“…The City has always had its share of crooks, charlatans and incompetents and although the club was rather good at enabling its members to identify them it was very bad at putting them out of business. Many of them continued to flourish and to rip off those who were not members of the club…” 
Introduction and overview
On 19 March 2008, the London market experienced allegations of abusive conduct by persons disseminating false and misleading information about the liquidity of Halifax Bank of Scotland (HBOS) shares, allowing traders to profit from the short selling in those shares – a practice known as “trashing and cashing.  ” Allegedly, emails circulating around the financial markets contained rumours that HBOS was struggling to fund its day-to-day business and that an emergency meeting had been called with the Bank of England. A further rumour stated that the Financial Times was writing an exposé of the bank’s liabilities that “would raise the spectre of a run on the bank”  At 1pm that day the value of HBOS shares had fallen by around 19%  resulting in the Bank of England issuing what was described as an unprecedented denial that HBOS was facing liquidity problems and the UK’s Financial Services Authority (FSA) publishing a warning to the financial industry that it would not tolerate abusive trading and that it had commenced an investigation into potential market abuse and unusual trading patterns, and that if it found any evidence of “trashing and cashing” it would start a probe more deeply, tracking the e-mails, and listening to taped phone calls  . The Financial Times reported that on the face of it the negative rumours on 19 March 2008 looked like blatant market abuse, but that despite the FSA’s swift reaction, punishment by press release would not satisfy the regulators critics and that there was an increasing demand for the FSA to ‘flay criminals with the rules.’  The wealth of media coverage and adverse comment about the extreme market conditions of that day, together with the alleged abuse occurring at a time of unprecedented economic conditions served to place the FSA – which has statutory duties to maintain market confidence and reduce financial crime and has as one of its strategic aims to promote efficient, orderly and fair markets  – under pressure to get results against abusers of the financial markets  . Such pressure acted to highlight that although it might be easy to identify market abuse there is very real difficulty in proving it  and that much of the FSA’s market abuse activities although useful for catching the casual insider or abuser do not help in catching organised rings of abusers  .
The Financial Services and Markets Act 2000 as amended (which throughout this thesis is described as either the Act or the 2000 Act unless the context otherwise requires) establishes a civil law enforcement regime prohibiting seven distinct market abuse behaviours and allowing for the imposition of financial penalties by the FSA in the event of a person committing Market Abuse. The regime is supported by a civil law enforcement framework allowing for the speedy resolution of enforcement cases, together with a judicial safeguard allowing disputed cases to be referred to the Upper Tribunal (Tax and Chancery)  . Since the implementation of the 2000 Act and notwithstanding the market abuse regime there arguably remains a continued threat to the cleanliness of the financial markets  . In response the FSA has gradually extended its approach to market abuse enforcement beyond the civil market abuse regime relying on other parts of its rule book as well as an increasing reliance on the use of criminal prosecutions  . Criminal prosecutions certainly generate more publicity and the threat of a custodial sentence provides a more credible deterrent than the threat of a financial penalty. Emphasising the appropriateness of criminal prosecutions in cases of Market Abuse Lord Judge CJ in R v McQuoid CA  said “prosecution in open and public court will often and perhaps much more so now than in the past, be appropriate.”
The essence of market abuse and historical approaches to dealing with abuse in the financial markets.
The very essence of market abuse is the interference in the free working of markets that can involve interference with the supply of, as well as the demand for, a security  . Abuse can take place through a wide range of activities and the range can be as wide as perhaps the inventiveness of the prospective abuser. Examples of Market Abuse include Insider Dealing, Market rigging; illegal take up; share price manipulation; fictitious transactions such as washed sales or rollover sales  ; and market distortion  . Moreover the extent of abuse can vary from the small scale occasioned by a broker and involving only an individual client, to large scale abuse that threatens the very fabric of a securities market  . As will be explored in more detail below, abuse in the financial markets has been historically regulated through a combination of the criminal law applied to all users of the financial markets and the regulation of market professionals. Ambiguity surrounding the definition, causes and handling of market abuse has, however, historically protected the abuser from public scrutiny and sanction. M Clarke asserts that it is the structure of the business environment that can provide misconduct with both opportunities and as well as methods for misconduct to be managed. He states, “…business itself, naturally, likes to think of misconduct and certainly crime as exceptional. To do otherwise would be to invite a host of difficulties: public doubt about the integrity of business or even the entire business sector, alarm at the disloyalty of employees or fellow directors, confusion about what are acceptable standards of conduct. It makes much more sense to polarise misconduct into rare flagrant cases demanding action as crime, and the rest as just business…” 
Although the emerging financial crisis of 2007 acted to bring to the surface abusive practices, abuse in financial markets is not a recent phenomenon. For as long as people have been able to make money from trading, there is evidence of persons exploiting markets in order to make money from abusive rather than normative market conduct  . There are many notable cases in history of abuse in the market, ranging from the collapse of the South Sea Company  (which charts what is possibly the first stock market boom) the unlawful share price manipulation in the Guinness affair in the 1980’s  , through to the high profile regulatory enforcement case involving the manipulation of the price of individual shares by CitiGroup Global Markets in 2005  . It has been observed that there are long-established traditions of market control and legal process to prevent market abuse which can perhaps be traced as far back to the Roman Emperor Diocletian and the legal doctrine of ‘Just Price’  . This doctrine held that markets had to be organised in ways in order to be just, thus legitimising interference in the institutional structures of markets to achieve that aim. Such concept of the importance of fairness in the markets remained in place and was used in the 1970’s as a justification for the regulation of insider trading contrary to the counter views of Professor Manne, who argued that Insider Dealing in fact provided benefits for financial markets and just reward for entrepreneurs  . The ideology of legitimised interference remains in place today as the corner stone of the State’s control against market abuse. The Common Law offences of engrossing, regrating and forestalling were a product of such ideology, intending to prevent manipulation of markets in essential goods. Gilligan identifies such doctrine of legitimised interference and more formal control of abuse in the UK markets through the emergence in the Middle Ages of the guild system and the control of the professions through restrictive trade practices and the granting of trade monopolies through royal charters  . The main commercial towns during the fourteenth century were granted Court of Staple in which merchants judged their own customs, a practice subsequently absorbed into Common Law. Gradually in England the Courts of common law and equity assumed jurisdiction over commercial matters and by the Eighteenth century the process of integrating specialist mercantile expertise into the resolution of disputes emerged when Lord Mansfield empanelled special jurors from the City of London to determine crucial cases on financial, insurance and trading customs  .
There is some suggestion that Market Abuse is more prevalent on less developed financial markets. For example data shown in Table 1 to this thesis shows that over 40% of the FSA market abuse disciplinary cases relate to activities on the London Stock Exchanges junior market, AIM  . Such a phenomenon is, however not new. Rider stated in 1979 that “…it would perhaps be a fair assumption that insider trading occurs more on less developed securities markets than on those where there is effective market surveillance and attention to proper and accurate timely corporate disclosure…”  Gilligan observes that it was the illiquid securities markets of the Eighteenth and Nineteenth Centuries that presented opportunities for market abuse  . The Seventeenth Century witnessed the rise of public trading in Company securities, and although providing business with greater opportunities for raising finance, it offered to a wider audience opportunities for profit from short term speculation and thus perhaps gave rise to a growth in short term speculative trading and an increase in market abuse. A Parliamentary enquiry that followed England’s capital markets post boom crisis of 1693-1695 reported into the extent of manipulation in the markets and led to Parliament enacting ‘An Act to Restrain the Number and Practice of Brokers and Stock-Jobbers’  . The Royal Commission reported:
“The pernicious Art of Stock-jobbing hath of late,… wholly perverted the End and Design of Companies and Corporations, erected for the introducing, or carrying on, of Manufacturers,… by selling their shares for much more than they are really worth…”
Unlike the arguments that have existed in defence of the practice of insider dealing  , the law has traditionally held as abhorrent market manipulation and has sought to regulate against those that conduct manipulation at the expense of others by focusing on the threat that such conduct has on the market place as a whole. Rider, expressing the view that market confidence is effected by market abuse as it is insider dealing observed, “…It should be emphasised that from the standpoint of investor confidence the mere suspicion that abuses occur or the allegation that the market is unfair is likely to be just as disruptive as proof that abuses have taken place…”  Instances of the Crown’s willingness to prosecute abuse in the financial markets is evident from the nineteenth century. In R v De Berenger,  De Berenger together with seven others were convicted of a market manipulation. The defendants were accused of “unlawfully contriving false reports, rumours, arts, and contrivances, to induce the subjects of the King to believe that a peace would soon be made …thereby to occasion without any just or true cause a great increase and rise of the public Government funds and Government securities…with a wicked intention thereby to injure and aggrieve all subjects of the King who should, on the 21 February, purchase or buy any part or parts, share or shares of and in said public Government funds and other Government securities.”  The manipulation was led by a Captain Alexander Cochraine (later known as Lord Dundonald) together with his Uncle the Hon Cochraine-Johnstone, a stockbroker. For over two years Britain had been at war with France and the Cochrains effected a manipulation of the market by spreading false rumours of Napolean’s death and likely peace with the French. De Berenger masquerading as Col R Du Borough, went to Dover stating that he had just arrived from France where Napolean had been killed in battle and that the Allied Armies held Paris. Simultaneously a Ralph Sandon and two others maintained the news story whilst travelling from Dartford to London. Government funds rose and Lord Dundonald sold at a profit of £139,000 stock he had bought only a week before. 
In more recent times, the UK Government introduced specific legislation criminalising abuse in the financial markets. First introduced in 1939 and subsequently re-enacted in S13 of the Prevention of Fraud (Investments) Act 1958, S47(2) Financial Services Act 1986 and more recently S397 Financial Services and Markets Act 2000, it became an offence to manipulate the market through the reckless or international making or misleading statements.  What has become evident, however, is the limited use of such offence when dealing with abuse  and although there have been examples of its use in cases such as R v Hipwell (the City Slickers case)  in 2005 which concerned share price manipulation (prosecuted under the 1986 Act offence) and the case of R v Rigby and Bailey  in 2005 (prosecuted under the 2000 Act offence) concerning false statements to the market in the annual report for AIT plc shares, prosecutions for ‘criminal market abuse, often have the appearance of a strategic statement  . It was perhaps the 1980’s notorious market abuse prosecutions in the cases of Guinness and Blue Arrow, (which will be explored in more detail below) that led the State and financial regulators to consider that a Civil law method of disposing of market abuse cases would be the panacea for market regulation in the United Kingdom.
The concept of Tribunal involvement in regulatory decision making is not however new. The State’s intervention in financial regulation through the Prevention of Fraud (Investments) Act 1939, although criminalising market abuse, introduced the requirement for the licensing of those carrying on securities business. Any license granted could be revoked in the event of a criminal offence under the 1939 Act. The intention to revoke such a license gave rise to a right under S6(1) of that Act to refer the matter to a Tribunal of Inquiry. It is unlikely, however, that such Tribunal operated with a great deal of independence from the State. The role and authority of such Tribunal remained in place without amendment under the subsequent Prevention of Fraud (Investments) Act 1958 and latterly a Tribunal independent of the regulatory process was established under Chapter IX of the Financial Services Act 1986 to review referrals of decisions in relation to the granting and revocation of authorisation  . That Tribunal and the regulatory structure within which it operated is discussed further below.
The corporate excess of the 1980’s and challenges to market abuse prosecutions.
The Guinness affair
The late 1980’s saw the high profile prosecution of senior executives of Guinness plc together with a number of senior City business men who had been involved in an illegal scheme to support the share price of Guinness plc during its takeover bid for Distillers plc.  The prosecution has almost developed a level of infamy as a result of the publicity arising from the sentencing of Saunders, Guinness’ Chief Executive and subsequent Human Rights challenges concerning protection from self incrimination  . The original prosecution, however, was based on conduct that was abusive to the market in that the conduct of paying undisclosed indemnities and success fees to purchasers of shares, mislead the market into believing that they were genuine risk taking purchasers and thus created a false market. In fact at the trial a number of Distiller’ shareholders gave evidence that the price of the Guinness shares had swayed their decision and they would have acted differently had they known of the payments  . Ernest Saunders was initially convicted on two counts of conspiracy to abuse the market contrary to S13(1)(a)(i) of the Prevention of Fraud (Investments) Act 1958, eight counts of false accounting contrary to S17(1)(b) Theft Act 1968 and of two counts of theft. The takeover took place in early 1986 at a time when Guinness plc was in competition with another company, the Argyll Group plc. Guinness’ offer to the Distillers’ shareholders, included a substantial share exchange element, and accordingly a critical factor for the success of the offer was the prices at which Guinness shares were quoted on the stock exchange. Guinness had established a takeover team and it was the aim of that team to maintain and, if possible, inflate the price of Guinness shares. The Guinness takeover team consisted of Ernest Saunders, Olivier Roux acting as finance director and Thomas Ward an American lawyer also acting as a director of Guinness. The takeover team made arrangements with a number of Guinness share supporters, including Ronson, the chairman of the Heron Group of Companies, Parnes, a stockbroker, and Lyons, a prominent businessman. The supporters purchased a significant number of Guinness shares. During the course of the Distillers takeover bid the Guinness share price rose dramatically on April 11, 1986 to 353 pence, but once the bid had been declared unconditional it fell significantly to 296 pence. It was further alleged that the payments out of Guinness funds were not authorised by the Board and so amounted to theft  .
The case of Blue Arrow and County Nat West
With the freeing up of the financial markets following Big Bang  came a rising profile of sophisticated and complex abuse in the UK financial markets. Unfortunately for the reputation of regulation in the City much of the more complex abuse proved itself to be challenging to prosecute. Some of that difficulty arose out of the complexity of the offences, such as insider dealing, elsewhere weaknesses were exposed in the ability of both the prosecuting authorities and the Courts to manage complex investigation and trials. With the Blue Arrow prosecutions being a case in point, in the early 1990s much concern and criticism arose regarding the undertaking of lengthy and complex financial crime trials.
Blue Arrow (BA) was a successful recruitment agency business. In 1987 it considered the takeover of an American recruitment agency, Manpower Inc. A lawful takeover plan was developed which enabled a public announcement to be made on 4th August 1987 with news of a bid by BA for the shareholdings in Manpower Inc. The bid was successful and its success was announced on 7th September. The takeover financing plan was however problematic and its conduct was considered to have manipulated the market. Put simply it was alleged that the defendants in the case had rigged the market, by not disclosing that there had been insufficient shareholder appetite for the share allotment and that a complex financing arrangement had been structured in order for shares to be offered for public sale and that in withholding such information the market had been misled into attributing a higher value to the Blue Arrow shares thus creating an appetite for purchasing the shares. The fundamental of this allegation was described by Mr Nicholas Purnell, QC, for the prosecution during the preparatory hearing as being an allegation that there was “an agreement to rig the market” and that “. . . the way in which the market was rigged was to create a situation which enabled the market to trade in the shares of Blue Arrow in ignorance of those steps which had been taken to enable the rights issue to be completed and to enable the market to believe that there were voluntary takers for the shares at the rights issue price or above.” 
The prosecution’s case was initially based on two charges. The first against all defendants was of a conspiracy to contravene section 13 of the Prevention of Fraud Investment Act 1958, that is, the fraudulent inducement of persons to invest money. The second charge was of conspiracy to defraud contrary to the common law which related to the taking in the placing and the consequent parcelling of shares and non-disclosure. The two charges between them involved initially fourteen defendants and covered a period of nineteen months.
The trial commenced on 11th February 1991 with the jury retiring to consider its verdict on 11th February 1992  . It was reported that the trial was then the second longest criminal trial in English history  . At trial, convictions were secured against Mr Cohen the Deputy Chief Executive of National Westminster Investment Banking and Chief Executive of County Nat West (CNW), Mr Reed the Managing Director of CNW who was in charge of its Corporate Advisory Division, Mr Wells an Executive Director of CNW, Mr Gibbs the head of the Corporate Finance Division of Philips & Drew Securities Limited (P&DSL) a firm of stock brokers a subsidiary of Phillips & Drew Ltd and Mr Stainforth a director in the Corporate Finance Division of Phillips & Drew Ltd.
In allowing the appeals against conviction the Court of Appeal summed up the sense of frustration with the complexity of the trial “The awesome time-scale of the trial, the multiplicity of issues, the distance between evidence, speeches and retirement and not least the two prolonged periods of absence by the jury (amounting to 126 days) could be regarded as combining to destroy a basic assumption. This assumption is that a jury determine guilt or innocence upon evidence which they are able as humans both to comprehend and remember, and upon which they have been addressed at a time when the parties can reasonably expect the speeches to make an impression upon the deliberation (as to which see Landy 72 Cr App Rep 237, 245 by Lawton LJ)…” 
The complexity of this trial together with a later enquiry led to a public reaction that may very well have contributed to the notion that an administrative law system for dealing with abuse in the financial markets was likely to be preferable to the numerous failed attempts to deal with market abusive behaviour. 
Market abuse and the threat from insiders
Insider dealing is a form of market abuse which is now subject to both regulatory and criminal law prohibitions  . Opinion regarding the criminality of insider dealing has varied. Historically the need to regulate the practice of insider dealing was not popular and was in effect left to the Common law and the challenges to the fiduciary duties of company directors  . The law was made complicated by the case of Percival v Wright (1902)  which did not recognise that the UK Common Law provided any hope of civil sanctions against insider dealing in that it was taken to show that directors are permitted to use inside information for their own investment purposes. It was perhaps the growth in the size and value of the securities markets that saw the emergence of a need for regulation of insider practices. Rider and Ashe believe that the major reason for controlling insider dealing is that it adversely affects confidence.  For many years a variety of academics and practitioners have put forward views about the consequences of insider dealing and until the 1980’s it was questioned whether the practice needed to be regulated or indeed criminalised at all  . There has been significant change, however in such mindset and today insider dealing is not only firmly rooted as a criminal offence but as one that contributes to financial losses to investors  . Steps to introduce legislation in the United Kingdom, had however, taken a number of years – up to the end of the World War II the buying and selling of stocks and shares in a company on the basis of information known only to the company or its directors, officers and advisors was considered legitimate and widespread. Between the end of the World War II and the late 1950’s it began to be considered unethical to make private profits at the expense of the main body of shareholders. By the 1960’s and early 1970’s the practice became widespread once more, often using knowledge of a takeover and insider dealing was even described by the Financial Editor of the Sunday Times on 14 February 1973 as the “crime of being something in the City”. Insider dealing did not appear as a criminal offence on the UK’s Statute books until 1980  . The incidence of Insider dealing and the City’s attitude to it provides a sense of the overall problem that regulation has in responding to abuse in the financial markets. 
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