Last month, the United States Securities and Exchange Commission (SEC) secured a record sentence against Raj Rajaratnam the founder of Galleon hedge fund, of eleven years for insider dealing. This high profile case, together with a number of other related convictions, has increased the focus on the FSA's track record in tackling and securing convictions in cases involving systemic and widespread market abuse. In May, Margaret Cole asked the coalition government to increase the maximum sentence for insider dealing to ten years (from seven years), in order to enable the FSA to emulate the successes of the SEC. This would bring the maximum penalty for insider dealing into line with other types of fraud in the UK, but would still remain significantly lower than the maximum sentences that can be imposed for insider dealing in the US. The highest sentence imposed to date by a UK court for insider dealing is three years and four months1, some way behind the 11 year sentence received by Mr Rajaratnam (US prosecutors had sought a sentence of 25 years). However, the gains made by those convicted in the UK to date have been significantly less than those in the Galleon case.
The success of the Galleon prosecutions was heavily dependant on "wire-tap" evidence obtained by the SEC. In the UK, although the Regulation of Investigatory Powers Act 2000 (RIPA) provides the FSA with limited powers of surveillance to "monitor, observe or listen" suspects,2 the interception of communications via telecommunication systems is expressly prohibited.3 The FSA does have powers to access records of telephone conversations (albeit for a limited window).
The European Commission's new Market Abuse Regulation (see below) would require the regulator to be empowered to obtain telephone and data traffic records from telecoms operators, so as to establish for example: the identity of suspects, that persons have been in contact at a certain time, and that a relationship between people exists.4 The results in the Galleon cases may well encourage the FSA to make fuller use of such tools.
Since 6 March 2009, FSA regulated firms have been required to record all telephone conversations and electronic communications relating to client orders and the conclusion of transactions in the equity, bond and derivatives markets, and to retain the recordings for six months.5 From 14 November, firms will also be required to record telephone conversations and electronic communications sent from or received on mobile telephones or other mobile handheld electronic communication devices.
The FSA has invested in a new surveillance and monitoring system, Zen, which replaces the existing Sabre II system. This system went live in August and is expected to strengthen market abuse monitoring, alerting and reporting functions, possibly enhancing its ability to detect cases involving systemic and widespread market abuse.