On 3 April 2012, the FSA published a notice recording its decision to fine Mr Hannam, a senior banker and an approved person, £450,000 for disclosing inside information to third parties on two separate occasions.  The FSA acknowledged that the disclosures were not made with an intention or expectation that the information would be abused, that there was no evidence that anyone dealt in shares as a result of Mr Hannam’s disclosures or that Mr Hannam made any personal gain as a result; and that Mr Hannam did not act without honesty or integrity in making the disclosures.

Mr Hannam is contesting the decision and has referred the matter to the Upper Tribunal.   The FSA has nevertheless chosen to publish the Decision Notice pursuant to the new powers granted to it under the Financial Services Act 2010.

In this Decision Notice, the FSA builds on its analysis in the Greenlight decisions, approaching the assessment of what constitutes inside information by reviewing the information in its context, and applying an element of interpretation.  The finding that information which has already been communicated to a person can nevertheless still subsequently be “disclosed” improperly is repeated here.

Two significant and distinct issues however emerge from this case.  The FSA has stated that the appropriate standard of proof in market abuse cases is merely whether it is more likely than not that what is alleged in fact occurred.  In addition, the FSA concluded that information disclosed “purely” in furtherance of a client’s commercial interests is not a disclosure made in the proper course of employment, profession or duties.  If upheld, this could potentially have significant implications for the way in which M&A business is transacted.   We examine these points in more detail below.

The facts

As the Global Co-Head of UK Capital Markets at his firm, Mr Hannam was the lead corporate adviser to Heritage Oil Plc (Heritage), an oil and gas company listed on the LSE, and a key adviser to Heritage’s CEO.  At the relevant time, Heritage had exploration projects in Uganda and in the Kurdistan region of Iraq.    In June 2008 Heritage had received an unsolicited approach from a third party who was potentially interested in acquiring either drilling licences granted to Heritage by the Ugandan government, or Heritage itself.  Mr Hannam was an insider in relation to that potential transaction.

Mr Hannam also had other clients and contacts with interests in Kurdistan.  Mr Hanna, was also involved in discussions between Heritage and “Client A” in relation to a possible corporate transaction.  In those discussions, Heritage’s CEO had indicated that Heritage had received approaches from interested parties but in terms that did not disclose inside information. 

On 3 September Heritage announced successful test drilling in one of its Ugandan drilling programmes, and indicated that exploration risks in a second proposed drilling programme (which included a prospect called “Warthog”) had been reduced.  

On 9 September 2008, Mr Hannam sent an email to Client A in which he updated him on on-going discussions with a potential acquirer of Heritage.  He referred to the fact that he was advising Heritage’s CEO, to excitement over recent drilling results, and to the likelihood of the offer coming in a £3.50 – £4.00 per share in the current market conditions.  Mr Hannam was aware that this client might recommend that the organisation he represented purchase a stake in Heritage.

Between 9 and 16 September the closing price of Heritage shares fluctuated between 193.5 p and 209p per share.  The Takeover Panel asked Heritage to make an announcement following share price movements, and on 18 September 2008, Heritage announced that it was in preliminary discussions with an unidentified third party relating to a potential disposal of certain assets, which might or might not lead to an offer for Heritage.  Following the announcement the price of Heritage shares closed at 240p.

On 30 September, Heritage announced that the third party discussions had been terminated and that drilling had commenced on a well at Warthog (which was estimated to complete within a month) and at another well (estimated to take 4-5 months).

In early October, Mr Hannam had several discussions with Client A about investments in companies with interests in Kurdistan.

On 5 October, Heritage employees were told that the company had entered a blackout period in which employees would be prohibited from dealing in Heritage shares, because the drilling at Warthog would be shortly be entering the reservoir zone.  The Heritage CEO received an email report on 7 October which recorded positive indicators relating to the presence of oil at Warthog; a similar email the following day also recorded positive indicators.  The CEO interpreted this as good news and that oil had been found.  He told Mr Hannam about the positive test results.

Mr Hannam drafted a second email which was sent to Client A at 11:11am on 8 October 2008.  That email was blind copied to a second client and also forwarded to members of Mr Hannam’s team.  The email reported on developments relating to Kurdistan, including a proposed visit by Mr Hannam and a meeting with the Heritage CEO, and noted in a postscript that Heritage had just found oil and “it is looking good”.   That afternoon, Mr Hannam sought and obtained approval from his firm’s Commitments Committee to take on Client A as a client.

When Heritage announced the oil find at Warthog as a significant new discovery, the price of Heritage shares rose from 172.75p (at the previous day’s close) to 198p.  The announcement contained information that had not been in the emails including the approximate size of the discovery.

The Kurdistan Regional Government have issued a press release which in effect confirms that Client A was Ashti Hawrami, Minister of Natural Resources for the Kurdistan Regional Government and that neither the KRG, nor any representative of the KRG, responded to the information in the emails or took any action as a result of that information.

Standard of proof

Mr Hannam had argued that the appropriate standard was the criminal standard.  The FSA considered that the case was not subject to the criminal standard of proof, merely noting that the Upper Tribunal in market abuse cases applies the civil standard of proof – i.e. the balance of probabilities.  The FSA goes on to interpret this (in a comment in brackets) as equating to “is it ‘more likely than not’ that what is alleged actually occurred.  This rather unsatisfactory paragraph masks a wider debate which has not yet properly been vented in the courts.  The Tribunal has historically used a civil standard with a “sliding scale” in market abuse cases, to take into account the nature of market abuse proceedings, so that the test it applies in practice equates to the criminal standard.

The “sliding scale” approach was disapproved in Re B, a case involving where Lord Hoffman said:

“I think that the time has come to say, once and for all, that there is only one civil standard of proof and that is proof that the fact in issue more probably occurred than not.  I do not intend to disapprove any of the cases in what I have called the first category, but I agree with the observation of Lord Steyn in McCann’s case (at 812) that clarity would be greatly enhanced if the courts said simply that although the proceedings were civil, the nature of the particular issue involved made it appropriate to apply the criminal standard.”

It is not evident that Re B necessarily mandates that the Tribunal apply a mere balance of probabilities in market abuse cases, nor that it is appropriate for the English Courts to apply the civil standard, even though market abuse proceedings are civil in nature.   In his judgment, Lord Hoffman cited with approval Lady Butler-Sloss in re U (A Child) (Department for Education and Skills intervening) [2005] Fam 134,143-144  who stated that

“There would appear to be no good reason to leap across a division, on the one hand, between crime and preventative measures taken to restrain defendants for the benefit of the community and, on the other hand, wholly different considerations of child protection and child welfare   The strict rules of evidence applicable in a criminal trial which is adversarial in nature is to be contrasted with the partly inquisitorial approach of the court dealing with children cases in which the rules of evidence are considerably relaxed”. 

Market abuse proceedings are more akin to crime and preventative measures taken to restrain (or deter) defendants for the benefit of the community than to matters of child protection and welfare; indeed the European Court of Justice has stated that in the light of the nature of the infringements at issue and the degree of severity of the sanctions which may be imposed, such sanctions may, for the purposes of the application of the ECHR, be qualified as criminal sanctions.  Given that Mr Hannam has referred his case to the Upper Tribunal, it seems to us that this is an issue that the appellate courts might appropriately be asked to consider in due course.

Inside information and price sensitivity

Although Mr Hannam argued that the information was not sufficiently precise or price sensitive to constitute inside information, the FSA analysed the information provided by Mr Hannam in the context of the totality of the information available to the client, finding it to be precise in that it was sufficiently specific to enable a conclusion to be drawn that once announced, it would be likely to have a positive effect on the price of Heritage shares.  As in Greenlight, the FSA’s approach involved some reading between the lines, interpreting the information provided in the context of other available information.  So, for example, the FSA concluded that the postscript in the October email could only refer to the Warthog well, given the timeframes for drilling set out in Heritage’s 30 September announcement.

The FSA also found that it was likely that if the information was generally available, it would have a significant effect on price in that it was information of a kind that a reasonable investor would be likely to use as part of the basis of his investment decisions.  The FSA noted the positive effect of the announcements on the share price (although it acknowledged that the second announcement provided more information than Mr Hannam had disclosed).

Information already disclosed

Mr Hannam argued that since the information in the September email had previously been disclosed to Client A by Heritage’s CEO, Client A was already aware of the information and it was not “disclosed” to him by Mr Hannam.  The FSA repeated the phraseology it adopted in the Greenlight case, saying that “even if the information is the same, the mere fact that another person has stated it may lend credence to its veracity.  Further it may carry more weight depending on by whom it is disclosed”.  The language seems rather less appropriate to this context.  However, as was also the case in Greenlight, the FSA also noted that Mr Hannam had in fact disclosed more specific information than had the Heritage CEO.

Failure of issuer to announce inside information without delay not a defence

Mr Hannam argued that the fact that Heritage had not announced the information at the time he sent the emails meant that the information could not have been inside information (since otherwise it should have been announced without delay).   It seems likely that Heritage made its announcement once there was hard evidence that oil had been found and could estimate capacity (which wasn’t referred to in email).  However, the FSA clearly found that the earlier information (though potentially uncertain) was precise enough – effectively construing it as “preliminary reports suggest oil”,  which is in itself specific information which a reasonable investor might consider relevant to his investment decisions.  The statement “looking good” lacks specificity, though read in tandem with the rest of the postscript, and the publicly available information, one can see that it arguably delivers the same message as “preliminary reports suggest oil”.   Nevertheless, the FSA made no criticism of Heritage for the timing of its disclosures in this case.

The FSA went on to stress that even had there been a failure on Heritage’s part to disclose the information, that would not alter the fact that Mr Hannam had improperly disclosed inside information.   This is consistent with previous statements that the responsibility for assessing whether information is “inside information” lies with the person in possession of the information.

Disclosure not in the proper course of employment, profession or duties

The FSA acknowledged that Mr Hannam had implicit authority to make the disclosure to Client A of the information in the two emails, and that he was acting in Heritage’s interests.  Mr Hannam acknowledged that it had been an error to send the October email with the postscript to the second client.  However, he argued that his mandate as financial adviser to Heritage was to proactively advance Heritage’s negotiations with Client A.  Even if he was incorrect, he contended that he had reasonable grounds to believe that he was not committing market abuse.

The FSA stated in response that the disclosures to Client A was unnecessary, unwarranted, and purely in furtherance of his client’s commercial interests.  This did not make the disclosures reasonable, nor was it made in fulfilment of a legal obligation.  In the FSA’s view, the disclosures were therefore not made in the proper course of Mr Hannam’s employment, profession or duties under section 118(3) of the Financial Services and Markets Act 2000.

In the guidance in DTR 2.5.7(2), the FSA clearly accepts that selective disclosure of inside information relating to a major transaction requiring shareholder support, or which could significantly impact its lending arrangements or credit rating, may be made by an issuer to major shareholders, lenders and its credit agency – provided they are bound by confidentiality.  The examples of circumstances in which an issuer might justifiably disclose inside information to a person other than one of its employees set out in DTR 2.5.792) include disclosure to:

  • the issuer’s advisers and advisers of other persons involved in the matter  in question;
  • persons with whom the issuer is negotiating or intends to negotiate any commercial financial or investment transaction (including prospective underwriters or places of the financial instruments of the issuer);
  • employee representatives or trade unions acting on their behalf;
  • any government department, the Bank of England, Competition Commission or other statutory body or regulatory authority;
  • major shareholders of the issuer; the issuer’s lenders; and
  • credit rating agencies.

Although the FSA found that these disclosures were not strictly made on a “need to know now” basis, it is arguable that the disclosure to Client A, which was implicitly authorised by the client, fell squarely within the purposes set out in guidance in DTR 2.5.7(2): Client A was a person with whom the issuer potentially intended to negotiate an investment transaction.  The Final Notice provides no real analysis on this issue.

It may be that the FSA’s point is merely that it was not necessary – viewed from Heritage’s perspective rather than Mr Hannam’s – to make those disclosures to Mr A at those particular times.  However, the conclusion that information disclosed “purely” in furtherance of a client’s commercial interests is not a disclosure made in the proper course of employment, profession or duties is likely to create some consternation amongst issuers and brokers alike.  It would have perhaps have been preferable for the FSA to focus on the fact that the other conditions which should surround selective disclosure were not in place: it does not appear, for example, that Client A had agreed to keep the information confidential and not to trade.   

Firms may wish to consider whether procedures in place in the deal generation side of their businesses are sufficient to ensure that inside information is adequately controlled, and whether there might be some mileage in imposing some aspects of the ECM/DCM wall-crossing disciplines into the M&A side of the business.  This case may in particular serve as a useful prompt to remind M&A bankers that they should (in the FSA’s phraseology) be applying their minds to:

  • whether what they are disclosing is inside information;
  • whether they have the client’s express authority to disclose the information;
  • whether the issuer and its advisers can demonstrate a need for disclosing the relevant inside information;
  • whether they are comfortable that delay and selective disclosure are permitted under the DTRs where the client is listed; and
  • whether it has been made clear to the recipient that they are or may be receiving confidential and inside information, which they cannot disclose to others or otherwise use.  

It may also be prudent to consider what controls or monitoring might sensibly be imposed around these kinds of discussions, and what records might usefully evidence the issuer’s authority to disclose, the basis for concluding that disclosure was warranted, and the recipient’s agreement to keep the information confidential and not use it.