Published FCA cases against directors of listed stocks are relatively rare. There have unusually been two recently published sets of cases, and executive and non-executive directors alike would do well to pay close attention to them.

The first is a set of Decision Notices in relation to Carillion plc and three of its former executive directors. They are Decision Notices, rather than Final Notices, as the cases have been referred by the executive directors to the Upper Tribunal. Accordingly, the FCA findings should be considered as provisional.

  • In short, the FCA found that Carillion had recklessly published announcements that were misleading and which did not fully or accurately disclose its true financial performance. It found that Carillion had contravened the Market Abuse Regulation and Listing Rules in various respects.
  • As for the three directors, they were found to have been knowingly concerned in Carillion's breaches.  The FCA stated said that the directors were involved in approving announcements to the market that they knew were "materially inconsistent" with what they knew about the financial risks and exposure created by some aggressive contract accounting judgements that had been used, but which they had not made either the Board or Audit Committee aware of. The FCA concluded that they were reckless, and decided on fines for them ranging between £154,000 and £397,400.

The second case concerns a Final Notice to Sir Christopher Gent, who was at the time the non-executive chairman of ConvaTec Group Plc. The FCA found that he had acted negligently in unlawfully disclosing inside information concerning an expected RNS announcement relating to the revision of ConvaTec's financial guidance and the retirement of its CEO.

  • Sir Christopher disclosed the information to two major shareholders in ConvaTec before the revised guidance and notice of the retirement of ConvaTec's CEO was announced. It is not said that he did so out of any improper motive, and indeed the FCA accepted that Sir Christopher thought that he was acting in the best interests of the company. The FCA found that Sir Christopher had acted negligently in disclosing the inside information because he should have realised that the information that he disclosed constituted or may have constituted inside information and that it was not in the normal exercise of his employment or duties to disclose it. He was fined £80,000.

Comment

The FCA's findings against the three former Carillion executives appear largely to be the result of its assessment of their inaction in the context of the information that they had access to in their positions within the company.

  • Cases of alleged recklessness routinely involve the consideration of whether certain facts were "red flags" and what should have been the proper response in light of them. At its most basic, the lesson from these cases is that board members need to remain vigilant and rigorous in their assessment of what they receive.  If these cases reach the Upper Tribunal, the facts will be thoroughly tested and the Upper Tribunal will make its findings about the significance of what the executives received. The Upper Tribunal is a judicial body and its detailed findings can often be the basis for important learning.

The Sir Christopher Gent action contains more learning points for directors of listed entities, whether executive or non-executive, than the Carillion cases currently do.

  • It was accepted by the FCA that, at the time when Sir Christopher made the disclosures, the information was not in a state to be announced to the market, and that ConvaTec had not yet formally classified it as inside information. However, this did not prevent the information from constituting inside information.  The FCA makes clear that the test of whether information is inside information is a prescribed test, which does not depend on whether it is sufficiently precise to be announced immediately.
  • Sir Christopher argued that he had taken advice from relevant people in relation to the disclosures. Whilst the FCA said that this was relevant to whether he had acted negligently (rather than to whether he had in fact disclosed inside information), for various reasons it was not convinced by his reliance.
  • Related to this, the FCA said that Sir Christopher had not properly applied his mind to the specific question of what information he might properly disclose, when, in what manner and to whom.  It accordingly found that he had failed to obtain clear formal advice in relation to these questions before making the disclosures.
  • It concluded that the training he had received on the Market Abuse Regulation and his own "considerable experience" should have led him to realise that he was not acting in the normal exercise of his employment, profession or duties in making the disclosures.
  • This case illustrates how important it is for directors to critically assess the significance of their actions, even when they believe (however experienced they may be) that they are acting in the best interests of the company. Further, in order to put themselves in the best position to maximise their protection, they may wish to obtain clear formal advice before acting.

These cases highlight the FCA's determination to uphold high standards in relation to capital markets. As the FCA's Executive Director of Enforcement and Market Oversight stated in relation to the Gent case: "We will continue to rigorously enforce against breaches when we see them to ensure this important principle [of proper disclosure of inside information] remains uppermost in the minds of issuers and their senior officers." Directors should ensure that they are familiar with them and the lessons to be learnt.