The prospect of being investigated by the FCA for insider dealing can be extremely daunting. In a blog aimed at suspects, Tom Bushnell sets out the basic steps someone in this invidious situation should take.
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Being accused of insider dealing can be an upsetting and unsettling experience. Investigations can feel intrusive; enquiries can drag on for years; and the consequences, for anyone found culpable, can be very serious indeed.
A central part of the work of its enforcement department, the Financial Conduct Authority (FCA) is experienced at investigating insider dealing and enjoys a fairly (but not entirely) successful record of winning cases.
The FCA has, over recent months, become more focussed on allegations of one-off ‘opportunistic’ insider dealing incidences in which the sums involved may be lower than in previous cases.
The fact that someone is being investigated for insider dealing will almost always come out of the blue: often by a phone call from an FCA investigator or, worst of all, being arrested and taken to a police station for questioning.
While being accused of insider dealing is a worrying experience, conviction is by no means a forgone conclusion. There is much that can be done to defend an unmerited allegation.
This blog outlines the basic steps anyone accused of insider dealing can do to maximise the chances of the investigation being resolved satisfactorily.
1. Understand what insider dealing is, and how the FCA investigates it
Insider dealing (also known as insider trading) is a criminal and civil offence under the Criminal Justice Act 1993 and Market Abuse Regulation respectively. The civil offence is often referred to as ‘market abuse’.
While there are important differences between the criminal and civil offences (more on which below), the essence of both is the same: unlawfully taking advantage of financially sensitive information which is not known to the rest of the market.
The classic example of insider dealing is when a board member at a listed company who knows of confidential plans to acquire another company buys shares in that target company before the public announcement.
Insider dealing is investigated and prosecuted by the FCA. The agency has dedicated teams of investigators and lawyers within its Enforcement and Market Oversight Division.
Being accused of either the civil or the criminal offence of insider dealing can have devastating consequences to an individual’s professional reputation and career, and by extension to their personal lives.
Not only are the consequences of being found culpable serious, but FCA investigations generally move slowly. It is not unknown for FCA investigations into insider dealing to last years.
For the suspect, doing nothing is rarely a good option. In order to achieve a successful resolution, allegations of insider dealing / market abuse should generally be addressed pro-actively – and handled with great care – from the beginning.
2. Know the difference between criminal and civil insider dealing
Anyone facing FCA investigation for insider dealing needs to recognise the similarities – and differences – between the criminal offence of insider dealing and the civil offence of market abuse.
In both criminal and civil law, there are three types of insider dealing. Summarised in non-legal language these are:
- The ‘primary offence’, by which someone who has inside information trades in stocks whilst in possession of that inside information.
- The ‘disclosing offence’, by which someone who has inside information improperly discloses it to another person.
- The ‘encouraging offence’, by which someone with inside information encourages or recommends another person trade on the basis of it (without necessarily passing on the information).
Under both the criminal and civil regimes, there are complex and technical rules concerning what is and isn’t inside information, and what kinds of trading (and on what markets) are caught.
The main differences, in practice, are how they are tried, and the outcomes if a person is found guilty or liable.
Criminal insider dealing is tried in the criminal courts (usually in front of a jury); must be proved ‘beyond reasonable doubt’; and can result in imprisonment for up to ten years and a hefty confiscation order.
The civil offence, by contrast, is determined by the FCA’s independent decision-making tribunal on the ‘balance of probabilities’ and cannot lead to imprisonment (although it can lead to very large financial penalties, amongst other sanctions).
For the individual suspect, it is usually preferable to face market abuse proceedings than criminal prosecution.
The FCA does not need to choose at the outset whether a case will be criminal or civil. Indeed it rarely does. The agency can instead run investigations on a ‘dual track’ basic (i.e. it simultaneously seeks evidence that supports both a criminal and a civil outcome) until the time comes to either choose between them, or take no further action.
3. Research thoroughly to accurately reconstruct events
Insider dealing allegations are often circumstantial. This means that rather than having a piece of ‘smoking gun’ evidence which directly shows inside information being passed from Person A to Person B before Person B trades, the FCA instead has a set of circumstances from which it alleges one can infer the illegal passing of inside information.
Insider dealing allegations are also often made a long time after the event: they can relate to conduct that took place months or even years ago. This conduct (perhaps conversations or meetings between friends) might have been completely innocuous or unremarkable.
As such, an often crucial part of an insider dealing defence strategy involves reconstructing exactly what happened in order to undermine the inferences that the FCA has incorrectly drawn.
There is often an element of ‘thinking outside the box’ to this task. We might look at a client’s phone records, text messages, social media posts, bank statements, travel records, bills, trading history or travel records.
We might also start to search for publicly available information about the stocks in question. Information that is already in the public domain cannot, by definition, be inside information. Thus, finding a published example of the ‘inside’ information in question will provide a complete defence. This remains the case even if a suspect did not see this published information at the time.
Even public information which is less specific, or differs slightly from the ‘inside information’ alleged to have been passed, can provide important evidential context showing that otherwise suspicious trading is in fact entirely innocent.
Likewise, it is never too early for the defence to understand an individual’s trading patterns. The FCA will look for evidence in a trading history which suggests that a person was trading on inside information rather than taking the usual risks inherent in lawful trading. The defence should look for the reverse.
4. Preserve material
It follows from the above that anyone under investigation for insider dealing should preserve any evidence that might, even tangentially, be relevant to the events in question.
This isn’t important only for a successful defence – it is a requirement in law under, amongst other things, section 177(3) of the Financial Services and Markets Act 2000 (‘FSMA’).
In 2020 the FCA prosecuted an individual for deleting his WhatsApp chat history shortly after being arrested on suspicion of insider dealing. Although the individual was acquitted, the FCA’s short press release afterwards threatened ‘We will take action whenever evidence we need is tampered with or destroyed.’
5. Consider what the FCA insider dealing investigation means for your work
After the shock of being informed they are under investigation, many insider dealing suspects will need to consider what this means for their jobs.
If the allegations are said to have taken place at, or through, work, then there is a high chance their employer will already know about the investigation as the FCA is likely to have served compulsory demands for information and documents.
If this has taken place, the FCA will have stressed the confidentiality of their investigation. Employers should therefore limit who learns of it to those within the organisation who need to know.
In any event, some suspects may be required, under the terms of their employment contract or because they are regulated, to tell their employer of an investigation. Similarly, some regulatory bodies require regulated individuals to notify them directly if under investigation. Timely employment or regulatory law advice is sometimes necessary.
One other way a person’s employer can become involved is if the FCA seize data from the employee that concerns the employer: for example, a work phone, or a personal phone which contains work data. Here again, it may be necessary to inform an employer about this.
And if the employee in question receives legal advice on behalf of their employer, then they may need liaise with the FCA’s in-house legal professional privilege (‘LPP’) risk team in order to make sure that the employer’s LPP is protected.
In some cases there can be a silver lining to the involvement of work: some individuals within a company will be covered by directors’ and officers’ insurance (‘D&O insurance’) to pay the legal fees of responding to an investigation. Given the scarcity and paucity of legal aid (especially pre charge), this can be valuable.
6. Prepare fully for the FCA insider dealing interview
A suspect’s first interview with the FCA is an important part of any insider dealing investigation. Assuming a suspect isn’t under arrest, this interview will normally take place at the FCA’s offices in Stratford, east London. The interview itself can vary in length, from an hour or so to more than a day. A suspect has a right to a lawyer to be present with them.
In cases where someone is not under arrest, this interview is voluntary. However, it is normally sensible for a suspect to attend.
Ahead of the interview, the FCA will usually provide some of its evidence by way of pre-interview disclosure. However, this does not always occur, and it sometimes necessary to persuade the FCA to provide adequate disclosure. The recipients of pre-interview disclosure (both client and lawyer) will almost certainly be subject to stringent confidentiality rules prohibiting onward sharing of the material other than in specific circumstances.
The FCA interview will generally be conducted ‘under caution’, something which gives the suspect three main options:
- Answer all questions and provide a full account; or
- Exercise their right to silence (answer ‘no comment’); or
- Provide a prepared statement before or after the interview, but otherwise exercise their right to silence.
There are pros and cons to each of these. The best approach will depend on the specific circumstances of each case.
The FCA’s current practice, following the interview, appears to be only to provide a copy of the interview recording and transcript if an individual is charged with an offence, even though its policy says the suspect ‘will’ always be provided with this.
7. Be patient
The FCA does not move quickly. After interview, a suspect in an insider dealing investigation can often face an uncomfortable wait whilst the agency continues its investigation and follows up any issues raised in the interview.
A tactical question, for the defence, can sometimes be whether or not to chase the FCA: on the one hand, a suspect may want to know where they stand; on the other hand is may not be wise to ‘poke the bear’.
A suspect may get invited back to a further interview. This often happens when the FCA is approaching a decision on what, if any, action to take.
It is possible, after interview, for the suspect’s defence team to write to the FCA to seek to persuade it about the correct outcome in the case. The defence may invite the agency to treat a case as one of civil market abuse, rather than criminal insider dealing. Or it might invite the FCA to drop the case entirely (perhaps because the evidence is weak, and/or it isn’t in the public interest to continue).
8. Don’t panic
Being investigated for insider dealing can be a distressing experience, not only for the individual involved, but also their loved ones. The initial days and weeks after an accusation can be frightening as the suspect struggles to comes to terms with a bewildering (and it may seem open-ended) process.
But there is no reason to panic. With good advice it is possible to understand the investigation; to identify the best strategic steps to take; and to regain some control over what is happening.
Individuals under investigation for insider dealing should also take comfort from the fact that not every FCA investigation ends in criminal prosecution. In fact, it is quite the reverse.
The FCA has limited resources and opens more investigations than it intends to prosecute (indeed, its general enforcement strategy over the last few years has been to view an investigation as an end in itself, rather than having to lead to enforcement action). The right defence, properly presented, can sometimes see the investigation closed without action being taken.
Tom Bushnell is an associate barrister in Hickman & Rose’s Business Crime team. He is an expert in conducting insider dealing cases from investigation to trial, and is currently advising individuals under investigation for insider dealing and market abuse. Prior to joining Hickman & Rose, Tom was at the independent Bar, where he acted in the FCA’s last two major insider dealing prosecutions (defending in FCA v SB and JS, and prosecuting in FCA v Abdel-Malek and Choucair), and advised the FCA on a complex ongoing insider dealing investigation.
