In a groundbreaking case the Financial Services Authority fined the stockbroker and investment bank Evolution Beeson Gregory £500,000 yesterday, the first time a company has been found guilty of distorting the market. The head of market-making at Evolution, Christopher Potts, was also fined, £75,000.
Evolution was found to have been deliberately shorting shares in the cash shell Room Service Group, which is now called Azure Holdings, in September and October of 2003. "Selling short" means selling shares that are not owned in the expectation that the price will fall to a level where they can be bought back at a profit.
While not itself illegal, Evolution was found to have sold short about 252 per cent of the total quoted capital of Room Service, a level beyond Evolution's ability to deliver. Trading in Room Service was suspended on 22 October 2003 leaving Evolution not only unable to deliver stock it had sold but also unable to buy to cover the position. Evolution has already paid £150,000 to investors disadvantaged by its actions.
In a pre-prepared statement Evolution said that it had reluctantly accepted the fine levied by the FSA in the hope that the episode could be brought to a conclusion. It also said: "It is unfortunate that it has taken an incident such as this to help produce a clearer understanding of the definition of market abuse."
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