24 Oct 2011
Comment from IMS Group:
While the UK’s Financial Services Authority has been gaining commendable traction with insider dealing and market abuse enforcement in the last few years the authorities on the other side of the Atlantic have intensified their own efforts and approach as evidenced by the use of surreptitious wiretaps and multiple targets in the Galleon case. The 11 year sentence handed to Raj Rajaratnam, co-founder of defunct hedge fund Galleon is the longest ever handed down for a crime of this nature. Indeed, it was considerably less than the 24 years requested by the prosecution and was reduced on account of the disgraced billionaire’s ill health and past charitable donations.
It has been said that an impediment to the successful prosecution of white collar crimes is that juries are unable to understand them. However, this was not a highly technical infringement with the jury agreeing with the prosecution’s case that Rajaratnam had been guilty of deliberate conduct calculated to profit (to the tune of millions of dollars) from illicitly obtained company information not yet known by the market.
Sentence
The 11 years exceeds the current maximum of 7 available to a UK criminal court. Earlier this year in May, the FSA’s Interim Managing Director and former Head of Enforcement, Margaret Cole, asked the coalition government to increase the maximum sentence for insider dealing from seven to ten years in order that insider dealing penalties be put in line with other types of white-collar offence in the UK. Until such an increase, one can envision the FSA eyeing the 7 year maximum as a target to be achieved. Currently, convicted insider trader Christian Littlewood represents the high water mark sentence at 40 months.
Telephone record evidence
The most striking feature of the Galleon case is its use of wiretap evidence revealing private conversations in which Rajaratnam gleaned and shared non-public company information. While evidence of wrongdoing obtained in this way is not admissible in UK court proceedings (material obtained from a wiretap may only be used for background intelligence and is not itself admissible), the UK regulator has had access to mandatory voice records of traders’ calls since March 2009 and this will be extended to mobile phones in November 2011. The requirement is to maintain such records for 6 months. The FSA’s recently enhanced trade surveillance system, ZEN, enables the FSA to detect suspicious trades which may result in the FSA contacting firms requesting that they preserve voice records beyond the 6 month timeframe.
Until such times as the FSA or its successor is granted the power to obtain interception warrants, the most intrusive technique divulged in recent years was the revelation by the FSA in early 2008 that it had been “cold calling” traders and investors that had engaged in transactions that, as a minimum, stood out and required fuller explanation. These telephone interviews are made without prior notice to the trader or investor or their employer.
Expert Networks
The Galleon case also shone the light on modern techniques by which investors and traders obtain company information following a regulatory clamp down on so-called selective disclosure by issuers at the start of the last decade. Specifically, the use of Expert Networks was highlighted. These are commercial firms which offer access to business experts and past or even present company executives, often on a subscription basis. It is essential that subscribers to Expert Network services protect themselves from being tainted with inside information, either deliberately or negligently by the expert. Click here for IMS’ previous note on the subject.
The FSA has not yet published any material specifically on Expert Networks. However, it has published plenty on market abuse (click here for back copies of the FSA’s Market Watch publication) to supplement the UK securities legislation itself. Accordingly, fundamental inside information considerations arise when dealing with Expert Networks or indeed any source of information. Inside information should be avoided unless you want to be restricted, or worse, convicted.
Conclusion
The increasing ferocity with which securities regulators are targeting capital market misconduct, especially since the financial crisis, is something that market participants, anywhere in the world, should take due notice of. The Galleon case is a stern warning of the likely implications of deliberate misconduct. However, here in the UK firms need to maintain awareness of the UK regulator’s expectations regarding preventative system and controls. For regulated firms, the insider dealing and market abuse regime is one which has positive obligations in addition to prohibitions.
While the UK’s Financial Services Authority has been gaining commendable traction with insider dealing and market abuse enforcement in the last few years the authorities on the other side of the Atlantic have intensified their own efforts and approach as evidenced by the use of surreptitious wiretaps and multiple targets in the Galleon case. The 11 year sentence handed to Raj Rajaratnam, co-founder of defunct hedge fund Galleon is the longest ever handed down for a crime of this nature. Indeed, it was considerably less than the 24 years requested by the prosecution and was reduced on account of the disgraced billionaire’s ill health and past charitable donations.
It has been said that an impediment to the successful prosecution of white collar crimes is that juries are unable to understand them. However, this was not a highly technical infringement with the jury agreeing with the prosecution’s case that Rajaratnam had been guilty of deliberate conduct calculated to profit (to the tune of millions of dollars) from illicitly obtained company information not yet known by the market.
Sentence
The 11 years exceeds the current maximum of 7 available to a UK criminal court. Earlier this year in May, the FSA’s Interim Managing Director and former Head of Enforcement, Margaret Cole, asked the coalition government to increase the maximum sentence for insider dealing from seven to ten years in order that insider dealing penalties be put in line with other types of white-collar offence in the UK. Until such an increase, one can envision the FSA eyeing the 7 year maximum as a target to be achieved. Currently, convicted insider trader Christian Littlewood represents the high water mark sentence at 40 months.
Telephone record evidence
The most striking feature of the Galleon case is its use of wiretap evidence revealing private conversations in which Rajaratnam gleaned and shared non-public company information. While evidence of wrongdoing obtained in this way is not admissible in UK court proceedings (material obtained from a wiretap may only be used for background intelligence and is not itself admissible), the UK regulator has had access to mandatory voice records of traders’ calls since March 2009 and this will be extended to mobile phones in November 2011. The requirement is to maintain such records for 6 months. The FSA’s recently enhanced trade surveillance system, ZEN, enables the FSA to detect suspicious trades which may result in the FSA contacting firms requesting that they preserve voice records beyond the 6 month timeframe.
Until such times as the FSA or its successor is granted the power to obtain interception warrants, the most intrusive technique divulged in recent years was the revelation by the FSA in early 2008 that it had been “cold calling” traders and investors that had engaged in transactions that, as a minimum, stood out and required fuller explanation. These telephone interviews are made without prior notice to the trader or investor or their employer.
Expert Networks
The Galleon case also shone the light on modern techniques by which investors and traders obtain company information following a regulatory clamp down on so-called selective disclosure by issuers at the start of the last decade. Specifically, the use of Expert Networks was highlighted. These are commercial firms which offer access to business experts and past or even present company executives, often on a subscription basis. It is essential that subscribers to Expert Network services protect themselves from being tainted with inside information, either deliberately or negligently by the expert. Click here for IMS’ previous note on the subject.
The FSA has not yet published any material specifically on Expert Networks. However, it has published plenty on market abuse (click here for back copies of the FSA’s Market Watch publication) to supplement the UK securities legislation itself. Accordingly, fundamental inside information considerations arise when dealing with Expert Networks or indeed any source of information. Inside information should be avoided unless you want to be restricted, or worse, convicted.
Conclusion
The increasing ferocity with which securities regulators are targeting capital market misconduct, especially since the financial crisis, is something that market participants, anywhere in the world, should take due notice of. The Galleon case is a stern warning of the likely implications of deliberate misconduct. However, here in the UK firms need to maintain awareness of the UK regulator’s expectations regarding preventative system and controls. For regulated firms, the insider dealing and market abuse regime is one which has positive obligations in addition to prohibitions.
