Inside the wall

Market reCap

• Inside the wall
• FSA consultation on PDMR transactions – issues for brokers
• Significant changes to the listing regime
• The end of "no names" calls to the UKLA? And the first edition of Primary Market Bulletin
• AIM Regulation and directors participating in a secondary fundraising
• QCA remuneration committee guide for smaller quoted companies
• Kay Review of UK equity markets – interim report published

There have been two recent Financial Services Authority ("FSA") market abuse decisions relating to the improper disclosure of inside information and "wall-crossing" and one related decision on insider dealing. The purpose of this article is to provide a brief look at the law in this area, the facts of these cases and to note the key messages, including the attitude of the FSA.

1. The relevant provisions

Under section 118(1) of the Financial Services and Markets Act 2000 ("FSMA"), market abuse includes behaviour (whether by one person alone or by two or more persons jointly or in concert) which occurs in relation to qualifying investments admitted to trading on a prescribed market and which falls within any one or more of the types of behaviour set out in sections 118(2) to 118(8) of FSMA.

It is important to note that this is a civil offence and is different from the criminal offence of insider dealing under the Criminal Justice Act 1993. Therefore the standard of proof here is "on a balance of probabilities" as opposed to "beyond reasonable doubt". Key concepts include:

- Insider Dealing: section 118(2) of FSMA provides that the first type of such behaviour is where an insider (as defined in FSMA) deals, or attempts to deal, in a qualifying investment or related investment on the basis of inside information (as defined in FSMA) relating to the investment in question.

- Improper Disclosure: under section 118(3) of FSMA, another market abuse behaviour is the disclosure of inside information by an insider to another person otherwise than in the proper course of the exercise of his employment, profession or duties.

- Wall-crossing: the FSA describes wall-crossing in the David Einhorn decision notice (see below) as a well-established practice whereby a company can legitimately provide inside information to a third party.  It may be carried out verbally or in writing. The third party is asked if it is prepared to be wall-crossed, usually for a specified period of time. If it agrees, it is then told the relevant information. Sometimes written terms are agreed, which set out the basis on which the third party agrees to receive the inside information.

2. FSA decision on Ian Hannam

In 2008, Mr Ian Hannam was global co-head of UK capital markets at J.P. Morgan and a key adviser to Heritage Oil plc – listed on the Main Market in London with interests in Uganda and Kurdistan. Mr Hannam also had other contacts interested in these regions – Mr A (of organisation C) and Mr B.

In September 2008, Mr Hannam sent an email to Mr A, which disclosed that J.P. Morgan, as adviser to Heritage, was engaged in discussions with a potential acquirer of Heritage. In October 2008, Mr Hannam sent an email to Mr A, with a blind copy to Mr B, reporting certain developments and disclosing in a post-script that Heritage had just made a discovery of oil which "was looking good". On 21 October 2008, Heritage announced that it had found oil in its Ugandan well and the price of its shares rose by 14.62%.

On 27 February 2012, the FSA fined Ian Hannam £450,000 for engaging in two instances of market abuse by improper disclosure. The FSA found that information in both emails constituted inside information and it was not in the proper course of his employment, profession or duties for Mr Hannam to have disclosed it. The FSA said that although Mr Hannam had implicit authority from his client to make disclosure of the information contained in both emails (apart from the information in the post-script in the October email) and was acting in his client's interests, he did not consider whether he was disclosing inside information or whether it was necessary to disclose it in order to properly discharge his client responsibilities. The FSA concluded that the disclosure was not reasonable, nor was it in fulfilment of a legal obligation and given that Mr Hannam was an approved person, very experienced and held a very senior position, this was a serious failure and he should be fined even though he had made no personal gain.

Mr Hannam has referred the matter to the Upper Tribunal, which may uphold, vary or cancel the FSA's decision.

3. FSA decision on Andrew Osborne

In 2009, Mr Andrew Osborne led the corporate broking team at Merrill Lynch, which was acting as joint book runner and co-sponsor for a new equity raise in Punch Taverns plc ("Punch") – listed on the Main Market in London. Merrill Lynch had specific wall-crossing procedures for Punch shareholders that required a confidentiality agreement to be signed.

In June 2009, Greenlight Capital Inc. – a US hedge fund manager – had interests in shares representing 13.3% of Punch's equity capital. Mr Osborne was tasked with making the initial approach to wall-cross US shareholders of Punch by arranging calls with them. However, David Einhorn, Greenlight's owner and sole portfolio manager, refused to be wall-crossed and therefore requested the call to proceed on a non-wall-crossed basis. Nevertheless, during the call on 9 June 2009, Mr Osborne disclosed various pieces of inside information regarding the new equity raise to Mr Einhorn.

After the call, Greenlight began to sell Punch shares and, on 11 June 2009, Mr Osborne was specifically informed by Punch management that Greenlight had sold a significant number of shares. On 15 June 2009, the equity issue was announced and Punch's shares fell by 29.9%. Greenlight's sale of Punch shares prior to the announcement resulted in Greenlight avoiding a loss of approximately £5.8 million.

On 15 February 2012, the FSA imposed a fine on Mr Osborne of £350,000 for engaging in market abuse by improper disclosure. As an experienced corporate broker with significant wall-crossing experience he should have followed Merrill Lynch's wall-crossing procedures and been careful about what information he disclosed to Greenlight. Mr Osborne has not referred the matter to the Upper Tribunal.

4. Greenlight and David Einhorn

Following from the above facts, on 12 January 2012, the FSA imposed a financial penalty of £3.65 million on Greenlight, and a financial penalty of £3.64 million on Mr Einhorn, in each case for engaging in the market abuse of insider dealing in relation to Punch shares. Press reports suggest that they have decided to put the decision behind them rather than pursue an appeal.

5. Conclusion – key messages

• The FSA has increasingly pursued cases against top executives rather than simply fining firms.
• It is best practice to clearly say that one does not want to be wall-crossed at a start of a conversion about a transaction. Sanctions may be much worse if this is not done.
• Even so, it remains the responsibility of every person receiving information to assess whether inside information has been disclosed.
• Various pieces of information that may not be inside information on their own may become so when taken and construed together.
• Large market abuse fines may be imposed even where there is no personal gain – and even when it is a result of an honest error of judgment.
• As demonstrated in the Greenlight case, the market abuse regime can have extra-territorial reach because it applies to all securities tradable on European regulated markets.
• Market professionals should note and comply with the regulatory requirements and any transaction-specific procedures including getting verbal agreements to be wall-crossed, ideally supported by a file note or written confirmation, or a confidentiality agreement signed.
• If in any doubt about regulatory requirements always consult with your internal compliance team, legal advisers or as appropriate with senior management.

Shash Dayal is an associate in the Corporate Group of Field Fisher Waterhouse LLP in London.