Market Abuse: Acts without an 'actuating purpose'

29/04/2010

On 22 April 2010, market makers Winterflood Securities Limited (Winterflood) and two of its traders Stephan Sotiriou and Jason Robins (together, the Appellants) lost their appeal against the Financial Services Authority (FSA) in the Court of Appeal and were fined £ 4,000,000, £200,000 and £50,000 respectively. They were also made to pay FSA's costs of the appeal of £52,500.

Winterflood was involved as the primary market maker in an illegal share ramping scheme relating to the shares of AIM-listed Fundamental-E Investments Plc (the Shares). The scheme involved trading massive volumes of the Shares through Winterflood who, in facilitating rollover trades and delayed rollover trades, had the effect of (1) misleading the market as to the supply, price and demand for the Shares, and (2) distorting the market for the Shares. It was alleged that Winterflood continued its highly profitable trading and made approximately £900,000 from trading the Shares without taking steps to ascertain if the trades were genuine. The FSA stated that the Appellants played a pivotal role in the scheme and they should have been aware that there were 'clear and substantial risks of market manipulation' as the trades constituted a 'series of unusual features'.

The Appellants appealed against the decision of the Financial Services and Markets Tribunal (the Tribunal) that market abuse had been committed. The preliminary issue before the Court of Appeal was whether a person or a firm must have had a deliberate intention to distort the market to commit market abuse under the Financial Services and Markets Act 2000. The Tribunal previously decided that no 'actuating purpose' (i.e. a purpose which motivates or incites a person to act) to mislead or distort the market was necessary in order to commit market abuse in the manner alleged in this case. It was not necessary for the FSA to prove a subjective mental element on the part of the Appellants to mislead or distort the market.

The Court found that whilst the relevant provisions in the Code of Market Conduct (the Code) identified specific instances and behaviour with an 'actuating purpose' as market abuse, it was not prepared to accept that those provisions sought to imply that other instances or behaviour did not constitute market abuse where such behaviour fell below the expected standards of the Code. In other words, the FSA did not purport to create a safe harbour 'by default' under the Code. Consequently, the Court dismissed the appeal.

Contact: xiaohanguo@city-law.net

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