Market abuse news – Winter 2016

In this issue for Winter 2016 we cover recent developments in legislation and the approach of regulators to the enforcement of market abuse in Asia, Europe and the US.

Asia: Hong Kong

Mr Thomas Atkinson, recently appointed head of the Enforcement Division at the Hong Kong Securities and Futures Commission (SFC), gave a keynote speech at the 7th Pan Asian Regulatory Summit on 9 November 2016[1]. Mr Atkinson explained the SFC’s enforcement priorities and emphasised that he wanted the SFC’s enforcement division to focus on “quality over quantity” and to prioritise “high impact cases” that address key risk areas. He intends to:

  • give priority to cases that post the greatest threats to the interests of the investing public and the integrity of the markets; and

  • identify cases which will bring the highest impact when a successful enforcement outcome is reached;

with the view of maximising the deterrent effect of the SFC’s enforcement efforts against misconduct.

Listed companies are high on the SFC’s enforcement priorities plus related concerns, particularly corporate fraud and misfeasance, market manipulation and intermediary misconduct. And the SFC has set up new teams to focus on each of these areas. With this in mind we anticipate that the SFC will pursue enforcement action targeting:

  • Individual liability - holding individual wrongdoers (i.e. directors and individuals involved in the management of companies responsible for misconduct) accountable for misconduct, where appropriate; and

  • Sponsor liability - More cases in respect of misconduct by IPO sponsors where the SFC would seek to hold firms and senior management accountable. In the SFC’s view, “the conduct and the level of professionalism demonstrated by some sponsors … left a lot to be desired…”.

SFC collaboration with China regulator

Additionally, Mr Atkinson said that due to the large percentage of Hong Kong listed companies having business operations in mainland China, the SFC is building “very close” collaborative relationships with Mainland regulators, notably, the China Securities Regulatory Commission (CSRC). In appropriate cases, the SFC will also conduct joint investigations with the CSRC.

Asia: Japan 

Tokyo District Court revokes FSA monetary penalty order for insider trading

On 1 September 2016, for the first time, the Tokyo District Court revoked an order for an administrative fine imposed by the Financial Services Agency (FSA).

The FSA ordered a financial consultant to pay a fine in June 2013 on the ground that she had engaged in insider trading using non-public information for a public offering. She denied that she had engaged in insider trading and brought an action for the revocation of the order. The court found that she had not engaged in insider trading, and therefore the order to pay an administrative fine by the FSA was illegal. The FSA immediately appealed this ruling to the Tokyo High Court. At the time of writing, the case is awaiting a hearing at the High Court.

This is the first ruling by the courts to revoke an FSA order to impose a financial penalty. In practice, Japanese financial institutions tend not to challenge the FSA. While the FSA has been trying to actively enforce the insider trading regulations, the FSA may encounter resistance. Foreign institutions and individuals are beginning to challenge FSA orders and it is likely that we will see an increase in such rulings in the future.

Asia: People’s Republic of China

China announces first cross-border market manipulation enforcement under Shanghai-Hong Kong Stock Connect

On 18 November 2016, the China Securities Regulatory Commission (CSRC) announced that it had successfully concluded an investigation, with the assistance of the Securities and Futures Commission of Hong Kong (SFC), against cross-border market manipulation under the Shanghai-Hong Kong Stock Connect programme (Shanghai-Hong Kong Stock Connect). This action marks the first of its kind since the launch of Shanghai-Hong Kong Stock Connect in November 2014. It highlights the regulators’ shared commitment to reinforcing order in the stock market in the mainland China and Hong Kong securities markets.

The CSRC alleged that an individual surnamed Tang and several accomplices were involved in manipulating the stock of Zhejiang China Commodities City Group, which is listed in Shanghai and traded on the Shanghai-Hong Kong Stock Connect. Tang made illegal gains of over US$6 million. Meanwhile, the CSRC also found that Tang and others gained about US$40 million by manipulating five other stocks on the mainland China market.

This enforcement action is part of a broader and on-going campaign to crack down on stock-market manipulation. It is reported that in the first half of 2016, the CSRC investigated 52 cases of stock-market manipulation, a 68 per cent rise on the same period last year.

Europe: France 

Reform of French sanctioning regime to avoid double jeopardy

Proposed changes to the French Market Abuse sanctioning regime came into force with Law No. 2016-819 of 21 June 2016, which has introduced new provisions into French law governing the dialogue between the Public Prosecutor and the Autorité des Marchés Financiers (AMF), the French Financial Markets Authority, so as to avoid both administrative and criminal prosecutions for the same infringement.

At present, there is no clear indication as to which cases will be handled by the French Public Prosecutor rather than by the AMF.

France implements Criminal Sanctions for Market Abuse Directive

France has implemented the Criminal Sanctions for Market Abuse Directive, which creates a common minimum set of criminal sanctions for market abuse. This directive has been transposed into French law by the Law No. 2016-819 of 21 June 2016.

Criminal sanctions that can be imposed by the French Criminal Courts have increased significantly and are now aligned with the financial penalties that can be imposed by the AMF in the course of administrative proceedings.

Extension of AMF sanctioning powers

On 8 November 2016, the French National Assembly adopted a new law (Law “Sapin 2”) relating to transparency, the fight against corruption and the modernisation of economic life. This law includes provisions reinforcing the powers of the AMF and, in particular, increasing the maximum administrative sanctions that the AMF can impose on corporate entities to 15 per cent of total annual turnover on the basis of the annual accounts for the last financial year (compared to 5 per cent of turnover under pre-existing law).

Europe: Germany 

Naming and shaming spreading to Germany

In Germany, the practice of ‘naming and shaming’, i.e. the public disclosure of violations of the law and/or of the sanctions imposed for them by regulatory authorities is set to come into increasing focus in 2017. As a result of the EU legislation that has come into force since the beginning of the financial crisis, this remedy used by the regulatory authorities is increasingly becoming part of the German regime. Handing out financial penalties without publicity was seen as an insufficient sanction for conduct breaches in the financial sector, which led to the introduction of ‘naming and shaming’, already well-known in other jurisdictions. The aims of this strategy are to create a deterrent effect, inform market participants of the market standards expected, restore the public’s confidence in this sector and provide consumer protection.

The new EU legislation to regulate financial markets introduced since 2012, for example CRD IV, MiFID II and MAR, contains provisions requiring regulatory authorities to disclose/publish sanctions. These standards have since been transposed into German law, meaning that Germany’s financial regulator, BaFin, is beginning to publically disclose relevant violations.

In 2014, BaFin did not disclose any sanctions from its banking and financial market supervision. BaFin published nine cases in 2015 and twelve violations in 2016 in either anonymised or non-anonymised form on its website (see details in the table below).

At European level, the practice is somewhat different to BaFin’s approach of providing rather limited information in the disclosures. For example, the European Securities and Markets Authority (ESMA) discloses much more comprehensive information on the sanctions and their background than the BaFin. The trend would appear to be that the coming years will see both an increase in disclosures and more comprehensive information being disclosed on sanctions by the regulatory authorities[1].

BaFin’s published enforcement

  Banking supervision

Market supervision

Measures published in 2016

1 non-anonymised

6 anonymised

5 non-anonymised

0 anonymised

Measures published in 2015

4 non-anonymised

4 anonymised

1 non-anonymised

0 anonymised

Measures published in 2014 - -

Europe: Italy

Further legislative changes in Italy

Following MAR taking effect on 3 July 2016, on 24 October 2016 Commissione Nazionale per le Società e la Borsa (Consob), the Italian Regulator supervising financial markets, started the process of amending CONSOB's regulations for issuers and markets. These amendments will ensure that national second level regulations comply with the MAR and the related delegated legislation.

Europe: United Kingdom

Lower enforcement penalties generally but market abuse enforcement continues

To date, for the financial year 2016/17, Enforcement fines issued by the FCA are at their lowest level for over ten years, which is largely a reflection of the conclusion of major regulatory investigations into benchmark fixing that have been ongoing for the last few years. Having said that, the steady series of market abuse enforcement (whether regulatory or criminal prosecutions) continues. Investigating complex market abuse conducted by market professionals takes longer and the FCA will not always win those cases. Nevertheless, the FCA wants to focus more on these cases and seems to have a series of them in its pipeline.

Since our previous newsletter, three individuals have pleaded guilty to charges of insider dealing in two separate criminal prosecutions. In the first case, a portfolio manager at BlackRock traded on information received in the course of his employment about deals involving two energy companies[1]. In the second, a member of a listed company’s financial reporting team obtained non-public information concerning the proposed takeover of his employer (Logica plc) and disclosed that information to his neighbour who traded in Logica’s shares in advance of a public announcement[2].

FCA views dark pools as a potential source of market abuse

The FCA has published a report following its thematic review of dark pools[3]. Its findings suggest that operators of dark pools do not always provide clear detail about the design and operation of the dark pool to users or monitor pools sufficiently to detect market abuse. Accordingly, the FCA recommends that operators identify and manage conflicts of interest better, and improve monitoring of operational integrity, best execution and client preferences. Amongst other risks involved in dark pools, the FCA views them as potentially at risk from market abuse, and operators should consider these findings carefully.


US Supreme Court ruling in highly anticipated case lifts cloud over DOJ insider-trading prosecutions

On December 6, 2016, the US Supreme Court issued a unanimous decision in Salman v United States[1] upholding Salman’s insider-trading conviction and restating a rule of a decade ago that allows juries to infer a personal benefit—a necessary element of the crime of insider trading—when an insider gifts information to a relative. Our summer 2016 issue of Market Abuse News explains the background of this highly anticipated case. While the decision to align with prior precedent will have little effect on insider-trading prosecutions in mostStates in the US , it will free federal prosecutors in the New York area from the restriction placed on it by the stricter rule articulated in the widely-heralded 2014 appellate court decision of United States v Newman[2], which required the prosecution to prove that the accused insider expected a tangible benefit in return for the disclosure.

The Supreme Court’s reaffirmation of its prior rule without elaboration leaves several open questions. First, it remains unclear how far the inference extends beyond information sharing between relatives. The Court resolved the narrow issue presented in Salman, a case involving a tip from one brother to another, by stating that the inference applies to relatives. The decision says little about whether the Court would give the prosecution the benefit of the inference in cases involving friends or acquaintances. Second, the Court did not address another element of the 2014 Newman decision, which requires the government to prove that the tippee knew that the information came from an insider who received a personal benefit. That element of the offense presumably remains in place in the New York area where the decision in Newman must be followed on this point.

How lower courts treat these open questions will determine how aggressively prosecutors pursue cases. For instance, a court could refuse to permit the inference of a personal benefit when the tipper and tippee are professional acquaintances rather than family. Similarly, a court could reject liability for individuals at the end of a “tipping chain”—those who are downstream recipients of information but who have no personal relationship with the original tipper—because the tippee did not know that the tipper received a personal benefit. What the Salman decision does, however, is eliminate one celebrated element of ambiguity from insider-trading law in New York.

SEC expands data-driven enforcement strategies with new electronic platform

After a delay of six years, the US Securities and Exchange Commission (SEC) has approved a schedule for the creation of the Consolidated Audit Trail (“CAT”), a digital warehouse that will store records of all trading activity across the U.S. equity markets[3]. The CAT will enable the SEC to more effectively monitor market behavior and to identify and investigate misconduct by tracking every trade and the customers behind them.

The SEC has increasingly incorporated data analytics into its enforcement strategy. Analytics allow the SEC to identify suspicious trading patterns by scanning billions of rows of data. Fueled in part by such tactics, the SEC has set records for enforcement actions in each of the last three years, culminating with 868 cases in the 2015/2016[4] financial year. Insider trading charges comprised 78 of these actions, some of which were based on leads generated solely through data analysis. In one example, the SEC and Department of Justice brought insider trading charges against a Barclays investment banker and his friend after data revealed that the friend had traded ahead of ten mergers involving Barclays[5].

Despite the increased use of analytics, the SEC still often lacks consistent and timely access to the data necessary to spot trading patterns that span numerous electronic platforms. The CAT will facilitate analytics-based enforcement by integrating and streamlining the various sources of data distributed across the fractured U.S. exchanges. Once the system is operational in 2018, we expect to see a further increase in data-driven enforcement investigations (and probably actions) for conduct that may otherwise have gone undetected.