An innocent crime? FSA's fine for market abuse halved by Upper Tribunal

02 February 2011

The Upper Tribunal has ruled that the FSA was too harsh when fining a former banker for market abuse.

Despite agreeing that market abuse occurred in contravention of s.118 FSMA and rejecting the 'reasonable grounds' defence under s.123 FSMA, the Tribunal accepted there had been no 'deliberate or premeditated deceit'. 

David Massey, a former corporate finance executive at Zimmerman Adams International, was found guilty of engaging in market abuse when he short sold 2.5 million new shares in Eicom plc based on inside knowledge he had acquired concerning the availability of discounted shares.  In the December 2009 Decision Notice, the FSA originally imposed a penalty of £281,474 and made a prohibition order preventing him from performing any functions relating to regulated activities.  After appealing the verdict, the Tribunal almost halved the penalty to £150,000.

In its decision, the Tribunal found that Mr Massey did not deliberately trade "knowing full well that he was committing market abuse, [or] that he was afterwards deliberately deceitful about the circumstances of the transaction."  The Tribunal emphasised that their view of the case was less serious than the view taken by the FSA in the Decision Notice.  They thought "he was (rightly) concerned about whether he was entitled to do what he did, but by a process of wishful thinking persuaded himself on inadequate grounds that he was so entitled".  The Tribunal considered the appropriate penalty to be the amount of profit made by Mr Massey, plus 50%.  The Tribunal said that its decision had nothing to do with the fact that the FSA's penalty was in excess of Mr Massey's financial means and criticised his attitude in supplying the FSA with verifiable financial information as "remarkably uncooperative."

Furthermore, the Tribunal added that although the prohibition order was justified, it should not be regarded as a lifetime ban.  Mr Massey may be able to work within financial services in the future if he can provide evidence that he has been rehabilitated as a fit and proper person to perform regulated activities.  One wonders how he might achieve this given the comments from Margaret Cole, the FSA managing director of enforcement and financial crime, who said:

"Massey’s actions were unacceptable…Massey used the trust invested in him by both parties to create the opportunity to trade on the basis of inside information and he distorted the truth to hide his actions, profiting at the expense of other market users. This type of conduct threatens the integrity of the market and will not be tolerated by the FSA."

This case creates yet more uncertainty about the boundaries between criminal conduct and civil breaches and between dishonesty and recklessness.  I wrote recently about the confusion that could result when considering the insurance of regulatory defence costs arising from a case involving a lack of integrity but no dishonesty (see my article here).  The common law has grappled with these issues for decades and has yet to produce settled answers.  It looks like the financial services sector is planning to go through the same process for its parallel jurisdiction.

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