Red faces at FSA as 'Plumber' cleared of market abuse

The Financial Services Authority found itself embarrassed by its erratic disciplinary system yet again yesterday, as Paul "The Plumber" Davidson and the trader Ashley Tatham were cleared of market abuse charges after a costly, and occasionally farcical, four-year investigation.

The verdict, published by the Financial Services and Markets Tribunal yesterday afternoon, ended one of the most sorry episodes in the regulator's history.

As well as costing the FSA several million pounds in external legal fees and many hundreds of internal man hours, the regulator was also forced to sack the head of its regulatory decisions committee two years ago, after he compromised the independence of Mr Davidson's first appeal hearing.

Christopher Fitzgerald was forced to resign after he told colleagues he had bumped into Terence Mowschenson QC, who was a member of the four-man Tribunal panel hearing Mr Davidson's case, while out on a walk in the small hours, shortly after the hearing had begun.

After admitting to talking to Mr Mowschenson about the case, the hearing was disbanded. A new hearing could not be heard for almost 18 months, finally getting under way at the start of this year.

The FSA took up the case in 2002, alleging Mr Davidson had breached regulations in the build up to the flotation of a fledgling biotech firm, Cyprotex, in 2002, in which he was the biggest shareholder.

Shortly before the flotation, Mr Davidson laid a spread bet with City Index, for which Mr Tatham was a trader. City Index then covered its position by taking out a "contract for difference" on the stock with Dresdner Kleinwort Wasserstein, which in turn covered its own position by buying shares in Cyprotex.

The FSA alleged Mr Davidson took out the spread bet knowing DKW would be forced to take a position in the stock, ensuring all the shares in Cyprotex were successfully sold before the float. However, Mr Davidson maintained he was unaware of the transaction. The regulator was proposing to land Mr Davidson with the largest-ever fine handed down to an individual - £750,000. But publishing its verdict yesterday, the Tribunal said the FSA had failed to prove the guilt of either party.

Mr Davidson, who was made bankrupt towards the end of 2004, was forced to represent himself at the hearing. At the end of last year, a court refused to allow him to emerge from bankruptcy after the accountants PKF said he still owed them £20m.