View from City Road: Tough lesson for securities industry

There were rousing cheers and drinks all round the Edinburgh financial community last night at the decision by three appeal judges that the conviction of Thorold Mackie for insider trading was a miscarriage of justice.

There has been much public anger at dirty business in the financial community, and a strong feeling that examples should be made to teach others a lesson. But in this case it was hard to find anything but sympathy for Mr Mackie among colleagues in other firms.

This was made an emotional issue by the fact that new insider dealing legislation to implement European directives recently widened the definition of the offence in a way that initially caused paranoia among analysts and investment managers and led to threats that information from companies would dry up.

The legislation was modified after much lobbying, but some of the uncertainties about how it will be applied in court remain.

However, the Mackie decision does nothing to clarify this; it was brought under the previous version of the law, and - more important - does not appear to tell us anything about the implementation of the new act.

This is because the case turned on straightforward questions of fact and of evidence rather than interpretation of the finer points of the insider dealing law itself.

There was no dispute over the fact that Mr Mackie had passed information from Shanks & McEwan to colleagues who then dealt for clients. But was Mr Mackie made an insider when he discussed Shanks & McEwan's prospects with its chairman, shortly before a profit warning? Or did he simply glean information without being told of the warning? The judges have come down on Mr Mackie's side.

The lesson from the episode for the securities industry is that rigorous procedures are needed to monitor conversations between analysts and companies. The Stock Exchange has recommended companies have a third party present when they talk to analysts.

Equally, brokers need a compliance system that forces a rigorous analysis of how information is acquired before it is dealt on. US firms in London, for example, have tough internal reporting systems - based on dealings at home with the SEC - which put the methods of some British competitors in the shade.

If there is even the slightest doubt about whether an analyst has accidentally been made an insider by being given confidential information by a client, then dealings are banned. Tough for profits, perhaps, but good for reputations.