1 Quarter 1 2015 2 Welcome to Maples and Calder's quarterly newsletter on financial services regulatory enforcement, where we provide you with updates on all hot regulatory and enforcement topics, from global trends to in-depth advice on Irish-specific issues. Enforcement Actions – Ireland The Central Bank issued warning notices against three unauthorised investment firms during the first quarter of 2015. These warnings can be very damaging to the reputation of a firm and they have a knockon impact when applying for regulatory licences in other jurisdictions or when applying to be an approved person. Click here to read more. There were no enforcement sanctions issued against Irish regulated entities during this quarter. The Central Bank's on-going investigation of Custom House Capital Ltd (in liquidation) and persons concerned is listed for mention in the Examiner’s Court on 9 July 2015 after the judgment relating to the quantum of the costs of the liquidation was discussed in the Examiner’s Court on 13 January 2015. The Official Liquidator is due to submit a report to the Examiner’s Court by 2 July 2015. Click here to read more. Enforcement Actions – International During quarter four the UK FCA issued warning notices against 71 firms acting without the necessary regulatory licence. Also in the UK, four entities were fined c. £20.47 million, one person was fined £35,212 for insider dealing and three others were fined and sentenced to 10, 12 and 19 months' imprisonment respectively for insider dealing and six individuals were banned from acting in various senior roles, of which all were personally fined. Another individual was sentenced to ten years’ imprisonment for defrauding investors of at least £3.5m, using false instruments and accepting deposits without authorisation. Two others received a total of seven years’ imprisonment for defrauding investors and operating a collective investment scheme without authorisation. A former trader was banned from the UK financial services industry for lacking honesty and integrity following a LIBOR fraud conviction in the US. For further details please click here. 3 In international news, on 19 March 2015 the Director of Enforcement at the US Securities and Exchange Commission ("SEC") outlined its enforcement priorities for 2015 and stated that it will continue to focus on investigating complex products and on investment advisors and the funds they manage, with particular attention on conflicts of interest, misrepresentations regarding performance or investment strategies and fiduciary duty breaches. It will also continue to pursue financial reporting and auditing violations, insider trading microcap fraud/pyramid schemes and potential securities violations, including partnering with the Office of Compliance, Inspections and Examinations and the Trading and Markets Division to ensure compliance with Commission Rules. It is also developing new technology to enable it to more effectively discover and prosecute securities fraud. Also in March a former company officer received half-million dollar whistleblower award for reporting a securities fraud case to SEC. Legislative/Regulatory Enforcement Developments – Ireland On 9 February 2015 the Central Bank published its enforcement priorities for 2015. It highlighted the following enforcement priority areas across all sectors: (i) Prudential requirements; (ii) Systems and controls; (iii) Provision of timely, complete and accurate information to the Central Bank; (iv) Appropriate governance and oversight of outsourced activities; (v) Anti-money laundering /counter terrorism financing compliance; and (vi) Fitness and probity obligations. On 26 February 2015, the Central Bank published its programme of themed inspections in markets supervision setting out supervisory priorities for 2015. The themed inspections, in addition to the Central Bank's day to day PRISM supervisory activities, cover the following areas: cyber security/operational risk; integrity of regulatory; treatment of pricing errors for the calculation of fund NAVs; depository oversight; proprietary trading; conduct of business; suspicious transaction reports; person discharging managerial responsibilities; and risk management in UCITS. On 30 March 2015 the Central Bank published Client Asset Regulations and Investor Money Regulations which aim to ensure that investment firms and fund service providers will have stronger systems and controls in place to protect the ownership rights of clients and investors respectively. The Central Bank published guidance to assist in interpreting the Regulations. The commencement date for the Client Asset Regulations is 1 October 2015 and 1 April 2016 for the Investor Money Regulations. 4 Featured Article Conduct of Regulatory Investigations and Enforcement Proceedings In Ireland there is hardly any case law providing guidance on the conduct of regulatory investigations and enforcement proceedings by the Central Bank of Ireland ("CBI"). However, reports of equivalent processes under UK law are instructive. A recent decision by the UK Upper Tribunal (Tax and Chancery Chamber) (the "Tribunal") in Carrimjee v The Financial Conduct Authority sheds light on a number of fronts. In this case the Financial Conduct Authority ("FCA") alleged that the applicant ("C") was complicit in a client's alleged market abuse on the LSE's International Order Book market (the "IOB Market"). The allegations focused on trading activities during the "closing auction". The decision deals with a number of issues such as what a lack of "integrity" means, the appropriate standard of proof for serious charges, the role of expert evidence, and restrictions on the regulator adopting inconsistent positions in separate proceedings relating to the same subject matter. It also highlights the danger of financial services professionals "turning a blind eye" to the obvious. Summary of facts C was a fund manager and investment advisor with nearly 20 years' experience in the financial services industry and had his own firm. His client, G, was a sophisticated investor who wished to trade on the IOB Market. G was also a client of P, a broker employed by a different firm to C's. C and P were jointly party to a number of phone calls and other communications with G leading up to G's dealing on the IOB Market. P took the lead in terms of providing specific advice or recommendations on proposed trades. C adopted a passive role. FCA took the view that G had engaged in market abuse by artificially driving up the price of certain financial instruments on the market (including global depositary receipts in Gazprom plc). FCA brought regulatory proceedings against G. G settled with the FCA and agreed a financial penalty of over $6 million. The settlement with G was recorded in a "Final Notice" issued by FCA. FCA also issued regulatory proceedings against C and P. FCA had initially alleged that P and C knowingly assisted G to manipulate the IOB Market. P made representations to FCA after which it modified its position and alleged that P failed to exercise due skill, care and diligence in her dealings with G. P settled FCA's regulatory action on this basis. The Final Notice in P's case set out a detailed summary of the facts and recorded that P may have been "an innocent victim" of G's scheme to manipulate the IOB Market, and whilst she did not set out to assist G in market abuse, P ought to have realised that G was acting for an illegal purpose. FCA imposed a monetary penalty on P but did not take her trading licence from her. 5 By contrast, FCA decided to impose a monetary penalty on C and to take his trading licence from him. C appealed FCA's decision to the Tribunal. A question which arose on appeal was whether FCA could – contrary to the version of events recited in the Final Notice issued in P's case – contend that C knew that G intended to engage in market abuse. C contended that it was unfair. The circumstances of FCA's case against P were the same as the case against C. C contended that it was unreasonable for FCA on appeal to contend that C knew G was engaged in wrongdoing when in its Final Notice against P it had accepted that this was not the case. Key issues These were as follows: (a) The standard of proof for serious regulatory breaches, such as market abuse. (b) Whether FCA could adopt a position in C's case that was inconsistent with the Final Notice issued to P. (c) Certain other evidential issues. The Tribunal's conclusions were as follows: (a) Standard of proof FCA bore the burden of proving its case. The standard of proof was whether FCA's version of events was more probable than the version put forward by the applicant: i.e. whether the FCA proved its case on the balance of probabilities. Even though the allegations were serious, there was no basis in statute or in principle for requiring FCA to prove its case by reference to a more exacting standard – i.e. beyond a reasonable doubt. (b) Could FCA adopt a position different from that adopted in the Final Notice? As a statutory body FCA was required to act rationally and it would be inconsistent with this duty for it to adopt a case theory against C that was not factually consistent with the terms of the Final Notice against P. This meant that FCA could not allege that C knew that G intended to manipulate the market. This was inconsistent with the Final Notice issued against C. Accordingly as C and P were treated as acting together, it followed that FCA could not make such a case against C either. All that FCA could legitimately allege was that C – like P – ought to have known that there was a risk that G was intending to manipulate the IOB Market and that he was oblivious to this risk. (c) Certain evidential issues 6 Two key conclusions emerge from the Tribunal's analysis of the evidence: First, although transcripts of recorded phone conversations could be illuminating, it was important to treat them with a degree of caution due to the fact that, amongst other things, individuals express themselves inaccurately in phone conversations and often the transcript will omit important context such as the manner by which certain statements were made. Secondly, the Tribunal was assisted by expert evidence from FCA as to the workings of the relevant market, in particular during the crucial end-of-day period referred to as the "closing auction". (d) Turning a "blind eye" to wrongdoing – definition of "integrity" The Tribunal adopted a definition of "integrity" as meaning "moral soundness, rectitude and steady adherence to an ethical code." Although the Tribunal found that C was not aware that G was proposing to engage in market abuse, it found that C ought to have been aware that this was a risk in the circumstances. The Tribunal found that C was reckless as to whether or not G was seeking to manipulate the market. C was therefore not acting with integrity. Integrity connoted an objective "moral compass" and it was irrelevant that subjectively C may have thought that he did nothing wrong. Acting recklessly is an example of acting without integrity. Conclusion The case sheds light on detailed issues that may arise in the context of CBI regulatory proceedings. Of particular interest is the Tribunal's decision that the regulator could not adopt inconsistent "case theories" against respondents alleged to have been engaged in joint wrongdoing. The case also confirms that even where serious allegations are made, the burden of proof is on the balance of probabilities (not beyond a reasonable doubt). Finally, the case highlights the dangers involved in turning a blind eye to obvious potential wrongdoing in terms of assessing the integrity of a financial services professional. 7 If you would like further information, please speak with your usual Maples and Calder contact, or the contacts below. * Have your say on upcoming featured articles – please email us at firstname.lastname@example.org Contacts John Breslin Partner, Dublin email@example.com +353 1 619 2074 David Nolan Director, Financial Services Regulatory firstname.lastname@example.org +353 1 619 2056 Nicholas Cole Associate, Dublin Nicholas.email@example.com +353 1 619 2113 Dudley Solan Partner, Dublin firstname.lastname@example.org +353 1 619 2022 Malachi Sweetman Associate, Dublin email@example.com +353 1 619 2052 Callaghan Kennedy Associate, Dublin firstname.lastname@example.org +353 1 619 2716 James Scanlon Tríona Ryan Associate, Dublin Associate, Dublin email@example.com firstname.lastname@example.org +353 1 619 2061 +353 1 619 2740 8 About Maples Maples and Calder is a leading international corporate and finance law firm. Since establishing in Ireland in 2006, the Dublin office has grown to over 250 people and has advised on many high profile and complex transactions in Ireland. The firm's affiliated organisation, MaplesFS, provides specialised fiduciary, accounting and administration services to corporate, finance and investment funds entities. The Maples group comprises more than 1,000 staff in 12 offices worldwide. To find out more about the firm visit maplesandcalder.com and maplesfs.com © Maples and Calder 2015 This update is intended to provide only general information for the clients and professional contacts of Maples and Calder. It does not purport to be comprehensive or to render legal advice.