In a relatively high profile judicial review decision on 9 March 2015 involving a trader investigated as part of the "London Whale" case, the Court has given a likely uncontroversial judgment that the
In a relatively high profile judicial review decision on 9 March 2015 involving a trader investigated as part of the "London Whale" case, the Court has given a likely uncontroversial judgment that the Financial Conduct Authority ("FCA") made a rational decision in deciding not to pursue an investigation against a regulated individual. The case was brought in unusual circumstances in that the Claimant trader sought relief which would compel the FCA to continue to investigate his own alleged misconduct, news which most regulated individuals or entities would celebrate. The Claimant claimed that he wanted the opportunity to clear his name via the FCA process.
Background
The Claimant was a former derivatives trader at JP Morgan Chase who worked as part of a "synthetic credit portfolio" ("the portfolio"). In 2012, it was announced that the portfolio had sustained trading losses of $5.8bn, the spectre of which became popularly known as the "London Whale" losses (named after a particular trader (not the Claimant) who took outsized trading positions). The announcement caused US regulatory and criminal investigations into allegations that the Claimant (and colleagues) had "mismarked" derivative positions, by overstating the value of the portfolio and concealing the extent of the losses. In August 2012, the Financial Conduct Authority ("FCA") began to investigate the allegations against (separately) the Claimant, other individuals working on the portfolio and JP Morgan itself for alleged breaches of the Financial Services and Markets Act 2000 ("FSMA"). Transcripts of the FCA's investigatory interviews with the Claimant were shared with the US authorities and in September 2013, a US federal jury indicted the Claimant for conspiracy, falsifying JP Morgan's books and records and causing false statements to be made in JP Morgan's filings. Shortly afterwards, the FCA reached a settlement agreement with JP Morgan for £137.61m after concluding that the bank's "extremely serious failings" had "allowed traders on the [portfolio] to conceal them through mismarking the [portfolio's] positions"[1].
After publishing its decision against JP Morgan, the FCA decided to terminate the investigation against the Claimant in December 2013 but not against other traders who had worked on the portfolio. The FCA's reasons for this included the fact that the US Securities and Exchange Commission and the US Department of Justice had open civil and criminal cases against the Claimant, which would apparently (though this was not specified) see that objectives of deterrence or punishment would be fulfilled if required. The FCA also considered that as the Claimant no longer resided in the UK at the time of its decision, and was unlikely to be employed again in the UK financial services industry, pursuing the investigation against him would not represent a proportionate use of its resources. The Claimant challenged this decision on several grounds, but particularly that it was irrational for the reasons outlined below.
Statutory basis for the FCA's decision
Under FSMA, the FCA's statutory strategic and operational objectives include ensuring that financial markets "function well" together with "protecting and enhancing the integrity of the UK financial system"[2]. The FCA is empowered to investigate an individual where, for example, "circumstances suggest" that they "may be guilty of misconduct"[3]. Under s.170 of FSMA, it is empowered specifically to terminate an investigation or limit its scope, without specific (statutory) conditions.
Judgment
The Court cited R (Corner House Research) v Serious Fraud Office[4] and its precedent that the Court will only interfere with a decision by an independent prosecutor or investigator (not) to investigate a matter in "highly exceptional cases". Further, it should be "slow to interfere" with decisions by law enforcement agencies as to the proper allocation of their resources, adding that the FCA was not "obliged to investigate every case where the circumstances suggest that misconduct may have occurred". The Court recognised, however, that a regulator's decision is not unfettered; it must operate rationally[5] and it must pursue its statutory purpose[6]. Further, whilst a decision maker is not to place "manifestly disproportionate" weight upon a factor in reaching its decision[7], the weight to be attributed to each factor is "in general" an element of the decision maker's discretion. The Court considered that it could only interfere on this ground where "no reasonable decision maker could sensibly have given it the weight which it was given" (i.e. by the standards of unreasonableness established by Wednesbury).
The Court's judgment considered, in particular detail, whether the FCA had placed a "manifestly disproportionate" weight on the existence of the US proceedings against the Claimant, and whether this was particularly evident by the apparently unfair nature of the US proceedings. The Court considered that this argument was "somewhat strange" but in any event fell "well short" of showing that the weight given by the FCA to the existence of the US proceedings was "manifestly disproportionate"; it was, as is outlined above, but one of the factors which informed the FCA's decision.
The Court did not accept that the FCA's consideration of the time and resources it would have required to continue its investigation against the Claimant was irrational, and that resource allocation was a matter for the FCA's discretion. The Court considered specifically that the FCA acted reasonably in considering that the US proceedings would fulfil the need for deterrence and/ or punishment (if wrongdoing were found).
The Court found that the FCA's decision to terminate its investigation was "entirely rational", and that it had been for the FCA to attribute what weight to give to each of its "legitimate considerations". The claim for judicial review was, accordingly, dismissed.
[1] FCA Final Notice – JP Morgan, 18 September 2013, para 2.2
[2] S. 1B and 1D of FSMA
[3] S. 168 of FSMA
[4] [2008] UKHL 60. The Court also cited R (Bermingham) v Serious Fraud Office ([2006] EWHC 200), which commented on the well-established deference the Court is to give to the relevant authority's "expert assessments of weight and balance which are so conspicuously within the professional judgment of the statutory decision maker that there will very rarely be legal space for a reviewing court to interfere".
[5] To the standards in Wednesbury
[6] Corner House Research
[7] R (Gallagher) v Basildon District Council ([2010] EWHC 2824)
Background
The Claimant was a former derivatives trader at JP Morgan Chase who worked as part of a "synthetic credit portfolio" ("the portfolio"). In 2012, it was announced that the portfolio had sustained trading losses of $5.8bn, the spectre of which became popularly known as the "London Whale" losses (named after a particular trader (not the Claimant) who took outsized trading positions). The announcement caused US regulatory and criminal investigations into allegations that the Claimant (and colleagues) had "mismarked" derivative positions, by overstating the value of the portfolio and concealing the extent of the losses. In August 2012, the Financial Conduct Authority ("FCA") began to investigate the allegations against (separately) the Claimant, other individuals working on the portfolio and JP Morgan itself for alleged breaches of the Financial Services and Markets Act 2000 ("FSMA"). Transcripts of the FCA's investigatory interviews with the Claimant were shared with the US authorities and in September 2013, a US federal jury indicted the Claimant for conspiracy, falsifying JP Morgan's books and records and causing false statements to be made in JP Morgan's filings. Shortly afterwards, the FCA reached a settlement agreement with JP Morgan for £137.61m after concluding that the bank's "extremely serious failings" had "allowed traders on the [portfolio] to conceal them through mismarking the [portfolio's] positions"[1].
After publishing its decision against JP Morgan, the FCA decided to terminate the investigation against the Claimant in December 2013 but not against other traders who had worked on the portfolio. The FCA's reasons for this included the fact that the US Securities and Exchange Commission and the US Department of Justice had open civil and criminal cases against the Claimant, which would apparently (though this was not specified) see that objectives of deterrence or punishment would be fulfilled if required. The FCA also considered that as the Claimant no longer resided in the UK at the time of its decision, and was unlikely to be employed again in the UK financial services industry, pursuing the investigation against him would not represent a proportionate use of its resources. The Claimant challenged this decision on several grounds, but particularly that it was irrational for the reasons outlined below.
Statutory basis for the FCA's decision
Under FSMA, the FCA's statutory strategic and operational objectives include ensuring that financial markets "function well" together with "protecting and enhancing the integrity of the UK financial system"[2]. The FCA is empowered to investigate an individual where, for example, "circumstances suggest" that they "may be guilty of misconduct"[3]. Under s.170 of FSMA, it is empowered specifically to terminate an investigation or limit its scope, without specific (statutory) conditions.
Judgment
The Court cited R (Corner House Research) v Serious Fraud Office[4] and its precedent that the Court will only interfere with a decision by an independent prosecutor or investigator (not) to investigate a matter in "highly exceptional cases". Further, it should be "slow to interfere" with decisions by law enforcement agencies as to the proper allocation of their resources, adding that the FCA was not "obliged to investigate every case where the circumstances suggest that misconduct may have occurred". The Court recognised, however, that a regulator's decision is not unfettered; it must operate rationally[5] and it must pursue its statutory purpose[6]. Further, whilst a decision maker is not to place "manifestly disproportionate" weight upon a factor in reaching its decision[7], the weight to be attributed to each factor is "in general" an element of the decision maker's discretion. The Court considered that it could only interfere on this ground where "no reasonable decision maker could sensibly have given it the weight which it was given" (i.e. by the standards of unreasonableness established by Wednesbury).
The Court's judgment considered, in particular detail, whether the FCA had placed a "manifestly disproportionate" weight on the existence of the US proceedings against the Claimant, and whether this was particularly evident by the apparently unfair nature of the US proceedings. The Court considered that this argument was "somewhat strange" but in any event fell "well short" of showing that the weight given by the FCA to the existence of the US proceedings was "manifestly disproportionate"; it was, as is outlined above, but one of the factors which informed the FCA's decision.
The Court did not accept that the FCA's consideration of the time and resources it would have required to continue its investigation against the Claimant was irrational, and that resource allocation was a matter for the FCA's discretion. The Court considered specifically that the FCA acted reasonably in considering that the US proceedings would fulfil the need for deterrence and/ or punishment (if wrongdoing were found).
The Court found that the FCA's decision to terminate its investigation was "entirely rational", and that it had been for the FCA to attribute what weight to give to each of its "legitimate considerations". The claim for judicial review was, accordingly, dismissed.
[1] FCA Final Notice – JP Morgan, 18 September 2013, para 2.2
[2] S. 1B and 1D of FSMA
[3] S. 168 of FSMA
[4] [2008] UKHL 60. The Court also cited R (Bermingham) v Serious Fraud Office ([2006] EWHC 200), which commented on the well-established deference the Court is to give to the relevant authority's "expert assessments of weight and balance which are so conspicuously within the professional judgment of the statutory decision maker that there will very rarely be legal space for a reviewing court to interfere".
[5] To the standards in Wednesbury
[6] Corner House Research
[7] R (Gallagher) v Basildon District Council ([2010] EWHC 2824)