SFC sanctions international bank for sponsor failings
On 17 May 2018, the Hong Kong Securities and Futures Commission (SFC) announced that it had reprimanded and fined the sole sponsor of Real Gold Mining Limited (Real Gold) HK$57million to settle the SFC’s concerns about the sponsor failing to conduct adequate and reasonable due diligence on Real Gold’s customers and properly supervise its staff1
The case marks the first concluded SFC disciplinary action against a “bulge-bracket” international bank for deficiencies in HK IPO sponsor work.
The SFC found that:
Real Gold’s prospectus disclosed that its sales increased over twenty-fold within two years, and it appeared that, save for one customer, its customers had changed significantly during that period;
All customer interviews were conducted by telephone;
There was no direct confirmation from the customers of the transaction amounts;
The sponsor did not interview one of the three customers with whom Real Gold had seemingly entered into a memorandum of long-term cooperation and did not ask another customer about the document, when it was interviewed, to authenticate it;
A sponsor principal was appointed over four months after the sponsor was mandated, by which time preparations for the listing application were well under way;
One of the sponsor principals thought she was the “signing responsible officer” for the listing application and believed that another team member was the sponsor principal. She was not involved in conducting due diligence or in correspondence with the Stock Exchange; and
The due diligence work conducted on customers was handled by junior staff with little supervision.
In reaching this resolution, the SFC took into account that:
This was the first and only listing application that the SFC had concerns about with respect to the sponsor’s work;
The breaches concerned a limited portion of the sponsor’s due diligence;
There was no evidence that the breaches were deliberate, intentional or reckless;
The sponsor applied a reasoned weighting towards production-related due diligence and away from customer-related due diligence, which the SFC did not think met regulatory requirements;
Senior management and external counsel were engaged early to address the SFC’s concerns; and
The sponsor took steps to strengthen its internal controls and systems with respect to sponsor work after this listing.
China levies record US$870 million fine for stock manipulation
China’s securities regulator imposed a RMB5.67 billion (US$870 million) fine on a domestic railcar owner in March 2018 for manipulating share prices of three newly-listed companies. This is the biggest single penalty in the country’s financial market. Notably, the fine is almost six times the profit earned by the railcar owner from its misconduct. This underscores China’s continuous crackdown on market irregularities in the world’s second-biggest equity market.
Austrian regulator's annual report shows active investigation of market abuse cases
The Financial Market Authority (Finanzmarktaufsicht (FMA)’s annual report for 2017 shows the FMA actively investigating potential market abuse cases2. Specifically, the FMA:
Carried out 1,503 routine analyses and reviews;
initiated 84 investigations (30 involving misuse of inside information; 54 of market manipulation);
completed or withdrew 72 investigations (21 involving inside information; 51 of the market manipulation cases); and
forwarded 6 reports to the Central Public Prosecutor for Economic Crime and Corruption.
Austria introduces criminal sanctions for misuse of inside information and market manipulation
An insider who intentionally uses inside information is subject to imprisonment for a maximum of five years, if the transaction volume exceeds EUR 1 million. Recommendations involving inside information are also subject to imprisonment for up to five years. The unlawful disclosure of inside information is punishable by a maximum imprisonment of two years.
FMA cooperates closely with overseas authorities
FMA cooperates closely with its European and international partners in the supervision of the stock exchange and securities trading. During 2017, 31 requests for mutual assistance were sent to authorities in other countries; seven were addressed to the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, “BaFin“) and 24 to partner authorities in other countries. The number of inquiries received from overseas authorities has increased from 26 in 2016 to 32 in 2017; 21 of the requests were made by BaFin.
Austria repeals legislation to comply with MAR
Notably, to ensure that Austria complies with MAR, FMA has repealed the Issuer Compliance Ordinance (Emittenten Compliance Verordnung), so that the previous concept of “compliance relevant information” (ie non-public information that is confidential and price relevant) from Austrian statutory law no longer applies.
German Federal Constitutional Court rules out criminal loophole for insider trading and market manipulation
On 3 May 2018, the German Federal Constitutional Court (Bundesverfassungsgericht: BVerfG) confirmed the decision of Germany’s highest court for civil matters, the Federal Court of Justice (Bundesgerichtshof (BGH) on a potential loophole in pursuing insider dealing cases3. The question before the BGH was whether the new version of section 38(3)(1) and section 39(3d)(2) German Securities Trading Act (WpHG) of 2 July 2016 opened up a loophole in the law regarding the prosecution of insider trading and market manipulation. On the one hand, amendments to the German Securities Trading Act came into force on 2 July 2016 and make specific reference to the European Market Abuse Regulation (MAR) and, on the other hand, the relevant rules of the MAR relied upon and referred to became directly applicable in EU member states from 3 July 2016 (one day after the German legislation).
In this case the complainant had been sentenced to a substantial fine by a lower court for committing the administrative offence of market manipulation. The complainant argued that there was no legal basis for his conviction because under German law. If the law in force at the time of the offence is amended prior to the decision, the more lenient law shall apply. The complainant also argued that the references to EU rules in the German Securities Trading Act were null and void, because, at the time, the MAR had not entered into force.
The BGH did not accept this line of reasoning and the BVerfG has now, confirmed this ruling. The references to Art. 14 and 15 of the MAR in the German Securities Trading Act meant that the German legislator declared those provisions of the MAR as applicable in Germany from 2 July 2016 before becoming directly applicable to all member states.
Consob issues guidelines on managing privileged information and investment recommendations
Uncertainty surrounding the operation of the Market Abuse Regulation (MAR) has prompted the National Commission for Companies and the Stock Exchange (Consob) to adopt official best practice guidelines on MAR related matters.
Consob guidelines No. 1 of 13 October 2017 recommend organisational measures to ensure compliance with MAR provisions. In particular, these guidelines cover recommendations for listed companies for setting up insider lists, identifying inside information and the situations in which disclosure can be delayed. Although primarily addressed to listed companies, there are points of interest to financial institutions acting in an advisory or other capacity in transactions involving listed companies.
Consob guidelines No. 2 of 13 October 2017 provide guidance to persons who produce or disseminate investment recommendations or other information recommending or suggesting an investment strategy. The guidelines set-out best practice rules on:
fair presentation of investment recommendations;
communication of conflicts of interests; and
channels of distribution of investment recommendations.
CONSOB reports on its market abuse investigations in 2017
On 11 June 2018, Consob published its annual report on 2017 activities and plans for 2018. In 2017:
Consob received 352 reports of alleged suspicious transactions, of which 262 came from intermediaries, companies managing stock exchanges or multilateral trading systems, and 80 came from overseas securities market regulators;
approximately 57 per cent of the alleged suspicious transactions concerned insider trading, 31 per cent market manipulation and the remaining 12 per cent related to multiple market abuse violations;
most of the suspicious transactions reports related to the equities markets (78 per cent);
Consob imposed 6 administrative sanctions in connection with market abuse violations (compared with 20 administrative sanctions in 2015), and five of these involved insider trading violations; and
Five cases were reported by Consob to the Public Prosecutor as potentially entailing criminal offences.
FCA’s consistent focus on market abuse amid emphasis on enforcement in all areas
There has been little change in the FCA’s ongoing focus on addressing market abuse: it remains clear that the prevention of (and enforcement relating to) market abuse is a high priority for the FCA. Market abuse is named as one of the key drivers of harm to wholesale markets in the FCA’s 2018/19 business plan4, and the FCA published proposed new guidance for firms in March 20185, with a new chapter focused on good practice in relation to detecting, reporting and preventing insider dealing and market manipulation (to assist in complying with the Market Abuse Regulation). The consultation closed at the end of June and final guidance has not yet been published.
There have not been any recent blockbuster fines for market abuse but notable FCA outcomes connected with market abuse over the past year have included:
A firm, Tejoori Ltd, was fined £70,000 for a breach of Article 17(1) of the MAR, which was the FCA’s first fine issued to an AIM-listed company for late disclosure of inside information;
a fine in excess of £1 million issued against Interactive Brokers (UK) Ltd for failings in respect of its market abuse controls and failure to report suspicious activity (January 2018);
confiscation orders against two individuals convicted of conspiring to insider deal in May 2016, and who are currently serving sentences following those convictions (May 2018); and
a fine issued to a former BAML bond trader for giving a false / misleading impression to the market (November 2017).
Following the conclusion of the majority of the large scale conduct investigations that have characterised the bulk of the FCA’s enforcement activities in recent years and saw record fines levied in 2014-16, the regulator’s fining activity has unsurprisingly declined but without a corresponding drop off in the volume of enforcement cases open. In 2017, there was an approximate 75 per cent increase in the number of open investigations within the FCA enforcement team’s portfolio. This has been driven by a number of factors, but one of the key amongst them is the regulator’s willingness to pursue actions against listed corporates based on inaccurate or delayed disclosure to the market that could amount, in the FCA’s view, to market abuse.
In a speech given by Mark Steward, Director of Enforcement and Market Oversight at the FCA on 14 June 20186, he emphasised the following points about FCA enforcement strategy going forward:
For an effective approach to enforcement, the FCA will not just focus on imposing larger and larger penalties. Sanctions are only one element as “Good enforcement [also] requires robust, accurate and faithful processes for detecting misconduct in all its guises and acting quickly and effectively.”
The FCA will increasingly use a combination of powers in enforcement situations as “Outcomes to [FCA] investigations may involve the use of enforcement, supervision, or competition powers, or a combination of some or all”.
4 The FCA’s business plan 2018/19 is available at https://www.fca.org.uk/publications/corporate-documents/our-business-plan-2018-19
5 The FCA’s guidance consultation is available at https://www.fca.org.uk/publication/guidance-consultation/gc18-01.pdf
6 Speech available at https://www.fca.org.uk/news/speeches/has-industry-improved-ten-years
Authorities Crack Down on “Spoofing” in Commodities Markets
US enforcement authorities are devoting increasing attention to holding entities, as well as individuals, accountable for “spoofing” in commodities markets. “Spoofing” refers to placing buy or sell orders with the intent to cancel before execution, often with the goal of manipulating market prices.
In January 2018, the Commodities and Futures Trading Commission (CFTC) announced settlements with Deutsche Bank, HSBC, and UBS for spoofing in the US precious metals futures markets. In both the Deutsche Bank and UBS cases, groups of traders located both within and outside the US, including in London and Singapore, engaged in spoofing on the Commodity Exchange, Inc. (COMEX). The three settlements include civil penalties ranging from $1.6 million to $30 million and require the banks to undertake remedial measures to prevent future violations.
On the same day, the DOJ announced its largest ever futures market criminal enforcement action against eight defendants, seven of whom were charged with spoofing. Seven of those charged were traders with global financial institutions and commodities trading firms located in the US, the UK, Australia, Singapore, and Switzerland. The DOJ alleged that the eighth individual developed software that enabled Navinder Sarao to spoof the Chicago Mercantile Exchange, contributing to the 2010 “flash crash.” Sarao pleaded guilty to one count of spoofing in 2016. The CFTC simultaneously announced civil enforcement actions against six of the individuals charged by the DOJ.
US enforcement agencies have made it clear that, because traders have worldwide access to US markets, enforcers will identify and combat spoofing in those markets wherever the responsible traders may be located. During a panel discussion hosted by Freshfields featuring leaders from the DOJ Fraud Section, Acting Principal Deputy Chief Robert Zink emphasized that spoofing conduct often occurs outside the US, but with “consequences [that are] global and affect Americans.”More recently, in a May 2018 speech, a CFTC commissioner emphasized the CFTC’s willingness to pursue the firms where spoofing occurs7. The CFTC may fine firms that either have a generally inadequate supervisory system or fail to perform supervisory duties diligently.