Trends in Regulatory Enforcement in UK Financial Markets 2018/19 Mid-Year Report
By Erin B. McHugh and Kanchan Pathak
The FCA's Enforcement Annual Performance Report indicates that the regulator is opening more cases per year
than ever before, consistent with the trend observed in our previous report. While the number of cases being closed has also increased, the number of open cases at year-end 2017/18 was higher
than in any year since the FCA was created. With the FCA having to prioritise resources for Brexit, this trend is unlikely
to reverse in the near future.
Trends in Regulatory Enforcement in UK Financial Markets 2018/19 Mid-Year Report
Erin B. McHugh and Kanchan Pathak1
NERA Economic Consulting maintains a proprietary database (the NERA FCA database) of fines and non-pecuniary enforcement by the Financial Conduct Authority (FCA).2 In this report, we present a detailed analysis of these data, supplemented with data on redress schemes agreed with the FCA and fines associated with Deferred Prosecution Agreements (DPAs) agreed with the Serious Fraud Office (SFO), to reveal trends that may not be apparent from a review of individual cases.
Unless noted otherwise, the data presented for the financial year 2018/2019 are for the first six months of the financial year (1 April 2018 to 30 September 2018).3 In Figure 1 to Figure 6 of this report, the six-month data have been annualised (scaled up) to show estimated full-year results assuming that the number of outcomes (or total amount of fines) in the second half of the 2018/19 financial year equals that in the first half. Additional data on the number and amount of fines by period (including by category of alleged misconduct) are available on NERA's website.4
Following conclusion of the large-scale investigations into foreign exchange and interbank rate manipulation, which resulted in fines against firms totalling more than 2 billion during the financial years 2012/13 to 2015/16, the FCA has redirected its enforcement priorities. With respect to firms, the FCA has emphasised its willingness to use the full range of its enforcement powers, using means other than fines where considered appropriate. Data confirm that the FCA's use of non-pecuniary enforcement measures has expanded in the last few years. The FCA has also made use of redress schemes agreed with firms to compensate victims of alleged misconduct. Moreover, consistent with the shift observed in the financial years 2016/17 and 2017/18, the majority (by count) of fines in the first half of 2018/19 were issued against individuals (rather than firms). With the Senior Managers and Certification Regime (SM&CR) coming into full effect in 2019, we may continue to see increased enforcement activity against individuals going forward.
The FCA has lowered its threshold for opening an investigation and is now opening more cases per year than ever before. However, with the FCA's focus on preparation for withdrawal from the EU,5 the regulator may struggle to close these investigations quickly.
Capital market disclosure issues remain a focus area for the FCA. In this edition of our report, we discuss how economic experts estimate economic loss due to an alleged misstatement or omission by a company.
Aggregate Amount for Individuals ( Millions)
Aggregate Amount for Firms ( Millions)
Update on FCA Enforcement Activity
In the first six months of the 2018/19 financial year, the number and aggregate amount (i.e., total value) of fines imposed on both firms and individuals remained at a low level. A slight uptick was observed in the total amount of fines on individuals relative to the amount in the prior financial year (see Figure 1).
Figure 1. Annual FCA Fines 2013/142018/19
20 15 10
Individual (Left-Hand Side Axis)
Firm (Right-Hand Side Axis) 2,000
Number of Fines
The FCA imposed two fines on firms and five fines on individuals in the first half of 2018/19, totalling 1.6 million and 0.9 million, respectively. Both in terms of the number of fines and the total amount of fines, fines imposed in the first half of 2018/19 exceeded those levied in the first six months of the 2017/18 financial year (where no fines on firms were imposed and only four fines were imposed on individuals, totalling 0.3 million). For the full 2017/18 financial year, there were six fines on firms and ten fines on individuals, totalling 69.0 million and 0.9 million, respectively. All of the 69.0 million in fines against firms in the financial year 2017/18 were imposed in the second half of the year. We are on track to observe a similar pattern this year, with over 50 million in fines already issued against firms since October.
Number of Fines
Number of Fines
Number of Fines
We classify FCA fines into four categories based on the economic impact and nature of the alleged misconduct, namely: Market Integrity Violations, Customer Protection Failures, Compliance Failures, and Other Fraud or Misconduct.6 Figure 2 below shows that the number of fines imposed on both firms and individuals has generally been declining over the past few years across all four categories of alleged misconduct.
Figure 2. Number of Annual FCA Fines by Category of Alleged Misconduct 2013/142018/19
25 Market Integrity Violations
Customer Protection Failures
Other Fraud or Misconduct
0 2013/14 2015/16 2017/18 2013/14 2015/16 2017/18 2013/14 2015/16 2017/18 2013/14 2015/16 2017/18
Both of the fines imposed on firms in the first half of this financial year fell under the Customer Protection Failures category. For individuals, two fines were imposed under the Customer Protection Failures category, and one fine was imposed in each of the three remaining categories. Closer examination of the total amount of fines across all four categories of misconduct reveals that the uptick in fines on individuals is driven by fines in the Customer Protection Failures and Compliance Failures categories (see Figure 3; note the different scales for the axes across panels).
Figure 3. Aggregate Annual FCA Fine Amounts by Category of Alleged Misconduct 2013/142018/19
Aggregate Amount for Individuals ( Millions)
Other Fraud or Misconduct
Aggregate Amount for Firms ( Millions)
Other Fraud or Misconduct
Market Integrity 200 Violations
The median fine imposed on firms for the current financial year (based on data from the first six months) is the lowest since the FCA was created in 2013.7 However, the median fine imposed on individuals has gone up substantially in the current financial year (again, based on data from the first six months) and is in fact the second highest since financial year 2013/14. See Figures 4 and 5.
Aggregate Amount ( Millions)
Median Fine ( Millions)
Figure 4. Aggregate and Median Annual FCA Fine Amounts Against Firms 2013/142018/19
Fines Excluding Interbank Rate and FX Interbank Rate Fines FX Fines Scale-Up Median Fine
Figure 5. Aggregate and Median Annual FCA Fine Amounts Against Individuals 2013/142018/19
Aggregate Fines Scale-Up 20 Median Fine
Aggregate Amount ( Millions)
Median Fine ( Thousands)
Although the number of fines has generally been declining, use of non-pecuniary enforcement measures (excluding Threshold Condition outcomes)8 has continued to increase, as shown in Figure 6. As we discussed in our previous report,9 the increase in non-pecuniary enforcement measures coincided with the FCA taking over regulation of consumer credit firms, which more than doubled the number of firms regulated by the FCA. The pace of non-pecuniary enforcement in 2018/19 appears to be similar to that in 2017/18, the financial year with the highest level of non-pecuniary enforcement since the inception of the FCA.
In the first six month of 2018/19, the FCA applied non-pecuniary enforcement measures against 72 firms and 60 individuals. With SM&CR being extended to insurers in December 2018, and then to solo-regulated financial services in December 2019, the use of non-pecuniary enforcement measures will likely continue to increase, in particular with respect to individuals.
Figure 6. FCA Enforcement Activity Against Firms and Individuals 2013/142018/19
Financial Penalty Non-Pecuniary Measure Scale-Up 120
The FCA's Enforcement Annual Performance Report indicates that the regulator is opening more cases per year than ever before (see Figure 7), consistent with the trend observed in our previous report.10 While the number of cases being closed has also increased, the number of open cases at year-end 2017/18 was higher than in any year since the FCA was created. With the FCA having to prioritise resources for Brexit, this trend is unlikely to reverse in the near future.
Number of Outcomes
Number of Cases
Figure 7. Cases Opened and Closed by the FCA 2013/142017/18
Cases Opened During the Year 500 Cases Closed During the Year
Open Cases at Year-End
The FCA has emphasised its willingness to use the full range of its enforcement powers, including means other than fines, where considered appropriate.11 For example, the FCA has made use of redress schemes through which regulated firms agree to compensate victims of alleged wrongdoing. The FCA also coordinates with other regulators, including the SFO, and considers their actions when determining enforcement outcomes. For example, we have previously noted that the FCA declined to fine Tesco for market abuse in view of factors that included the SFO's penalty for substantially similar conduct.12 In this report, for the first time we present data not only on FCA fines, but also on fines associated with Deferred Prosecution Agreements (DPAs) agreed with the SFO. We also show estimated amounts associated with redress schemes agreed with the FCA (see Figure 8).
Figure 8. FCA Aggregate Firm Fines and Redress Estimates, and SFO Fines from DPAs 2013/142018/19
FCA Firm Fines FCA Redress Agreed with Firms SFO DPA Fines
Aggregate Amount ( Millions)
2017/18 2018/19 (H1)
The estimated redress amounts shown in Figure 8 correspond to 15 different redress schemes announced in final notices.13 These amounts do not include any amounts associated with voluntary redress schemes, which may have preempted issuance of a final notice by the FCA. Hence, these amounts likely underestimate the total compensation to consumers. (Note that, unlike in Figure 1 to Figure 6, the data shown in Figure 8 for 2018/19 have not been annualised.)
While there have only been four fines issued in connection with DPAs since their introduction in February 2014 (and none in the first half of 2018/19), two of these fines exceed 100 million. The four fines issued in connection with DPAs are listed below:
The SFO secured the first UK DPA with Standard Bank in November 2015, pursuant to which the firm agreed to pay a fine of approximately 17 million to suspend an indictment alleging failure to prevent bribery.14
In July 2016, the SFO secured a DPA with an unnamed firm that paid a fine of approximately 7 million to suspend an indictment alleging conspiracy to corrupt, conspiracy to bribe, and failure to prevent bribery.15
Rolls-Royce entered into a DPA with the SFO in January 2017 that involved a fine of 497 million to suspend an indictment alleging offences of conspiracy to corrupt, false accounting, and failure to prevent bribery.16
In connection with the SFO's most recent DPA, in March 2017 Tesco agreed to pay a fine of approximately 129 million to suspend prosecution of allegations relating to false accounting by its subsidiary.17
At the same time that Tesco's DPA with the SFO was announced, the FCA announced that Tesco had also agreed to a redress scheme to compensate investors.
Focus on Timeliness and Adequacy of Market Disclosures
The FCA's March 2017 Tesco enforcement action marked the first time the regulator used its powers under section 384 of the Financial Services and Markets Act to require a listed company to pay compensation for market abuse. The FCA stated that Tesco's overstatement of expected profits in a trading update "gave a false or misleading impression about the value of publicly traded Tesco shares and bonds".18 The compensation payable to investors under the redress scheme was estimated by the FCA at approximately 85 million, plus interest.19
In our last edition of this report, we noted that the FCA had opened more investigations into capital market disclosure issues.20 This continues to be a focus area for the regulator. Recent enforcement actions in relation to the timeliness and adequacy of market disclosures include:
A 27 million fine issued on 17 October 2017 against global mining company Rio Tinto for breaching Disclosure and Transparency Rules by failing to impair the value of one of its assets in a timely fashion in its financial reporting. FCA Executive Director of Enforcement and Market Oversight Mark Steward stated that the Rio Tinto fine was "the largest fine imposed to date by the FCA for a breach of rules relating to a firm's official listing and demonstrates how vitally important high standards of disclosure and transparency are to ensuring our markets function fairly and effectively".21
A 70 thousand fine issued on 13 December 2017 against investment company Tejoori Limited for breaching the Market Abuse Regulation (MAR) by failing to promptly disclose inside information. This was the first fine imposed by the FCA on an Alternative Investment Market (AIM) company22 for late disclosure following the introduction of MAR on 3 July 2016.23 Mr Steward stated, "Tejoori's failure to promptly disclose inside information misled the market in Tejoori's shares and prevented investors from making fully informed investment decisions".24
The FCA has also opened at least five other investigations related to capital market disclosure issues in the last two years, at least three of which appear to be ongoing:25
Construction and support services provider Carillion: In January 2018, Carillion announced that the FCA had opened an investigation into the timeliness and content of its disclosures to the market between December 2016 and July 2017. Separately, the FCA is also investigating allegations of insider dealing in Carillion's shares.26
Internet of things solutions company Telit: In March 2018, Telit informed the market that it had been notified by the FCA of an investigation into the timeliness of announcing certain items included in its interim results published in August 2017.27
Construction and support services company Interserve: In May 2018, Interserve announced an FCA inquiry into the firm's disclosures to the market between July 2016 and February 2017 regarding its decision to exit the energy-to-waste business; the firm had initially estimated a cost provision of 70 million associated with the decision, but later revised this provision to 160 million.28
Ensuring timely, accurate disclosures by listed companies is important to maintaining the integrity of the UK capital markets, an objective of the FCA.29 MAR requires issuers "to publicly disclose inside information which directly or indirectly concerns them as soon as possible".30 Shareholders can suffer economic loss due to misstatements or omissions in a company's disclosures, as discussed in more detail in the next section. Moreover, a delay in publishing inside information can allow insiders to benefit by trading on that information.
Estimating Economic Loss Due to an Alleged Misstatement or Omission A basic principle of finance theory is that the value of a company's share is equal to the present discounted value of expected future cash flows (for example, dividends) accruing to shareholders.31 If a company's shares trade in an efficient market,32 the share price will reflect its value based on all publicly available information and will rapidly adjust to reflect any new (and value-relevant) information. Misstatements or omissions in a company's public disclosures can therefore potentially affect the company's share price. For example, an overstatement of earnings guidance may result in share price "inflation", whereby shares trade at a higher price than their "true" value--meaning the price at which the securities would have traded had the company not overstated its earnings guidance. Shareholders can suffer an economic loss if they purchase shares at an inflated price and hold those shares through what is referred to as a "corrective disclosure"--meaning a disclosure that reveals the "truth" to the market and reduces or removes share price inflation. To illustrate this concept, consider a simple hypothetical example. Figure 9 shows the share price quoted in pence sterling (GBX) for a hypothetical company (1 GBP = 100 GBX). Assume that on Day 1, the company misstates its earnings guidance to the market, providing an overstatement of expected earnings. Then on Day 100, the company discloses that the previous earnings guidance was overstated and provides revised earnings guidance. We will refer to this period between Day 1 and Day 100 as the "alleged inflation period". Following the company's announcement on Day 100, the company's share price declines, closing at a share price that is 50p (pence) per share lower than the closing share price on the prior day.
Figure 9. Share Price of (Hypothetical) Company 300 Alleged Inflation Period 250
Closing Price (GBX)
Alleged Misstatement of
Previous Earnings Guidance
0 Day 1
The typical starting point in estimating share price inflation (and, hence, associated economic loss, if any, to shareholders) is an analysis of the share price reaction upon a corrective disclosure. In our hypothetical example, the share price dropped by 50p per share on the date of the corrective disclosure. However, some of this share price drop could be due to factors other than the corrective disclosure (e.g., general market movements or industry-wide factors). Economic experts use a statistical method known as an "event study" to isolate the share price reaction to the corrective disclosure (if any) from other factors affecting the share price.33 The event study method is the standard approach used to establish loss causation and estimate damages in US shareholder class action litigation, and has also been used in shareholder litigation in other jurisdictions (e.g., Canada, Australia, and the Netherlands).
For example, the FCA appears to have relied upon an event study method to estimate compensation under the Tesco redress scheme, stating:
The approach to compensation has been derived by looking at the fall in the price of the relevant shares and bonds between close of trading on [the last trading date before the corrective disclosure] and close of trading on [the date of the corrective disclosure] and adjusting for economy-wide and industry-wide effects on price movements.34
The remainder of this section provides a brief overview of the principal steps economic experts use to perform an event study and estimate share price inflation (if any) due to an alleged misrepresentation or omission, using our hypothetical example as a case study. While we use our simple hypothetical example to illustrate these steps, we also discuss potential complicating factors that may require further economic analysis.
1. Estimate market model A market model is estimated using regression analysis and measures the statistical relationship between a company's share price returns and the returns of the "market". A market model could allow us to state, for example, that, when the FTSE 100 increases by 1%, based upon historical data we would expect the company of interest's share price to increase by approximately 1.5%.
The "market" can be proxied by a broad market index, an industry index, or both. An economic expert may also build a custom index of peer companies to the company of interest. The market model is ideally estimated over a "clean period" that is unaffected by any alleged misstatements or omissions by the company. Care must also be taken in deciding the length of the estimation window. Here, a trade-off applies.35 The longer the estimation window, the more data is available to estimate the market model, implying more accurate regression results. However, with a longer estimation window, it is also more likely that the underlying relationship between the company's share price returns and the returns of the market may have changed over the period. Economic experts use regression statistics--for example, the r-squared36--to assess the fit of a regression model and to determine the appropriate estimation window and explanatory variable(s) for a company's share price returns.
2. Estimate predicted share price return and excess share price return associated with company-specific disclosure(s) The parameters of the market model allow us to estimate a predicted share price return for the company of interest had no disclosure been made on that date. This predicted share price return is then compared to the observed share price return, with the difference representing the abnormal or excess return. To determine whether the observed excess return may be due to chance alone (rather than any company-specific disclosure), an economic expert performs tests for statistical significance.
Absent any other company-specific news released concurrently with the corrective disclosure (referred to as "confounding news"), we can assume that any statistically significant excess return is attributable to the corrective disclosure. If, however, there is confounding news, techniques should be used, where possible, to isolate the effect of the corrective disclosure. The appropriate procedure to do so will depend upon the available data and the nature of the disclosures. For example, if the corrective disclosure is made at a different time of day than the confounding news, it may be possible to use intra-day share price data to isolate the separate effects of these disclosures.
Returning to our hypothetical example, let us assume for the sake of simplicity that there is no confounding news. Let us further assume that of the 50p price decline following the company's corrective disclosure, we attribute 20p to market movements, using our estimated market model. Assuming the observed excess return is statistically significant, we might attribute the remaining 30p price decline to the corrective disclosure.
3. Estimate inflation over alleged inflation period In the previous step, we estimated that 30p of the decline in the share price is attributable to the corrective disclosure. The question we now face is what the effect of the corrective disclosure would have been at an earlier point in time in the alleged inflation period. A commonly used approach is to assume that the corrective disclosure would also have resulted in the same 30p decline at each earlier point in the alleged inflation period. This is referred to as the "constant level" (or "constant dollar") inflation method. This is the method that appears to have been used in Tesco's redress scheme agreed with the FCA.37 In our hypothetical example, use of the constant level inflation method would mean that the alleged true value of the share price remained 30p per share below the observed trading price at each point in time during the alleged inflation period. See Figure 10.
Closing Price (GBX)
Figure 10. Alleged Inflation Using Constant Level Inflation Method
Closing Price Alleged True Value 250
Alleged Inflation Period
100 Alleged per Share Inflation of 30 Pence
0 Day 1
Another method is to assume that inflation remained a constant percentage of the observed share price (the "constant percentage" method). The appropriate inflation method to use in each case will depend upon the nature of the alleged misstatement or omission.38
In our hypothetical example, we assume a single misstatement and a single corrective disclosure. Often there are multiple alleged misstatements and/or multiple (partial) corrective disclosures. In such cases, inflation may be best modelled as changing during the alleged inflation period--for example, increasing with each alleged misstatement and decreasing with each corrective disclosure.
4. Estimate aggregate economic losses to shareholders From an economic standpoint, investors who purchase shares at an inflated price and hold those shares through a corrective disclosure are considered to have suffered a loss that is attributable to the misrepresentation or omission. Figure 11 illustrates this concept using our hypothetical example.
Shares purchased prior to the alleged misstatement are not considered to have been purchased at an inflated price. Only those shares purchased during the alleged inflation period may be associated with an economic loss due to inflation ("inflation loss"). In this specific example, using the constant level inflation method, shares purchased during the alleged inflation period but sold prior to the corrective disclosure would not be associated with an inflation loss. This is because, in this example, the overpayment at purchase is (fully) recovered through a sale at an inflated price.
Closing Price (GBX)
Figure 11. Determining Loss Due to Alleged Inflation
Purchases Made During the Alleged 250 Inflation Period
Sold Before Disclosure--No Inflation Loss 200 Sold After Disclosure-- Inflation Loss
Alleged Inflation Period
0 Day 1
Depending upon the specifics of each case, it is possible that a shareholder may not fully recover the amount of any alleged inflation paid at purchase upon a sale prior to the corrective disclosure and, hence, may claim an economic loss. In the UK, there is no precedent for whether such a loss would be considered recoverable as damages. In the US, following the Supreme Court decision in Dura, it has been argued that any inflation losses incurred prior to a corrective disclosure do not meet loss causation requirements and are therefore not recoverable.39 We note that, with respect to the Tesco redress scheme, the FCA stated, "Those purchasers who sold all of their shares or bonds before the corrective statement was issued on 22 September 2014 will not have suffered any loss as a result of the market abuse and are therefore ineligible to claim under the scheme."40 Here, therefore, only those shareholders who purchased during the alleged inflation period and held through the corrective disclosure were eligible for compensation.
Going back to our hypothetical example, estimating aggregate economic losses to shareholders requires an estimate of how many shares were purchased during the alleged inflation period and held through the corrective disclosure. In the absence of complete transaction-level data, economic experts can use trading models that consider the behaviour of different types of investors to estimate the number of affected shares.41
Going forward, we may see further enforcement outcomes and agreed redress schemes in relation to capital market disclosure issues. NERA will continue to monitor and analyse these developments as they unfold.
1 Ms McHugh is an Associate Director and Mr Pathak is a Consultant at NERA Economic Consulting. The authors would like to thank Brad Heys and Robert Patton for valuable feedback on earlier drafts, and Trudy Pham, George Moschopoulos, and Nick Shin for research assistance.
2 The NERA FCA database includes data from all final notices issued by the FCA (and its predecessor, the FSA, before 2013) going back to 2002. The annual number and aggregate amount of fines derived from this database may differ from statistics published by the FCA in its annual reports. This is for several reasons. First, beginning with its 2009/10 Annual Report, the FCA assigns each fine to a financial year based on the publication date of the press release announcing the fine, whereas NERA uses the date of the final notice. Second, the FCA does not include in its count of fines those reduced to zero owing to financial hardship, whereas NERA does. NERA also includes in its count of fines (though they sum to a total fine amount of zero) instances where the final notice indicates that the FCA decided not to fine an individual or firm for reasons including a penalty from another regulator for the same or similar conduct (see, for example, our discussion regarding the FCA's Tesco enforcement action). Finally, NERA treats fines on sole proprietorships (i.e., businesses consisting of a single individual) as having been imposed on individuals, whereas the FCA classifies these as fines on firms.
3 FCA financial years start on 1 April and end on 31 March. 4 http://www.nera.com/publications/archive/2019/trends-in-regulatory-enforcement-in-uk-financial-markets-reports.html 5 Financial Conduct Authority, "Business Plan: 2018/19", pp. 1617, available at
https://www.fca.org.uk/publication/business-plans/business-plan-2018-19.pdf. 6 For a more detailed discussion of these four categories, please refer to the appendices in our earlier publications--e.g.,
Erin McHugh and Robert Patton, "Trends in Regulatory Enforcement in UK Financial Markets 2016/17 Mid-Year Report", 8 December 2016, available at http://www.nera.com/publications/archive/2016/trends-in-regulatory-enforcement-in-uk-financialmarkets-2016-17.html. 7 The calculation of the median fine excludes fines reduced to zero, for example, because of financial hardship. 8 Threshold Conditions are fundamental requirements firms must meet and maintain for authorisations. The FCA can vary or cancel a firm's permission in cases where the firm fails to meet these requirements. See Financial Conduct Authority, "The FCA Handbook", 1 March 2016, Section 2.3.1. 9 See Erin McHugh, "Trends in Regulatory Enforcement in UK Financial Markets: 2017/18 Mid-Year Report", 18 January 2018, p. 9, available at https://www.nera.com/publications/archive/2018/trends-in-regulatory-enforcement-in-uk-financial-markets--2017-1.html. 10 Ibid, p. 17. 11 Financial Conduct Authority, "FCA Mission: Our Approach to Enforcement", March 2018, pp. 1314, available at https://www. fca.org.uk/publication/corporate/our-approach-enforcement.pdf. 12 See Erin McHugh, "Trends in Regulatory Enforcement in UK Financial Markets: 2017/18 Mid-Year Report", 18 January 2018, p. 6. 13 Each redress amount is estimated as of the date of the final notice and therefore may differ from the actual redress paid over the life of the scheme. 14 Serious Fraud Office, "SFO agrees first UK DPA with Standard Bank", 30 November 2015, available at https://www.sfo.gov. uk/2015/11/30/sfo-agrees-first-uk-dpa-with-standard-bank/. Fine is converted from USD to GBP using the exchange rate at the date of the agreement. See Serious Fraud Office, "Deferred Prosecution Agreements", available at https://www.sfo.gov.uk/publications/guidance-policy-and-protocols/deferred-prosecution-agreements/.
15 Serious Fraud Office, "SFO secures second DPA", 8 July 2016, available at https://www.sfo.gov.uk/2016/07/08/sfo-secures-second-dpa/.
16 Serious Fraud Office, "SFO completes 497.25m Deferred Prosecution Agreement with Rolls-Royce PLC", 17 January 2017, available at https://www.sfo.gov.uk/2017/01/17/sfo-completes-497-25m-deferred-prosecution-agreement-rolls-royce-plc/.
17 Tesco PLC, "Deferred Prosecution Agreement in Relation to Historic Accounting Practices", 28 March 2017, available at https://www.tescoplc.com/news/news-releases/2017/deferred-prosecution-agreement-in-relation-to-historic-accounting-practices/.
18 Financial Conduct Authority, "Tesco to pay redress for market abuse", 28 March 2017, available at https://www.fca.org.uk/news/press-releases/tesco-pay-redress-market-abuse.
19Ibid. 20 See Erin McHugh, "Trends in Regulatory Enforcement in UK Financial Markets: 2017/18 Mid-Year Report", 18 January 2018, p. 20. 21 Financial Conduct Authority, "Rio Tinto plc fined 27m for breaching Disclosure and Transparency Rules", 17 October 2017, available
at https://www.fca.org.uk/news/press-releases/rio-tinto-plc-fined-%C2%A327m-breaching-disclosure-and-transparency-rules. 22 AIM is a sub-market of the London Stock Exchange that is designed to offer smaller companies the opportunity to raise capital
from the public market. See full definition on AIM, available at https://www.londonstockexchange.com/companies-andadvisors/aim/for-companies/companies.htm. 23 Financial Conduct Authority, "Market Abuse Regulation", available at https://www.fca.org.uk/markets/market-abuse/regulation. 24 Financial Conduct Authority, "AIM Investment Company fined for failing to disclose inside information as soon as possible", 14 December 2017, available at https://www.fca.org.uk/news/press-releases/aim-investment-company-fined-failing-disclose-insideinformation-soon-possible.
25 In March 2017, Cobham reported that the FCA's enforcement division was investigating its handling of inside information in the weeks before its April 2016 rights issue (see Peggy Hollinger, "Cobham faces FCA investigation over profit warning", Financial Times, 27 March 2017, available at https://www.ft.com/content/09c905ae-deac-31ca-8fe9-968626d30907. In August 2017, Mitie disclosed that the firm has been notified of an FCA probe into the timeliness of its profit warning in September 2016 (see Naomi Rovnick, "Financial watchdog probes Mitie on profit warning", Financial Times, 29 August 2017, available at https://www.ft.com/content/e6f0c052-8c81-11e7-a352-e46f43c5825d. The FCA announced that its investigations into Mitie and Cobham were discontinued in June 2018 (see Katie Martin, "FCA ends probe into Mitie's 2016 profit warning", Financial Times, 27 June 2018, available at https://www.ft.com/content/ a393e48c-79d0-11e8-bc55-50daf11b720d and August 2018, respectively (see "Discontinuation of FCA Investigation", Financial Times, 15 August 2018, available at https://markets.ft.com/data/announce/detail?dockey=1323-137568351G97M7MOOIRE9I8R478H1P4HV7.
26 Cat Rutter Pooley, "FCA launches investigation over Carillion market updates", Financial Times, 3 January 2018, available at https://www.ft.com/content/96d2855e-6b17-38d3-91f9-f20ce2ca63df.
27 Caroline Binham and Nic Fildes, "UK financial watchdog launches probe of Telit", Financial Times, 27 March 2018, available at https://www.ft.com/content/4a70b796-31a4-11e8-ac48-10c6fdc22f03.
28 Gill Plimmer and Naomi Rovnick, "FCA probes Interserve over market announcements", Financial Times, 11 May 2018, available at https://www.ft.com/content/4a30c9e6-54e1-11e8-b3ee-41e0209208ec.
29 The FCA has an operational objective to "protect financial markets", stating "we protect and enhance the integrity of the UK financial system". See, for example, https://www.fca.org.uk/about/the-fca.
30 Financial Conduct Authority, "Market Abuse Regulation", 4 May 2016 (updated 25 September 2018), available at https://www.fca.org.uk/markets/market-abuse/regulation.
31 Richard Brealey, Stewart Myers, and Franklin Allen, Principles of Corporate Finance, 2003, pp. 6061. 32 "The Efficient Market Hypothesis, as defined by Fama (1970), states that a market is efficient if asset prices fully reflect the
information available. [...] Further, the information is impounded in the prices correctly and instantaneously as soon as it becomes known." See Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried, The Analysis and Use of Financial Statements, 2003, p. 166. 33 An event study analyses the change in share price following a disclosure. If a share does not trade in an efficient market, then new information may not be rapidly impounded in the share price and the results of an event study may not be reliable. 34 See FAQs published by KPMG LLP, as Administrator of the Tesco Compensation Scheme (the "Tesco Scheme"), 23 February 2018, p. 4, available at https://assets.kpmg.com/content/dam/kpmg/uk/pdf/2017/08/tcs-general-faqs.pdf. Emphasis added. 35 David Tabak and Chudozie Okongwu, "Inflation Methodologies in Securities Fraud Cases: Theory and Practice", July 2002, available at http://www.nera.com/publications/archive/2002/inflation-methodologies-in-securities-fraud-cases-theory-and-pr.html. 36 "R-squared, or the coefficient of determination, provides a descriptive measure of the proportion or percent of the total variability of a dependent variable that is explained by the regression model." See Paul Newbold, William Carlson, and Betty Thorne, Statistics for Business and Economics, 2003, p. 387. 37 For example, each net purchaser of Tesco shares during the alleged inflation period was entitled to compensation of 24.5p per share, regardless of the date at which the shares were purchased within the alleged inflation period. See Tesco PLC, "Tesco Redress Scheme: FAQs", 28 March 2017, available at https://www.tescoplc.com/media/392145/redress-scheme-faqs.pdf. 38 For further discussion of inflation methodologies, see David Tabak and Chudozie Okongwu, "Inflation Methodologies in Securities Fraud Cases: Theory and Practice", July 2002. 39 Dura Pharmaceuticals, Inc et al. v. Broudo et al., 544 US 336, 125 S. Ct. 1627. 40 See Financial Conduct Authority, "Tesco to pay redress for market abuse", 28 March 2017. 41 See, for example, Marcia Kramer Mayer, "Best-Fit Estimation Of Damaged Volume in Shareholder Class Actions: The MultiSector, Multi-Trader Model of Investor Behavior", October 2000, available at http://www.nera.com/publications/archive/2000/ bestfit-estimation-of-damaged-volume-in-shareholder-class-actio.html.
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