FCA fines individual for committing market abuse based on information provided by a third party

We consider here the FCA's enforcement action against Kenneth Carver for committing market abuse (insider dealing) in breach of section 118(2) of the Financial Services and Markets Act 2000 (FSMA) when purchasing shares on the basis of inside information provided to him by his friend, Ryan Willmott. The FCA took separate action against Mr Willmott, who pleaded guilty to the criminal offence of insider dealing under sections 52(1) and 52(2)(b) of the Criminal Justice Act 1993 (CJA 1993).

Background

In April and May 2012, CGI Group Inc engaged in discussions to purchase Logica Plc (target). The target was a company listed on the London Stock Exchange and was part of the FTSE 250 Index. In his capacity as an employee of the target, Mr Willmott was part of the project team working on the acquisition of the target by CGI Group Inc (takeover) and had been added to the official insider list for the takeover.

Facts

Discussion between Mr Carver and Mr Willmott

After retiring from his job as an accountant, Mr Carver had supplemented his income by regularly trading shares in large UK listed companies using an online dealing account. Mr Carver's friend, Mr Willmott, was aware of the fact that he had, and used, an online dealing account.

On the evening of 28 May 2012 (three days before the takeover was announced), Mr Willmott visited Mr Carver at his home. During this meeting, Mr Willmott informed Mr Carver of the impending takeover and suggested that it was an opportunity for Mr Carver to make a profit by trading in the target's shares. Mr Willmott told Mr Carver the likely target share price for the takeover and the likely timing of the announcement relating to the takeover.

On Mr Carver's account of events, he was aware that Mr Willmott was an insider relating to the proposed takeover and that the information provided to him by Mr Willmott was not publicly available. Mr Carver also told the FCA that he immediately identified that, if he traded in the target's shares as Mr Willmott had suggested, there was a risk that his conduct would amount to insider trading.

On the basis that Mr Willmott had provided the inside information about the takeover to him, Mr Carver agreed to use his own money to purchase shares in the target to the value of £10,000 on behalf of Mr Willmott and to give Mr Willmott any profit made from those shares.

Trading the shares

The day after his discussion with Mr Willmott, and two days before the takeover was announced, Mr Carver liquidated all of his other trading positions and used these funds to purchase shares in the target. Mr Carver purchased 62,000 shares in the target with a value of £42,522.70 (shares). £10,000 of the shares were purchased in accordance with Mr Carver's agreement with Mr Willmott and the remaining £32,552.70 of the shares were purchased by Mr Carver for himself. This investment by Mr Carver was the single biggest trade he had undertaken using his online trading account and represented substantially all of his savings. Shortly after he traded, Mr Carver confirmed to Mr Willmott that he had purchased the shares.

At 7.00am on 31 May 2012, the takeover was announced. The target's share price rose by 59.8% following this announcement. Shortly afterwards on the same day (at 8.06am and 8.07am) Mr Carver sold the shares, making a total profit of £24,206.70. Mr Carver telephoned Mr Willmott immediately upon selling the shares.

Mr Carver subsequently paid £6,000 to a third party bank account for the benefit of Mr Willmott. This sum represented the approximate profits that Mr Carver had made on the £10,000 of shares he had bought and sold on behalf of Mr Willmott. Mr Carver retained the remaining profits of £18,206.70.

Decision

The FCA's findings against Mr Carver

The FCA found that Mr Carver had committed market abuse in breach of section 118(2) of the Financial Services and Markets Act 2000 (FSMA). Section 118(2) prohibits an insider dealing or attempting to deal in a qualifying investment or related investment on the basis of inside information relating to the investment in question.

In particular, the FCA concluded that Mr Carver was an insider for the purposes of section 118(2) of FSMA (as defined in section 118B(e) of FSMA) as a result of him acquiring inside information from Mr Willmott. In addition, the FCA concluded that Mr Carver knew or could reasonably be expected to have known that the information he received from Mr Willmott was inside information because:

• Mr Carver knew that Mr Willmott was an employee of the target.
• Mr Willmott paid an unusual visit to Mr Carver's house specifically to inform him about the takeover and the opportunity for him to make a profit by trading in its shares.
• Mr Willmott asked Mr Carver to trade on his behalf and did not provide funds for Mr Carver to do so.
• Mr Carver immediately identified the risk of insider dealing, but did not take independent steps to confirm whether the information provided to him by Mr Willmott was inside information and whether he could legitimately trade on the basis of that information.
• Mr Carver knew that the information provided to him by Mr Willmott related to a prospective and imminent takeover and that Mr Willmott was "absolutely certain" that the announcement of this transaction would increase the target's share price.

Section 123(2) of FSMA states that the FCA may not impose a penalty for market abuse if an individual either believed, on all reasonable grounds, that his behaviour did not constitute market abuse, or took all reasonable precautions and exercised all due diligence to avoid behaving in a way which constituted market abuse.

The FCA was not satisfied that these circumstances applied in light of Mr Carver's conduct, especially given the fact that it found that Mr Carver had recognised the risk of insider trading, but had not taken reasonable steps to ascertain whether the information provided to him by Mr Willmott was inside information and whether he could legitimately trade on the basis of that information.

Sanction imposed on Mr Carver

The FCA fined Mr Carver £35,212. However, had Mr Carver not been able to demonstrate that a higher financial penalty would have caused him serious financial hardship, the FCA would have imposed a financial penalty of £122,212 on him. When calculating Mr Carver's financial penalty, the FCA also took into account the fact that Mr Carver had provided significant co-operation in relation to its investigation and that he had provided a full account of events at an early stage.

Action taken against Mr Willmott

Prior to the publication of the FCA's enforcement action against Mr Carver, Mr Willmott pleaded guilty to three counts of the criminal offence of insider dealing under the Criminal Justice Act 1993 (CJA 1993) in connection with this matter. In addition to disclosing information about the takeover to Mr Carver, Mr Willmott had also set up an online trading account in the name of a former girlfriend to carry out additional trading for his own benefit in the target's shares. On 27 March 2015, Mr Willmott was sentenced to ten months' imprisonment for his conduct.

Comment

The FCA's action against Mr Carver demonstrates its willingness to dedicate significant time and resources to taking action against individuals for market abuse, even when the sums of money involved are relatively small (the profits made by Mr Carver as a result of his trading came to a total of £24,206.70). The FCA’s commitment to its ongoing work to take action against firms and individuals for market abuse was listed as one of the FCA’s key priorities in its Business Plan for 2015/16.

The FCA's action against Mr Carver and Mr Willmott in relation to this matter also highlights the interaction between the civil market abuse regime in FSMA and the criminal insider dealing regime in the CJA 1993. The FCA has not announced its rationale for taking criminal action against Mr Willmott and civil action against Mr Carver. However, given the higher standard of proof for criminal actions, it is possible that the FCA decided that it may not be able to convince a jury beyond all reasonable doubts that Mr Carver committed insider dealing under the CJA 1993. In addition, the final notice issued to Mr Carver emphasises the significant co-operation that he provided in relation to the FCA's investigation into him and Mr Willmott. It is possible that this co-operation also played a part in the FCA's decision to take civil, as opposed to criminal, action against Mr Carver.

Decision

FCA: Final notice: Kenneth George Carver (dated 30 March 2015). This article first appeared on www.practicallaw.com and is published with the permission of the publishers.