Two City traders yesterday escaped with a slap on the wrist after the city watchdog found they had committed market abuse.
Darren Morton, a director and Christopher Parry, a vice president at Dresdner Kleinwort - now part of Commerzbank – were censured for selling Barclays bonds when they were aware of a potential new issue that was likely to depress prices. However, no financial penalty was imposed.
Rather than agreeing a settlement with the Financial Services Authority’s investigators, the two took the case to its “Regulatory Decisions Committee” which opted not to impose a fine.
This is a relatively unusual move, and lawyers said the light penalty it imposed could encourage others to follow suit.
In the “final notice” of the decision it was noted that guidance had not been given on the issue and the two had subsequently attended training.
In line with industry practice, Barclays Capital, which was acting for Barclays had contacted Mr Morton to gauge appetite for a future bond issue. Key investors are often “sounded out” before new bond or share issues. The issue was on more favourable terms than the existing bonds.
Mr Morton, who told Mr Parry about the planned issue, argued that the information was not “relevant”, “inside” or “price sensitive”. They felt it was perfectly acceptable to trade ahead of new issues. The two - were portfolio managers with Dresdner’s Structured Investment Vehicle K2 - oversaw $65 million of a Barclays.
After hearing of the new issue, they sold the lot to two other companies, leaving them with a $66,000 loss (£42,000).
While the committee did not accept their arguments, because of the mitigating factors, and the fact they did not personally profit from the trades, they were only censured rather than receiving a greater penalty.
Margaret Cole, FSA director of enforcement said: Insider dealing is cheating, whatever market it is in. It was argued that practices in the debt market meant it was always acceptable to trade after being “sounded out” on a new issue. This is not the case. Market participants must always be alert to the possibility that inside information is being passed, and where it is they must not trade.”
She added: “Our action reflects the fact that some market participants may, in the past, not have paid sufficient attention to their obligations in this area. Future offenders will be likely to face significantly more severe sanctions.”
The watchdog said it would follow up this case with future work with the industry to ensure that firms, and their staff, were aware of their obligations.
“This case shows that in nine times out of ten FSA can spot market abuse from a distance of a hundred yards - here we have the one-in-ten case”, said Simon Morris of law firm CMS Cameron McKenna.
“FSA was less sure of its ground than usual, as is reflected by a mere censure and not the normal fine or prohibition. Firms and individuals should always scrutinise FSA's market abuse allegations, calling in market evidence to rein in its wilder claims. While resulting in a censure, the outcome in this case vindicates the two individuals' refusal to roll over and accept all of FSA's allegations.”Reuse content