THE FSA AND INSIDER DEALING

22 Oct 2012

Introduction
Insider Dealing prosecutions have a chequered history. Historically, few prosecutions
were brought and even fewer were successful. More recently, no doubt in part
because of the much-publicised banking crisis, there appears to be a much greater
appetite to investigate and prosecute such cases. And it is a fact that the Financial
Services Authority (“FSA”) has been more successful in its strategy which in turn
appears to have further stoked its appetite for such prosecutions.
This paper proposes to set out how the FSA views insider dealing, its powers to
bring criminal prosecutions and possible strategies in defending such prosecutions.
FSA approach to criminal prosecutions
The FSA is now the designated investigator and prosecutor of insider dealing and its
appetite for bringing criminal proceedings has increased significantly in the last three
years. This has been brought about by the recognition, through the Northern Rock
fiasco and the present banking crisis, that “light touch regulation” was no longer the
darling people believed it was.
The FSA now recognises that the high risk practises adopted by individuals and
Institutions which helped to cause the banking crisis must be prevented and one of
the ways to ensure that is to get tough in how it use its enforcement tools.
As a result of the change in emphasis in how the FSA carries out its regulatory tasks,
it has sought to strengthen its Enforcement and Financial Crime Division by
recruiting experienced and specialised criminal investigators and lawyers. Only
recently was the head of the Fraud Prosecution Service recruited as its Chief
Criminal Counsel.
The now outgoing CEO Hector Sants told the City last year:
“There is a view that people are not frightened of the FSA. I can assure you that
this is a view I am determined to correct. People should be very frightened of the
FSA.”
Margaret Cole, Director of the FSA’s Enforcement and Financial Crime Division, in a
speech to the British Bankers Authority in 2009 gave an illuminating insight in to how
the FSA go about investigating this offence:
“At the FSA we decided three or so years ago that we should take stronger
action in relation to markets offences – in particular insider dealing, a crime we
have specific statutory remit to investigate and prosecute…..
Two essential elements in the investigation process for insider dealing and other
markets offences are: access to good intelligence; and the ability to analyse it.
This is a highly specialised area, in which the FSA can claim to have massive
experience, with the Markets Division of the FSA maintaining close liaison with
all the major exchanges, and can follow up suspicious trading activity quickly and
expertly.
The FSA has the tools it needs to prosecute markets cases. Importantly, we
also have the option to take cases down the regulatory market abuse route (an
option which we have used frequently since 2000), and can apply civil recovery
and fines to these cases. Where the offenders are authorised by the FSA, that
authorisation can be removed.
If the decision is taken to prosecute – and I should say we strictly follow the
guidance laid down in the Code for Crown Prosecutors and the FSA
Enforcement Guide, charges of money laundering can be added to charges of
insider dealing where appropriate, and recovery of the proceeds of crime can be
achieved through the confiscation process, backed up by restraint orders.”
It should now be recognised that the FSA does not consider itself a light weight
prosecutor and is determined to use all the investigatory techniques that any other
specialised prosecution agency has available to them. And, with Royal Assent
being given last year to the Coroners and Justice Act, the FSA will soon be able to
make use of the immunity from prosecution and assisting offender powers in Part 2
of the Serious Organised Crime and Police Act 2005.
Insider dealing
There is growing acknowledgment both within the City and the legal establishment
that the public are more interested in what happens in the City and now understand
how decisions taken in the City can impact on their own life. This means that at least
one hurdle in bringing such prosecutions has been eroded as it is felt that juries will
care about such cases and if the case is prosecuted skilfully will understand the
evidence.
It is not difficult to understand why it is necessary to criminalise insider dealing yet
when faced with trying to prosecute it as an offence it continues to be difficult to root
out and prove. The history of insider-dealing prosecutions in the UK has not been a
distinguished one. This is partly because the law is complex and technical and partly
because the “insider” is often not identified so the case is built on circumstantial
evidence.
The offence of insider dealing is set out in Section 52(1) of the Criminal Justice Act
1993 (“CJA”). The elements of the offence have detailed definitions which are
contained both within primary and secondary legislation. In short there are three
ways in which an individual, possessing inside information, can commit an offence:
i. dealing in securities
ii. encouraging another person to deal in securities or
iii. disclosing inside information.
The dealing offence and the encouraging offence both refer to dealing in securities.
The CJA sets out certain circumstances that must exist for the offence to be
committed. The disclosing offence refers to the passing of inside information but it is
not necessary to prove that there has been any dealing as a result of the information.
The defences are either general or specific.
The general defences identified are:
i. He did not at the time expect the dealing to result in a profit attributable to
the fact that the information in question was price-sensitive information in
relation to the securities;
ii. At the time he believed on reasonable grounds that the information had
been disclosed widely enough to ensure that none of those taking part in
the dealing would be prejudiced by not having the information; or
iii. He would have done what he did even if he had not had the information.
In addition Schedule 1 CJA contains separate special defences that are designed to
ensure that legitimate market practices are not hindered. They are:
i. A defence that protects the normal activities of market makers acting in
good faith;
ii. Market information defences;
iii. A price stabilisation defence.
Recent case law relating to the FSA’s powers to bring prosecutions
Recent prosecutions by the FSA have established the following principles;
i. The FSA does not require the consent of the DPP to bring a criminal
prosecution for insider dealing. [Uberoi 2008 EWCA Crim 3181]
ii. The FSA has the power to prosecute offences beyond those referred to in
sections 401 and 402 of FSMA 2000 and, in particular, it has the power to
prosecute offences contrary to sections 327 and 328 of POCA 2002.
[Rollins and McInerney [2009] EWCA Crim 1941]
iii. Where offences form part of the same criminality as offences that the FSA
has undoubted power to prosecute under FSMA 2000, it is sensible that
they should be capable of being included in the same indictment and that
the FSA should be able to act as the single prosecutor instead of having to
bring in another prosecuting authority. The rationale for this decision was
that, on the appellants’ case the FSA would not even be able to prosecute
an offence of conspiracy to commit offences under FSMA 2000, since the
offence of conspiracy, whether under section 1 of the Criminal Law Act
1977 or at common law, falls outside the powers of prosecution expressly
conferred by sections 401 and 402. That would be a highly unsatisfactory
position and cannot have been the legislative intention. [Rollins and
McInerney [2009] EWCA Crim 1941]
iv. It was for the FSA to decide when to prosecute. It was only when an abuse
was plainly shown that a court should intervene. The fact it would have
been reasonable to take another course of action did not necessarily lead
to a conclusion that the course of action it did take amounted to an abuse
of process. [R v McQuoid [2009] EWCA Crim 1301, Wandsworth LBC v
Rashid [2009] EWHC 1844 (Admin)]
Tips and Hints
As the FSA has made it clear it intends to make use of the more extensive
investigative powers it has together with associated money laundering legislation
and the full ambit of the Proceeds of Crime Act 2000. A successful defence will
require not only an intimate knowledge of the insider dealing legislation, but a true
understanding of the extent of the FSA’s investigative powers under FSMA, the uses
they can legitimately be put to and the limits of such powers.
This means it is no longer sufficient to simply have an understanding of the
regulatory ambit of the FSA or of general criminal law, and what is required is to
seek expert advice from the few practitioners who are specialist in this growing area
of the law.
Set out below is an initial checklist to consider when faced with a case involving
insider dealing:
i. the complexities of the legislation and how it relates to every day practices in
the City;
ii. which trading practises are captured by the legislation;
iii. how the specific and general defences operate;
iv. what information is in the public domain
v. what amounts to a “significant affect on price”
vi. what information is “specific or precise”.
Conclusion
So what ever becomes of the FSA in the future, what is certain is in the meantime
the FSA will continues to investigate and prosecute such offences, and any one who
fails to take the FSA seriously should be frightened. To successfully contest
Insider Dealing Prosecutions, the Defence will have to be alert to technical
defences, ensure the powers the FSA have to investigate have not been
abused and ensure those involved in the defence case are expert in their field.

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