Freshfields Bruckhaus Deringer llp Global market abuse news: autumn 2013
In this issue we highlight some recent developments in legislation and regulatory approach
in Asia, Europe and the US.
Asia: Hong Kong
Update on the SFC’s action against US based hedge fund for insider dealing
In 2009, the Securities and Futures Commission (SFC) made an application to the court
pursuant to section 213 of the Securities and Futures Ordinance seeking various orders
against Tiger Asia, a US based hedge fund, and its senior officers, including an injunction
order to freeze Hong Kong and overseas assets, and orders to unwind the relevant
transactions and to restore affected counterparties to their pre-transaction positions. Tiger
Asia and its senior officers challenged the SFC’s application on the basis that the court cannot
make final orders under section 213 without a decision by the Market Misconduct Tribunal
(MMT) or a criminal court on whether insider dealing has taken place.
The case was heard by Hong Kong’s highest court, which, in May 2013, delivered its judgment
confirming that the court has free standing jurisdiction to grant remedies in proceedings
under section 213 where it considers appropriate to do so1
. In addition, it is now clear that
MMT or criminal proceedings may also be brought against the relevant defendants before,
during or after the section 213 proceedings.
In July 2013, the SFC instituted proceedings in the MMT against Tiger Asia and its senior
officers for insider dealing. The case is set down for hearing in May 2014. Upon a finding that
insider dealing has taken place, the MMT may make a wide range of orders, including orders
banning Tiger Asia and/or its senior officers from trading in the Hong Kong markets and
disgorgement of profits. In the meantime, the SFC is also continuing with the section
SFC makes statement on prosecutorial responsibility
On 30 August 2013, the SFC issued a statement on prosecutorial responsibility in response to
comments made by Mr Kevin Zervos SC, the retiring Director of Public Prosecutions.
In the Yearly Review of the Prosecutions Division 2012, Mr Zervos shared his view on the
importance of separation of prosecutorial responsibility from regulatory or investigatory
. In particular, Mr Zervos noted his concern that the SFC, which is a regulatory
and investigatory agency with extensive coercive powers, also possesses prosecutorial
responsibility. This may potentially give rise to conflicts of interest. He also commented that
there appears to be a lack of internal regulation and policing within the SFC and that, unlike
Securities and Futures Commission v Tiger Asia Management LLC & Ors (FACV 13/2013).
Available at: http://www.doj.gov.hk/eng/public/pdf/pd2012/director.pdf
North America Global market
Autumn 2013Global market abuse news: autumn 2013
the Independent Commission Against Corruption in Hong Kong, SFC investigations are not
currently under the supervision of an independent committee.
In response, the SFC’s statement on prosecutorial responsibility3
explained that while it has
statutory power to conduct summary prosecutions in the Magistrates’ Courts in its own
name, an arrangement was reached between the SFC and the Prosecutions Division in 2007
with a view to elevating the prosecution of serious market misconduct cases to higher courts
in Hong Kong. Under this arrangement, the SFC agreed to refer all potential market
misconduct prosecutions to the Prosecutions Division to assess whether the case should be
criminally prosecuted and, if so, whether the case should be prosecuted summarily by the
SFC in the Magistrates’ Courts or on indictment by the Prosecutions Division in higher
courts. The SFC further commented that it was concerned with the level of resourcing within
the Prosecutions Division allocated to handle referrals from the SFC and that no case has
been taken up by the Prosecutions Division for prosecution on indictment during the tenure
of Mr Zervos as Director of Public Prosecutions.
The new Director of Public Prosecutions, Mr Keith Yeung Kar-hung, SC, assumed duty on
9 September 2013 and the market is waiting to see whether a change at the helm of the new
Director of Public Prosecutions will result in more criminal prosecutions on indictment for
offences under the Securities and Futures Ordinance.
T +852 2846 3492
Legislative amendments for insider dealing
In June 2013, the Japanese parliament approved amendments to the Financial Instruments
and Exchange Act, including more stringent regulations on insider dealing. The amendments
will be in effect by June 2014. Key changes are:
• introduction of ‘tipper’ administrative liability:
— a person who ‘tips’ inside information, or recommends trades, to a third party
with the purpose of encouraging the tippee to trade based on the information
or the recommendation, shall be subject to criminal and administrative penalties
if the insider dealing is actually committed based on the information or the
recommendation. Criminal liability is a feature of pre-existing legislation but imposed
only in one case; and
— a company (including an investment firm) whose employee ‘tips’ inside information
or makes recommendations (as described above) in the course of the company’s
business, is also subject to criminal and administrative liability; and
• increased administrative penalties (equivalent to three times the value of management
fees earned for the month in which the insider dealing is committed) for a person or
company who commits insider dealing while managing the assets of investors.
T +81 3 3584 8502
Available at: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/
doc?refNo=13PR86Global market abuse news: autumn 2013
Asia: People’s Republic of China
Fifth largest fund management company penalised for suspected insider
dealing by ex-employee
Following media reports on suspected insider dealing and front running by a former fund
manager generating improper profits of around $3.1m, the China Securities Regulatory
Commission (CSRC) penalised the fund management company for internal controls
. The CSRC criticised the company for, among other things, failing to effectively
control the flow of information, adequately detect abnormal transactions in its own fund
products and properly monitor securities trading of its staff and their relatives. The CSRC
ordered the fund management company to undergo a six-month rectification period, during
which the CSRC will suspend all approvals of new business and new products applications.
T +852 2846 3492
Europe: EU-wide developments
EU Parliament adopts text of MAR
In our winter 2011 issue of Market abuse news, we explained the key proposals for a
Regulation to replace the Market Abuse Directive (2003/6/EC). On 10 September the EU
Parliament adopted the text of the Market Abuse Regulation (MAR). MAR extends the scope
of the market abuse prohibitions to cover a wider range of investments and on a wider range
of trading venues, changes the definition of ‘inside information’ and provides for a minimum
toolkit of investigation and sanctioning powers for national regulators. MAR applies to
administrative sanctions for market abuse, not criminal sanctions.
On the whole, MAR reflects the proposals explained in our earlier newsletter but there are a
few changes, including:
• abusive behaviour relating to benchmarks falls within the market abuse regime;
• accepted market practices is retained as a safe harbour from the market manipulation
prohibition but the conditions under which national regulators will recognise them will
be tightened up;
• the defences to insider dealing are retained; and
• ‘Chinese walls’ are expressly recognised to protect employees on the opposite side of that
wall from being deemed to have knowledge of inside information.
Law on the separation and regulation of banking activities affects AMF’s
On 26 July 2013, a bill on the separation and regulation of banking activities entered into
force. The bill mainly deals with the separation of market and retail banking activities
carried out by financial institutions but also contains changes to the powers of the Autorité
des Marchés Financiers (AMF) that could assist it in investigating insider dealing and market
abuse. For example, the AMF can:
• sanction individuals who, in the course of investigations, refuse to provide documents,
copies or information requested by investigators, or refuse to answer summons or give
access to professional premises when requested by investigators5
Decision on 6 September 2013, see http://www.csrc.gov.cn/pub/newsite/bgt/xwfbh/201309/
French Monetary and Financial Code, article L. 621-15 II (f).Global market abuse news: autumn 2013
• obtain from regulated institutions all documents and information necessary to monitor
• interview individuals in their professional premises7
. The conditions in which such
interviews will take place will be set out in a statement or decree;
• investigate and pursue attempts of market manipulation8
• investigate and pursue manipulation of benchmarks or indices9
AMF Sanctions Commission imposes first penalty for encouraging insider
dealing and highest penalty to date
On 16 April 2013, for the first time the AMF Sanctions Commission imposed sanctions for
making recommendations to encourage another person to conduct insider dealing. The AMF
fined a banker €200,000 because he, as adviser to a company, knew the inside information
that the company was going to lose an exclusive licence contract and encouraged two of his
relatives to sell the company’s shares that they held.
On 1 July 2013, the AMF Sanctions Commission imposed an €8m fine on LVMH, the biggest
fine in the history of the AMF, for having provided misleading information to the public on
the shares held in Hermès and failed to provide accurate and timely information on the
acquisition of additional shares in Hermès.
French Supreme Court considers scope of market manipulation provisions
The French Supreme Court ruled that a company bringing court proceedings for damages
against a listed company that increases its claim during the proceedings, before the listed
company releases its accounts, on the face of it, does not commit a fraudulent practice likely
to constitute the criminal offence of price manipulation10.
In this case, the claimant stated the size of its claim at the start of proceedings. The claimant
increased it a few days before the defendant was to publish its accounts. When the new figure
was announced the price of the listed company’s stocks fell dramatically. The listed company
alleged that the significant increase by the claimant of its claim right before the release of its
accounts qualified as a ‘fraudulent practice purported to hinder the normal functioning of
listed markets’ in accordance with Article L. 465-2 para. 1 of the French Criminal Code which
bans market price manipulation. The Supreme Court, however, rejected this allegation.
T +33 1 44 56 44 83
T +33 1 44 56 55 14
Ibid, article L. 621-8-4.
Ibid, articles L. 621-10, L. 621-11 and L. 621-12.
Ibid, article L.621-12.
Ibid, article L. 621-15 II c) and d).
Supreme Court decision No. 12-81047 dated 27 March 2013.Global market abuse news: autumn 2013
Investigation and enforcement of market abuse increased further
The number of market abuse cases investigated by the Federal Financial Supervisory
Authority (BaFin) rose from 259 in 2011 to 354 in 2012. BaFin’s annual report published
in May 2013 states:
• BaFin investigated 250 new cases of potential market manipulation, which accounts for
an increase of around 50 per cent on the previous year. In addition, the offices of public
prosecutors and police departments asked BaFin for its assistance in 144 ongoing
preliminary proceedings compared with 125 in the previous year. In contrast,
investigations initiated into insider dealing decreased slightly from 29 in 2011 to
26 in 2012;
• more than half of the new investigations of market manipulation were initiated by the
trading monitoring departments (Handelsüberwachungsstellen) of the German stock
exchanges for manipulative trading (eg manipulations of reference markets, self-dealing
or pre-arranged transactions);
• BaFin found evidence of market manipulation in 121 of the investigated cases and pressed
charges against 229 suspects (compared with 211 in 2011). In the insider dealing
investigations, BaFin pressed charges against 25 suspects (compared with 52 in 2011)
in 11 cases (compared with 20 in the previous year); and
• the criminal courts convicted 24 people on market manipulation charges, up from 11 in
the previous year, and 7 people on insider dealing charges, up from 2 in 2011.
German Federal Court of Justice implements ECJ decision on the meaning
of ‘inside information’
In its decision of 23 April 201311, the German Federal Court of Justice (Bundesgerichtshof, BGH)
considered the Geltl/Daimler case12 following the ECJ’s decision on the issues referred by the
BGH. As we outlined in the spring 2011 edition of European market abuse news the case relates
to the information that Jürgen Schrempp, the CEO of Daimler AG’s management board,
intended to resign was inside information that should have been published immediately to
the market. Jürgen Schrempp had informal discussions with the group works council
chairman in mid-July 2005 but the formal resignation of Mr Schrempp and the appointment
of his successor was formally approved by the supervisory board at the end of July 2005.
The ECJ clarified that intermediate steps in a protracted process may qualify as precise
information and therefore as ‘inside information’ within the meaning of Art. 1 of the Market
Abuse Directive 2003/6. The ECJ further held that information can only be inside information
if it relates to future circumstances or events that have a realistic prospect of occurring. On
the other hand, the magnitude of the effect on the price of a financial instrument that will
be caused by these future circumstances or events is not relevant if the other conditions
In applying this ruling of the ECJ, the BGH held that Mr Schrempp’s announcement of
his intention to resign as CEO to the chairman of the supervisory board may qualify as
Even though the BGH decision sheds some light on the interpretation of the term ‘inside
information’ it does not constitute the end of the Geltl/Daimler case; the BGH remanded the
case to the Higher Regional Court in Stuttgart for further consideration on the facts.
T +49 69 27 30 81 52
BGH, II ZB 7/09.
European Court of Justice, matter C-19/11. Global market abuse news: autumn 2013
Enforcement activity increases in Italy
CONSOB’s annual report for 2012 indicates increased monitoring, investigations and
enforcement activity for market abuse compared with previous years. CONSOB conducted 208
preliminary investigations in 2012 (compared with 107 in 2011), concluded 26 market abuse
investigations and brought administrative actions or criminal prosecutions in 12 cases,
including four cases of insider trading and four cases for market-based manipulation
CONSOB intends to continue to increase its efforts against insider trading and other forms of
Recent enforcement case
On 6 March 2013 CONSOB imposed its second-biggest fine ever for market manipulation.
CONSOB fined Salvatore Ligresti (head of the Italian family that controlled Fondiaria-sai
through the company Premafin) and two ‘trusted’ associates a total of €11.3m for carrying
out a trading strategy aimed at supporting the price of shares in Premafin between
November 2009 and September 2010. The sanction includes a penalty of €5m for
T +39 02 625 30304
T +39 02 625 30358
CMNV announces investigation into market manipulation/naked
On 23 May 2013 the Spanish Securities Market Commission (Comisión Nacional del Mercado
de Valores, CNMV) announced that it is investigating possible irregularities in the valuation
of Bankia shares. The CMNV is focusing on the period 16–30 May 2013 when the bank put
11m shares on the market. There was a high volume of trading and shares traded at almost
2.5 times Bankia’s capital, prompting rumours of prohibited naked short selling.
The president of the CNMV, Elvira Rodriguez, did not reveal the names of the parties being
investigated for potential violation of the law, but said that they were overseas institutional
investors. The investigation process has proved complicated because the CMNV needed to
obtain information from overseas national supervisors but it is almost finished and the
CMNV will send the findings to the European Securities and Markets Authority (ESMA).
T +34 91 700 3740
T +34 609 141 353
E email@example.comGlobal market abuse news: autumn 2013
High frequency trading on the FCA’s radar
The Financial Conduct Authority (FCA) has imposed a financial penalty of $903,176
(approximately £600,000) on a US-based high frequency trader, Michael Coscia, for market
manipulation13. The FCA found that, between September and October 2011, Mr Coscia
deliberately engaged in manipulative behaviour known as ‘layering’ in oil trades on the
International Commodities Exchange in the UK. He placed and rapidly cancelled orders that
he did not intend to trade with the intention of creating a false impression of buyer or seller
interest. Mr Coscia made a profit of $279,920 from this conduct, which formed part of the
FCA’s calculation of the penalty.
This is the first UK action against a high frequency trader for market manipulation. The
FCA accepts that high frequency trading and the use of algorithms are common practice in
a modern financial services market but, in line with its focus on market integrity, the FCA
will bring enforcement action in instances where these techniques are used to abuse the
market14. With the FCA’s increased resources directed to market monitoring, high frequency
trading and other techniques that give rise to increased risk for market manipulation are
likely to be scrutinised more closely with potential enforcement action in mind.
FCA decides to sanction three market professionals for facilitating
In November 2011, Mr Goenka, a private investor, was fined $9,621,240 (approximately £6m)
by the Financial Services Authority (FSA), the FCA’s predecessor, for market abuse (insider
dealing)15. This was the largest fine ever imposed by the FSA on an individual. The FCA has
imposed the following penalties on market professionals whose actions facilitated
Mr Goenka’s market abuse.
• £45,673 on Vandana Parikh16, the broker who executed the manipulative trades on behalf
of Mr Goenka. Ms Parikh explained the process of market manipulation to Mr Goenka
without recognising the risk that this posed or challenging Mr Goenka’s intentions,
although she suspected that Mr Goenka held related structured products that could
benefit from manipulation of the market. Therefore, the FCA found that Ms Parikh did
not use due skill and care in her dealings with Mr Goenka.
• £70,258 on David Davis17, a senior partner and compliance officer at the broking firm.
Ms Parikh alerted Mr Davis, who monitored and authorised the trades. He did not know
of Mr Goenka’s desire to manipulate closing prices or that he held related derivative
products but he failed to take sufficient preventative steps before authorising the trades
or report the trading as suspicious afterwards despite clear warning signals.
• £89,004 on Tariq Carrimjee18, who introduced Mr Goenka to the broking firm. The FCA
found that he recklessly assisted in the insider dealing because he suspected that Mr
Goenka wanted to manipulate closing prices and, nevertheless, introduced him to a
broker to conduct those trades.
FCA final notice dated 3 July 2013.
See FCA press release dated 22 July 2013.
FSA final notice dated 17 October 2011.
FCA final notice dated 6 August 2013.
FSA final notice dated 5 July 2012.
FSA decision notice dated 26 March 2013. Note that this decision is subject to a challenge and will be
considered by the Upper Tribunal.freshfields.com
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These actions illustrate the FCA’s intention to highlight its expectations of market
professionals and impose sanctions on professionals who, although not directly involved in
market abuse or with actual knowledge of it, should have taken steps to prevent or reduce
the risk of market abuse.
T +44 20 7832 7302
T +44 20 7832 7671
North America: US
US regulators and prosecutors continue the trend of tough enforcement
US regulators are continuing their intense focus on insider trading within the hedge fund
industry and supporting sectors in 2013. In July, federal prosecutors took the bold step of
bringing criminal insider trading charges against a group of affiliated hedge fund
management companies – SAC Capital Advisors, LP and others. The trades at issue included
mergers and acquisitions, private equity buy-outs, and corporate restructurings in publicly
traded companies across different industry sectors. The suit followed a $600m record-setting
civil settlement in March.
When it comes to insider trading, the US Securities and Exchange Commission (SEC) aims to
bring many and big cases. The SEC states that over the last three years it has filed more
insider trading actions than in any three-year period in its history – 138 cases against almost
400 defendants19. In June 2013, the SEC’s co-director of enforcement explained in an
interview that, ‘We’ve gotten better at detecting illegal activity, and at using technology that
allows us to draw connections and see patterns20.’
In both civil and criminal enforcement, the courts may rein in the government’s expansive
interpretation of its authority to prosecute insider trading, though it may take several
months for current test cases to work their way through the trial and appeals process and,
in the meantime, the current trend is likely to continue.
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T +1 202 777 4560
The New Yorker, 10 June 2013 available at: http://www.newyorker.com/talk/