Regulator targets insider leaks in four takeovers

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The Independent Online

The City watchdog is investigating four deals for evidence that inside information was leaked to enable unscrupulous traders to make huge profits, it emerged yesterday.

The Financial Services Authority refused to name the companies involved, but confirmed that three of the four were ordered to announce that they were in deal talks by the Takeover Panel following sharp rises in their share prices while supposedly "secret" talks were in progress.

All four deals went through in the past year. News of the investigations follows FSA research that found insider trading could have taken place before as many as a third of takeover announcements.

The regulator said it was holding "detailed discussions" with all the parties involved in the deals including investment banking advisers, lawyers, equity and debt issuers, PR agencies and secure printers.

New "controls" could be introduced depending on the outcome of the probes.

In its "Market Watch" publication, the regulator said: "We note that M&A deals are often complex and involve a large number of 'insiders'. In this review, we will meet specific 'deal teams' to go through the chronology of deals, undertaking a high-level study of IT systems and security and reviewing hard-copy filing systems together with a sample review of documents."

Sharp rises in share prices before talks are announced have been a notable feature of a large number of deals during the M&A boom of the past 12 months.

Examples include the offer for the steelmaker Corus by India's Tata, the takeover of AWG by a private-equity consortium including 3i, the bid for Gallaher by Japan Tobacco, the announcement of a number of takeover approaches by the builder Wilson Bowden and Associated British Ports' takeover by a Goldman Sachs-led consortium.

The FSA also said it wanted to review the operation of so-called "Chinese Walls" - which are supposed to ensure that sensitive information does not leak from investment banks' deal advisers to their trading desks.

While the regulator admitted that leaks are more likely given the increasing complexity of deals - particularly those involving private-equity interests - it wants to see if there are ways that the number of people having access to sensitive information can be reduced.

The investigations are being carried out in conjunction with the Takeover Panel, which polices takeovers and mergers in Britain.

In the same publication, the regulator voiced particular concerns about information leaking during private-equity deals.

The FSA found that a large number of private-equity firms regularly receive "ah hoc" enquiries about their involvement in deals from "various sources".

"Private-equity firms commented that these are common practice. However, firms consider the calls unhelpful and we agree with this," the FSA said.

The regulator fears that the losers in auctions involving private-equity firms were sometimes prepared to leak information about deals.

While most of the leaks came from "innocent conversations", some were held to be "deliberate".

The FSA was given the responsibility of policing insider dealing in the Financial Services and Markets Act.

Under its "civil regime", convictions - which can lead to unlimited fines - can be secured if an individual is deemed to have acted improperly "on the balance of probabilities".

When insider trading was purely a criminal offence, the Department of Trade and Industry had a woeful record of securing convictions.

However, while there have been more successful cases brought by the FSA, they are still relatively rare.

New "best practice" guidelines that are set to be issued as a result of the investigations would give the regulator the opportunity to take tough action against those who fail to comply.