Davidson and Tatham v Financial Services Authority, Court of Appeal - United Kingdom Financial Services and Markets Tribunals, May 16, 2006, [2006] UKFSM FSM031

Resolution Date:May 16, 2006
Issuing Organization:United Kingdom Financial Services and Markets Tribunals
Actores:Davidson and Tatham v Financial Services Authority
 
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MARKET ABUSE ­ company to be listed on the Alternative Investment Market ­ take up of shares in the placing slow ­ the idea emerged that if a spread bet were placed then the spread betting firm would hedge the bet through a contract for differences with a counterparty who would then hedge the contract for differences by purchasing shares in the placing thus completing the placing ­ whether either or both of the Applicants engaged in market abuse ­ no ­ whether penalties should have been imposed ­ no ­ whether the amounts of the penalties were appropriate - no ­ whether Mr Tatham was in breach of Principles 2 and 3 ­ no ­ references determined in favour of the Applicants ­ FSMA 2000 Ss 64, 66, 118 and 123 FINANCIAL SERVICES AND MARKETS TRIBUNAL PAUL DAVIDSON First Applicant ASHLEY TATHAM Second Applicant - and - THE FINANCIAL SERVICES AUTHORITY Respondent Sitting in London on 18-20, 23-27 and 30-31 January 2006; 1, 13-16, 21, 22, 24, 27 and 28 February 2006; and 2, 6 and 7 March 2006 Tribunal: DR A N BRICE (Chairman) MR C A CHAPMAN MR J PARSLOE The First Applicant in person Dr Michael von Pommern-Peglow and Sir Nicholas Bonsor Bt for the Second Applicant Tom Beazley QC, with Javan Herberg of Counsel, instructed by the Financial Services Authority for the Respondent © CROWN COPYRIGHT 2006 CONTENTS PARAGRAPH Background 1 The references 3 The legislation 6 The issues 9 The evidence 10 The facts 16 Mr Davidson 17 Cyprotex 21 Mr Tatham 26 Mr Howe 27 Mr Davidson opens an account with City Index 30 Mr Davidson gives Mr Howe authority to trade 34 Mr Davidson makes two further payments to Mr Howe 38 City Index and spread betting 41 City Index's counterparty ­Dresdner Securities 50 The Alternative Investment Market (AIM) 54 The progress of the Cyprotex flotation 62 The Clubhaus spread bet 66 The meetings with Mr Cooke of Dresdner Kleinwort and with Credo 69 The arrangements for the Cyprotex spread bet 75 Monday 28 January 2002 The early conversations 76 Monday 28 January 2002 The legal advice 81 Tuesday 29 January 2002 The bet moves to £4 million 84 Tuesday 29 January 2002 The directors are told the placing is filled 88 Wednesday 30 January 2002 Compliance consultations 92 Thursday 31 January 2002 The bet increases to £5 million maximum 95 Friday 1 February 2002 The prospectus 98 Monday 4 February 2002 The first placing letter 102 Tuesday 5 February 2002 Mr Davidson goes to Barbados 105 Wednesday 6 February 2002 Dresdner sign the first placing letter 107 Wednesday 6 February 2002 The withdrawal of Credo 108 Thursday 7 February 2002 Dresdner sign the second placing letter 113 Friday 8 February 2002 The second placing letter sent to Mr Howe 117 Monday 11 February 2002 The Reuters Article 118 Tuesday12 February 2002 The placing agreement 121 Tuesday12 February 2002 The final prospectus 122 Wednesday 13 February 2002 Mr Long is told about the bet 128 Wednesday 13 February 2002 The bet is booked 129 Thursday 14 February 2002 The contract notes 130 Friday 15 February 2002 Cyprotex floated 131 Sunday 17 February 2002 Mr Davidson meets Mr Long 137 Monday 18 February 2002 The meeting in Macclesfield 138 Tuesday 19 February 2002 Mr Davidson meets Altium 141 Tuesday 19 February 2002 Dresdner seeks advice 142 Wednesday 20 February 2002 Mr Davidson's margin is increased 147 Altium meet the lawyers 149 Gilbert Elliott become concerned 150 Mr Davidson is investigated 153 City Index investigate 155 Altium express their views 158 The views of the other placees 160 Cyprotex now 161 The views of the Takeover Panel 165 The progress of the references 167 PARAGRAPH Reasons for decision - Four preliminary legal matters 173 (1) Is market abuse a criminal charge? 174 (2) What is the burden and standard of proof? 186 (3) What is the role of the Tribunal? 201 (4) Should we have considered an application of no case to answer? 205 Reasons for decision Issue 1 - Did the Applicants engage in market abuse? 211 (1) What in fact was the behaviour of Mr Davidson? 215 (a) Our view of the witnesses 219 (b) The position of Mr Howe 224 (c) Does the evidence support the case of the Authority? 225 (d) Does the evidence support the case of Mr Davidson? 247 (e) Our views 259 (2) What in fact was the behaviour of Mr Tatham? 262 (a) Did Mr Tatham know at the outset about the scheme? 263 (b) When did Mr Tatham know about the scheme? 267 (c) Did Mr Tatham assist the scheme? 271 (d) Did Mr Tatham attempt to conceal or fail to disclose? 274 (e) Did Mr Tatham fail to consult? 279 (f) Should Mr Tatham have used a manufactured trade? 283 (g) Our views 285 (3) Did the behaviour occur in relation to qualifying investments? 286 (4) Was there a false and misleading impression? 289 (a) The Code of Market Conduct 291 (b) The AIM Rrules 298 (c) The expert evidence ­ Mr Hinton 301 (d) The expert evidence ­ Mr Brown 309 (e) Two factual matters 314 (i) Did the timing of the bets mean that they could not be disclosed? 315 (ii) Was full disclosure made to Mr Long on 13 February 2002? 318 (f) Our views 321 (5) Was there a failure to observe reasonable standards of behaviour? 332 (a) The expert evidence 334 (b) Our views 338 (6) Our conclusions on issue (1) 342 Reasons for decision Issue 2- Should penalties have been imposed? 344 Reasons for decision Issue 3 - Were the amounts of the penalties appropriate? 347 Reasons for decision Issue 4 - Was Mr Tatham in breach of Principles 2 and 3? 364 Summary of decisions on all the issues 367 Decision 372 DECISION5 Background

1. Mr Paul Davidson (Mr Davidson) was the majority shareholder in, but not, at the relevant time, a director of, a company called Cyprotex PLC (Cyprotex), the ordinary share capital of which was to be admitted to trading on the Alternative Investment Market (AIM) of the London Stock Exchange. Mr Nigel Howe (Mr Howe) was an employee of the nominated broker in charge of the placing, namely, Messrs Gilbert Elliott (Gilbert Elliott). The take up of shares in the placing was slow and the idea emerged that, if a spread bet were placed in respect of shares in Cyprotex, then the spread betting firm would hedge the bet through a contract for differences with a counterparty, who would then hedge the contract for differences by purchasing shares in the placing, thus completing the placing.

2. The flotation was due on 15 February 2002. A few days before that date, and on the account of Mr Davidson, Mr Howe placed a large spread bet with a firm called City Index Limited (City Index) of which Mr Ashley Tatham (Mr Tatham) was the executive director of trading. City Index hedged the bet by a contract for differences, the counterparty of which was Dresdner Kleinwort Wasserstein Securities Limited (Dresdner Securities). Dresdner Securities hedged its exposure by purchasing shares in Cyprotex in the placing. By this means the placing was filled. The references

3. On 23 October 2003 the Financial Services Authority (the Authority) issued a Decision Notice to Mr Davidson, Mr Howe and Mr Tatham. The Decision Notice stated that the Authority had decided to impose a penalty of £750,000 on Mr Davidson; a penalty of £300,000 reduced to £50,000 on Mr Howe; and a penalty of £100,000 on Mr Tatham. The penalties were imposed because the Authority was of the view that Mr Davidson, Mr Howe and Mr Tatham had agreed to a scheme or arrangement to facilitate the flotation of Cyprotex. The scheme or arrangement was that a spread bet would be placed with City Index who would hedge its position by a contract for differences so that the counterparty to the contract for differences would hedge its own exposure by purchasing shares in the placing, thus ensuring that the placing was filled. The Authority was also of the view that all three persons were aware (or agreed) that these arrangements would not be disclosed. It followed, in the view of the Authority, that the arrangements gave a false and misleading impression as to the demand for, or the value of, the shares in Cyprotex and so amounted to market abuse within the meaning of section 118 of the Financial Services and Markets Act 2000 (the 2000 Act) from which it followed that the Authority had power, under section 123 of the 2000 Act, to impose the penalties.

4. Mr Davidson was not an approved person under the 2000 Act but Mr Howe and Mr Tatham were. The Decision Notice also stated that the Authority considered that Mr Howe had failed to comply with Principles 1 (integrity), 2 (due skill, care and diligence) and 3 (failure to observe proper standards of market conduct) and that Mr Tatham had failed to comply with Principles 2 and 3. No separate penalties were imposed on Mr Howe and Mr Tatham in respect of their breaches of the Principles as the Authority considered that such breaches were covered by the penalties for market abuse.

5. Mr Davidson and Mr Tatham referred the Decision Notice to the Tribunal. Mr Howe did not. The legislation

6. Section 123 of the 2000 Act contains the provisions giving the Authority power to impose penalties in cases of market abuse and provides: "123(1) If the Authority is satisfied that a person ("A") - (a) is or has engaged in market abuse, or (b) by taking or refraining from taking any action has required or encouraged another person or persons to engage in behaviour which, if engaged in by A, would amount to market abuse it may impose on him a penalty of such amount as it considers appropriate. (2) But the Authority may not impose a penalty on a person if, having considered any representations made to it in response to a warning notice, there are reasonable grounds for it to be satisfied that ­ (a) he believed, on reasonable grounds, that his behaviour did not fall within paragraph (a) or (b) of subsection (1), or (b) he took all reasonable precautions and exercised all due diligence to avoid behaving in a way which fell within paragraph (a) or (b) of that subsection. (3) If the Authority is entitled to impose a penalty on a person under this section it may,...

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