CSA Partners: Compliance Blog

The Telegraph writes that two more individuals connected to US hedge fund Greenlight Capital have been fined over a multi-million pound insider-dealing case.

The European Commission has published its legislative proposals which revise the Market Abuse Directive. The proposed new framework consisting of a Regulation (directly applicable rules) and a Directive aims at:

• adaptation of the EU rules to the new market reality, in particular by extending their scope to financial instruments only traded on new platforms and over-the-counter, as well as adapting rules to new technology
• clarifying that market abuse occurring across both commodity and related derivative markets is prohibited
• reinforcing cooperation between financial and commodity regulators
• introducing tougher and greater harmonisation of sanctions (including criminal sanctions), and
• reducing administrative burdens on small and medium sized issuers.

As for insider lists the Commission has concluded that differences in national laws implementing the MAD have imposed unnecessary administrative burdens on issuers. The Regulation aims to eliminate these by providing that the precise data to be included in such lists should be defined in delegated acts and implementing technical standards adopted by the Commission.

Applying the new market abuse framework of the Regulation in an undifferentiated manner to all SME growth markets may deter issuers on those markets from raising capital on the capital markets. Without prejudice to the objectives of preserving the integrity and transparency of financial markets and of protecting investors, the proposal therefore adapts the market abuse framework to the characteristics and needs of issuers whose financial instruments are admitted to trading on SME growth markets.

The scope and size of the business of those issuers is more restricted and the events giving rise to the need to disclose inside information are typically more limited than those of larger issuers. The Regulation therefore requires those issuers to disclose inside information in a modified and simplified market-specific way. Such inside information may be published by those SME growth markets, on behalf of those issuers, in accordance with a standardised content and format defined in implementing technical standards adopted by the Commission. Those issuers are also exempt, under certain conditions, from the obligation to keep and constantly update insiders’ lists.

The Regulation further clarifies the scope of the reporting obligations in relation to managers’ transactions. These reports serve important purposes by deterring managers from insider trading and providing useful information to the market about the manager’s view on the price movements of the shares of the issuers. The Regulation clarifies that any transaction made by a person exercising discretion on behalf of a manager of an issuer or whereby the manager pledges or lends his shares must also be reported to the competent authorities and be made accessible to the public. Moreover, it introduces a threshold of €20 000, uniform in all Member States, which triggers the obligation to report such manager’s transactions. This higher threshold will contribute also to reducing the administrative burden on SMEs.

The proposal now passes to the European Parliament and the Council for negotiation and adoption. Once adopted the regulation would apply from 24 months after its entry into force.

Relevant links & valuable resources:

• Copy of the press release

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1217&format=HTML&aged=0&language=EN&guiLanguage=en

• Proposal for a Regulation of the European Parliament and of the Council on insider dealing and market manipulation (market abuse)

http://ec.europa.eu/internal_market/securities/docs/abuse/COM_2011_651_en.pdf

• Proposal for a Directive of the European Parliament and of the Council on criminal sanctions for insider dealing and market maniuplation

http://ec.europa.eu/internal_market/securities/docs/abuse/COM_2011_654_en.pdf

• Commission’s Impact Assessment Accompanying the document Proposal for a Regulation on insider dealing market manipulation (market abuse)

http://ec.europa.eu/internal_market/securities/docs/abuse/SEC_2011_1218_en.pdf

• Official FAQ

http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/715&format=HTML&aged=0&language=EN&guiLanguage=en

• Note from Freshfields Bruckhaus Deringer on the review of the Market Abuse Directive

http://www.freshfields.com/go/pdfs/Bank-of-the-Future-MAD-review-note.pdf

New York Times writes about the fallen hedge fund billionaire Raj Rajaratnam received the longest prison sentence ever for insider trading on Thursday, capping an aggressive government campaign that has ensnared dozens and may help deter the illegal use of confidential information on Wall Street.

Judge Richard J. Holwell of Federal District Court in Manhattan sentenced Mr. Rajaratnam, 54, the former head of the Galleon Group hedge fund, to 11 years in prison. A jury convicted Mr. Rajaratnam of securities fraud and conspiracy in May after a two-month trial.

“Insider trading is an assault on the free markets,” said Judge Holwell, who also imposed a $10 million fine and ordered Mr. Rajaratnam to forfeit $53.8 million in ill-gotten profits. “His crimes reflect a virus in our business culture that needs to be eradicated.”

The sentence was a watershed moment in a two-year push by federal prosecutors. Over that period, Preet S. Bharara, the United States attorney in Manhattan, has brought charges against 54 people with insider trading crimes. Of those, 50 have been either pleaded guilty or have been convicted at trial. Three others’ situations are pending, and the fourth is a fugitive.

Yet the crackdown on insider trading — a crime whose victims are not always apparent — has come at a time when many Americans have questioned why authorities have not pursued charges against bank executives over their role in the financial crisis, which still weighs on the economy.

Read the whole story …

The Securities and Exchange Commission today charged a former Goldman, Sachs & Co. employee and his father with insider trading on confidential information about Goldman’s trading strategies and intentions that he learned while working on the firm’s exchange-traded funds (ETF) desk.

The SEC’s Division of Enforcement alleges that Spencer D. Mindlin obtained non-public details about Goldman’s plans to purchase and sell large amounts of securities underlying the SPDR S&P Retail ETF (XRT). He tipped his father Alfred C. Mindlin, a certified public accountant. Father and son then illegally traded in four different securities underlying the XRT with knowledge of massive, market-moving trades in these securities that Goldman would later execute.

The case marks the SEC’s first insider trading enforcement action involving ETFs.

“With his father’s helping hand, Spencer Mindlin exploited his inside knowledge of Goldman’s complex hedging strategies to line his own pockets,” said George S. Canellos, Director of the SEC’s New York Regional Office.

Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Market Abuse Unit, added, “We are aggressively working to identify and prosecute illegal insider trading across multiple markets and derivatives products regardless of the complexity of the trading pattern that we have to unravel in our investigations.”

According to the SEC’s order instituting proceedings against the Mindlins, the insider trading occurred in December 2007 and March 2008. Goldman was the largest institutional holder of the XRT in order to allow its customers to short the XRT. To hedge its long position in the XRT, Goldman shorted the individual securities underlying the XRT.

The SEC’s Division of Enforcement alleges that by virtue of his position on Goldman’s ETF desk, Spencer Mindlin knew Goldman’s current nonpublic position in the XRT and Goldman’s nonpublic plans to trade large amounts of securities underlying the XRT in order to hedge its position in the XRT. Spencer and Alfred Mindlin began purchasing and selling the four individual securities underlying the XRT within months after Spencer Mindlin joined Goldman’s ETF desk. They placed almost all of their trades in a brokerage account in the name of another family member. Spencer Mindlin failed to disclose his and his father’s trading to Goldman.

According to the SEC’s order, Spencer Mindlin learned on multiple occasions about Goldman’s trading intentions through e-mail communications he received shortly before he and his father placed their trades. In one instance when Alfred Mindlin phoned TD Ameritrade to upgrade the family member’s account to allow for the trading of options, he received a call on another line from Spencer Mindlin while on hold with the TD Ameritrade representative. Because the TD Ameritrade call was recorded, Spencer and Alfred Mindlin’s conversation discussing a trade was captured on tape. In later instances, Spencer Mindlin impersonated his father on at least four calls to TD Ameritrade. On one call, he instructed the firm not to execute a trade too early in the day because this would “chew into my profit – my profit on this trade.” The Mindlins obtained at least $57,000 in illicit profits through their insider trading.

The SEC’s Division of Enforcement alleges that by engaging in the misconduct described in the SEC’s order, the Mindlins willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The proceedings will determine what relief, if any, is in the public interest against the Mindlins, including disgorgement of ill-gotten gains, prejudgment interest, financial penalties, and other remedial relief.

According to media-sources the Securities and Exchange Commission has asked credit rating agency Standard & Poor’s to disclose who within its ranks knew of its decision to downgrade US debt before it was announced last week, as part of a preliminary look into potential insider trading, people familiar with the matter say.

The inquiry was made by the SEC’s examination staff, which has oversight of credit rating firms, one person familiar with the matter said. The exam staff can make referrals to the SEC’s enforcement division if it believes any laws have been violated, but the inquiry might not result in a referral.

This person said they were looking at who had the information as a starting point. Allegedly the agency is not aware of a leak from an S&P insider.

Proving someone leaked information about the downgrade, or traded ahead of it, could be challenging. Many traders anticipated the downgrade and bets could occur across numerous securities or currencies without inside information. In a traditional insider trading case, there is often a more predictable correlation between a company’s stock price and a particular development.

The inquiry comes as the SEC has sought to be more pro-active in its oversight responsibilities. The agency launched specialized units within its enforcement division last year and has revised the approach of its examination group after hiring new leadership.

The exam group first gained the ability to inspect credit rating agencies in 2007. Those powers grew following the passage of the Dodd-Frank law last year. The exam group, led by Carlo di Florio, has been working more closely with the enforcement division in its review of registered firms since the SEC reorganized those divisions.

If the investigation results in a case, it would not be the first time government-related information leaked or a rating firm employee was charged with insider trading.

The SEC’s look comes as the Senate banking committee has said it is looking at S&P’s decision.

European financial markets have been very volatile over recent weeks. The developments have raised concerns for securities markets regulators across the European Union. ESMA has been actively monitor-ing the markets over the last few weeks and has been exchanging information with national competent authorities on the functioning of the markets and the market infrastructure.

Given these recent market developments, ESMA wants to emphasise the requirements in the Market Abuse Directive (MAD) referring to the prohibition of the dissemination of information which gives, or is likely to give, false or misleading signals as to financial instruments, including the dissemination of rumours and false or misleading news. European competent authorities will take a firm stance against any behaviour that breaches these requirements and ESMA will support national authorities to act swiftly against any such behaviour which is clearly punishable. While short-selling can be a valid trading strategy, when used in combination with spreading false market rumours this is clearly abusive.

In the area of short-selling regulation, many authorities already have either requirements for the disclo-sure of net short positions and/or bans of certain types of short sales in place2. Recent developments have meant that all competent authorities have reinforced the monitoring of their markets and are keeping their regulatory requirements under review. ESMA has coordinated discussions between the national compe-tent authorities, specifically on the content and timing of any possible additional measures necessary to maintain orderly markets.

Today some authorities have decided to impose or extend existing short-selling bans in their respective countries. They have done so either to restrict the benefits that can be achieved from spreading false rumours or to achieve a regulatory level playing field, given the close inter-linkage between some EU markets. These measures have been aligned as far as possible in the absence of a common EU legal frame-work in the area of short-selling and given the very different national legal bases on which such measures can be taken.

The following countries have today announced or will shortly announce new bans on short-selling or on short positions: Belgium, France, Italy and Spain. Information on these measures can be retrieved from the websites of the relevant competent authorities. The measures will take effect as of 12 August 2011.

The full text of the statement is available at: http://www.esma.europa.eu/popup2.php?id=7699

Christian Littlewood, a senior investment banker and former Financial Services Authority (FSA) Approved Person, his wife Angie Littlewood (also known as Siew Yoon Lew and Angie Lew) and a family friend Helmy Omar Sa’aid have pleaded guilty to 8 counts of insider dealing contrary to section 52 of the Criminal Justice Act 1993. They are alleged to have made approximately £590,000 profit from the trades.

The offences relate to trading in a number of different London Stock Exchange and AIM listed shares between 2000 and 2008 and were only brought to an end when the City of London Police working with FSA staff arrested the Littlewoods in March 2009.

The third defendant Helmy Omar Sa’aid was returned to the UK in March 2010 following the execution of a European Arrest Warrant in Mayotte, one of the Comoros Islands.

The case was bought by the FSA and heard at Southwark Crown Court. It is the sixth successful prosecution for insider dealing bought by the FSA and is part of its ongoing drive to tackle market abuse and promote efficient, orderly and fair markets.

Margaret Cole, managing director of enforcement and financial crime, said:

“It seems that the penny is beginning to drop. These guilty pleas show that our strategy of a tough approach to insider dealing – and, in particular, demonstrating that we are prepared to fight difficult criminal prosecutions to trial – is paying off. Dedicated hard work, bold and innovative use of the tools at our disposal and close seamless co-operation between our markets, enforcement and intelligence functions underpin our successful track record in this complex area.”

The full sentencing and confiscation hearing will take place in the week commencing 31 January.

http://www.fsa.gov.uk/pages/Library/Communication/PR/2011/002.shtml

FSA/PN/002/2011
10 January 2011