The FCA has imposed a fine of £37,198 on Christopher Niehaus, a managing director at Jeffries International Limited for disclosing client confidential information over 'Whatsapp' in order to impress a friend and another Jeffries client.
Niehaus was an experienced and senior employee of Jeffries, responsible for European Industrial groups in Jeffries' Investment Banking division. As part of his role, he had regular access to confidential information, including information regarding forthcoming deals that Jeffries' clients would be involved in. The FCA found that on a number of occasions between 24 January 2016 and 16 May 2016, Niehaus used Whatsapp to share client confidential information regarding two Jeffries clients, with both a third Jeffries client and a friend. The FCA also found that he had communicated confidential information during a social gathering. By way of example:
- In a Whatsapp conversation over 24 and 25 January 2016, Niehaus told a friend that he was working on a deal for a client of Jeffries. Niehaus provided the name of the client and said that it was involved in a potential acquisition of another company. This was in the context of a discussion about how Niehaus might pay off his mortgage by receiving a bonus if that deal was successful.
- During a social gathering on 22 April 2016, Niehaus told a Jeffries client that a second client was about to complete a rights issue. He did this in Whatsapp conversations on 21 and 23 April, naming the second client to whom the information related. These two Jeffries clients were competitors.
Niehaus told the FCA that the purpose of these communications was simply to impress the recipients and he accepted that he should have known better. Consistent with this, the FCA found that neither Niehaus' friend nor the Jeffries client to whom disclosure was made, actually dealt in the securities in relation to which Niehaus had provided information. The FCA also found that Niehaus had not expected them to deal in these securities when he disclosed the confidential information.
The FCA determined that Niehaus had acted contrary to Principle 2 of the Statement of Principles for Approved Persons (acting with due skill care and diligence). The disclosure of information about one client's prospective rights issue to a competitor was considered to be particularly serious, as it might have provided the recipient with a unique commercial advantage and represented a failure to pay due regard to the interests of clients.
In fixing the penalty, the FCA applied the 5-step framework in DEPP6.5B. Two interesting points arose. First, the FCA determined that Niehaus' misconduct was at level 3 in terms of seriousness (therefore taking as its starting point 20% of his income over 12 months preceding the disclosures). In determining that the misconduct was at level 3, the FCA considered factors including the fact that Niehaus acted deliberately and weighed that against the lack of profit and unlikely impact on the market. Second, the FCA reduced the second step figure by 15% in recognition of Niehaus' co-operation during the investigation, including his prompt and detailed answers during an interview under caution. Niehaus also benefited from a 30% early settlement discount, for agreeing a penalty at stage 1. The resulting penalty on Niehaus was therefore £37,198.
Niehaus' case is an interesting example of misconduct involving a misuse of confidential information that does not involve actual or attempted market abuse or insider dealing (although the fact that the FCA interviewed under caution suggests that was an initial line of enquiry). Whilst some may view a penalty of £37,198 to be excessive, given the lack of prejudice and the reason for the disclosure (in essence showing off to a friend and an apparently close business contact), there was plainly the potential for far greater damage to be done. Further, Niehaus abused clients' expectations of commercial confidentiality.
The significant reduction (15%) for co-operation and prompt admissions is also noteworthy. This is a significant and tempting discount for those at the early stages of an investigation. It interacts interestingly with the right to silence enjoyed by the subject of a cautioned interview. It also remains to be seen whether the FCA would offer a discount for admissions further down the line where the subject had first given a no comment interview.