1. UK & US Insider Trading / Market Abuse Law and Enforcement
Privileged and Confidential Attorney-Client Communication
Peter Burrell
Copyright © 2010 by Willkie Farr & Gallagher LLP. All Rights Reserved. These course materials may not be reproduced or disseminated in any form without the express permission of Willkie Farr & Gallagher LLP.

2. “Civil” market abuse / insider trading
An insider deals or attempts to deal in a qualifying investment or related investment on the basis of inside information (insider trading) Ryan Willmott of Logica Plc convicted of insider trading based on information about the takeover of Logica Plc
An insider discloses information to another person otherwise than in the proper course of his employment, profession or duties (wrongful disclosure) Julian Rifat convicted of passing inside information to an associate who traded for their joint benefit
If not (a) or (b), a person deals based on information which is not generally available to those using the market but which, if available, would likely be regarded as relevant when determining the terms upon which to transact and a regular user would regard it as a failure to observe the standards expected of a person in the dealer’s position (market abuse)
Effecting transactions (otherwise than for legitimate reasons) which give or are likely to give a false or misleading impression as to the supply, demand or price of a QI or to secure a QI at an abnormal price (market manipulation)

3. “Civil” market abuse / insider trading
For example:
Buying or selling qualifying investments at the close of the market with the effect of misleading investors who act on the basis of closing prices, other than for legitimate reasons
Wash trades – that is, a sale or purchase of a qualifying investment where there is no change in beneficial interest or market risk, or where the transfer of beneficial interest or market risk is only between parties acting in concert or collusion, other than for legitimate reasons
Painting the tape – that is, entering into a series of transactions that are shown on a public display for the purpose of giving the impression of activity or price movement in a qualifying investment
Entering orders into an electronic trading system, at prices which are higher than the previous bid or lower than the previous offer, and withdrawing them before they are executed, in order to give a misleading impression that there is demand for or supply of the qualifying investment at that price
Transactions where both buy and sell orders are entered at, or nearly at, the same time, with same price and quantity by the same party, or different but colluding parties, other than for legitimate reasons, unless the transactions are legitimate trades carried out in accordance with the rules of the relevant trading platform (such as crossing trades)
Entering small orders into an electronic trading system, at prices which are higher than the previous bid or lower than the previous offer, in order to move the price of the qualifying investment, other than for legitimate reasons

4. “Civil” market abuse / insider trading
In the opinion of the FCA the following factors are to be taken into account when considering whether behaviour is for “legitimate reasons”, and are indications that it is:
if the transaction is pursuant to a prior legal or regulatory obligation owed to a third party
if the transaction is executed in a way which takes into account the need for the market or auction platform as a whole or operate fairly and efficiently
the extent to which the transaction generally opens a new position, so creating an exposure to market risk, rather than closes out a position and so removes market risk; and
if the transaction complied with the rules of the relevant prescribed markets or prescribed auction platform about how transactions are to be executed in a proper way (for example, rules on reporting and executing cross-transactions)
Effecting transactions using fictitious devices or other forms of deception (manipulating devices)
Disseminating information which you know or could reasonably have known was false and which gives or is likely to give a false or misleading impression as to a QI (wrongful dissemination)
Misleading behaviour and distortion market abuse, ie, not within (d), (e) or (f) but which is likely to give a regular user a false or misleading impression as to the supply, demand or price of a QI or which a regular user is likely to regard as behaviour that would or would be likely to distort the market and fails the regular user standard

5. Scope Prescribed Markets
All markets established under the rules of a UK recognised exchange and save for (c) and (g), all regulated markets within the EEA
Qualifying Investments
All instruments covered by the Market Abuse Directive, eg, shares, bonds, securitised debt, units in collective investment undertakings, money market instruments, financial futures contracts, forward rate interest rate agreements, interest rate and other swaps, options, commodity derivatives, any other instrument admitted to trading on a regulated market
Related Investments
(a) and (b) - An investment whose price or value depends upon the price or value of a QI, eg, dealing in an Over the Counter derivative, eg, spread bet on a bond/share, based on inside information would be insider trading Damian Clarke, former equities trader at Schroders charged in relation to spread bets based on insider information
(c) - Covers anything which is the subject matter of, or whose price/value, is expressed by reference to the price of a QI, eg, a commodity which underpins an option

6. Scope (cont’d) Territorial Scope Behaviour in the UK
Relates to a QI trading on a prescribed market in the UK or accessible electronically from the UK
In the case of (a) and (b), in relation to an investment which is related to a QI, eg, dual listed shares, if the trading takes place in Australia/the US in shares which are also listed in London
Indirect Market Abuse
If you create an expectation that you will act and then fail to do so

7. Criminal Insider Trading
An individual:
has information as an insider (ie, he knows the information is inside information and he knows he has it from an inside source)
the information relates to particular securities or a particular issuer of securities, is specific or precise, has not been made public and if it were made public would be likely to have a significant effect on the price
deals directly or through a professional intermediary on a regulated market
and the securities are of a type specified, eg, shares, debt securities, options, futures, contracts for differences, depository receipts
Also applies to encouraging a person to deal
Separate offence for wrongful disclosure of information

8. Defences
Market Abuse
Believe on reasonable grounds that behaviour did not amount to market abuse (ie, an objective test)
Took all reasonable precautions and exercised all due diligence to avoid engaging in market abuse
Criminal Insider Trading
Did not expect the dealing to result in a profit attributable to the fact the information was price sensitive information
On the reasonable grounds believed the information had been sufficiently widely disseminated to ensure that none of those taking part would be prejudiced by not having the information
Did not deal based on the information
Other defences for encouraging, similar to above
Other defences for wrongful disclosure, eg, did not expect them to deal

9. Reporting
If you suspect that criminal insider trading has taken place, then a duty to report arises under the UK’s anti-money laundering regime. The report should go to the MLRO
If you arrange or execute a transaction for a client and you have reasonable grounds to suspect that the transaction might constitute market abuse, the FCA, via compliance, must be notified without delay

10. 28 May 2014, Ian Charles Hannam v FCA
Case Study: Wrongful Disclosure / Rumours
Facts
Hannam was a senior banker at JP Morgan and an approved person
The FCA discovered two s sent from Hannam, on 9 September 2008 and 8 October 2008, to Tony Buckingham, CEO at Heritage Oil Plc including inside information about the potential acquirer of Heritage without making it clear that this information was a rumour or securing any confidentiality obligations
There was no evidence that anyone dealt in shares as a result of Hannam’s disclosure or that he had made any personal gain as a result

11. 28 May 2014, Ian Charles Hannam v FCA   Case Study: Wrongful Disclosure / Rumours
The Upper Tribunal considered the information to be inside information on the following grounds:
On the evidence there was reasonable prospect of an offer being made, not withstanding that no offer would be made without satisfactory drilling data being obtained
The information was specific in that it enabled the recipient to draw conclusion on the possible effect on price
Therefore, the s sent by Hannam had disclosed relevant information, he believed that the information was positive and that information was inside information

12. 28 May 2014, Ian Charles Hannam v FCA   Case Study: Wrongful Disclosure / Rumours
The Upper Tribunal concluded that Hannam had disclosed information in breach of the Takeover Code. In addition, the information he had disclosed could only be disclosed if the recipient was under an obligation of confidentiality, which it was not in this case

13. 28 May 2014, Ian Charles Hannam v FCA
Case Study: Wrongful Disclosure / Rumours
Consequences
If the rumour turned out to be true:
potential offence of encouraging insider dealing if:
information received from an inside source
related to securities of a specific type
which were traded on a regulated market
If the rumour turned out to be false:
potential market abuse offence as:
disseminating information
which you knew or reasonably expected was false
or was likely to give a false or misleading impression as to the qualifying investment

14. 28 May 2014, Ian Charles Hannam v FCA Case Study: Wrongful Disclosure / Rumours
Appropriate actions
Verify whether the information is correct, e.g., FCA website, news agencies
If the rumour is passed on you must ensure that:
 clearly state the information is a rumour
 clearly state that the information is unsubstantiated / not verified
 ensure no additional credence or embellishment is given
 the origin of the information is sourced where possible
an obligation of confidentiality is obtained from the recipient of the information
Elevate the matter to your line manager / compliance team

15. 20 March 2014, Mark Stevenson v FCA Case Study: Market Manipulation
Facts
Mark Stevenson was a bond trader and director on a London bond trading desk at Credit Suisse Securities (Europe) Limited (CSSEL)
Stevenson traded a range of bonds including UK government gilt futures, operating a trading book in his name
Stevenson was able to trade with a large degree of autonomy, designing and implementing his own strategies
Stevenson bought a significant portion of a UK government gilt (£331 million) on 10 October 2011 as a result of which the price and yield increased

16. 20 March 2014, Mark Stevenson v FCA Case Study: Market Manipulation
Consequences
The FCA concluded that:
Stevenson was aware that his trading in the Bond on 10 October 2011 would not only increase CSSEL’s holding in the UK government gilt but also increase its price
The trade was done in order to increase the return for CSSEL if the Bank of England subsequently bought CSSEL’s holding in the QE auction later that day
Stevenson could have purchased the UK government gilt at another time
The FCA issued a financial penalty of £662,700 and invoked a prohibition order banning Stevenson from performing any function in relation to any regulated activity carried on by any authorized or exempt person or exempt professional firm

17. What Is Insider Trading in the US?
Trading While in Possession of Material, Nonpublic Information Obtained in Breach of Duty of Confidence
Possession, Not Use
You should assume the SEC will Deem Your Possession to be Possession by All of [...].
Materiality
Non-public
Breach of Confidence - Please note difference between US/UK Law David Einhorn – was found “guilty by FCA” but would not have been under US Law as information was provided to him by the company with their advisers’ knowledge.

18. When Is Information Material?
Substantial Likelihood that Reasonable Investor Would Consider it Important in Making an Investment Decision
Significantly Alters “Total Mix” of Information Available
Only Scrutinized in Hindsight by the SEC

19. What Is Nonpublic Information?
Alternative Definitions:
Public If Broadly Disseminated and Readily Available
Nonpublic Only “If It Was Not Available to the Public Through Such Sources as Press Releases, Securities and Exchange Commission Filings, Trade Publications, Analysts’ reports, Newspapers, Magazines, Rumors, Word of Mouth Or Other Sources.”
Specific Market Rumor ≠ Fact

20. January 17, 2012 Insider Trading Charges: U. S. v. Newman et al
January 17, 2012 Insider Trading Charges: U.S. v. Newman et al., and SEC v. Adondakis, et al.
Criminal and civil charges against seven individuals, Diamondback and Level Global.
From 2008 to 2009, defendants were “friends who worked as analysts at various investment firms” and who exchanged inside information obtained directly or indirectly from employees of publicly-traded technology companies.
Diamondback (Tortora and Newman) paid Goyal (Neuberger Berman analyst, formerly at Dell) $175,000 “consulting fee” in soft dollars for providing “confidential” info from Dell IR employee.
Dell IR employee provided the MNPI to Goyal “in breach of the fiduciary duty that [he] owed to Dell, and did so with the expectation of receiving a benefit.”
Tortora passed info to Newman, Adondakis, Horvath and Kuo.

21. Emails from U.S. v. Newman et al. Complaint
8/5/08: Tortora ed Newman info received from Goyal:
“Dell checks:
- Q finished on fri, numbers still coming in
- rev could be slightly above 16B, street at 15.9, implying a 1% top line beat
- gm looking at 17.5% vs street at 18.3%, however could go higher as things get rolled up
- as of now, best guess 35c – 36c vs street at 36c
- doesn’t sound good, but still very prelim and could change
- sounds like could be short after run and DB preview that got expectations up”

22. Emails from U.S. v. Newman et al. Complaint
8/25/08: Horvath to His PM:
“[T]he data is second hand but this contact was correct in the last two quarters. JT did diff’t checks 7/3, 7/24, and 8/5 all the while the message was revs small upside, opex in-line but GMs under pressure but said he wasn’t sure magnitude until the final roll up. Then final read came thru on 8/18 and was bps GMs miss, revs small upside, and opex in line netting out to EPS miss. I think investors understand that GM will be down slightly q/q and could even miss consensus GM but I don’t think they are expecting a big miss on GM.”

23. U.S. v. Newman et al. Complaint
8/28/08: Dell Announced Q2
GM 17.2%, worse than the 18.4% expected.
The next day, Dell fell 13%, from $25.21 to $21.73.
Level Global had 8.6 million share short position.
Diamondback had 700,000 share short position.
Hedge Fund A (reported to be Sigma) had 150,000 share short position.

24. U.S. v. Newman et al. Complaint: NVDA
2/9/09 (day before earnings) Kuo “Check with an accounting manager at NVDA through a friend of mine. Jan quarter revenues at $481M, down 46.4% qoq. Consensus at $489M, down 45% qoq. NVDA preannounced the quarter and guided for revenues to decline 40-50% qoq. My friend forgot to ask for GM but says will call this guy again today.” Later, Kuo ed: “NVDA Jan Q GAAP GM will be 29.4%.”
2/10/09: NVDA reported Q4 revenues of $481.1 million and GAAP GM of 29.4%.
5/4/09: “NVDA checks over the weekend, after the close of the quarter. April quarter revenues around $668 million. Came in better than last read (mid April) due to strong pickup in demand and unit shipment in the last week of April. April quarter GM 30%.”
5/7/09: NVDA reported Q1 revenues of $664.2 million and non-GAAP GM of 30.6%.

25. U.S. v. Newman et al. Complaint: NVDA
8/6/09 9:56 a.m.: “NVDA checks – final read before the print. Initial projections for July quarter was $750M and % GM and they came in a little better on a strong finish to the quarter. July quarter revenues $777M. GAAP GM in the 20% range.”
8/6/09 4 p.m.: NVDA reported Q2 revenues of $ million and GAAP GM of 20.2%.

26. Research: Direct Communication with Company Employees
Line Between Good Research and Illegal Trading
Look for Breach of Confidentiality/Employee Policy
Consider Materiality
Mosaic Theory of Materiality
Regulation FD (Fair Disclosure)
May Be Able to Take Some Comfort From FD
But Not a Legal Defense
Lower Level Employees May Pose Greater Risk
Scrutiny of Expert Networks

27. Research: Communication with Customers, Competitors, or Suppliers
Cannot Trade on MNPI Where You Know Or Have Reason to Know That Source has Confidentiality Obligation
Red Flag: “You didn’t hear it from me.”
Mosaic Theory of Materiality

28. Research: Miscellaneous
Market-Color Information: Generally Fine, but Do Not Trade on Information about Specific, Not-Yet-Executed Trade
Rumors: Only Improper if You Know (or Should Know) that the Original Source Is Tainted
Red Flags: “I got this from a lawyer involved in the deal,” or “You didn’t hear it from me.”
When in doubt, assume source is tainted and check with Chief Compliance Officer
Sell-Side Analyst Reports: Do Not Trade with Advance Warning of Rating Change
Likely to Involve Breach of Duty by Tipper

29. Dealing with MNPI Employees Must Notify Counsel if Given MNPI.
Advice of Counsel Defense.
Employees Lack Authority to Agree to Keep Info Confidential, Except Thru Written Contract Approved by Counsel.

30. Care with s
“Do not print or forward this”
“Do not ask me where this came from”
“You do not want to know”
“We do not ‘know’ this”
“I wonder why he wants to do that...”
“My trading will push the market lower, and then I will let it bounce”
Therefore – do not exaggerate, be careful, DOJ/SEC will take them at their worst.

31. Questions and Comments31