Financial regulation partners are now in even higher demand as financial institution clients panic after the Financial Services Authority (FSA) recently fined former J.P. Morgan Cazenove banker Ian Hannam £450,000 for market abuse.
The financial watchdog issued the fine against Hannam after he allegedly shared financial information ahead of a deal, violating the so-called ‘wall-crossing’ rule.
The FSA has recently clamped down on market abuse. Tracey McDermott, the FSA’s acting director of enforcement and financial crime, said: ‘Directors should note the personal consequences for those who fail to meet our requirements.’
Since the Hannam decision was passed in April, corporate brokers have started scrambling for legal advice in the midst of what they view as a further crackdown by the FSA.
‘Hannam has caused firms to say “how might this affect the way we do things?” Clients want to give their bankers some practical guidance,’ said David Berman, head of the financial services regulation group at City firm Macfarlanes.
‘Hannam has caused firms to say “how might this affect the way we do things?”’
David Berman, Macfarlanes
The increased scrutiny of the FSA seems to be paying dividends for Macfarlanes. ‘Our financial services practice is growing tremendously, beyond anyone’s expectations in terms of our new client wins and the type of work that we’re doing,’ said Berman.
‘Our part of the market has been buoyant,’ explained Fulbright & Jaworski financial services litigator Chris Warren-Smith. ‘Clients are seeking advice more regularly now.’
The increased FSA scrutiny is having an effect on how those in the financial services industry are behaving. Nick Kynoch, a partner in the funds and financial services practice at Berwin Leighton Paisner, said: ‘Clients are far more aware of the risks at the moment. The FSA is getting the message across that financial institutions have to think very carefully about what they’re doing about their everyday practices.’
Hannam is currently appealing the fine that was handed out for allegedly disclosing insider information to a potential investor. He is arguing that the regulator was stretching the definition of market abuse.
Barney Reynolds, who heads the financial institutions advisory and global financial regulatory practice at Shearman & Sterling, supports Hannam’s decision to appeal. He said: ‘It seemed to me that there were grounds to say that what he was doing was valid negotiation.’
But Reynolds added that it was helpful that the FSA is taking action on market abuse as this will increase case law and subsequently certainty. ‘The only way of sorting this out in our legal system is through the court process. I don’t think it’s necessarily a bad thing to have court decisions because it provides certainty, the court is able to provide finality to the whole thing,’ he said.
In January, the FSA fined hedge fund manager David Einhorn £3.6m for market abuse. The Einhorn fine is particularly interesting to City partners because he categorically denied that he was willingly given insider information about a deal involving Punch Taverns. Einhorn told the FSA that he asked not to be told information regarding the deal by the other parties on a call. They did disclose and he was prosecuted by the FSA. The nail in Einhorn’s coffin was that he immediately tried to sell the shares that had been discussed after the call. Former Merrill Lynch broker Andrew Osborne was also fined £350,000 by the FSA over the same deal.
Other cases of market abuse this year include: Richard Joseph being charged with eight counts of insider dealing in January and Nicholas Kyprios, head of European credit sales at Credit Suisse, being fined £210,000 for improper market conduct.
‘The concern on the Hannam case was that the decision itself led to lack of clarity. It looks so restrictive that literally any contact with one of your bidders could be improper. If that decision stood, without clarification, it could have a chilling effect,’ Reynolds said.
Reynolds fears that the FSA could run amok if left unchecked. ‘The danger with the FSA is that they may want scalps, regardless of the analysis that gets there,’ he said.
The current chaotic environment, with the FSA pursuing all and sundry, must be good news for financial services lawyers. In these uncertain times, clients will be seeking legal advice to ensure that they don’t face the wrath of the regulator.