Market abuse – beware the triple-headed regulator
Andrew George explores the High Court’s first encounters with anti-market abuse injunctions and its future implications.
Given the length of the Financial Services and Markets Act 2000 (“FSMA”), it is unsurprising that, even a decade on, some sharp-edged tools still lay unused within the depths of the Financial Services Authority’s regulatory toolkit. As far as market abuse was concerned, two specific, and very different, routes to a desired regulatory outcome have come to be well recognised. The first, and most drastic, that of genuine “criminal” market abuse – normally a prosecution for a misleading statement or practice under s397 of FSMA – brought into existence protocols between the FSA and City of London Police, a genuine criminal angle to the FSA’s Enforcement division, and some notable successes since the initial conviction and imprisonment of two former directors of software firm, AIT, in 2005. Criminal prosecutions however take substantial time and money and (to many decision-makers) the interplay of juries and complex financial facts make their outcome inherently uncertain. There have not been many FSA criminal prosecutions for market abuse. The second, and hitherto more conventional route, has been for the FSA to take “civil market abuse” proceedings through its own RDC and, if the matter is referred, the specialist Tribunal. Since the Tribunal first considered a market abuse case – FSA v Mohammed, again in 2005 – there have been a number of lengthy market abuse hearings before the Tribunal and a number of rulings on important legal issues relating to the offence both by the Tribunal (such as FSA v Jabre) and the Court of Appeal (for example, FSA v Winterflood).
This year, for the first time, however, the FSA has invoked a third procedural avenue for its market abuse proceedings – the Chancery Division of the High Court. Section 381 of FSMA provides this Court with jurisdiction to grant an injunction to prevent market abuse if it is satisfied that (amongst other things), “there is a reasonable likelihood that a person will engage in market abuse.” In FSA v Kahn, Newey J confirmed that this jurisdiction does not only allow the granting of “interim” or “emergency” injunctions but provides the Court with jurisdiction to grant a Final Injunction. The FSA obtained its first such injunction, against Mr Kahn, in May 2011. Moreover, as a result of section 129 of FSMA “the Authority may on an application to the Court under [amongst other things] section 381 request the Court to consider whether the circumstances are such that a penalty should be imposed on the person to whom the application relates.” In June 2011, these powers were invoked for the first time as the FSA obtained a final injunction against Barnett Michael Alexander, and an Order requiring him to pay a £700,00 fine and £322,818 in restitution to firms. This followed the prior grant of an interim injunction and a freezing order in favour of the FSA against Mr Alexander.
In neither of these cases was a full trial necessary. However, they raise the prospect of market abuse trials being heard in the High Court and the potential for the FSA to consider whether, and in what circumstances, the greater formality of the High Court, the absence of “lay” decision-makers and the possibilities of greater speed and publicity,given the absence of the RDC-stage of the process, might make the High Court a venue of choice.
It is presumably likely that the FSA will continue to consider the High Court something of an exceptional forum for market abuse, confined to either serial offenders – Mr Kahn had been made bankrupt by the FSA in 2008, after admitting liability for a previous offence, before committing the further acts of market abuse which led to the Court’s injunction – or to cases where there is a genuine need to obtain an immediate order. However, now that the FSA has started to explore this jurisdiction, the prospect of the Chancery Division, rather than the Tribunal, being the forum for major market abuse hearings (and therefore for commentary on, for example, FSA penalty policy) is very real.
Andrew George appeared as Counsel in
FSA v Mohammed, FSA v Jabre, FSA v Kahn and FSA v Alexander