Mohammed v Financial Services Authority, Court of Appeal - United Kingdom Financial Services and Markets Tribunals, January 18, 2005, [2005] UKFSM FSM013

Resolution Date:January 18, 2005
Issuing Organization:United Kingdom Financial Services and Markets Tribunals
Actores:Mohammed v Financial Services Authority

FSMA: MARKET ABUSE restrictions on share dealing by an auditor - expert evidence misuse of information - qualifying investments - information not generally available to those using the market - "based on" - relevant information - failure to observe reasonably expected standard of behaviour - penalty THE FINANCIAL SERVICES AND MARKETS TRIBUNAL ARIF MOHAMMED Applicant - and - THE FINANCIAL SERVICES AUTHORITY Respondent Tribunal: WILLIAM BLAIR QC (Chairman) CATHERINE FARQUHARSON KEITH PALMER Sitting in London on 7, 8 and 9 March 2005 The Applicant in person Mr Andrew George, instructed by the Respondent, for the Respondent © CROWN COPYRIGHT 2005 DECISION

1. The Applicant, Mr Arif Mohammed, was an audit manager with the accountancy firm PriceWaterhouseCoopers ("PwC"). In summary, the Financial Services Authority ("FSA") contends that the Applicant engaged in market abuse in that he purchased shares5 in a company called Delta plc ("Delta") at a time when he knew, as a result of confidential information obtained in the course of his employment with PwC, that Delta intended to sell its electrical division, that the sale process was progressing well, and that any sale was likely to be announced shortly. This behaviour the FSA asserts was market abuse within the meaning of s. 118 of the Financial Services and Markets Act 200010 ("FSMA"). By a Decision Notice dated 30 April 2004, the Regulatory Decisions Committee of the FSA decided to impose a penalty of £10,000 on the Applicant.

2. The Applicant has referred the matter to the Tribunal challenging the decision on a number of grounds. In summary, he contends that all he was aware of was a possible15 sale, that he had none of the details which would have affected the share price, that his purchase of the shares was not in any way influenced by the information which he had, that his audit duties as regards Delta were very limited at the time of the purchase, and that though the purchase breached the independence rules applicable to auditors, his action was not unlawful, and he has not committed an act of market abuse. In the20 alternative, he contends that the penalty imposed on him is too severe given in particular his financial circumstances.

3. The Tribunal observes at the outset that the Applicant has represented himself before us with skill and moderation. It also observes that uniquely in the case of market25 abuse allegations, the FSMA provides for a legal assistance scheme available to eligible applicants where the interests of justice require it. This scheme was drawn to the Applicant's attention by the Tribunal at a directions hearing on 25 November 2004. We believe that he was already aware of it, but also think that it would be sensible for FSA procedures to publicise the scheme to those potentially eligible to use it, so far as this is30 not already done. For example, mention of the scheme could be included where the decision notice explains the right to refer the matter to the Tribunal. At all events, in the present case the Applicant did not apply under the scheme, telling us that he did not satisfy the criteria, since he had been getting financial assistance from his father which formed part of his income albeit on a temporary basis.35 The Tribunal's approach

4. This is the first time the market abuse provisions in FSMA have been the subject of a ruling by the Tribunal. The task of the tribunal is to conduct "a de novo review of40 the matters referred to it. It may consider evidence whether or not it was available to the Authority at the material time. It may decide points of law, including disputes about the limits of its own jurisdiction and the lawfulness of the decisions and actions of the Authority" (R (on the application of Davies and others) v Financial Services Authority [2004] 1 WLR 185 at [8], per Mummery LJ).45

5. The Applicant submits that a market abuse case is akin to a criminal offence, and that the burden is on the FSA to prove its case beyond reasonable doubt. The FSA submits that this is a "balance of probabilities" case, subject to the decisions that this Tribunal has made in relation to what is sometimes described as the "sliding scale", the50 principle being that the more serious the allegation the more cogent the evidence needs to 3 be to prove it: see Hoodless and Blackwell v FSA ((FS & M Tribunal, 3 October 2003, at [21]), Legal & General Assurance Soc Ltd v FSA (FS & M Tribunal, January 2005, at [19]). These, it is true, were not market abuse cases, and the Tribunal recognises that specific considerations arise in such cases, including the fact that (as in the present case) enforcement action may be taken against persons who are not regulated by the FSA.5 Nevertheless, on the burden of proof point, the Tribunal agrees with the FSA's submission, holding that the "sliding scale" principle applies. The issue may be of limited practical effect, because we proceed on the basis that the allegation made against the Applicant is a serious one attracting potentially serious penalties, and have applied the sliding scale with that in mind.10 The evidence before the Tribunal

6. There was extensive disclosure by the FSA in accordance with its duty under rules 5 and 7 of the Financial Services and Markets Rules 2001. The Applicant filed a15 full written response dated 4 August 2004 to the FSA's Statement of Case, together with supporting documents. We received written and oral evidence from four people from PwC who were concerned with the Delta account in one capacity or another, from the Head of Compliance at PwC, from a witness called by the FSA as an expert in the capacity of a regular user of the market, and from the Applicant himself. All witnesses20 sought to assist the Tribunal in a careful manner. However, we have not been able to accept that the expert can truly be described as independent. And ultimately, we were unable to accept the evidence of the Applicant on some of the key issues. The facts as we find them are set out in the following paragraphs. Project Spark

7. The Applicant qualified as a Chartered Accountant in 1994, and joined Coopers & Lybrand (which subsequently merged to become PwC) in 1995, becoming a manager in 2000. As such, he worked in the firm's audit practice based in Birmingham.30

8. Delta is an industrial group with operations in a number of countries, whose shares are quoted on the London Stock Exchange. The Applicant was a member of PwC's audit team responsible for auditing the UK part of Delta's electrical division, becoming manager of the team in January 2000. He managed year-end audits for Delta's35 financial years ending December 1999, 2000 and 2001, as well as interim audits. Delta was one of a dozen or so clients that he had.

9. During the first half of 2002, the Board of Delta decided to dispose of its electrical division. The sale project was codenamed "Project Spark." The evidence of Mr40 David Watson, a London-based partner of PwC who was responsible for Delta's audit between 1999 and 2002, is that in 2001 the electrical division reported £10.0 million profit before taxation out of a total of £26.1 million reported for the continuing operations of the whole of the Delta group. Its net assets were £109.5 million compared to £298.2 million for the whole of the Delta group. Its turnover was £233.2 million out of a total of45 the £594.2 million reported for the whole of the Delta group. On any view therefore, this was a major disposal for the company to make.

10. In about June 2002, Delta asked PwC to carry out certain work in order to assist with Project Spark. Mr Watson says that PwC agreed to do some update work for the50 company, reviewing the results of the electrical division for the first half of 2002, and 4 following up matters identified during the 2001 audit. It is not in dispute that he spoke to the Applicant on 9 July 2002, telling him of the prospective sale, and explaining to him what work Delta wanted done in connection with it.

11. In an e-mail to the Applicant sent the same day, Mr Watson attached the agreed5 scope of work with Delta, and said. "Can I re-enforce that nobody at the Electrical division is aware of Project Spark (the proposed disposal of the division) except for Mike Galley [the Managing Director of the electrical division]. It must not be discussed10 with company officials in any circumstances." The e-mail was copied to Mr Harrold, a Midlands-based PwC partner in charge of managing the audit of the UK-based entities in Delta's electrical division, Mr Watson leaving it to the two of them how they would coordinate the work.15

12. The need for secrecy was also referred to in an e-mail sent to the Applicant the same day by Delta's Financial Controller, Mr Mark Luton. In it Mr Luton said, "As David [Watson] has mentioned, this is highly confidential". The Tribunal has no doubt that it was well understood by those who did know about the proposed sale that the20 information was highly confidential. This included the Applicant who had been told about the need for secrecy in terms, and who in any case as an experienced accountant would have understood this perfectly. Responsibility for the audit work25

13. The agreed work, which was relatively modest in scope, was completed on 7 August 2002. Thereafter in September 2002, there was a change in the Applicant's duties as regards Delta, when Mr Harrold delegated the role of the manager of the audit of the UK-based entities in the electrical division to Mr Edward Cadby. The Applicant30 says, and the Tribunal accepts, that this was at least is part on his recommendation, and certainly there was no criticism of his performance.

14. Mr Harrold's evidence is that he asked the Applicant to continue with a watching brief over the audit. The Applicant described himself "as assuming a background role on35 this client" in an e-mail of 18 September 2002. The general point he makes, which again the Tribunal accepts, is that his...

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