Swiss Bank faces discipline over Trafalgar

SFA investigation questions Chinese walls
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The Independent Online
The Securities and Futures Authority is seeking to discipline Swiss Bank Corporation over its controversial role advising Trafalgar House in the attempted pounds 1.2bn hostile takeover of Northern Electric earlier this year.

The Department of Trade and Industry and the Serious Fraud Office have decided not to pursue the case, which means that SBC will not face criminal prosecution under insider trading laws.

But it is believed that the SFA will be seeking both to fine and censure SBC on the basis of the detailed investigation it has already carried out.

The DTI, which alone has the powers to conduct a criminal prosecution on insider trading, appears to have decided that the information compiled by the SFA would not justify going to court. The SFO has taken a similar view, sources said.

The investigation has centred on the question of the viability of Chinese walls in an integrated investment house such as SBC.

As part of its tactics for the takeover of Northern Electric, SBC sold contracts for difference to Trafalgar House which guaranteed it a profit should the share price in the regional electricity company rise.

To cover its own exposure to these contracts, SBC's market-makers bought shares in a number of other regional electricity companies (RECs), whose shares were likely to be boosted in the event of a takeover bid in the sector.

In the event, once news of the takeover emerged, shares throughout the sector jumped sharply, prompting widespread controversy over SBC's tactics.

The SFA investigation is believed to have examined the possibility of unethical behaviour by SBC in its treatment of those shareholders from whom it bought REC shares, insofar as they may have been disadvantaged by any possible prior knowledge of a takeover bid.

The SFA is also believed to be considering disciplinary action against SBC for having allegedly breached a statutory law on insider trading. Even though there is to be no criminal prosecution, the SFA can still accuse a member firm of insider trading under its own rules, government sources suggested.

The SFA refused yesterday to comment on its investigation into SBC.

Should SBC be disciplined, as regulatory sources suggested is likely, this will involve lengthy negotiations between the SFA and SBC's formidable posse of lawyers, who have so far been very active in this affair, and parried the investigators already on several occasions.

The Stock Exchange quickly cleared SBC of any breach of its rules. However, in response to the widespread market concern expressed at the time of the takeover, it is in the process of drawing up changes to these rules on the use of derivatives and undisclosed large market positions in takeovers, following detailed consultation of its members and big institutional investors.

Regulators conceded that SBC's innovative use of derivatives had exposed a weakness, if not a gap, in the rules governing takeovers.

Separately, the Bank of England yesterday said it was reviewing its memorandum of understanding with the SFA with the aim of ending the regulatory confusion exposed by the Barings collapse.

"To co-operate better each has to be much clearer about its responsibilities. We knew what we were doing, but it seems parts of the Bank had different ideas of what was going on. We need to clear up this confusion," Richard Farrant, chief executive of the SFA, said.

The SFA is still investigating a number of former Barings executives.

"They are unlikely to get a job in the City unless we are fully satisfied they are capable of holding any position for which they may apply," Mr Farrant said.