SBC fined pounds 300,000 over Chinese Wall lapse

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The Independent Online
Swiss Bank Corporation was yesterday subjected to the largest ever fine imposed by the Securities and Futures Authority as the regulator concluded two disciplinary cases against the bank.

Swiss Bank was "severely reprimanded" and fined pounds 300,000 for failing to follow and implement its Chinese Wall procedures during 1994 when its market makers bought more than 8 per cent of the share capital of Yorkshire Electricity.

The SFA said the bank had "failed to observe high standards of market conduct" and had "failed fully to implement, monitor and control its Chinese Wall procedures" or to operate well-defined compliance and supervisory procedures. In addition to the fine the bank was ordered to pay pounds 121,095 towards the SFA's costs.

In the second case, SBC was ordered to pay pounds 180,000 for its actions relating to the liquidation of the Kleinwort Benson European Privatisation Trust (Kepit) in 1996. It was also ordered to pay costs of pounds 55,000.

Commenting on the two cases, Richard Farant, the SFA's chief executive, said: "Managing and controlling the different parts of an integrated investment house in order to ensure fair treatment of clients and other market participants is challenging. SBC failed that test."

Mr Farant took the opportunity to issue a warning to other firms saying that "the SFA will persistently pursue and judge harshly cases where the needs of the market or the interests of clients are subordinated to the interests of the firm, even if this is not intended."

SBC recognised the severity of the fines and said it was committed to keeping its administrative processes under constant review. It does not plan to take any disciplinary action against any individuals as a result of the Yorkshire Electricity case as the SFA said in its report that the bank's employees had acted in good faith and had not wilfully breached the SFA's principles.

However, the bank has taken disciplinary action against several members of staff over the Kepit affair.

The SFA's action over Yorkshire Electricity relates to SBC's conduct between August and December 1994. At that time the bank's corporate finance department was marketing cash performance notes to corporate clients as a means of providing cover for the costs of bid situations. A cash performance note is an instrument which tracks the market price of a security.

Though a client had told SBC it was interested in making a bid for Yorkshire, the bank failed to restrain its market makers from acquiring a stake of 8.2 per cent in the company, more than double the level required for hedging purposes.

SBC was acting as financial adviser to Trafalgar House in its pounds 1.2bn bid for Northern Electric, which together with a lax price control announcement by the electricity regulator, had caused share prices to soar across the sector.

SBC acknowledged that it failed to operate well-defined compliance and supervisory procedures. In the event, SBC's client did not mount a bid for Yorkshire, though it was eventually taken over earlier this year by a joint US bid.

In the Kepit case, SBC's bid for the investment trust portfolio was accepted by Kepit's fund manager but in the time between the acceptance and the agreed time at which the strike price would be set, SBC's heavy selling in the market forced prices down, to the disadvantage of its client.

In its settlement with the SFA, Swiss Bank acknowledged that it "failed to act with skill, care and diligence and to ensure fair treatment to its client." SBC referred to the action as "an isolated incident".

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