Winterflood Securities Ltd & Ors v Financial Services Authority, Court of Appeal - United Kingdom Financial Services and Markets Tribunals, March 11, 2009, [2009] UKFSM FSM066

Resolution Date:March 11, 2009
Issuing Organization:United Kingdom Financial Services and Markets Tribunals
Actores:Winterflood Securities Ltd & Ors v Financial Services Authority
 
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MARKET ABUSE Effect of Code Actuating purpose Preliminary issue - Whether necessary to have actuating purpose to mislead or distort the market No References dismissed FSMT 2000 s.118(2)(b) and (c) FINANCIAL SERVICES AND MARKETS TRIBUNAL (1) WINTERFLOOD SECURITIES LIMITED (2) STEPHEN SOTIRIOU (3) JASON ROBINS Applicants - and - FINANCIAL SERVICES AUTHORITY The Authority Tribunal: SIR STEPHEN OLIVER QC TERENCE MOWSCHENSON QC Sitting in public in London on 11 March 2009 Charles Flint QC and Javan Herberg, instructed by Ashurst LLP, for the Applicants Bankim Thanki QC, Michael Green and Katherine Watt, for the Authority © CROWN COPYRIGHT 2009 2 DECISION Introduction1. These consolidated References referred to the Tribunal on 17 July 20085 concern the Applicants trading of shares in Fundamental-E Investments plc ( FEI ) on the Alternative Investment Market ( AIM ) between September 2003 and July 2004. Following an investigation and warning notices, and an oral representations meeting before the Regulatory Decisions Committee ( the RDC ) of the Financial Services Authority ( the FSA ), on 19 June10 2008 the RDC issued decision notices finding that all three Applicants had engaged in market abuse within the meaning of section 118 of the Financial Services and Markets Act 2000 ( FSMA ), and imposed financial penalties of £4 million on the First Applicant ( Winterflood ), £200,000 on the Second Applicant ( Mr Sotiriou ) and £75,000 (reduced to £50,000 on the grounds of15 personal financial circumstances) on the Third Applicant ( Mr Robins ).2. On 22 January 2009 the Tribunal ordered that two issues be tried as preliminary issues in the consolidated References and that the hearing of the preliminary issues be treated as the hearing of the References pursuant to Rule 13(2) of the Tribunal Rules, on the basis that the determination of the two20 preliminary issues substantially disposed of the Reference, given the parties agreement that neither would seek to pursue further issues (subject to the possibility of an appeal) in the light of the decision on the preliminary issues. Accordingly, it is common ground that the Tribunal should either allow the References, directing the Authority to take no action in respect of the matters25 referred, or (if it finds against the Applicants) dismiss the References, directing the Authority to take the action set out in the Decision Notices, according to its findings on the preliminary questions.3. Messrs Sotiriou and Robins took no part at the hearing of the preliminary30 issue, but they supported and adopted the submissions of Winterflood. They have agreed to be bound by the decision of the Tribunal.4. Market abuse is defined in section 118 FSMA. At the material times, the relevant provisions were in the following terms:35 118(1) For the purposes of this Act, market abuse is behaviour (whether by one person alone or by two or more persons jointly in concert): (a) which occurs in relation to qualifying investments traded on a market to which this section applies;40 (b) which satisfies any one or more of the conditions set out in subsection (2); and (c) which is likely to be regarded by a regular user of that market who is aware of the behaviour as a 3 failure on the part of the person or persons concerned to observe the standard of behaviour reasonably expected of a person in his or their position in relation to the market. 118(2) The conditions are that:5 (a) (b) the behaviour is likely to give a regular user of the market a false or misleading impression as to the supply of, or demand for, or as to the price or value10 of, investments of the kind in question; (c) a regular user of the market would, or would be likely to, regard the behaviour as behaviour which would, or would be likely to, distort the market in investments of the kind in question.15 . . . 118 (10) regular user , in relation to a particular market, means a reasonable person who regularly deals on that market in investments of the kind in question.5. For the purposes of these preliminary issues there is no dispute between the20 parties that the Applicants behaviour could fall within the conditions of section 118 FSMA, so that looking solely at the definition set out in that section that behaviour could fulfil the criteria of market abuse. However, the Applicants contend that merely satisfying the statutory definition of market abuse is not sufficient and that it is necessary for the Authority to prove some25 form of subjective mental element on the part of the Applicants to mislead or distort the market. This requirement, they claim, is imposed by the Code of Market Conduct ( the Code ) which has been issued by the Authority pursuant to section 119 FSMA and must be read into the statutory definition.6. The Authority s position is that market abuse within the meaning of section30 118 is behaviour that satisfies the statutory definition contained in section 118. So far as material to these references the Code merely provides non- exhaustive guidance as to the sorts of behaviour that the Authority considers would amount to market abuse within the meaning of s.118. The principal issue for determination by this Tribunal is which of those positions is correct.35 This is to be determined by the determination of the issues (set out below) directed to be heard by the Directions published on 22 January 2009.7. The preliminary issues are questions of law. They are: (a) In order for Winterflood to have committed market abuse under section 118(2)(b) or 118(2)(c) of FSMA on the basis set out in the40 4 Statement of Case, was it necessary for them to have an actuating purpose (as defined in the Code) to mislead or distort the market? ( the Actuating Purpose Issue ) and (b) If the Tribunal finds that in order for Winterflood to have committed5 market abuse under section 118(2)(b) or 118(2)(c) FSMA it was necessary for it to have acted recklessly or more than grossly negligently , is it permissible for the Authority to put forward the allegations of recklessness against Winterflood as set out in the Statement of Case at paragraphs 53.3, 54.3, 56 and 57 ( the Fresh10 Allegation Issue ).8. The Actuating Purpose Issue is in the nature of a preliminary issue of law. If it is a necessary ingredient of market abuse that the Applicants have an actuating purpose to mislead or distort the market then the Authority has15 accepted that its case on this Reference cannot succeed. On the other hand, if an actuating purpose is not necessary to establish market abuse in this context, then (subject to the Fresh Allegation Issue, below) the Applicants have accepted that they would not pursue the reference further.9. On Winterflood s case the Fresh Allegation Issue does not arise; the Actuating Purpose Issue will resolve the reference one way or the other. There is no case pleaded by the Authority in its Statement of Case that the requirement to prove an actuating purpose, if there is such a requirement, may be met by an allegation of recklessness. The further issue arises only if the Tribunal were to25 find that market abuse requires an actuating purpose, but that an actuating purpose may be established by proving recklessness . In that eventuality, the Applicants contend a second issue of law could arise. They contend that the Authority is not entitled to allege in its case to the Tribunal, and the Tribunal is not entitled to find, that the Applicants acted recklessly because such a case30 was advanced to the RDC by the Authority but was not adopted by the RDC and was not embodied in the Decision Notices. The Applicants reserved their position as to whether it is permissible under the FSMA, and as a matter of due process, for the Authority to advance a case on a Reference which was not part of the decision notice being referred. We heard no argument on the35 second issue although the issue was referred to in the skeleton arguments. Factual Background10. The background to the References is set out in the respective skeleton40 arguments. It was accepted that the Tribunal had to approach the matter on the basis that the facts set out in the Statement of Case were correct and we emphasise that we make no determination of the facts For convenience we take the description of the background facts from the Authority s skeleton argument.4511. Winterflood is a London-based market-maker specialising in smaller company securities, including those listed on AIM. Winterflood provided a market 5 making service in the shares of FEI which were traded on AIM. At the material times, Mr Sotiriou and Mr Robins were market-makers employed by Winterflood, and were responsible for Winterflood's market making activities in relation to FEI until 3 February 2004, and between 3...

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