further breaches in the future, as well as a deterrent to others. Mr Carrimjee did not dispute this principle, but argued that the penalty proposed by the FCA on the basis that he had acted without integrity and breached APER Principle 1 was excessive.

The Upper Tribunal was critical of the way in which the FCA had calculated Mr Carrimjee’s financial penalty (particularly, the way in which the FCA had tried to increase the final figure). However, notwithstanding these comments the Upper Tribunal ruled that the financial penalty calculated by the FCA was appropriate.

Issue 4: Further directions in relation to the FCA’s proposal to remove Mr Carrimjee’s approval and impose a prohibition order on him.

As the Upper Tribunal found that the FCA had not made out its case that Mr Carrimjee acted without integrity, the Upper Tribunal remitted this matter to the FCA with a direction to reconsider its proposal to remove Mr Carrimjee’s authorisation and impose a prohibition order on him. In doing so, the Upper Tribunal noted that it is relatively rare for the FCA to withdraw a person’s approved person status and impose a prohibition order in cases where individuals have failed to act with due skill, care and diligence on one occasion. The Upper Tribunal stated that this factor, as well as the treatment of the broker (who did not have her approved persons status removed or a prohibition order imposed on her) in relation to this matter, suggests that it would be irrational and disproportionate if the FCA withdrew Mr Carrimjee’s approval and imposed a prohibition order on him.

COMMENT 

The decision of the Upper Tribunal reinforces the importance of approved persons remaining alive to the risk of market abuse and escalating any concerns that they have in an appropriate and timely manner.

Although previous FCA and FSA decisions have no official precedent value, the Upper Tribunal’s decision in this case emphasises the importance of the FCA being seen to take a consistent approach towards similar cases which rely on broadly the same evidence.

However, these comments are likely only to be of limited use to subjects of FCA enforcement investigations who want to argue that they should be treated the same as others who are being investigated for similar conduct in relation to the same matter. This is because subjects very rarely know what, if any, action the FCA is proposing to take against others before the FCA’s findings are published and it is too late to challenge them. As a result, although subjects of enforcement investigations may remind the  FCA of its public duty to act rationally and be consistent in its approach to taking enforcement action, only if subjects of enforcement investigations refer their matters to the Upper Tribunal and the FCA’s proposed findings are laid out in public may such arguments be made to their full effect.

This article first appeared on Practical Law and is published with the permission of the publishers.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.