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Conduct of Regulatory Investigations and Enforcement Proceedings

2015年 5月 5日

In Ireland there is hardly any case law providing guidance on the conduct of regulatory investigations and enforcement  proceedings  by  the  Central  Bank  of  Ireland  ("CBI").  However,  reports  of  equivalent processes under UK law are instructive. A recent decision by the UK Upper Tribunal (Tax and Chancery Chamber) (the "Tribunal") in Carrimjee v The Financial Conduct Authority sheds light on a number of fronts.

In this case the Financial Conduct Authority ("FCA") alleged that the applicant ("C") was complicit in a client's alleged market abuse on the LSE's International Order Book market (the "IOB Market"). The allegations focused on trading activities during the "closing auction".

The decision deals with a number of issues such as what a lack of "integrity" means, the appropriate standard of proof for serious charges, the role of expert evidence, and restrictions on the regulator adopting inconsistent positions in separate proceedings relating to the same subject matter. It also highlights the danger of financial services professionals "turning a blind eye" to the obvious.

Summary of facts

C was a fund manager and investment advisor with nearly 20 years' experience in the financial services industry and had his own firm. His client, G, was a sophisticated investor who wished to trade on the IOB Market. G was also a client of P, a broker employed by a different firm to C's. C and P were jointly party to a number of phone calls and other communications with G leading up to G's dealing on the IOB Market. P took the lead in terms of providing specific advice or recommendations on proposed trades. C adopted a passive role.

FCA took the view that G had engaged in market abuse by artificially driving up the price of certain financial instruments on the market (including global depositary receipts in Gazprom plc). FCA brought regulatory proceedings against G. G settled with the FCA and agreed a financial penalty of over $6 million. The settlement with G was recorded in a "Final Notice" issued by FCA.

FCA also issued regulatory proceedings against C and P. FCA had initially alleged that P and C knowingly assisted G to manipulate the IOB Market.

P made representations to FCA after which it modified its position and alleged that P failed to exercise due skill, care and diligence in her dealings with G. P settled FCA's regulatory action on this basis. The Final Notice in P's case set out a detailed summary of the facts and recorded that P may have been "an innocent victim" of G's scheme to manipulate the IOB Market, and whilst she did not set out to assist G in market abuse, P ought to have realised that G was acting for an illegal purpose. FCA imposed a monetary penalty on P but did not take her trading licence from her.
 
By contrast, FCA decided to impose a monetary penalty on C and to take his trading licence from him. C appealed FCA's decision to the Tribunal.

A question which arose on appeal was whether FCA could – contrary to the version of events recited in the Final Notice issued in P's case – contend that C knew that G intended to engage in market abuse. C contended that it was unfair. The circumstances of FCA's case against P were the same as the case against C. C contended that it was unreasonable for FCA on appeal to contend that C knew G was engaged in wrongdoing when in its Final Notice against P it had accepted that this was not the case.

Key issues

These were as follows:

(a) The standard of proof for serious regulatory breaches, such as market abuse.

(b) Whether FCA could adopt a position in C's case that was inconsistent with the Final Notice issued to P.

(c) Certain other evidential issues.

The Tribunal's conclusions were as follows: 

(a) Standard of proof

FCA bore the burden of proving its case. The standard of proof was whether FCA's version of events was more probable than the version put forward by the applicant: i.e. whether the FCA proved its case on the balance of probabilities. Even though the allegations were serious, there was no basis in statute or in principle for requiring FCA to prove its case by reference to a more exacting standard – i.e. beyond a reasonable doubt.

(b) Could FCA adopt a position different from that adopted in the Final Notice?

As a statutory body FCA was required to act rationally and it would be inconsistent with this duty for it to adopt a case theory against C that was not factually consistent with the terms of the Final Notice against P. This meant that FCA could not allege that C knew that G intended to manipulate the market. This was inconsistent with the Final Notice issued against C. Accordingly as C and P were treated as acting together, it followed that FCA could not make such a case against C either. All that FCA could legitimately allege was that C – like P – ought to have known that there was a risk that G was intending to manipulate the IOB Market and that he was oblivious to this risk.

(c) Certain evidential issues

Two key conclusions emerge from the Tribunal's analysis of the evidence:

First, although transcripts of recorded phone conversations could be illuminating, it was important to treat them with a degree of caution due to the fact that, amongst other things, individuals express themselves inaccurately in phone conversations and often the transcript will omit important context such as the manner by which certain statements were made.

Secondly, the Tribunal was assisted by expert evidence from FCA as to the workings of the relevant market, in particular during the crucial end-of-day period referred to as the "closing auction".

(d) Turning a "blind eye" to wrongdoing – definition of "integrity" 

The Tribunal adopted a definition of "integrity" as meaning "moral soundness, rectitude and steady adherence to an ethical code."

Although the Tribunal found that C was not aware that G was proposing to engage in market abuse, it found that C ought to have been aware that this was a risk in the circumstances. The Tribunal found that C was reckless as to whether or not G was seeking to manipulate the market. C was therefore not acting with integrity. Integrity connoted an objective "moral compass" and it was irrelevant that subjectively C may have thought that he did nothing wrong. Acting recklessly is an example of acting without integrity.

Conclusion

The case sheds light on detailed issues that may arise in the context of CBI regulatory proceedings. Of particular interest is the Tribunal's decision that the regulator could not adopt inconsistent "case theories" against respondents alleged to have been engaged in joint wrongdoing. The case also confirms that even where serious allegations are made, the burden of proof is on the balance of probabilities (not beyond a reasonable doubt). Finally, the case highlights the dangers involved in turning a blind eye to obvious potential wrongdoing in terms of assessing the integrity of a financial services professional.


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