Page last updated at 23:19 GMT, Thursday, 8 April 2010 00:19 UK

Are insider dealers afraid of the FSA?

By Edwin Lane
Business reporter, BBC News

FSA logo
The FSA has begun a clampdown on insider dealing

"People should be very frightened of the FSA," Hector Sants, the chief executive of the Financial Services Authority, warned City bankers in a speech last year.

He was talking about the need to curb the excesses of the City in order to prevent another catastrophic global financial crisis.

But judging by the FSA's recent activities, the battle against insider dealing is also high on the agenda.

The arrests of seven bankers and traders last month point to a more aggressive strategy from the regulator - a sign of the new "intrusive" approach promised by Mr Sants.

Among those arrested were bankers in senior positions at well-known City institutions.

There were stories of dawn raids on City offices, files seized, computers and even iPods taken away for inspection.

The FSA called it its "largest-ever operation against insider dealing", with 143 personnel involved, with a "sophisticated and long-running insider dealing ring" the target.

Last week, it added to that tally, charging seven more in an unrelated case.

But as impressive as its recent activities sound, they are in stark contrast to the FSA's past record on insider dealing.

Amateurish cases

Since the regulator gained its legal powers in 2001, it has prosecuted 19 people on charges of insider dealing.

Five have been convicted and are serving prison sentences, with the other cases still proceeding.

In the cases where convictions have been secured, the insider dealing operations have been amateurish, opportunistic and involving relatively small amounts of money.

Some in the City may still regard [insider dealing] as a... victimless crime
Arun Srivastava, partner at Baker & McKenzie

In the case of solicitor Christopher McQuoid and his father-in-law James Melbourne, McQuoid was found guilty of telling Melbourne about the impending takeover of TTP Communications by Motorola in 2006 - in which he was involved.

His father-in-law - a casual amateur investor - promptly called up Alliance & Leicester and bought more than 150,000 shares in TTP, having never invested in the company before.

Following the announcement of the takeover, the share price rocketed, giving Melbourne a nice profit of nearly £50,000.

Six months, later he wrote out a cheque to McQuoid for exactly half that amount.

The convictions were the first ever secured by the FSA in 2009. Prior to that, traders found to be engaging in insider dealing avoided prison and were simply fined.

But few cases will be as straightforward and blatant as the McQuiod-Melbourne case.

The problem for the regulator is that insider dealing is, by its nature, difficult to spot and even harder to prove.

By the admission of Hector Sants himself, levels of market abuse in the UK are still "unacceptably high".

'Circumstantial evidence'

The FSA's own "market cleanliness" statistics suggest that between 25% and 30% of investor deals are preceded by suspicious movements in share prices that could be the result of insider dealing.

Even when an incidence of suspicious dealing is reported to the FSA (as brokerages are obliged by law to do), building a case is a difficult process.

Hector Sants
Hector Sants says market abuse is still "unacceptably high"

"Very often, what you are left with is circumstantial evidence," explains Arun Srivastava, a partner at Baker & McKenzie and a former FSA enforcement officer.

"You might be able to show that [an individual] had access to insider information, and that they were involved in the relevant deals, but you can't show that they dealt on the basis of that information."

Bob Parker, vice-president of Credit Suisse's asset management business, argues that modern computerised trading means identifying the insider dealers is easier, but the problem for the FSA is one of manpower.

"The difference is that now the FSA have got the resources and the people to deal with it," he says.

Even if the regulator now has the intent and the resources to deal with insider dealing, its light-touch approach risks allowing a culture of invulnerability to develop in the City.

"Insider dealing was only criminalised in 1980," Arun Srivastava points out.

"So some in the City may still not regard it as that serious. Often they will regard it as a victimless crime."

If the high-profile arrests result in high-profile prosecutions and convictions, then the FSA might go some way to changing that view.

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