We are please to release autumn's issue of Global Market Abuse News.


Hong Kong 

SFC takes legal action against CITIC and former directors 

On 11 September 2014, the Securities and Futures Commission (SFC) launched proceedings in the Court of First Instance and the Market Misconduct Tribunal (MMT) against CITIC Limited (CITIC) (a PRC mining and property conglomerate listed in Hong Kong) and five of its former executive directors for allegedly disclosing false or misleading information.

The SFC alleges that a statement (contained in a circular CITIC issued in September 2008) confirming that CITIC's directors were unaware of any adverse material change in CITIC's financial position was false or misleading. This was because CITIC and the five directors were, at the time of making the statement, allegedly aware of a large financial exposure arising from its investment in certain leveraged foreign exchange contracts.  This, the SFC contends, is in breach of sections 277 or 298 of the Securities and Futures Ordinance (SFO), which ban any company or person from distributing materially false or misleading information that is likely to induce another person to subscribe for or buy securities.

The total value of purchases of CITIC's shares at the relevant time amounted to approximately HK$1.9bn. The SFC is seeking compensation or restoration orders in the court of first instance under section 213 of the SFO and sanctions against CITIC and the five directors in the MMT.  Assuming liability is established, the court of first instance will assess the amount of compensation to investors or restore them to their pre-transaction position.

The SFC's action comes four years after completing its investigation and on the eve of the expiry of the six-year limitation period to bring a civil lawsuit.

"These proceedings are consistent with the SFC's aim of obtaining equitable remedies[1]".  Any compensation or restoration ordered will serve as an important precedent for the calculation of the amount potentially required to restore or compensate a shareholder who traded in a market affected by false or misleading information.


Japan's regulator considers the first case involving manipulation of bond futures

On 5th September 2014 the Securities and Exchange Surveillance Commission (SESC) announced that it had recommended to the Financial Services Agency (FSA) a 330,000 yen (approximately US$3,000) administrative penalty against a Singapore-based trader for suspected market manipulation of 10-year Japanese government bond (JGB) futures.  The SESC stated that it suspected the trader of using a technique by which an investor places a large number of orders, which are later withdrawn, to create a misleading impression of demand in the market, creating an opportunity for profit for the trader.

The FSA is considering whether to impose the recommended penalty but this will be the first administrative fine against an investor for manipulation of JGB futures if the FSA follows the SESC's recommendation[2].

People's Republic of China 

China's  regulator  dismisses member of IPO Review Committee for alleged insider trading 

On 18 September 2014, the China Securities Regulatory Commission (CSRC) announced that it had dismissed a member of its initial public offerings review committee (the IPO Review Committee) for alleged insider trading and had commenced an investigation into the matter.

Deng Ruixiang, who was appointed to the 25-member IPO Review Committee in May 2014, is currently being investigated for suspected insider dealing that occurred prior to his appointment as a member of the IPO Review Committee. Mr Deng had previously been a general manager at China Life Asset Management, the investment arm of China Life Insurance. 

This is the first time that the CSRC has formally investigated a member of its IPO Review Committee, signalling a continued commitment by the regulator to combat market abuse and other illegal behaviour, to boost investors' confidence in newly listed companies. The CSRC said in a statement relating to Mr Deng's dismissal that it would toughen disciplinary actions and punish all offenders heavily[3].



Paris Criminal Court judgment: criminal sanctions supplement AMF's administrative sanctions

On 26 September 2014, the Paris Criminal Court imposed suspended prison sentences and fines of up to €2.5m on four defendants for insider trading in the context of an imminent announcement related to the takeover bid for Pechiney by Alcan in 2003.

The prosecution occurred after the Sanctions Commission of the French Financial Markets Authority (AMF) imposed administrative penalties of up to €1.5m on the same individuals for the same conduct in 2008.   

Under French legislation, the same market abuse conduct can be subject to both administrative and criminal sanctions, although cases of double sanctions are rare.

This decision occurred almost seven months after the European Court of Human Rights (ECHR) gave its judgment regarding the Grande Stevens case (Grande Stevens et al. v. Italy) on 4 March 2014.  The ECHR entered judgment against the state of Italy for prosecuting individuals for market manipulation even though they had already been charged with administrative sanctions by Italy's regulator.  The Paris Criminal Court did not disregard this decision, however, the judges relied on the decision on 22 January 2014 in which the French Supreme Court (Cour de cassation) refused to apply the principle of ne bis in idem in cases where administrative jurisdictions had rendered their decisions before the criminal courts imposed a sentence.

AMF's Sanctions Commission punishes an individual and firm for manipulation 

On 1 October 2014, the Sanctions Commission of the AMF imposed a €250,000 fine on Bourse Direct and an additional €75,000 fine on its client, Mr. Jean-Marie Puccio, in a case relating to market manipulation whilst online trading.

The Sanctions Commission found that Mr. Puccio had carried out price manipulation within the meaning of Article 631-1, 1° of the General Regulation of the AMF by investing on the small cap securities market using a recurring pattern, buying and selling securities on the same day without holding a market position for more than a trading day.  The AMF found that Bourse Direct did not have a compliance function with the necessary resources and expertise to carry out its operations and the AMF specifically criticised Bourse Direct for inadequate procedures to detect suspicious transactions that could involve price manipulation and the lack of a formal process to analyse and follow up alerts.

Despite the significant increase of the firm's activity in 2011, human resources in the control function were supplemented only at year end of 2011 and information technology resources supplemented at year end 2012.  Taking this into account, the Commission decided, notably, to go beyond the recommendations of the AMF Board and to impose upon Bourse Direct a €250,000 fine.


ECB assessment of banks' balance sheets creates tension with disclosure obligations

On 4 November 2014 the European Central Bank (ECB) took on the supervision of various banking groups under the single supervisory mechanism.  In view of this, the ECB conducted a comprehensive assessment including a balance sheet assessment of these banking groups and the results were recently published. To address its concern that information relating to the assessment of individual credit institutions released prior to the publication of the final results on the ECB website might lead to market disruption, the ECB  asked each bank to sign a confidentiality and non-disclosure agreement (NDA) for information re­lating to the comprehensive assessment. The initial draft of the NDA did not contain a carve-out for information required to be disclosed under national market abuse rules but, after feedback from the banks, the ECB  changed the terms of the NDA to permit such disclosures.

At least in Germany, the general view is that an issuer that is under a contractual confidentiality obligation is not exempted from statutory obligations to provide ad hoc disclosure. In other words, a mere contractual confidentiality obligation is not a legitimate interest of an issuer that would justify delay in disclosure.

In the future, Article 17 (5) of the Market Abuse Regulation will give an issuer that is a credit institution the option to delay the public disclosure of inside information on its own responsibility in order to protect the stability of the financial system. The disclosure may be delayed when:

  • it entails a risk of undermining the financial stability of the issuer and of the financial system;
  • it is in the public interest to delay the disclosure;
  • the confidentiality of that information can be ensured; and
  • the competent authority has consented to the delay.

It remains to be seen whether the ECB and other prudential regulators will ask banks to make use of this exemption in comparable cases in the future.


CONSOB clarifies scope of market manupulation conduct

In a recent decision, CONSOB determined that a false representation in the financial statements of a public listed company constituted a false communication of information by the issuer to the market, therefore it is conduct capable of being categorised as market manipulation under article 187-ter of the CFA[1].  Accordingly, CONSOB imposed an administrative sanction of Euro 400,000 on the CEO and on the officer responsible for drafting the financial statements of the public company.  This clarification of what conduct constitutes market manipulation represents an innovative approach by CONSOB in the Italian context.

CONSOB enforcement priorities 

In its 2013-2015 strategic plan, CONSOB stated that it intends to continue to focus its supervisory activities on verifying the integrity of the financial reporting provided by listed companies whose financial position is in doubt.   CONSOB's view is that, over the next three years, there will be a further increase in the number of listed companies in this position, giving rise to an increased risk of market manipulation and mispricing of listed securities.

CONSOB is already pursuing its stated objective as shown by the enforcement outcomes to date.  Last year, in two separate cases, CONSOB issued heavy sanctions against senior managers of listed Italian companies, who were charged with spreading false information and buying shares in those companies with the purpose of avoiding falls in share prices and dissimulating to the market the real financial position.  In these cases CONSOB and other regulators imposed administrative penalties on the individuals concerned amounting to Euro 11m and 3.4m and bans from holding certain roles for periods ranging from two to four years.  More enforcement actions in this vein are anticipated.


Let's Gowex: a Charade

The public knew little about Gowex, a telecoms company listed on the Spanish Alternative Stock Market (MAB), with offices in Madrid, Paris, London, Buenos Aires, Shanghai and Costa Rica until an article was published on 1 July 2014 that caused a stir in the market for its shares.

On 1 July 2014, the company Gotham City Research LLC (Gotham) published its report: "Let's Gowex: a Pescanovan Charade". Here it stated that Gowex's shares were worth €0.00 per share, and that over 90 per cent of Gowex's reported revenues did not exist. Gotham describes itself as a company which "focuses on due diligence-based, special situation investing", adding that "as of the publication date of our articles, we may have long or short equity positions in the companies covered".

The same day, Gowex denied the information in the article as completely untrue but the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores,CNMV) reacted swiftly, focusing on both Gowex and Gotham. The following day the CMNV made a public announcement that it had asked the Securities and Exchange Commission of the United States and the Financial Conduct Authority of the UK for information on Gotham so that the CNMV could investigate whether the document published by Gotham constituted market abuse according to Law 24/1988, of July 28, of the Spanish Stock Market.

Shortly after this, Jenaro Garcia, the founder of Gowex, admitted having misrepresented the financial accounts for at least the last four years.  Following this, he was charged with false accounting, distortion of economic and financial information and insider trading and Gowex filed for bankruptcy.

To prevent other cases similar to Gowex, the Spanish Government is considering measures to reform the MAB to allay concerns about its lower entry requirements, for example, excluding larger capitalization companies from the MAB.


Confiscation orders for insider dealers can exceed profits

Following successful criminal prosecutions for insider dealing in the UK, it is possible for the FCA to obtain confiscation orders for sums in excess of the profits made from the insider dealing if the relevant individuals are judged to have a criminal lifestyle.  If this is the case, profits from other trading during the relevant period can be assumed to be proceeds of crime. 

In a recent example, the FCA has applied to the court for and obtained confiscation orders amounting to £3.2m and cost orders amounting to £300,000 from seven convicted insider dealers[2].  Six of those people were convicted and sentenced to imprisonment in July 2012 for their involvement in an insider trading ring, which made approximately £730,000 in profit.  Confiscation orders were made for over £1m and one of them was ordered to pay costs to the FCA of £100,000 as well.  The seventh individual was convicted and sentenced to prison in March 2013 for insider dealing that made approximately £600,000 in profit and he was ordered to pay approximately £2.2m for confiscation of assets and £200,000 to the FCA for legal costs.  The FCA has applied for confiscation and costs orders in other cases but these confiscation orders are the largest sums obtained against insider dealers to date. 

UK's FCA emphasises increased role of surveillance

In a speech given recently by Patrick Spens, Head of Market Monitoring at the FCA, he emphasised the importance of routine transaction reports and suspicious transaction reports (STRs) by firms and the use to which this information is put by the FCA[3].  The FCA received 1,500 suspicious transaction reports last year.  The FCA has published guidance on the contents of suspicious transaction reports and recognises that it is receiving higher quality reports as a result.  The FCA still receives fewer STRs from certain inter-dealer brokers than it would expect considering their trading volume and will ask these brokers to submit a description of three transactions in the fixed income market that have come close to requiring an STR.  This is designed to assess the judgements being made on STRs at those firms. 

The FCA regards its in-house transaction monitoring system as unusual internationally in handling 13m transactions per day, containing a database of transactions going back to 2007 that can be used to analyse data and automatically forwards information for 8m transactions to ESMA for other regulators each day.  The data has already proved useful in enforcement cases, for example, providing comparative data in the enforcement action against a gilt trader, Mark Stevenson, in an enforcement action earlier this year[4].

North America


SEC bringing more cases, but fewer "blockbusters" 

The US Securities and Exchange Commission (SEC) continues its focus on insider trading enforcement, but has adopted an approach that goes beyond high-value, "blockbuster" transactions.  This follows a policy set out in October 2013 by the Chair of the SEC and former federal prosecutor, Mary Jo White, to pursue cases with lower values and lower stakes as well.  New data on enforcement activity suggests this is happening. 

For its 2013 fiscal year, the SEC reported 686 enforcement actions.  Recent data for its 2014 fiscal year shows a year-on-year increase, and in September alone the SEC filed civil charges against 36 individuals and companies, but in no case did it seek a penalty of more than US$370,000.  This follows some conspicuous losses earlier this year in large value cases against prominent individuals.  In the largest cases in 2014, the SEC reached seven settlements that exceed US$100m, four of which related to the 2008 financial crisis.  Under the current SEC leadership, increased numbers of enforcement cases in a broad range of areas is expected for the next few years.

SEC pays US$30m whistleblower award to overseas tipper 

In September 2014, the SEC announced a US$30m cash award to an individual outside of the United States who provided the SEC with a tip about violations of US securities laws.  This is the fourth time that the SEC has paid such an award to an individual living outside its jurisdiction and the largest award by the SEC to anyone, anywhere to date. 

Three years ago, the SEC started its "whistleblower" program in which it pays individuals who provide it with original information about securities violations, such as fraud, manipulation, and insider trading that lead to enforcement actions.  Awards are equal to 10 to 30 per cent of the monetary sanctions collected above US$1m.  Approximately 12 per cent of the SEC's tips come from individuals outside the US with the UK, Canada, and China leading the way and accounting for close to half of all non-US tips received.

The program remains controversial because of the potential incentive for an employee to circumvent a company's compliance program and report violations directly to the government.  US companies with subsidiaries abroad as well as non-US companies with shares traded on a US exchange (e.g., American Depository Receipts) should be mindful of the possibility that an employee could become a whistleblower.