Global market abuse news

Transcription

1 Global market abuse news Summary In this, our first global market abuse newsletter, we highlight some developments in legislation and regulatory approach that affect enforcement of market abuse in Asia, Europe and the US. Freshfields Bruckhaus Deringer llp Global market abuse news 1

2 Asia: Hong Kong Meaning of price sensitive information has been clarified Changes to the Securities and Futures Ordinance came into force on 1 January 2013, codifying the definition of price sensitive information. The new regime contains a clearer definition of price sensitive information and more detailed guidance on when a listed company is required to disclose price sensitive information. There are also civil penalties for breaches of disclosure requirements. This is a welcome change to the regulatory landscape in Hong Kong because the previous position around price sensitive information was often unclear. Proposed changes to sponsor s liability In December 2012, the Securities and Futures Commission (SFC) concluded its consultation on IPO Sponsor liability, following the record $42m fine and licence revocation for Mega Capital (Asia) Company Limited, for due diligence failures in its role as sponsor for the Hontex IPO. The SFC recommends much stricter obligations on sponsors during the IPO process (and harsher penalties for sponsors), including (i) civil and criminal liability for defective prospectuses; (ii) additional obligations for sponsors to check information provided to the regulator; and (iii) further guidance explaining adequate sponsor due diligence for IPOs. The new requirements will apply to listing applications submitted on or after 1 October 2013, when related amendments to the SFC s Corporate Finance Adviser Code of Conduct and Sponsor Guidelines take effect. Challenge to information request by SFC progresses At the end of March, the hearing of the matter between SFC and Ernst & Young started, considering whether PRC state secrets are a valid reason for not handing a listing candidate s audit working papers to the Hong Kong regulator. E&Y helped the mainland state-owned water treatment firm Standard Water apply for a listing in Hong Kong in 2009, but resigned as its auditor in 2010 after finding inconsistencies in documents. Standard Water subsequently withdrew its listing application. The SFC issued nine notices between April 2010 and October 2011 to E&Y asking for accounting records to check on Standard Water, but E&Y refused to oblige, citing PRC state secrets law which prevented it from handing the records over to an overseas regulator. SFC making greater use of injunctions Over the last year the SFC has increasingly used its powers under Sections 213 and 214 of the Securities and Futures Ordinance to obtain court injunctions against alleged market misconduct, for example against Chinese sportswear manufacturer Hontex, and Tiger Asia Management LLC, a New York based asset management company. Section 213 provides that when a person has contravened any relevant provision of the Ordinance, the courts may make a number of orders, including injunctions and orders requiring the person to take such steps as the court directs to restore the parties to any transaction to the position in which they were before the transaction was entered into. Mark Steward, the head of enforcement at the SFC, has said on several occasions that this is a route that the SFC will continue to pursue vigorously, because it gives the SFC the opportunity to secure compensation for investors and victims of fraudulent or illegal transactions. Asia: Japan Proposed legislation on insider dealing In December 2012, the Financial Advisory Council published proposals to introduce legislation providing more stringent penalties for insider dealing and disclosure of inside information. Draft legislation including these proposals is scheduled to be considered by the Japanese Parliament later this month. The key proposals are: a person who tips inside information to a third party with the purpose of making the tippee trade based on the information, shall be subject to criminal and 2 Freshfields Bruckhaus Deringer llp Global market abuse news

3 administrative penalties if the insider dealing is actually committed based on the information; a person who recommends trades, implying the existence of inside information or implying that he is in a position in which he should know the inside information, shall be subject to criminal and administrative penalties if the dealing takes place based on the recommendation; a securities firm whose employer is a tipper or makes recommendations (as described above) in the course of the firm s business, is subject to criminal and administrative liabilities (as well as the individual) and the administrative fine will be up to the value of commission payments from the investor over a three month period; and a person or company who commits insider dealing whilst managing the assets of investors, may forfeit part of their fees (eg, fees for a period of three months) as an administrative fine. Asia: People s Republic of China Supreme Court issues guidance on interpretation of insider dealing law The PRC Supreme Court and the Supreme People s Procuratorate (the public prosecutor) jointly issued the first guidance on the interpretation of the law on criminal offences of insider dealing and illegal disclosure of inside information that came into effect on 1 June Some key points follow: the phrase, persons who illegally obtain inside information on securities and futures trading is broadly defined to include those who: i. obtain inside information by means of stealing, swindling, extracting, eavesdropping, luring, spying or through a private deal; or ii. are close relatives of, or otherwise close to or get in touch with, the persons with knowledge of inside information during the sensitive period of inside information (ie the period from the formation of inside information until its public disclosure) and engage in, instruct others to engage in, or divulge inside information to cause others to engage in, obviously abnormal securities and futures trading. to assess whether suspected activities constitute obviously abnormal trading, various factors are taken into consideration, including but not limited to coincidence of trade timing, obvious deviation from normal trading practice, analysis of fundamentals and market trends affecting trading and prices of relevant investments, and the benefits to the relevant persons from trading; and the following are viewed as serious breaches of insider dealing prohibitions: (i) insider trading of securities exceeding a value of RMB 500,000, (ii) insider trading of futures using more than RMB 300,000 in futures margin; (iii) trading that makes a profit, or avoids a loss, of at least RMB 150,000, or (iv) various trading activities that breach prohibitions more than three times. Prosecutors retain a discretion to bring prosecutions for misconduct below these thresholds and to discontinue cases above these thresholds. China market regulator continues its attack on market misconduct In 2012 the China Securities Regulatory Commission (CSRC) increased its investigation and enforcement activity for market misconduct 1. For example, CSRC: received 380 cases of alleged violations including insider trading, market manipulation and false disclosure (a 31 per cent increase on 2011); 1 Figures published in a CSRC press release dated 22 February Freshfields Bruckhaus Deringer llp Global market abuse news 3

4 opened investigations of 316 cases, (a 21 per cent increase on 2011); referred 33 suspected criminal violations to relevant public security authorities (a 32 per cent increase on 2011), and prosecuted 28 individuals; and imposed administrative sanctions on 198 individuals with fines and disgorgement totalling RMB 437m (a 24 per cent increase on 2011). In the first quarter of 2013, CSRC imposed administrative sanctions for market misconduct, three of which related to insider trading and one to disclosure of inaccurate information by a listed company. It has been reported that the new commissioner of CSRC, Mr. Xiao Gang, intends to prioritise securities law enforcement in 2013, including reinforcing the insider registration requirement for all listed issuers to curb leaks of inside information and stop insider trading at its source. Europe: Germany New legislation on high frequency trading On 28 February 2013, the German Federal Parliament (Bundestag) adopted the High-Frequency Trading Act (Hochfrequenzhandelsgesetz, the HFT Act ) which stipulates specific regulatory requirements for algorithmic and high frequency trading. The HTF Act includes a license requirement for high frequency traders irrespective of their location on German regulated markets or MTFs and an amendment of the prohibition of market abuse. For more details of the HTF Act s effect on the market abuse regime please see our Winter 2012 edition of our European market abuse news where we reported on the draft bill, which was not substantially changed in the HTF Act adopted by the German Federal Parliament. The HFT Act will come into force following its publication in the German Federal Gazette which is expected shortly. BAFIN consults on guidance for algorithmic trading On 19 March 2013, the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) published a draft Circular for consultation concerning the requirements for systems and controls for algorithmic trading. The Circular is intended to partially implement the guidelines which were published by the European Securities and Markets Authority (ESMA) entitled Systems and controls in an automated trading environment for trading platforms, investment firms and competent authorities on 24 February The draft Circular contains an array of specific requirements for institutions that conduct algorithmic trading, including: institutions must install an adequate system for risk management that addresses the specific risks of algorithmic trading. In particular, the institutions must compile a list of the risks faced by the institution concerning the algorithmic trading and update this analysis on a regular basis; institutions must supervise all trading activities, whether by individuals or the institution s algorithms, to mitigate the risks of market abuse and market disruption. In particular, institutions must use appropriate systems (including automatic warning systems) to identify behaviour patterns suggesting possible market abuse; and institutions must establish procedures to identify suspicious transactions and to make the required notifications for those transactions. Comments on the draft can be submitted to the BaFin until 10 May Freshfields Bruckhaus Deringer llp Global market abuse news

5 Europe: Spain Market abuse is a priority in CNMV s 2013 business plan On 12 March 2013, the Spanish Securities Markets Commission (CNMV) published its business plan for One of the priorities identified for the CNMV is the intensification of supervision and sanction of market abuse conduct. CMNV announces investigation into potential market abuse On 11 March, the CMNV announced an investigation into Pescanova, a fishing company, for possible market abuse by the company, its directors or third parties 3. On 28 February, Pescanova filed for pre-insolvency proceedings due to the difficulty in renegotiating its debt. Subsequently, the value of its shares fell to 60 per cent of their value. Pescanova s former managing director and current adviser, however, sold 195,000 shares a month before the application for pre-insolvency proceedings. Therefore, the CNMV suspects that there might have been improper use of insider information. Europe: The Netherlands Dutch regulator announces its priorities for 2013 In January 2013, the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten) (the AFM) published its business plan 4, containing nine supervisory themes for the AFM s work this year. One theme is that the AMF aims to promote the fair and efficient operation of securities markets and robust infrastructure. The AFM s continuing focus on monitoring 2 Available online at: PlanActividad/PlanOfActivities_weben.pdf 3 The CMNV announcement is available at: Portal/verDoc.axd?t={60bc6c1b-f a671-cc9f987bf4d6} 4 Available online at: and enforcing against market abuse will contribute to work on this theme. The AFM also has longer term objectives for the next five years to improve stakeholders confidence that the AFM has a good grip on market abuse and to make sure that the AFM is capable of handling market abuse cases with the highest impact, including cross border cases in close cooperation with overseas supervisory authorities. In pursuit of this objective the AFM will remain resolute in taking action for market manipulation, insider dealing and late or incomplete publication of inside information. Europe: UK A new regulator has taken charge The UK regulatory regime changed on 1 April 2013, replacing the Financial Services Authority with a new twin peaks model and dividing responsibility between regulators. Now there are three key bodies in the UK regulatory regime: (1) the financial policy committee of the Bank of England (FPC) tasked with macro-prudential stability; (2) the prudential regulation authority (PRA) to authorise and prudentially supervise institutions that pose significant prudential risk, such as banks and other deposit takers, insurers and some significant investment firms; and (3) the financial conduct authority (FCA) to authorise and prudentially supervise other firms and supervise all institutions for conduct of business regulation, consumer protection issues and market integrity issues. Like the FSA, the FCA is responsible for both civil/administrative enforcement of the market abuse regime and criminal prosecution of insider dealing and market manipulation in the UK. It has also taken on responsibility as the UK Listing Authority with a remit that includes monitoring compliance by listed companies to disclosure requirements. Tribunal upholds regulator s decision to fine company 8m The former regulator, FSA, decided to impose a penalty of 8m on Swift Trade, a Canadian Freshfields Bruckhaus Deringer llp Global market abuse news 5

6 company acting as a network of dealers for market manipulation. The FSA alleged that the company, with its dealers in different jurisdictions, had deliberately and repeatedly traded so as to manipulate the price of securities listed on the London Stock Exchange (LSE). The Upper Tribunal upheld the FSA s decision. The following comments and decisions were made in dealing with issues raised by the company. The short-lived trades placed by Swift Trade s dealers were in contracts for differences (CFDs) on listed securities rather than on the securities themselves. According to market practice, these trades were automatically hedged with trades on the LSE placed by the institutions offering the market access. Therefore, even if the CFD trades themselves do not fulfil the criteria, the CFD trades were placed knowing and intending the CFD trades were to be automatically matched with hedge trades in the underlying securities. Therefore, Swift Trade caused the manipulative orders on LSE securities, which are qualifying investments. Guidance from the LSE indicates that deliberately short-lived trades that create a false or misleading impression are unacceptable. The conduct was widespread, deliberate and over a prolonged period, and attempts had been made to conceal it and dispute the findings. Therefore, a penalty of 8m was not disproportionate. Advisors. The CR settlement is the largestever for an insider trading case. It follows an earlier record $156m combined civil and criminal levy against the former hedge fund manager and billionaire founder of the Galleon Group, Raj Rajaratnam, who in 2011 was sentenced to 11 years in prison after being convicted of insider trading (though now on appeal). In the CR scheme, the SEC alleged that one of the firm s portfolio managers illegally obtained confidential details about a clinical trial from a doctor involved. CR passed this information to hedge funds that then profited and avoided losses resulting from trades placed on the basis of the inside information. The government s enforcement focus uses headline-catching names, such as Match Makers targeting expert networks and Perfect Hedge focusing on hedge funds. The efforts are producing notable results. In 2012, the SEC filed 55 new insider trading civil actions, while the government brought criminal charges against 31 individuals. The SEC also reached 118 settlements of insider trading charges in 2012, up significantly over the previous six-year average of just 71. US regulators have stressed that companies need to foster a robust culture of compliance and zero tolerance toward employee misconduct to avoid the severe financial consequences faced by CR and SAC Capital. United States US Insider Trading Enforcement Focuses on Hedge Funds; Landmark $602m Settlement 2013 shows every sign that US regulators and prosecutors are continuing an intense focus on insider trading within the hedge fund industry and supporting sectors. In March 2013, the US Securities and Exchange Commission (SEC) announced a $602m settlement on insider trading charges against hedge fund advisory firm CR Intrinsic Investors (CR) and an additional $14m settlement with its affiliate, SAC Capital 6 Freshfields Bruckhaus Deringer llp Global market abuse news

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