Near-record fines indicate FSA's harsh approach to market abuse

Over the past week, the UK Financial Services Authority (FSA) has enforced near-record fines on individuals involved in market abuse, following the strategy its senior managers laid out in 2011.

On January 25, the FSA fined David Einhorn, owner of prominent US hedge fund Greenlight Capital, and his fund £7.2 million for engaging in market abuse in relation to significant equity fundraising by Punch Taverns in June 2009.

Minutes after a telephone call with Punch's management and broker, where he was informed of an imminent capital-raising, Einhorn gave the order to sell all Greenlight's shares in the company; the fund then avoided losses of approximately £5.8 million when the share price fell as a result.

However, Einhorn had specifically told Punch's broker at Bank of America Merrill Lynch that he did not want to be given confidential information that would prohibit him from trading. In the US this would most likely have been enough to save him from accusations of insider trading, but the FSA has taken a tougher stance.

"The FSA accepted that Einhorn's trading was not deliberate because he did not believe it was inside information. However, this was not a reasonable belief," the regulator said in a press release announcing the fine. "This was a serious case of market abuse by Einhorn and fell below the standards the FSA expects, particularly due to Einhorn's prominent position as president of Greenlight and given his experience in the market."

David McCluskey, a London-based partner at Peters & Peters specialising in business crime litigation, explains the difference between the two approaches.

"The UK's wider definition for market abuse is starting to look like a good-behaviour manual – any conduct below a standard is market abuse, while the US offence looks at it as a negative criterion – conduct only transgresses if it is in breach of particular standards. It's also not quite a straight comparison: the UK still has criminal offences of insider dealing, but the standard of proof required and the various technical defences make obtaining convictions more of a challenge."

Einhorn's individual portion of the fine stands at £3.6 million including disgorgement of financial benefit, and is the second-largest fine ever handed down to an individual by the FSA for market abuse.

The only fine greater was the one issued to Dubai-based investor Rameshkumar Goenka in November 2011 for manipulating share prices: he was fined £6 million.

The FSA's head of enforcement, Margaret Cole, announced a new focus on individual wrongdoing last year, and has since stepped up the level of fines and investigations aimed at cases of market abuse – a pattern followed by regulators elsewhere.

On January 27 – two days after Einhorn's fine was announced – Greenlight Capital's former compliance officer, Alexander Ten-Holter, was fined £130,000 for failing to question and make reasonable enquiries before selling Greenlight's shares in Punch.

At the same time the FSA fined Caspar Agnew, a trading desk director at JP Morgan Cazenove, £65,000 for failing to identify the trade as suspicious and report it to the FSA.

"Compliance professionals and staff on sales and trading desks play a key role in assisting the FSA in detecting and preventing market abuse," says Tracey McDermott, acting director of enforcement and financial crime at the FSA. "Approved persons should be in no doubt as to their responsibilities in this area and the FSA will not hesitate to take tough action where they fall down on these."

Whether this onslaught of enforcement marks a new zero-tolerance stance to market conduct remains to be seen.

"Greenlight was to some extent a case on its own unusual facts, but even the FSA needs to gain the most impact with limited resources," McCluskey says. "In a word, no, this won't spark anything, but the FSA will continue trying to get the most bang for its regulatory buck."