A TYPICAL pub football conversation would not normally include market abuse. However, two big football deals have “sexed up” the issue of insider dealing and highlighted the way the Financial Services Authority (FSA) can now punish those who participate in it.
First, David Beckham’s sale was announced on the Manchester United website before the stock exchange was informed and the FSA has announced an inquiry. Secondly, just before Roman Abramovich’s takeover of Chelsea Football Club, about £600,000 of Chelsea Village shares were sold, culminating in a 15 per cent rise in share price. This, too, has been referred to the FSA and seven people, who could split up to £1 million, may face investigation. It is not suggested that either Abramovich, or Ken Bates, the Chelsea chairman, whose shares he bought, are involved.
Before the Financial Services and Markets Act 2000, the only weapon the authorities had to tackle insider dealing was the criminal law. This was, however, often a blunt instrument. The need to satisfy the burden of proof was frequently insurmountable. Between 1997 and 2000 there were only two successful prosecutions and only two more in 2002. One large case has already been dismissed this year.
To address these difficulties the Government made the FSA responsible for the wider civil market abuse regime brought in by the Act. This complements but not does replace the criminal law. Significantly, the FSA can start an investigation and decide later whether to use the criminal law or the new regime (which involves a lower standard of proof).
The new regime prohibits three forms of behaviour — misuse of information, the creation of a false or misleading impression, and a distortion of the market. If abuse is found, the FSA can impose unlimited fines or issue a public censure. It can also bring restitution proceedings to secure compensation for victims and seek an injunction preventing further abuse.
Advertisement
There are two defences to an accusation of market abuse: that a person believed on reasonable grounds that the behaviour was not market abuse or that he took all reasonable precautions to avoid abuse.
Last year’s Alternative Investment Market flotation of Cyprotex, the biotechnology company, is an example of the regime in operation. One feature of the flotation was that Cyprotex’s principal shareholder, known as “the Plumber”, took out a spread bet staking that the share price would rise after flotation. That bet was itself, in effect, underwritten by an investment bank, which then covered its position by buying most of the shares. The allegation was that nobody could lose and that without the bet the flotation would have failed.
In May 2003, the FSA found that the bet was market abuse and fined three individuals £1.2million. They have taken that decision to the Financial Services and Markets Tribunal. Two important issues are at stake: first, spread betting is not listed as behaviour amounting to market abuse. Secondly, the Plumber has said that he took legal advice — so he could argue that he had reasonable grounds for believing the bet was not market abuse.
It remains to be seen whether the Cyprotex hearing will have a bearing on the Chelsea case. However, as football may discover, this regime is wider than the criminal law and the FSA has lower thresholds to cross. The FSA has had an indifferent start and just as Chelsea FC hopes that Abramovich will change its fortunes, the FSA may hope that this new regime, and even these investigations, will be its turning point.
Advertisement
The author is a solicitor in the criminal and investigations department at Russell Jones & Walker