In an interesting example of regulatory action against third parties in a market abuse case, the Financial Conduct Authority (FCA) has recently fined a compliance officer and a broker for failing to spot, challenge or report the manipulation.
The FCA alleges that David Davis, a senior partner and compliance officer of Paul E Schweder Miller & Co, and Vandana Parikh, a broker at the same firm, failed to act with due skill, care and diligence in the period leading up to the illegal manipulation of the closing price of securities traded on the London Stock Exchange (LSE) by Rameshkumar Goenka, a Dubai based private investor, in October 2010.
Goekna was fined $9,621,240 (approximately £6 million) by the then regulator, the Financial Services Authority, on 11th November 2011 for market abuse. It was the largest fine imposed by the FSA on an individual.
So far as Davis and Parikh are concerned, the case dates back to April 2010, when Goenka was introduced to Parikh to execute trades in Gazprom and Reliance securities in LSE closing auctions.
A series of conference calls took place during which Goenka asked whether the closing price of Gazprom Global Depository Receipts (GDRs) could be raised by placing strategic orders. Parikh explained the impact that the size and timing of various orders might have on the closing price. However, although the matter progressed, an unforeseen announcement about Gazprom caused the price to drop unexpectedly on the intended trading day and the proposed trading was abandoned.
According to the FCA, Parikh failed to act with due skill, care and diligence by explaining the process of manipulation to Goenka without recognising the risk that this posed and without proper challenge or enquiry as to his intentions. Further, although Parikh speculated that Goenka had a related structured product she did not discuss this possibility with her compliance officer. The FCA has therefore imposed a penalty of £45,673 on Parikh.
In October 2010 Goenka then took the knowledge gained during the Gazprom preparations and used this as the basis for a successful strategy to illegally manipulate the closing price of Reliance, enabling him to avoid a loss of $3.1m on a related structured product.
According to the FCA, Parikh suspected but did not know that Goenka had an underlying structured product. Parikh informed Davis that she had concerns about the proposed Reliance trading, with the result that Davis became involved and monitored the trading.
Although Davis was not aware of Goenka’s desire to manipulate the price nor that he in fact held a linked structured product, he was aware of sufficient information to constitute clear warning signals and failed to take preventative steps before authorising the trades. Furthermore, Davis did not report the trading as suspicious after the event.
The FCA concluded that Davis failed to act with due skill, care and diligence by failing to challenge the instructions for Reliance and by failing to refuse to accept the orders to trade. He was fined £70,258.
Tracey McDermott, Director of Enforcement and Financial Crime with the FCA, explained that every individual involved in a chain that leads to trading must proactively challenge suspicious behaviour and ensure it is reported.
“All approved persons have a duty to help the FCA in its fight against market abuse, and must be vigilant in spotting, challenging and reporting market abuse,” she said. “That did not happen here. Instead, Goenka’s manipulative strategy was allowed to proceed unchallenged. This falls far short of our expectations of approved persons.”
For specialist legal advice on FCA investigations & prosecutions and any other regulatory or compliance related issues contact Lewis Nedas Law