FCA fines and bans financial adviser for committing market abuse
10 June 2016
In this decision report we consider the FCA's final notice issued to Mark Samuel Taylor on 5 May 2016. Mr Taylor was fined £36,285 (reduced from £78,819 on the grounds of serious financial hardship) and banned from performing any function in relation to any regulated activity in the future for committing market abuse (insider trading) contrary to section 118(2) of the Financial Services and Markets Act 2000 (FSMA).
Mr Taylor was a financial adviser. He also occasionally traded shares for his own account using a broker, using tips from brokers and wider research from public sources. The trades that Mr Taylor did for his personal account tended to be for between £1,000 to £3,000.
The wealth management firm that employed Mr Taylor, Towry Limited (Towry), had provided its employees, including Mr Taylor, with information about personal account dealing as well as market abuse and insider trading. Mr Taylor claimed that he did not recall reviewing this information during his employment with Towry, nor did he recall being made aware of a personal account dealing policy that applied to him. However, Mr Taylor did admit that he understood the definition of "inside information" and was aware that trading while in possession of such information was prohibited by law.
On 2 February 2015, Towry made an offer to acquire Ashcourt Rowan Plc (Ashcourt) for £2.70 per share. Ashcourt was a wealth management company and was listed in the London Stock Exchange's AIM market. Discussions between Towry and Ashcourt continued without a deal being finalised. During this time, Ashcourt's share price increased.
On 12 March 2015, before any public announcement was made, the CEO of Towry sent an email to all of its employees, including Mr Taylor. The email stated that Towry had increased its offer for Ashcourt to £3.49 per share. Seven minutes after sending this email, the CEO of Towry attempted to recall the email. Shortly afterwards, the CEO sent a further email to all employees stating that the increased offer price for Ashcourt "is not public information yet" and warning employees not to act on the information because to do so would "potentially [be] insider trading".
Just under two hours after the CEO's emails, Towry issued a public announcement that it had made a revised offer for Ashcourt had been made at £3.49 per share. Fifteen minutes later, the CEO emailed all Towry employees confirming that this announcement had been made to the market.
Mr Taylor was away from Towry's office until 10.55 on the morning of 12 March 2015. Mr Taylor confirmed to the FCA that he had read the emails from Towry's CEO about Towry increasing its offer for Ashcourt to £3.49 per share, that this information was not yet public and employees should not act on this information as doing so may constitute insider trading.
Notwithstanding this, shortly after receiving these emails Mr Taylor used his online personal trading account to purchase 5,582 shares in Ashcourt at £2.68 per share for a total of £15,011.82. Mr Taylor placed this trade before Towry announced its revised offer for Ashcourt to the market.
A minute after he placed the trade, Mr Taylor's broker emailed him using his work email address to provide him with a contract note in relation to his purchase of Ashcourt shares. Immediately after receiving the contract note, Mr Taylor changed the email address to which future trade confirmations should be sent, so that these would be sent to a personal email address instead. The explanation Mr Taylor gave to the FCA for his actions was that "he panicked, knowing that he had acted improperly".
After seeing Towry's public announcement regarding its revised offer for Ashcourt, Mr Taylor sold the 5,582 shares in Ashcourt that he had purchased for £3.31 each, making a profit of £3,498. The confirmation for this trade was emailed to Mr Taylor's personal email address.
The following day, 13 March 2015, Mr Taylor called his broker and asked whether it was possible to reverse the trades he had done in Ashcourt shares the day before. He told the broker that the reason for his request was that he feared he "may have been guilty or be judged to be guilty of insider trading". The broker informed Mr Taylor that it was not possible for him to reverse the trades and advised Mr Taylor to speak to his Compliance Division.
Despite realising that he may have committed insider trading, Mr Taylor failed to approach Towry's Compliance Division or the FCA with his concerns. He later told the FCA during interview that he "just buried [his] head and hoped the problem would go away".
In the meantime, Mr Taylor's broker reported his trading to the FCA in accordance with its obligation under rule 15.10.2R of the FCA's Supervision manual (SUP) to submit a suspicious transaction report to the FCA without delay when it has reasonable grounds to suspect that a transaction it has arranged or executed with or for a client might constitute market abuse.
The FCA concluded that:
At the relevant time, Ashcourt's shares were traded on AIM. As a result, they constituted "qualifying investments" admitted to trading on a "prescribed market" for the purposes of Article 10 of the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005 (SI 2005/381) (as is required by section 118(1)(a)(i) FSMA).
Mr Taylor's trading took place in the UK, fulfilling the jurisdictional criteria set out in section 118A(1)(a) and section 118A(1)(b)(i) FSMA.
Mr Taylor was an "insider" for the purposes of section 118B(e) FSMA. Mr Taylor became an insider as a result of acquiring inside information from his employer, Towry. Towry's CEO had explicitly flagged to employees that they should not act on the information about Towry's increased offer for Ashcourt as doing so could potentially be insider dealing and Mr Taylor knew that this information was not in the public domain at the time he bought trades in Ashcourt. In addition, Mr Taylor admitted to the FCA that, at the time, he understood that the information disclosed by Towry's CEO about the increased offer for Ashcourt constituted inside information.
The information disclosed by the CEO of Towry to employees, including Mr Taylor, namely that Towry had increased its offer for Ashcourt to £3.49 per share, constituted inside information for the purposes of section 118C FSMA. This is because it:
was precise for the purposes of section 118C(5) FSMA. At the time, Ashcourt's shares were trading at around £2.65, so the information about Towry's revised offer for Ashcourt was specific enough to enable a conclusion to be drawn that the price of Ashcourt shares trading in the market would rise;
was not generally available for the purposes of section 118C(2)(a) FSMA prior to Towry publicly announcing this information. Mr Taylor had understood that this information was not public at the time, as he had read the CEO's email, which stated that the information may not yet be public; and
was likely that, if generally available, the information provided by Towry to its employees, including Mr Taylor, would have had a significant effect on the share price of Ashcourt for the purposes of section 118C(2) and section 118C(6) FSMA. This is because it was the kind of information that a reasonable investor would be likely to use as part of the basis of his investment decisions. The FCA found that there was a real prospect of that information having a significant effect on the price of Ashcourt's shares. For example, following the announcement of Towry's revised offer for Ashcourt, Ashcourt's share price rose from £2.65 to £3.35, an increase of 26%.
As a result, the FCA found that Mr Taylor's decision to trade on 12 March 2015 was taken on the basis of inside information provided by Towry and the information related directly to Ashcourt. In these circumstances, the FCA found that Mr Taylor's conduct constituted market abuse (insider trading) contrary to section 118(2) FSMA, which prohibits an insider from dealing or attempting to deal in a qualifying investment or related investment on the basis of inside information relating to the investment in question.
The FCA followed the five steps set out in section 6.5C of the FCA's Decision Procedure and Penalties Manual (DEPP) to calculate a penalty to impose on Mr Taylor. The FCA fined Mr Taylor £36,285:
This sum included disgorgement of the £3,819 profit that Mr Taylor made from his trading on 12 March 2015.
As Mr Taylor co-operated with the FCA's investigation from the outset and provided a full account of his conduct at an early stage, the financial penalty imposed by the FCA included a 25% discount.
The FCA was originally proposing to fine Mr Taylor £78,819. However, Mr Taylor established that requiring him to pay this financial penalty would cause him serious financial hardship. As a result, the FCA significantly reduced the financial penalty to £36,285.
In addition, the FCA decided to impose a prohibition order on Mr Taylor on the basis that he acted without honesty and integrity by engaging in market abuse.
Over the past few years, the FCA has successfully concluded fewer market abuse cases than it would have perhaps hoped to. In July 2016, FCA Enforcement reported to the FCA's Board that the reason for the low number of concluded market abuse cases was that market abuse had become more complex (and therefore time-consuming) to conclude. Perhaps in an exception to this trend, the FCA's enforcement action against Mr Taylor was concluded just over a year from the date upon which Mr Taylor traded in Ashcourt shares. This timing is perhaps, in part, because Mr Taylor's trading was escalated swiftly to the FCA and Mr Taylor admitted his conduct at an early stage in the FCA's investigation (for which he received a 25% discount on his financial penalty).
The circumstances in which Mr Taylor came into possession of the inside information upon which he traded (that is, the email from Towry's CEO) should act as a warning to firms about the risks associated with the inadvertent dissemination of inside information. In this case, the CEO's mistake appears to have been recognised quite quickly, and steps were taken to emphasise to employees that the information his email contained may constitute inside information and that trading on the basis of such information may constitute insider trading. However, despite these steps being taken, Mr Taylor still decided to trade on the basis of the inside information contained in the CEO's email. In such circumstances, it will be important for firms to demonstrate that not only have they warned employees not to trade on certain information, but that they have also provided employees more generally with training on inside information, market abuse and personal account dealing restrictions and approval processes. The importance of ensuring that employees are aware of such issues was also emphasised in the recent final notice issued to WH Ireland. Based on the wording of Mr Taylor's final notice, it appears that Towry could point to information and training that it had provided to employees on these topics.
This article first appeared in Practical Law and is published with the permission of the publishers.
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