1. Securities and Investment Institute Market misconduct: recent developments & case studies Dorian Drew 18 September 2007

2. Agenda The past The present The future

3. Enforcement action to date The FSA’s approach will be “…to prioritise rigorously, investigating only those cases which are material and significant.” Howard Davies, March 2002

4. Enforcement action to date Developing body of precedent: –c.20 final notices –6 Tribunal decisions –1 criminal prosecution All actions under pre-MAD types of behaviour

5. Enforcement action to date Misuse of information cases Bracken, Middlemiss, Hutchings, Smith, Isaacs, Malins, Jabre and GLG, Davies, Parker, Mohammed Isaacs and Smith involved improper dissemination of information Baldwin: FSA failed to establish telephone conversation took place “Pre-existing trading strategy”: Parker and Jabre

6. Enforcement action to date False or misleading impression cases Shell, Indigo Capital and Bonnier Market distortion case EBG and Potts

7. Market misconduct under the Principles ABN AMRO Hoodless Brennan Deutsche Citigroup Jabre/GLG Pignatelli and Casoni Investments outside the scope of the market abuse regime

8. Penalties Range from £1,000 to £17m Tribunal’s comments in Parker Davidson and Tatham Aggravating/mitigating factors

9. Sean Pignatelli Statements of principle 2 & 3 - £20,000 penalty “Outsider trading” – passed on, and embellished, information received in an email from an analyst Did not believe information to be inside Prin 2 – failed to address his mind to warning signs and discuss with manager or compliance Prin 3 – relayed information in a way that gave impression it was inside information Credit Suisse had appropriate procedures

10. Roberto Casoni Statement of principle 3 - £52,500 penalty (stage 1) Research analyst - disclosed views and proposed valuation method to certain clients prior to publication Citigroup had appropriate procedures Star analyst - market abuse?

11. Current problem Market cleanliness –FTSE 350 trading statements: “marked improvement” –Public takeover announcements: “only the slightest improvement” –“More and tougher fines are required” “Sadly we can do sweet FSA about insider dealing”

12. Current solutions NAO recently reinforced the importance of enforcement powers FSA has signalled push on enforcement, particularly in relation to market misconduct and TCF Enforcement staff overhaul Budget increase Greater international focus

13. Current solutions Market Watch 18 – STR Review 2006: 400 STRs from 100 firms –Most of “high quality” –Most from small/medium firms –Most relate to equities markets –Insider dealing (not manipulation) SABRE update: £17m spend - real time monitoring

14. Current solutions “In partnership” – Sally Dewar –Dialogue to agree priority areas –Strengthening procedures and learning good practices –Reporting wrongdoing - STRs/self-reporting –Each taking tough action when abuse identified

15. Current solutions Plea bargaining/immunity agreements Smoother process - greater involvement of senior management Search and seizure/freezing injunctions Criminal prosecutions – four on the go Gold plating – Margaret Cole reassures…

16. Future focus – on the up Information flows: (Market Watch 21: inside information controls, Market Cleanliness Report) “Non-traditional” markets: Debt/credit/commodity derivatives markets Large financial institutions Hedge funds/private equity: misuse of information

17. Future focus – on the up MTFs/systematic internalisers Increased use of Principles Senior management? Financial crime (not just market abuse)

18. Future focus – On their way down Smaller market abuse cases Misuse of information Criminal investigations – “niche and easy”

19. Risk mitigation Appropriate procedures –Ensure clear recording of product features, external landscape and risks presented to firm –Implement clear rules/guidance –Undertake effective monitoring –Ensure there is evidence for pre-existing trading strategies

20. Risk mitigation Focus on FSA priority areas Training: gaps often identified Be proactive in identifying/reporting misconduct Interact with FSA and contemporaries Undertake robust disciplinary action

21. Case study You are the compliance officer for Brookwyn Bank which makes a market in Tajikismurf, a mining company listed on AIM. During an analysts’ conference call, the CFO of the company lets slip that the main geologist’s report used to support the IPO of the company contained significant errors. Whilst still on the call, your analyst calls you to ask whether he can notify the market maker with a view to shorting the stock.  What further information would you want? Would you let him do it? If so, what would you do to mitigate the risks?

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