Close Brothers, the UK merchant bank, has pledged to appeal after the financial regulator slapped it with a record £4m fine for alleged market abuse at one of its subsidiaries.
The Financial Services Authority (FSA) handed down its highest ever censure for a regulated company to Winterflood Securities, Close's market making arm, over share dealing in a company listed on London's Alternative Investment Market in 2004. Two Winterflood traders have also been named in the FSA's preliminary judgement, and have been handed fines of £200,000 each.
Close yesterday referred the regulator's decision to the Financial Services and Markets Tribunal (FSMT), an independent body that oversees the FSA's decisions. "With the support of Close Brothers, Winterflood has vigorously contested the FSA's allegation and, after careful consideration and on legal advice, has exercised its right to refer the FSA decision to the FSMT," the financial services group said.
Should the FSMT overturn the decision, the FSA's enforcement division, run by Margaret Cole, can appeal to reinstate the original ruling. Should the independent body reject the motion, the FSA can take the case to the Court of Appeal, a spokeswoman for the regulator said today.
The fine relates to dealings in Fundamental-e Investments, a computer components company listed on AIM. Winterflood acted as a market maker for the stock and "executed the majority of the relevant trades" under investigation by the FSA, Close said. The FSA alleged that Winterflood "failed to have appropriate regard to warning signs and failed to ask questions about the propriety of the third-party trades in Fundamental-e executed by Winterflood, and thereby committed market abuse". The regulator alleged that Wins and its traders unwittingly committed market abuse rather than deliberately.
The FSA started investigating Fundamental-e in July 2004 over fears the stock had been ramped after the shares spiked from just under 4p at the start of the year to almost 12p, before dropping 32 per cent in a day. Today Fundamental-e is worth less than a penny.
The case focuses on the involvement of a small stockbroker called SP Bell. The group was too small for Winterflood to normally deal with so Pershing Securities, the clearing and settlement business, acted as a middleman to trade in Fundamental-e stock. SP Bell fell into administration that year and it emerged that it had invested £10m of its clients' money in Fundamental-e without their authorisation. The head of SP Bell, Simon Eagle, turned out to be the chairman of Fundamental-e as well and his father was the computer group's largest shareholder.
The clients then refused to pay for the shares, which were left on Pershing's books. After the scandal erupted, Pershing sued Wins saying it had been left out of pocket by the dealings and Wins should have checked the trades were authorised. The companies settled out of court in 2006.