Hedge funds, Champagne and the pound: what are the legal ramifications of the ‘mini-budget’ conspiracy claims?
5 Oct 2022
Chancellor of the Exchequer Kwasi Kwarteng’s so-called ‘mini-budget’ of 23rd September has resulted in a slew of negative headlines for the UK Government.
One of the most striking stories has been the report that a group of Government-supporting hedge fund managers attended a dinner in the week before the mini-budget’s announcement; and afterwards ‘shorted’ the pound and government bonds (effectively betting their value would fall).
A separate report alleged Mr Kwarteng attended a Champagne reception with hedge fund bosses just hours after his announcement.
The Conservative party chairman Jake Berry has denied that the Chancellor gave details of future fiscal plans to people at the first event.
But Labour MP Tulip Siddiq has urged the Financial Conduct Authority (FCA) to investigate, saying it ‘should investigate any potential wrongdoing, to determine whether it is possible that any leaks or information provided by this Conservative government to their wealthy friends contributed to the collapse of the pound’.
Ms Siddiq’s request has found support on social media, with commentators Alastair Campbell and Gina Miller both suggesting the alleged behaviour may amount to ‘insider trading.’
Are they correct? And would any FCA investigation lead to a prosecution? In this blog, barrister Tom Bushnell, an expert in FCA criminal prosecutions, sets out the law relating to insider dealing.
What is insider dealing?
Insider dealing (also known as insider trading) is an offence contrary to Part V of the Criminal Justice Act (CJA) 1993. It can be committed in three main ways, but at the heart of all three is the knowing possession of ‘inside information.’
Subject to specific defences, anyone who possesses inside information is prohibited from doing any of the following:
- dealing in securities that are ‘price-affected securities’ in relation to the information;
- encouraging another person to deal in those securities.
- disclosing that information (other than in the proper performance of the functions of your employment/office/profession)
Insider dealing is investigated and prosecuted by the FCA. The maximum penalty is ten years imprisonment.
Insider dealing is also a civil or regulatory offence under the Market Abuse Regulation (‘MAR’). It is enforced by the FCA, which can impose a range of sanctions, including significant financial penalties. Whilst the focus of this blogpost is on the criminal offence of insider dealing, it should be noted that the civil regime also incorporates a strict definition of ‘inside information’ (Article 7 MAR).
Are the mini-budget allegations insider dealing?
Whilst the thought of cosy chats between Westminster insiders and hedge fund bosses ahead of lucrative trading activity might sound to the layman to be insider dealing, the criminal offence is very precisely defined.
Under s. 56 of the CJA 1993, inside information is information that:
(a) Relates to particular securities or to a particular issuer of securities or to particular issuers of securities and not to securities generally or to issuers of securities generally;
(b) Is specific or precise
(c) Has not been made public; and
(d) if it were made public would be likely to have a significant effect on the price of any securities.
If we apply the above criteria to what is alleged in this case, we might identify a few problems for any potential prosecution.
1. Did the information relate to particular securities or issuers?
Insider dealing prosecutions usually relate to particular pieces of market activity relating to particular securities or issuers (which can include the UK government and Bank of England). In practice this means it is often as specific as ‘company A is about to announce a takeover of company B.’
Mr Kwarteng’s mini-budget dealt with large scale economic decisions, the likes of which have hitherto not been used as the basis for insider dealing prosecutions. Given that the UK government is an issuer of securities, this would probably not be an insurmountable hurdle for any potential FCA prosecution. But macro-economic decisions by the government are less likely to meet the further elements of the definition of inside information.
2. Was the information specific or precise?
In order to be inside information, the information must be ‘specific or precise.’ Juries are generally left to interpret these terms for themselves, but in any criminal prosecution for insider dealing, the FCA would be required to identify exactly what the specific or precise information was.
As the leading textbook on insider dealing (‘Insider Dealing: Law and Practice’ by Sarah Clarke KC) describes, “If information is viewed on a scale, it would start at one end with innuendo, rumour, hint, and the like, rising to general information in the middle, and at the other end specific or precise information.”
General or nebulous hints about a Chancellor’s macro-economic plans are unlikely to be enough.
3. Was the information not public?
In order for a prosecutor to prove the information was inside information, they must prove a negative, namely that the information was not yet public. In practice, this is done by commissioning market research experts to comb open-source publications (such as newspapers and online chatrooms) for the specific piece of information in question.
Any allegation of insider dealing in relation to the mini-budget would therefore run into two further problems: first, that Westminster is a notoriously leaky ship (and so a recipient of information in advance of the announcement might argue it was already public); and second, it came after a protracted Conservative party leadership contest, in which Liz Truss talked repeatedly about her economic plans. Indeed, supporters of Liz Truss’ leadership rival Rishi Sunak have been quick to point to specific warnings he made in the campaign about the pound being devalued if Ms Truss did what she was planning.
4. Was the information price sensitive?
In order to be inside information, the information must be ‘price sensitive.’ This requires expert evidence, with the question for the expert being a hypothetical one: if the information in question had been released to the market at the time of the alleged offence, would it have had a ‘significant’ effect on the price of any securities? In practice, experts tend to interpret this as meaning an effect which would not otherwise be accounted for by normal market movements. The fact that the price of securities did move dramatically upon an announcement is often good evidence that the information had been price sensitive.
A prosecutor would therefore have to assess to what extent, if any, the market reacted as it did as a consequence of other factors that have been advanced since the mini-budget (such as the invasion of Ukraine or a strong dollar etc.) as opposed to the government’s actions.
What are the prospects of a prosecution in the mini-budget case?
Allegations of insider dealing are taken seriously by the FCA. They are investigated within the Enforcement and Market Oversight Division by specialist investigators, and prosecuted by a group of expert lawyers in the Criminal Prosecutions Team.
These people prefer evidence to theory.
In this case, even if conversations between Government and traders took place (and there is no direct evidence that they did) it is far from certain that what allegedly passed between the parties was inside information as defined in law.
Knowing what little we do about the case now, the technical definition of inside information raises a number of hurdles for a potential prosecutor.
Even if these hurdles were overcome, any potential prosecutor would then need to establish the remaining ingredients of one of the three insider dealing offences. In the case of the primary, trading offence (i.e. in relation to someone who received the inside information then traded with it), this would include establishing that the trading fell within the technical definition of ‘dealing in securities’ in sections 54-55 and schedule 2. On the face of it, shorting the pound would not, but shorting government bonds or FTSE 100 stocks probably would.
How long would an FCA investigation into the mini-budget claims take?
If there were to be investigation into these matters, it would likely last years, not months. The FCA does not undertake vast numbers of insider dealing investigations each year. Between April 2021 and April 2022, it opened just 25 new investigations (of which only seven were criminal).
The agency’s most recent insider dealing prosecution, which is due to be retried in September 2023 (following a jury being unable to reach a verdict earlier this year) concerns trading in summer 2016. As far as this author is aware, this is the FCA’s only insider dealing trial that has been heard in 2022 (a further trial was adjourned as a result of action by the Criminal Bar Association).
If there were an investigation into this matter the outcome would not be expected for some time. However, for now – and based on what has emerged so far – such an investigation seems unlikely. Ms Siddiq and others calling on the FCA to act may be unwise to hold their breath waiting for one.
In the meantime, anyone concerned by the allegations in these media reports might wish to consider whether – if the allegations were to be proven – they call into question the scope of the current insider dealing regime.