Market abuse, fraud and misleading communications
| DOI | https://doi.org/10.1108/13590791211243093 |
| Published date | 13 July 2012 |
| Pages | 234-254 |
| Date | 13 July 2012 |
| Author | Andrew Haynes |
| Subject Matter | Accounting & finance |
Market abuse, fraud and
misleading communications
Andrew Haynes
School of Law, Social Sciences and Communications,
University of Wolverhampton, Wolverhampton, UK
Abstract
Purpose – The purpose of this paper is to analyse the nature and content of the laws relating to
market abuse with a view to determining whether they only offer a civil law remedy for the State. The
three categories of insider dealing as defined by the Criminal Justice Act 1993 clearly offer a criminal
law based response, but as is shown here virtually all cases of market abuse can potentially be a basis
for a criminal prosecution.
Design/methodology/approach – The methodology adopted is to consider the other relevant areas
of law, namely the Fraud Act 2006, the law of conspiracy to defraud and the law relating to misleading
communications under s.397 of the Financial Services and Markets Act 2000 and then to determine
whether between them they cover all the areas of behaviour caught by the definitions of market abuse.
Findings – The consequences of this paper are that the Serious Fraud Office and the Financial
Conduct Authority now have the option in almost any case of market abuse of considering whether a
criminal or civil law approach is appropriate.
Originality/value – The approach adopted over the last two years by the prosecuting authorities of
using the criminal law to a greater extent in serious cases of insider dealing can now be extended to
market abuse generally where it is thought appropriate.
Keywords Fraud, Market abuse,Serious Fraud Office, Laws
Paper type Research paper
Introduction
Media stories relating to insider dealing have appeared over the last two years
concerning a change of approach being taken by the Financial Services Authority
(FSA)[1] with a greater emphasis on theuse of criminal prosecutions (Cole, 2007) and the
introduction of the SABRE II software system to track down abnormal market
behaviour. Coupled with this is the evidence of a far more extensive use of criminal
intelligenceoperations being carried out so as to facilitatearrests and secure convictions.
This raises questions about how enforcement in this area of financial crime might
develop. It is probablethat anti-insider dealing operationswill continue to lead to arrests,
but only on a small number of occasions relative to the scale of the offence. To put this
in context the FSA themselves have published an analysis (Monteiro et al., 2007; Dubow
and Monteiro,2006) which measured the extent to whichshare prices moved ahead of the
regulatory announcements that companies are required to make. The key part of the
analysis focused on takeover bids involving FTSE 350 companies. An assessment was
then made of the proportion of these that were preceded by abnormal share price
movements. The research did not provehow much market abuse was taking placebut it
did suggest that 23.7per cent of takeover announcements were precededby transactions
that were probably based on inside information. Later assessments have been slightly
more conservative in their measurement of the scale of these activities, but nonetheless
The current issue and full text archive of this journal is available at
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JFC
19,3
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Journal of Financial Crime
Vol. 19 No. 3, 2012
pp. 234-254
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791211243093
show disturbingly high figures. It is clear therefore that the insider dealing and market
abuse laws have achieved little beyond scratching the surface of the problem.
Whilst most of the criminals reflected in these statistics continue to evade arrest
the recent high profile insider dealing prosecutions[2] may lead to criminals looking for
a safer way to benefit from financial impropriety and the current relevant
legal definitions may encourage them to think that there is such a route. Insider
insider dealing, encouraging others to deal and leaking information. The civil offence of
market abuse has a much wider footprint and those who would otherwise attempt
insider dealing may decide that it is safer to make a profit without committing a criminal
offence. Obvious areas where such people may be attracted are the apparently
non-criminal activities amounting to market abuse, which are defined as: giving a false
or misleading impression with regard to an investment[3], utilising fictitious devices[4],
disseminating misleading information[5], market distortion[6] and also encouraging
others to carry out any of these acts[7]. It is worth briefly considering what these terms
cover. A false or misleading impression is given where a transaction is carried out in a
way that is likely to give a false or misleading impression as to the supply of, or demand
for, or as to the price of an investment or securing the price of an investment at an
abnormal or artificial level. Market distortion is behaviour other than this which would
give a regular market participant a false or misleading impression as to the supply or
demand of qualifying investments, or that would be regarded by such a person as
distorting the market and that they would regard the behaviour as a failure to maintain
the standards expected. Fictitious devices involve carrying out a transaction which
employs a fictitious device or deception to enter into a contract at what is essentially an
unfair advantage where that person gives, or is likely to give, a false or misleading
impression as to the supply or demand for, or as to the price of an investment, or to secure
the price of one or more such investments at an abnormal or artificial level. Market
distortion consists of other behaviour which is likely to give a regular user of the market
a false or misleading impression as to the supply of, demand for, or value of, qualifying
investments, or would be regarded by a regular user of the market as behaviour that
would distort, or would be likely to distort the market and the behaviour is likely to be
regarded by a regular user of the market as a failure on the part of the person concerned
to observe the standard of behaviour reasonably expected of a person in his position in
relation to the market. There is also a secondary offence of taking or refraining from
taking any action which requires or encourages another person to engage in market
abuse[8]. Financial misbehaviour will not always neatly fit into one of these categories
and in many instances will straddle two or more of them.
Enforcement
Fromthe point of view of potentialmalfeasants these lastfive activities have theattraction
that the most likely outcome if they are caught is that they will face FSA enforcement
action and then eitherbe fined, or if the FSA action is contested,end up having to face the
FSA in the FSA Tribunalon a civil basis. A complication ariseshere because if the FSA
decide to fine someone“[...] they may not in respect of any contraventionboth require a
personto pay a penalty [...] andwithdraw his authorisationunder section 33”[9].What the
FSA can do if the person agreesto co-operate is to include an agreementnot to work in the
financial services sector as part of the settlement. In the case of FSA authorised firms
Market abuse
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