Since the introduction of the civil regime in UK market abuse legislation it has been a lot easier for the UK regulator to pursue those suspected of market abuse and for a much wider range of activities than those that fell within ‘tipping’ and ‘dealing’ offences under the Criminal Justice Act 1993.
Indeed, successive legislative updates (FSMA 2002, MAD 2005 and, more recently, the MAR) have increased the scope for the regulator to clamp down on market participants whose behaviour falls below the expected standard. We have seen benchmark manipulation included in market abuse legislation and enforcement action for abuses utilising technological advancements such as algorithmic trading.
The market abuse landscape is almost unrecognisable in its current iteration and now, more than ever, market participants need to recognise and understand their obligations and one other key feature of the market abuse regime: the UK market abuse regime is effects-based rather than intents-based so it does not matter if the ‘accused’ acted wilfully.
This was illustrated in 2010 when Winterflood Securities lost an appeal against the then UK regulator, the FSA, for their part in a scheme involving SP Bell’s Simon Eagle and an AIM listed stock ‘Fundamental E’. Winterflood claimed they did not intend to mislead the market but the enforcement action was upheld at tribunal given the effect their activity had on the market and it cost them £4 million.
On 14 December this year the Financial Conduct Authority flexed its regulatory muscle and chalked up another ‘first’ that re-affirms its commitment to tackling market abuse when it fined Tejoori Limited (Tejoori) £70,000 for failing to inform the market of inside information as required by Article 17(1) of the Market Abuse Regulation (MAR).
This is the first fine imposed on an AIM company by the FCA for late disclosure following the introduction of MAR on 3 July 2016.
So what went wrong for Tejoori? Having acquired a significant shareholding (10.1% ) in BEKON Holding AG (BEKON), a privately owned German renewable energy company, which Tejoori valued at $3.35 million, Tejoori was notified of an impending takeover of BEKON. Tejoori failed to properly understand the terms of the takeover when they were strong-armed by other investors (using a ‘drag-along’ clause in their share agreement) into accepting and signing a share purchase agreement (SPA) that considerably under-valued their original investment and meant they would not receive immediate payment for their shares but might receive future consideration for the lower value.
Tejoori did not understand the terms of the SPA and did not understand that their shares would pass immediately to the purchaser so failed to disclose this to the market. Following announcements by BEKON and the purchaser, market speculation was positive in the anticipated affect this would have on the Tejoori investment and shares in Tejoori rose in price.
Upon clarifying that they should have made a disclosure to the market concerning the circumstances of the sale of their shares, Tejoori duly made an announcement and their share price dropped significantly.
Upon investigation, the FCA considered that the disclosure failings by Tejoori amounted to market abuse and issued an appropriate enforcement action. It was irrelevant that their actions had been unintentional – the effect of their failure to disclose was that investors made decisions based on incomplete information which would have influenced their investment choices had it been available.
£70,000 later Tejoori will be aware of their disclosure obligations and this enforcement action should serve as a warning to other firms – read MAR, make sure you understand your obligations and act appropriately.
It doesn’t matter if you unintentionally get it wrong – it’s the effect of your actions that matters to the regulator.
Understanding the impact of market abuse and the importance of regulatory compliance is more important than ever.
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