Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Friday, May 13, 2005

What happens when it all goes wrong?

In its short existence the market abuse regime has seen a surprising number of successful prosecutions. Here are 2 case studies.

The market abuse regime applies to conduct after December 2001. Under the Act the Financial Services Authority has power to impose financial penalties for market abuse, which is defined as one of three types of behaviour:
  • Misuse of information
  • Misleading statements and impressions
  • Market distortion
The first type – misuse of information – was used in the case of Mr Peter Bracken, Group Head of Communications, Whitehead Mann Group. WMG is a listed company providing executive search, selection and human resource consulting services. Peter Bracken learned of the issue of a negative trading statement. Upon learning of this, he placed an order to short sell 5,000 shares in WMG at 190p. The subsequent announcement highlighted lower profits due to “difficult trading conditions”. Peter Bracken subsequently bought stock at 138p to close out his short position. In the case the FSA noted that Peter Bracken repeated the same actions 2 months later.

The FSA fined Peter Bracken £15,000 for committing market abuse, and commented that he misused unpublished, confidential information about the company's financial performance to trade in WMG shares for personal profit.

Under the second category - misleading statements and impressions – the FSA prosecuted Robert Bonnier, in 1999 a Director of Indigo Capital, a New York based financial advisory and investment services firm.

Between 18 November 2002 and 8 January 2003 Mr Bonnier of Indigo made twelve inaccurate notifications to Regus plc, a listed company providing managed office space. These notifications related to dealings in Regus' shares. The notifications purported to show that Indigo had shareholdings in Regus. In fact Indigo mainly held contracts for difference (CFDs) referenced to Regus' shares and not Regus shares.

The notifications were subsequently announced to the market by Regus. Contracts for Difference do not transfer any voting rights or beneficial interest in any underlying shares, and in fact Cantors’ retained the ownership and voting rights. Under the Disclosure of Shareholdings - Under sections 198-202 of the Companies Act 1985 anyone acquiring an interest in 3% or more of a listed company's issued share capital must notify this to the company who, under the Listing Rules, is then required
to disclose this fact to the market. (see Shareholder disclosures – proactive and reactive).

The (FSA) Mr Bonnier £290,000 and Indigo £65,000 for issuing materially inaccurate statements which created a false or misleading impression amounting to market abuse.

Important information that you will (hardly ever) need to know
  • Financial information (Section 12 of listing rules and sections 226, 227 of Companies act).
  • Directors and their dealings. (Model Code)
  • Corporate Governance


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