THE recent conviction of Malcolm Calvert was the third successful criminal prosecution of insider dealing brought by the FSA and two further such prosecutions are ongoing. Significantly, the first FSA insider dealing criminal prosecution was not until 2008 and it is evident they the regulator is now intent on ramping up criminal prosecutions and have seemingly been given the green light despite legal challenges to its ability to do so.
A criminal prosecution is viewed as being a more effective deterrent than the imposition of a civil penalty and the FSA has more than doubled its number of employees with experience of criminal enforcement. It appears to be committed to criminal prosecutions of insider dealing.
Insider dealing was thought to be difficult to prove on the criminal standard of proof. The classic difficulty was in identifying the source of the information and proving it was inside information. For obvious reasons the source would be wary of coming forward and the FSA has worked with the Attorney General’s office on the introduction of statutory immunity agreements to enable witnesses to be granted immunity from prosecution in return for hard evidence. The FSA has also examined allowing leniency in punishment to take account of assistance a suspect provides it.
In the Calvert case it appears that one of the key issues was whether the jury could be satisfied that Calvert (formerly a partner at Cazenove) was in possession of specific, price sensitive information which he knew to be from an inside source. Significantly the jury were apparently so satisfied in relation to five counts (relating to three companies) despite the prosecution not adducing hard evidence to identify the source or to prove it was inside information as oppose to a hot tip or the application of Calvert’s expertise.
That evidential gap appears to have been bridged by the jury being convinced that, by inference, the information must have been inside information. The evidence before them included the statement of Bertie Hatcher, the man to whom Calvert passed the information and who then made the trades.
The FSA has kept up the momentum. On 23 March six men including Martyn Dodgson (a managing director at Deutsche Bank) and employees of Exane BNP Paribas, US hedge fund Moore Capital and London broker Novum Securities were arrested on suspicion of insider dealing. The FSA joined forces with the Serious Organised Crime Agency to run the operation which involved questioning the suspects and examining phones, computers and documentation.
It is thought that FSA/SOCA investigators are now examining trades that preceded major capital fundraisings by Segro, Barclays and Taylor Wimpey and the trades of 15 firms could be under the microscope to analyse evidence of any suspicious trading to include any trading peaks shortly prior to the capital raisings.
The conviction of Calvert demonstrated the FSA was able to take on a difficult case against a City “name” and succeed. The subsequent raids and ongoing investigations demonstrate the FSA’s intent to proactively unearth and confront insider dealing.
Historically, the SEC in the US was seen to have more teeth than its UK counterpart but with UK legislation arguably casting the net wider in its interpretation of insider dealing the tough approach by the FSA could see the UK becoming the harsher of the two regimes in this arena.