Market abuse can take a number of forms, including the improper disclosure of inside information and the dissemination of misleading information. Recent action by the Financial Services Authority (FSA) explores what information counts as "inside information" and, in a second case, illustrates the personal consequences for company directors of allowing misleading information to be published. The cases demonstrate a hard line approach from the FSA who are looking to deliver a message that market abuse will not be tolerated in any form. It has advisers and main board and subsidiary directors in its sights, as well as companies.

Improper disclosure of inside information

The FSA recently took action against Mr Hannam, a senior banker at J.P. Morgan Cazenove. Mr Hannam was a key adviser to Heritage Oil Plc ("Heritage"), a listed company engaged in oil exploration.

In September 2008, Mr Hannam sent an email to one of his contacts (who represented a company interested in investing in companies like Heritage), disclosing that Heritage was in discussions with a potential acquirer. This was not generally known at the time and was likely to affect the share price once it became known. It was therefore inside information.

Mr Hannam argued that the information had already been disclosed to his contact by the CEO of Heritage, and that it is not possible to disclose information to a person who is already aware of it. The FSA disagreed, stating that even if the information is the same, the mere fact that another person has stated it may lend credence to its veracity. Further, it may carry more weight depending on who discloses it.

In a short postscript to a second email in October 2008, Mr Hannam told his contact that Heritage "has just found oil and it is looking good". This again was information likely to have a positive effect on Heritage's share price and satisfied the definition of inside information.

The FSA acknowledged that Mr Hannam did not set out to commit market abuse, had acted in Heritage's interests and with its consent when making the disclosures to his contact and had not made a financial gain from his disclosures. However, the FSA imposed a fine of £450,000, in view of his experience, seniority and level of influence, and the need for credible deterrence of such behaviour. Mr Hannam has appealed the decision to the Upper Tribunal.

Click here for the Decision Notice for Mr Hannam.

Dissemination of misleading information

Cattles plc ("Cattles") was a subprime lender, most of whose business was conducted through a subsidiary, Welcome Financial Services Limited ("Welcome").

Cattles' 2007 accounts were required to comply with International Financial Reporting Standard 7 for the first time, but they failed to do so. This meant the accounts showed a pre-tax profit of £165.2 million rather than a pre-tax loss of £96.5 million. The misleading figures were subsequently repeated in a rights issue prospectus and market announcements.

Cattles argued that its finance director had breached his duties and that it would be unfair for his misconduct to be attributed to the company. The FSA disagreed.

In publishing the misleading 2007 accounts and the rights issue prospectus, Cattles disseminated information giving a false and misleading impression to the market as to the value of its shares in circumstances where it could reasonably be expected to have knowledge that the information was false or misleading. It, therefore, engaged in market abuse.

Cattles also failed to take reasonable care to ensure that information it made available to the market was not misleading, false or deceptive and did not omit anything likely to affect the import of the information. It failed to act with integrity towards holders and potential holders of its listed equity securities and failed to communicate information to holders and potential holders of its listed equity securities in such a way as to avoid the creation or continuation of a false market in such listed equity securities. These were all breaches of the Listing Rules applicable to Cattles as a premium listed company.

The FSA also found that the subsidiary, Welcome, had committed market abuse. It had approved its own 2007 accounts knowing they contained information which would be disseminated to the market in the Cattles group accounts. Welcome, as a financial services company authorised and regulated by the FSA, was also found to have failed to comply with Principle 3 (management and control) of the FSA's Principles for Businesses.

Both Cattles and Welcome were publicly censured by the FSA and only avoided substantial financial penalties as they are no longer going concerns.

The FSA also took action against individual directors, including directors of the subsidiary.

Cattles' finance director was found to have personally engaged in market abuse by approving and signing off the Cattles accounts with a view to publication. He was also knowingly concerned in Cattles' breaches of the Listing Rules. He was fined £400,000, reduced from £750,000 as this would have caused him serious financial hardship.

Welcome's managing and finance directors were also found to have committed market abuse, by approving Welcome's 2007 accounts in the knowledge that the information in them would be disseminated to the market. In addition, both were knowingly concerned in Welcome's failure to comply with Principle 3 (Management and control) of the FSA's Principles for Businesses. Both would have been fined £400,000, but the penalties were reduced to £100,000 for the managing director and £200,000 for the finance director on grounds of financial hardship.

The FSA also imposed a prohibition order prohibiting all three directors from performing any function in relation to any regulated activity, on the grounds that they are not fit and proper persons as their conduct demonstrated a lack of integrity.

The managing director of the subsidiary has appealed the FSA's decision to the Upper Tribunal.

Click here for the Final Notice for Cattles and here for Welcome.

Click here for the Final Notice for the Group Finance Director and here for Welcome's Finance Director.

Click here for the Decision Notice for Welcome's Managing Director.

Contact us

For further information, please contact:

Danielle Harris
Professional Support Lawyer
020 7002 8542
danielle.harris@mms.co.uk

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