Cracking the whip
The FSA has shown strong resolve in cracking down on market abuse this year, the clear message being that individuals are responsible for their actions
First came David Einhorn and his hedge fund Greenlight Capital’s £7.2m fine in January for insider trading. Then came Ravi Sinha’s £2.9m fraud fine from his time at private equity firm JC Flowers in the same month.
The start of 2012 saw a pair of hard-hitting enforcement actions from the FSA which, taken in consideration with a longer string of events stemming from 2011, signal an ongoing crackdown on financial crime by the regulator which is not going away. Not only that, UK firms are not the only ones under target: the FSA is clearly prepared to cross borders to get its conviction, both cases involved US firms.
The UK has traditionally lagged behind the US in tackling market abuse. The US Securities and Exchange Commission has enjoyed better success than the FSA in prosecuting cases, due partly to the stronger powers the US regulator has access to, for example the use of wiretap evidence. This technique was used with great success in securing the high-profile conviction of Raj Rajaratnam, the hedge fund manager and founder of Galleon Group, on a charge of insider trading last year. In the absence of the same tools at their disposal, the FSA may not have the same clout.
Nevertheless, keen to assert its authority and power as a regulator, the FSA has recently become more proactive in investigating cases of financial crime and market abuse and exercising its fining and criminal powers, sending the message that it can and will come down on firms and individuals who are abusing the market. A lesson learnt the hard way for Mr Einhorn and Mr Sinha, it seems.
In the case of Mr Einhorn, who is one of the world’s highest profile hedge fund managers, his misdemeanour was on a trading charge, for a trade made ahead of a 2009 equity fundraising by Punch Taverns, the pub company. His firm, Greenlight Capital, was fined £7.2m, with Mr Einhorn himself paying £3.6m of this.
Less than a week later, Mr Sinha was fined £2.9m after he admitted fraudulently billing one of the private equity house’s investment vehicles for £1.37m of “advisory fees” for his personal services. While Mr Sinha was spared a criminal investigation, the penalty was the largest ever fine given to an individual by the FSA in a case not related directly to market abuse, signalling the regulator’s cast-iron resolve to crack down on individuals subverting the system in all forms.
Mr Einhorn’s insider trading fine is the second largest ever handed down by the FSA to an individual for market abuse and given that he is one of the most prominent figures to be targeted by the FSA, the City should sit up and take notice. However, the figure which has been lesser reported is the £130,000 fine handed out to Greenlight Capital’s compliance officer, Alexander Ten-Holter, yet herein lies the most significant lesson to be learnt by other market participants.
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