7722656 Canada Inc (formerly carrying on business as Swift Trade Inc) and Peter Beck v the Financial Services Authority
On 23 January 2013, the Upper Tribunal upheld the FSA’s £8 million fine against Swift Trade Inc (“Swift”) (a dissolved Canadian company) for market abuse. The decision confirmed that the “layering” carried out by Swift constituted market abuse and that the FSA had jurisdiction to impose a penalty, despite Swift not being authorised by the FSA.
Layering (also known as “spoofing”) is where a person places a substantial order to buy or sell shares on one side of an order book, causing the share price to move as a result of increased supply or demand. A trade follows on the opposite side of the same order book, taking advantage of the share price movement. The initial large orders are then cancelled.
Swift allowed traders to place orders for contracts for differences (“CFD”) using dealing facilities with two of its direct market access providers (“DMA Providers”). The CFDs were placed in relation to shares quoted on the London Stock Exchange (“LSE”). The DMA Providers would then automatically hedge the trades with corresponding orders to buy or sell an equivalent quantity of shares on the LSE. This would achieve the objective of moving the price of the relevant shares and an actual trade would then be placed on the opposite side of the order book. The original orders would then be deleted.
A Decision Notice published by the FSA in May 2011 stated that the FSA intended to impose a fine of £8 million for breach of Section 118(5) of the Financial Services and Markets Act 2000 (“FSMA”).
Section 118(5) prohibits behaviour which occurs in relation to a qualifying investment and which consists of effecting transactions or orders to trade which are likely to give a false or misleading impression as to the supply of, demand for or price of a qualifying investment.
Swift argued that the Upper Tribunal lacked jurisdiction. Swift was incorporated in Canada, was not authorised by the FSA and had been dissolved prior to the publication of the Decision Notice. Swift therefore argued that, as it was “non-existent”, it could not have a penalty imposed upon it. The Upper Tribunal disagreed with this argument, stating that as the proceedings had been commenced before the dissolution, the case against Swift could proceed.
Swift also argued that the trades placed were in relation to CFDs which do not fall within the definition of “qualifying investments” under FSMA and therefore s118(5) could not apply. The Tribunal disagreed as when Swift placed orders it knew and expected that the DMA Providers would automatically place the corresponding orders on the LSE and that these corresponding orders were qualifying investments. It was not necessary for Swift to deal directly in the qualifying investments as Section 118 applies to behaviour which occurs “in relation to” qualifying investments. Further, the Tribunal noted that Section 118 could apply to one person alone or by persons acting jointly.
Swift argued that its trading strategy was transparent to the market and in accordance with accepted market practice. The Tribunal reviewed numerous emails by Swift employees that evidenced that it had tried to hide what it was doing from regulators. In addition, evidence was provided that concerns regarding the trading had been raised by representatives of the LSE and DMA Providers and that these concerns had been ignored. The Upper Tribunal determined that, as the trading deliberately gave a false impression as to the supply and demand of the instruments traded, at a detriment to other market users, it was market abuse.
The trades were not placed by employees of Swift but by dealers. Swift argued that it should not be responsible for the actions of such dealers which it described as “independent”. The Tribunal rejected this in light of the emails it had reviewed which it stated gave a clear impression that the dealers were acting on behalf of Swift and in accordance with the strategy determined by Swift.
The Upper Tribunal stated that Swift had deliberately set out to mislead the market for profit and described the case as being “as serious a case of market abuse of its kind as might be imagined”.
The FSA raised concerns about layering in 2009 and stated that it could constitute market abuse; this was reiterated in an FSA letter sent out to firms in December 2012. This decision by the Tribunal puts this theory beyond doubt and it would now be a very dangerous strategy for any firm to partake in layering or spoofing.
Furthermore, the decision serves as a reminder of the broad jurisdiction of FSMA. Firms with no territorial link to the UK can face enforcement action by the FSA even where they have traded in instruments that do not fall within the definition of a “qualifying investment” if the trading is behaviour “in relation to” a qualifying investment.
This is the largest fine imposed by the FSA for market manipulation.