A series of insider dealing scams, involving corporate takeover deals worth millions of pounds have been uncovered in the biggest-ever crackdown on market abuse in the City by its regulator.
Dozens of corporate advisers and executives have already, or will be shortly, interviewed in six separate cases being investigated by the Financial Services Authority (FSA).
The investigations have been prompted by a high number of suspicious trading alerts that identified unusual movements in share prices of companies ahead of almost a third of all merger or takeover announcements.
The FSA has brought just one criminal case of insider dealing since its inception in 2001. But the new crackdown reflects concerns that traders and corporate advisers in the heart of the City have resorted to using confidential information to make illegal profits from mergers and acquisitions markets which have been hit by the recession.
Margaret Cole, head of enforcement at the FSA, the chief City regulator, told The Independent she wanted to send a message to the City that there were no hiding places for those who tried to profit by abusing the financial markets. In the first of the six cases, a man and a woman, one a senior corporate finance adviser, were arrested last week in connection with an ongoing investigation into suspected organised insider dealing.
Ms Cole said that three other cases were being prepared for court this year and three more were being investigated. As part of the latest investigation, search warrants were executed at a number of addresses in Greater London. The operation involved 25 FSA staff, assisted by 11 officers from the City of London Police.
Ms Cole said: "I know of at least three other investigations which we are close to commencing as criminal proceedings. And I know of several other investigations which are being conducted on a criminal investigative basis." She added that decisions on the remaining cases would depend on what the evidence justified.
Ms Cole, a lawyer who worked for a leading US law firm before joining the FSA, said that according to the FSA's own research into suspicious transactions, insider dealing had "been going on for some time" which, she said, posed a "significant risk" to the City. In one of the cases being investigated, the FSA was given the names of 2,000 people who were or could have been privy to confidential market information.
Criminal prosecutions over insider dealing have had an unhappy history in the UK. The Serious Fraud Office and the Department of Trade and Industry were involved in a series of flawed cases until the responsibility for prosecuting was handed to the FSA in 2001. But the City regulator has fared little better, mounting just one case in almost eight years. That ended earlier this month in the first conviction for Ms Cole and her team.
In a significant breakthrough, a solicitor and his father-in-law were each sentenced to eight months in prison after being found guilty in the FSA's first insider dealing criminal case. The jury at Southwark Crown Court found that the lawyer, Christopher McQuoid, had passed inside information to his father-in-law, James Melbourne, who had traded on the back of it and made a £49,000 profit.
The FSA won a court order freezing the profits made from the trade, which McQuoid and his father-in-law had shared between them.
Ms Cole explained why she thought it had taken so long for a successful criminal prosecution: "You will remember cases where the SFO and DTI prosecuted insider dealing and didn't do very well with it. It was seen as a victimless crime; it was seen as not doing any harm. It was extraordinarily complex and difficult to get juries to understand and convict on."
The FSA was given powers to prosecute insider trading through the civil courts but found that it was not particularly effective either. It has turned to pursuing criminal prosecutions instead.
Ms Cole said the impact of jailing a 40-year-old solicitor, with an otherwise clean record, would act as a deterrent to those who thought they could get away with trading on confidential information.
But critics argue that until a market professional is sent to prison for insider dealing it will not make a real difference to the attitude towards a crime that is perceived by some as just as a "perk" of working in the City.
"Clearly we do want to deal with market professionals where we find the evidence and clearly we will. I think this case was an important case. We also want to deter the people who do insider dealing on an opportunistic basis. We don't want anyone to think they are under our radar. It would be a mistake for people to think out there that if I do a little bit every now and again I will be OK."
FSA monitoring of the markets has uncovered unusual trading in 29 per cent of cases before takeover or merger announcements were made.
But Ms Cole said: "Don't correlate 29 per cent of movements with 29 per cent of market abuse. We see it as an [indicator] for what we have to look at. All unusual price movements get looked at. We have not seen a massive drop-off yet. We would hope that the work we are doing this year would start translating down the line. But I think we have got a good idea of what's going on – I don't think we are missing anything. We look at all kinds of things and take early views to decide which cases are the promising ones to take forward."
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