In a recent decision of the Upper Tribunal, a preliminary issue has been decided against the FCA in an ancillary claim arising out of mis-trading perpetrated by JP Morgan Chase Bank in 2012.
On 18 September 2013, the FCA imposed a financial penalty on JP Morgan Chase Bank ("JP Morgan") in the sum of £137m. The Synthetic Credit Portfolio ("SCP") division of JP Morgan had suffered losses of some $6.2bn by the end of 2012 as a result of trades that subsequently became known as the "London Whale" trades. The FCA held, in imposing the fine, that JP Morgan had been guilty of various trading and management malpractices, including the employment of a high risk trading strategy, failing to vet and manage that strategy, failing properly to value its position within the SCP and failing to be open and co-operative with the FCA about the extent of the losses generated within the SCP.
The FCA imposed the fine by way of a Final Notice issued to JP Morgan and promulgated publically. Throughout this notice, the FCA made numerous references to "trader/s on the SCP". One of these traders, Mr Julien Grout, applied to the Upper Tribunal seeking a declaration that through its references to "traders on the SCP", the FCA had (i) identified Mr Grout (in line with the definition provided in the Financial Services and Markets Act 2000 ("FSMA"), see further below) and (ii) that as a result of being so identified, he had suffered prejudice. The Upper Tribunal was not called upon at this stage to decide what relief Mr Grout was entitled to, and indeed Mr Grout has not yet made clear what relief he seeks. It is envisaged that Mr Grout will at least seek a hearing at which he may challenge the allegations made against him (on his case) within the FCA's notices.
FSMA requires the FCA to give a third party prejudicially identified in a notice a copy of that notice before it is published so that he may comment on it and make any submissions that may affect the way the Final Notice is cast when it is published. The FCA accepted that it had not given Mr Grout a copy of the Final Notice prior to publication, but maintained that he was neither identified in it nor, if such identification had occurred, prejudiced by it.
The Upper Tribunal decided in Mr Grout's favour. In reaching this decision, the Tribunal set out the two stage test applicable to identifying third parties within FCA notices, namely:
Whether the relevant statements in the notice refer to "a person" other than the person to whom the notice was given. This stage of the test is to be applied without recourse to material outside the notice itself; and, if so
Whether the reference to a third party is a reference to the particular third party in question. This stage of the test is applied by reference to material that would be objectively known to persons acquainted with the particular third party or operating within the relevant area of the market.
Applying stage 1, the Tribunal held that the multiple references to "traders on the SCP" were clearly references to persons separate from JP Morgan itself, albeit employed by the bank, and not to the bank on a collective or corporate level. Applying stage 2, the Tribunal was in no doubt that relevant readers of the Final Notice (those acquainted with the third party or relevant market area, as delineated by the test) would have known at the time of publication that Mr Grout was one of the "traders on the SCP". In reaching this decision, the Tribunal took note in particular of contemporaneous media reports which personally identified Mr Grout.
Having decided that Mr Grout had been "identified" by the FCA within the meaning of FSMA, the Tribunal further held that he had also been prejudiced by being so identified. The passages within the notice identifying Mr Grout contained criticism of him and his behaviour.
This decision relates only to a preliminary matter. Nonetheless, the way is now clear for Mr Grout to challenge findings contained within the Final Notice, and therefore represents a potentially damaging defeat for the FCA.
This is becoming an increasingly difficult area for the FCA. In recent times it has issued a number of Final Notices relating, among other issues, to LIBOR, EURIBOR and FOREX which have given rise to numerous challenges, some of which, like here, have been successful and some that have not. The consequences for those affected can be severe and future career prospects limited as a result. It is right that the FCA is being taken to task over these issues and, going forward, must take greater care when issuing Final Notices to ensure people, who may not be subject to individual enforcement action, and who may never face it, are not prejudiced by the FCA's conduct.