In September, the Tribunal concluded that the prohibition order and £25,000 that the FSA had intended to impose on Mr Geddis for what it characterised as an abusive trading strategy were inappropriate in the circumstances. The Tribunal substituted a public censure. This case is a rare example of a successful challenge: it highlights the importance of the role of the Tribunal in providing independent scrutiny for disciplinary decisions.
As the FSA becomes bolder in using its statutory powers and pursuing risker cases, it is inevitable that there will be an increased appetite to challenge the regulator. Indeed in the financial year 2010/11, 40 referrals were made to the Tribunal, compared to 25 in 2009/10. There will also be a corresponding increased risk for the FSA that challenges will be successful.
FSA "misjudged the facts of the case"
Mr Geddis was a trader at Dresdner Kleinwort Ltd with responsibility for London Metal Exchange trading on behalf of the firm and its clients. On 21 November 2008, he rapidly built up a dominant position in a particular lead contract during the course of the morning. According to LME guidelines, given his dominant position, he was obliged to lend the stocks at a specified price, so as to prevent short position holders having to deliver at a materially higher level to satisfy their obligations. Later that day, Mr Geddis breached the guidelines by unwinding his position at rapidly increasing prices.
The FSA concluded that Mr Geddis had deliberately conducted market abuse by means of an abusive squeeze in order to secure substantial profits for his firm. The FSA believed that the behaviour merited a prohibition order and a fine of £100,000, to be reduced to £25,000 due to financial hardship. The Tribunal disagreed and believed that the FSA had "misjudged the facts of the case". It found that whilst the behaviour amounted to market abuse, Mr Geddis had merely been negligent. This follows the approach taken by the Court of Appeal in Winterflood Securities Ltd v. FSA10 that there is no requirement for an intention to commit market abuse – the fact that market abuse has been committed is sufficient.
In assessing the appropriate penalty, the Tribunal took into account (amongst other factors) the fact that no personal profit was obtained, there were no third party losses, the breach took place over a very limited period of time and was not premeditated, and assistance was sought immediately after Mr Geddis appreciated he had acted wrongly. Although on the particular facts in this case, the Tribunal concluded that public censure was the appropriate sanction, such market abuse cases will be rare.
What if …
This case highlights the issues for firms and individuals should the FSA publish a decision notice. In this case, if the decision notice had been published, the FSA's intention to impose a fine and prohibition order on Mr Geddis would have been in the public domain for a number of months, even though the Tribunal subsequently concluded that these sanctions were unsuitable. Whilst this may influence firms to settle before the decision notice stage, cases such as this may encourage firms to challenge cases before the Tribunal, particularly where the market abuse was not deliberate.
The Government's proposed reforms would reduce the ability of the Tribunal to substitute its judgment for that of the FSA to a narrow range of "disciplinary" matters which would not include prohibition orders. If Mr Geddis' case were to be determined under the new regime as currently proposed, the Tribunal would have been entitled to substitute the censure for the fine, but the decision on the prohibition would have had to be referred back to the FSA, along with the Tribunal's findings on the facts that Mr Geddis was fit and proper.
Increased focus on the commodities market
This was the first market abuse case brought by the FSA for behaviour on the London Metal Exchange. The fact that the FSA pursued this case despite the strength of the mitigating circumstances is evidence of its aggressive approach to market abuse not just in the securities sector, but also in the commodities markets.
There has been growing parliamentary concern in Europe about the financial sector's impacts on the commodities markets. Further enforcement action in this field, particularly given the European Commission's proposals for a new Market Abuse Regulation (see below) to:
- extend the market abuse regime to abusive behaviour on spot commodity markets impacting on financial instruments; and
- empower regulators in relation to commodities derivatives to request standardised information on related spot markets and reports on transactions, and to have direct access to traders' systems.
The energy sector in particular will be subject to increased scrutiny when the Commission's Regulation on wholesale Energy Market Integrity and Transparency (REMIT) comes into force. REMIT contains rules that prohibit the use of inside information, require the public disclosure of that inside information and prohibit certain behaviour constituting market manipulation in relation to wholesale energy products. Click here for further information.