R (Fleurose) v Financial Services Authority
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE MORISON |
| Judgment Date | 26 April 2001 |
| Neutral Citation | [2001] EWHC 292 (Admin) |
| Docket Number | Case No:CO/988/2000. |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 26 April 2001 |
[2001] EWHC 292 (Admin)
IN THE HIGH COURT OF JUSTICE
ADMINISTRATIVE COURT.
Royal Courts of Justice
Strand, London, WC2A 2LL
The Hon Mr Justice Morison
Case No:CO/988/2000.
Mr Anthony Speaight Q.C. leading Mr John Passmore of counsel, (instructed through the Bar Pro Bono U), appeared on the Applicant's behalf.
Mr Richard Gordon Q.C. of counsel (instructed by Allen & Overy appeared on the First and Second Respondent's behalf.
This is an application for judicial review of a decision of the Disciplinary Appeal Tribunal established by the Securities and Futures Authority [SFA], which dismissed Mr Fleurose’ [the applicant's] appeal against the decision of the SFA Disciplinary Tribunal. The Disciplinary Tribunal had found the applicant guilty of improper conduct as a trader in securities during his employment with JP Morgan Securities Limited [JPM]. He was suspended from acting as ‘a registered person’ for two years and ordered to pay £175,000 towards the costs of the SFA. Both the SFA and the Disciplinary Appeal Tribunal are Respondents.
There are two principal grounds for this application: first, that the disciplinary proceedings offended the provisions of the European Convention of Human Rights, and, second, that the decision of the Appeal Tribunal was legally flawed. The first point is, clearly, of some importance, not just to the financial services industry, but also to other disciplinary regimes. Whilst of importance to the parties, the second ground has less, if any, wider significance.
I start this judgment with a tribute to both leading counsel, whose arguments have greatly assisted the court. If I may say so, Mr Fleurose, has been given legal representation of the highest order by Mr Speaight QC.
The relevant background facts
The applicant, was a Senior Cash Arbitrage Trader employed at the time by JP Morgan Securities Limited [JPM]. It is alleged that on 28 November 1997, with another, his immediate boss, he manipulated the FTSE 100 Index so as to ensure that JPM did not have to make a payment under a binary option. Under the option JPM were obliged to make a payment to the counter-party if both the FTSE 100 Index and the S & P 500 Index were higher at the end of the month than at the beginning. The S & P Index was significantly higher than it had been at its November opening, but by the end of November 28, the last trading day of that month, the FTSE 100 was closer to the ‘strike level’ of 4842.3; that is, the level above which payment would have to be made by JPM. At 4.10 pm, the FTSE 100 stood at 4856.56 points, and at 4.29 pm, 4869.856. The FTSE 100 closes at 4.30 pm and, during the last six seconds of trading, the Index dropped by 38.08 points to below the strike level. The binary option was ‘out of the money’ and JPM relieved of an obligation to pay approximately £475,500.
The applicant operated what was called a Trader Front End machine which was linked into the London Stock Exchange Electronic Trading System, which had been introduced into the London stock market for the first time on October 20 1997. The operator could, for example, use the machine to give sell orders at stated prices and a ‘trade’ occurs at the moment when there is a match between the offer and bid price of a given quantity of a given stock. In the eight minutes before the market closed, the applicant launched offers to sell 35000 shares in each of the five companies which head the list of stocks in the FTSE 100, and these offers were entered into the machine in waves. As a result, sales were effected to the value of £11,247,525. Sales in the last six seconds resulted from sell orders which had been entered at prices well below the then market levels. In calculating the Index level, the stocks making up the Index are ranked and weighted by reference to their market capitalisation, and, thus, the higher the rank of the stock the greater the impact upon the Index of any change in those stock values.
The reason for the sudden fall in the Index just before close of business was immediately investigated by the London Stock Exchange [LSE], which concluded that it had stemmed from substantial sales by JPM in the cash market during the last ten minutes. JPM carried out their own investigation and acknowledged that the trading activities of its Equity Derivatives Group, of which Mr Fleurose was a member, had breached the provisions of paragraph 2.10 of the Rules of the LSE, which prohibits a member firm, such as JPM, from doing an act or engaging in a course of conduct the sole intention of which was to move the index value. As a result of this breach, JPM were fined £350,000 by the LSE. The applicant was not, at the material time, a member of the LSE, and, therefore, not within the LSE's disciplinary reach.
The regulatory authority, [the first Respondent, the SFA] to whose jurisdiction both the applicant and the manager were subject, commenced disciplinary proceedings against each of them. The cases were heard separately because there was, at that time, no power to conjoin them. The case against the manager was heard by a Disciplinary Tribunal over a period of 13 days between 16 March and 7 April 1999. The applicant gave evidence at that hearing, and, in due course, the Tribunal found that the two charges of misconduct had been proved, and the manager was also found no longer to be a fit and proper person to be registered by the SFA. The Tribunal concluded that the manager's sole intention in ordering these sales to be effected by the applicant was to drive the Index down.
Between 12 April and 4 May 1999, the charges against the applicant, which were in similar terms to those against his manager, were tried and he was found guilty of the two charges of misconduct; but the Tribunal refused to declare that he was unfit to retain his registration; and he was suspended and ordered to make a contribution towards the SFA's costs. The charges brought against him were in this form:
“THE SECURITIES AND FUTURES AUTHORITY LIMITED (“SFA”) pursuant to Rules 7–60 and 7–61 of SFA's Rules, hereby institutes disciplinary proceedings against Mr Bertrand Fleurose on the grounds that:
A. He has committed the following acts of misconduct:
1) In breach of Principle 1 of the FSA's Statements of Principle, Mr Fleurose failed to observe high standards of integrity and fair dealing in his involvement in the trading activities of the Equity Derivatives Group of J P Morgan Securities Limited on 28th November 1997.
2) In breach of Principle 3 of the FSA's Statements of Principle, Mr Fleurose failed to observe high standards of market conduct in trading for J P Morgan Securities Limited on the London Stock Exchange on 28th November 1997.
B. He has ceased to be fit and proper to be registered by SFA.”
There followed 11 pages of a document headed “Summary of Facts” giving extensive details of the case and evidence relied upon.
The essence of the case against him was that although he acted on the orders of his manager, he knew the true purpose of what he was doing, and, under both his employment contract and the rules of the SFA it was his responsibility to refuse to carry out instructions which he knew to be unlawful and to refer the issue to the compliance officer.
“His willing co-operation in effecting transactions solely designed to depress the Index and his failure to question his orders or to make any reference to the Compliance Department constituted the misconduct alleged against him.”
The applicant accepted that it would have been improper for him to effect trades whose sole purpose was to manipulate the Index. His case was that he had no knowledge or suspicion that his manager was manipulating the market and thought that the deals he executed were legitimate deals to unwind a hedge in connection with the binary option. Thus, it was said, he had no knowledge or intent to act unlawfully; he was merely executing his superior's instructions which he had no reason to believe were unlawful.
The Tribunal, presided over by a QC sitting with a market man and an independent person, concluded that the applicant had participated in the sales
“in the knowledge that they were intended to depress the market below the strike level of the binary option”.
In support of their conclusions, the Tribunal relied, amongst other matters, on a statement which the applicant had made very soon after the material events during the course of the LSE investigation. If what he was alleged to have said was said, then his case that he did not know the true purpose of his deals that afternoon became less than credible. Second, they relied on events which had taken place earlier in the afternoon which, as the SFA contended, showed that the applicant knew, at an early stage, of the plan to manipulate the index. Third, they relied upon the evidence of a witness who described how she observed the traders, especially the applicant, to be happy and celebrating at the close. Her evidence was contradicted by the applicant but the Tribunal preferred hers to his and noted that the applicant had taken a close interest in the effect that the sales were having on the index.
“If, as he says, he was simply unwinding a hedge, there would be no reason to follow these sales so closely.”
and they rejected his explanation that it was merely “natural curiosity”, as unconvincing.
“We are satisfied that, with the knowledge he had acquired earlier in the day, especially at the...
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