Market abuse and insider dealing are the related concepts by which individuals or companies use market sensitive inside information to manipulate the market.
While insider dealing is a crime under the Criminal Justice Act 1933, market abuse comprises a range of behaviours and is more loosely defined under civil, rather than criminal, law.
The maximum punishment for anyone found guilty of the crime of insider dealing is seven years imprisonment. No one can be imprisoned for breaching civil law, but anyone found liable of market abuse offences can face unlimited fines.
The implications for any individual or organisation accused either offence are serious. Not only are the potential punishments severe, but the prospect of mounting an effective defence of what are usually highly complex allegations can be daunting.
Market abuse is governed in the UK by the Market Abuse Regulations (MAR), which came into force in July 2016. MAR is overseen by the Financial Conduct Authority (FCA), which has investigatory and enforcement powers against individuals and organisations for alleged breaches.
The MAR proscribes three specific behaviours, any one of which can, on its own, comprise a breach. The three behaviours are:
This is a relatively broadly drawn offence that captures the following four activities:
This offence arises where an individual or company possesses “inside information” and discloses that information to any other person, except where the disclosure is made in the normal exercise of their employment, profession or duties. An exemption to the offence is where inside information is disclosed in the course of a “market sounding”, which is a communication of information, prior to the announcement of a transaction, to gauge the interest of potential investors.
There is both a civil and criminal offence of insider dealing.
The civil offence of insider dealing is where a person possesses inside information and uses that information by acquiring or disposing of (for his/her own account or for the account of a third party), directly or indirectly, financial instruments to which that information relate.
The criminal offence of insider dealing, meanwhile, prohibits a person from dealing in price-affected securities when in possession of inside information; encouraging another to dealing in price-affected securities when in possession of inside information; or disclosing inside information otherwise than in the proper performance of his employment, office or profession.
It is significant that definition of ‘inside information’ differs between the criminal and civil offences. While ‘inside information’ under the civil definition covers a variety of categories of information, the criminal definition is much more focussed. Indeed, the criminal law definition covers just one category of information: that which relates to particular securities or to a particular issuer(s).
The FCA has secured a number of headline-grabbing criminal convictions for insider dealing, including Operation Tabernula, which resulted in two convictions with sentences of 4.5 and 3.5 years imprisonment and agreed confiscation orders totalling £1.7 million. It was heralded by the FCA as demonstrating its “capability and determination to root out this kind of abuse and ensure [the] market and the investing public are properly protected”.
An FCA investigation into suspected market abuse or insider dealing may be triggered as a result of one of the following: a suspicious transaction and order report; monitoring carried out by the FCA; or information being reported to the FCA from another source.
The FCA will initially embark on gathering preliminary evidence and the FCA’s Enforcement and Market Oversight division will decide whether to commence a formal investigation. If so, then a notice of appointment of investigators will be issued to the relevant firm or individual, which may be the first time that the individual/firm in question is aware of the investigation.
These investigations are not quick with the investigation stage itself typically lasting at least one to two years (sometimes longer), and with the FCA facing a mounting backlog of open investigations, these timeframes will unfortunately only increase. Once the investigation has concluded, the FCA makes its own decision as to whether or not there has been serious misconduct, and if the matter is to be contested then it must be referred to a separate “decision maker”, most commonly the Regulatory Decisions Committee (RDC).
The fact that the FCA has the power to bring both civil actions and launch criminal prosecutions for insider dealing has led to the rise in so-called ‘dual track’ investigations.
This is when the agency embarks on an investigation without first narrowing the scope of the investigation to a criminal or civil breach. It will conduct an open investigation and make an assessment based on the best admissible evidence as to which route to pursue.
The impact of these ‘dual track’ investigations is potentially very serious. Differences in the civil and criminal legal frameworks on matters such as disclosure and interviews means there is a danger that an individual may, in a desire to assist the FCA with its inquiries, inadvertently harm their own case in the long-run.
Anyone who is caught up in a dual track investigation should seek immediate expert legal advice.
Hickman & Rose has extensive experience of acting for individuals facing accusations of market abuse and insider dealing. Our lawyers have conjoined specialisms in both regulatory and criminal law and can develop a defence strategy that takes into account the unique strategic considerations at play should the FCA pursue a ‘dual track’ investigation.
Where the FCA pursues a regulatory action we have experience of acting throughout the entire lifecycle of the case, from compelled interviews, negotiating settlements through to contesting findings before the RDC. We have similarly advised many individuals facing criminal allegations by the FCA, and will work closely alongside our clients to find the best possible resolution in the circumstances.