Unit 8 – Tutorial

Tutorial 6

Market abuse, insider dealing, corporate fraud and money laundering

1. (a) Jim works for a merchant bank, and is involved with takeovers and mergers of listed companies. One
evening after work he is in a local restaurant with his colleagues, and mentions to one of his colleagues that
he has been working on a proposed takeover of X plc by Y plc. As the restaurant is very busy the
conversation is conducted fairly loudly. Amy who works for a stockbroker, is sitting at a corner table reading
a newspaper, and overhears this conversation. As Amy knows where Jim works, she immediately informs
her boss, who instructs the purchase of a large block of shares in both X plc and Y plc on behalf of clients.
Later when the bid is announced, the price of both companies’ shares rises steeply.

(b) Mark has taken to posting numerous messages under different names on a social media platform
concerned with trading shares in a range of listed companies, and he makes extensive use of Twitter. His
messages urge the readers to buy shares in Z plc, and give a range of positive messages about the
company’s fortunes. In fact, Z plc is not doing particularly well, and his messages have no basis in reality. He
has an extensive following, and many people bought the shares which briefly rose in price. Mark, who had
previously bought shares in Z plc when the price was low, sold them at the top of the market before they fell
steeply.

Explain the legal issues that arise in each of these cases.

NOTE: the quality of the evidence in all parts of the question is key to the outcomes. Note the standard of
proof is beyond reasonable doubt under criminal law, while the evidential standard is the balance of
probabilities under MAR. So, conclusions in this answer guide would vary depending on the quality of the
evidence, including proof of knowledge of insider status.

Issue (a): Is Amy guilty of any financial crimes (Insider dealing –CJA 1993 s. 52)

Rule: CJA 1993, s. 52 The offence.

(1)An individual who has information as an insider is guilty of insider dealing if, in the circumstances
mentioned in subsection (3), he deals in securities that are price-affected securities in relation to the
information.

(2)An individual who has information as an insider is also guilty of insider dealing if—

(a)he encourages another person to deal in securities that are (whether or not that other knows it) price-
affected securities in relation to the information, knowing or having reasonable cause to believe that the
dealing would take place in the circumstances mentioned in subsection (3); or
(b)he discloses the information, otherwise than in the proper performance of the functions of his
employment, office or profession, to another person with the requisite knowledge.

(3)The circumstances referred to above are that the acquisition or disposal in question occurs on a regulated
market, or that the person dealing relies on a professional intermediary or is himself acting as a professional
intermediary.

“Inside information” is defined as being specific, and not made public (s.56), and an “insider” as an individual
who knows the information is inside information and has it and knows he has it, from an inside source”
(s.57).

53 Defences.

(1)An individual is not guilty of insider dealing by virtue of dealing in securities if he shows—
(a)that he did not at the time expect the dealing to result in a profit attributable to the fact that the
information in question was price-sensitive information in relation to the securities, or
(b)that at the time he believed on reasonable grounds that the information had been disclosed widely
enough to ensure that none of those taking part in the dealing would be prejudiced by not having the
information, or

(c)that he would have done what he did even if he had not had the information.

(2)An individual is not guilty of insider dealing by virtue of encouraging another person to deal in securities if
he shows—
(a)that he did not at the time expect the dealing to result in a profit attributable to the fact that the
information in question was price-sensitive information in relation to the securities, or
(b)that at the time he believed on reasonable grounds that the information had been or would be disclosed
widely enough to ensure that none of those taking part in the dealing would be prejudiced by not having the
information, or
(c)that he would have done what he did even if he had not had the information.
(3)An individual is not guilty of insider dealing by virtue of a disclosure of information if he shows—
(a)that he did not at the time expect any person, because of the disclosure, to deal in securities in the
circumstances mentioned in subsection (3) of section 52; or
(b)that, although he had such an expectation at the time, he did not expect the dealing to result in a profit
attributable to the fact that the information was price-sensitive information in relation to the securities.

Application: Amy has not dealt in the price-affected security herself, but has encouraged another to do so.
As such she is in violation of s. 52 (2)(a). The information must be specific and precise. This might be hard to
prove given the facts of this problem. Evidence has to be proved to the criminal standard of beyond
reasonable doubt. The civil penalties regime of the Financial Services and Markets Act 2000 (s.118(4)) might
also be used and would be easier to prove as the standard of evidence is on the balance of probabilities.
These cases are brought by the FCA.

Conclusion: Amy will be guilty under s. 52 if the burden of proof can be met.

Issue: Has Amy contravened the Market Abuse Regulation (MAR)? Market Abuse Regulation (Reg (EU) No
596/20) Article 7-10 & 14.

Rule: Civil law is now found in the Market Abuse Regulation (Reg (EU) No 596/2014 which is directly
applicable in UK law without needing to be enacted into law. The law relates to shares traded on regulated
market (listed public companies) and applies to individuals and companies. Note MAR was incorporated into
UK law post-Brexit by the EU (Withdrawal) Act 2018.
The Financial Conduct Authority is given powers under MAR to impose civil sanctions for market abuse,
including insider dealing-prohibition arises where the person ought to know that it is inside information –
this could be discussed in the tutorial. Definition is in art 7. Civil fines might be levied, among other possible
sanctions. Can be challenged by the person alleged to have breached the law in the Upper Tribunal.

Application: Amy may be guilty of insider dealing under the market abuse regimen.

Issue: Is Amy’s boss guilty of any financial crimes (Insider dealing –CJA 1993 s. 52

Rule: As above

Application: Amy’s boss has dealt in price-affected securities with inside information. He might be able to
defend that he would have purchased the securities anyway. The civil penalties regime of Market Abuse
Regulation (Reg (EU) No 596/20) Article 7-10 & 14 – see above.

Conclusion: Amy’s boss is likely guilty of insider dealing under s. 52, and might be liable to civil penalties
under MAR. The Financial Conduct Authority could prohibit the firm from trading.

Issue: Has the firm of stockbrokers contravened any laws?

Rule: CJA 1993 does not apply because that only applies to individuals.
MAR may apply in relating to the insider dealing – see above – and large financial penalties might be applied
by FCA, or they might impose a prohibition on trading in listed securities.

Issue: Has Jim committed any offences?

Rule: See above – possibly, depending on evidence – CJA 1993 and MAR could both be relevant..

Application:

Employees would normally be subject to confidentiality provisions in his contract of employment, which he
has clearly breached.

Jim may have breached the prohibition against disclosing information in the CJA 1993, s. 52, but he could
avail; himself of the defence in s. 53 that he was not aware that his disclosure would lead to any insider
dealing.

Conclusion: Jim has probably not committed insider dealing under CJA 1993, unless the evidence shows he
gave a tip, based on precise inside information, but could be subject to penalty under his employment
contract.

Issue (b): Is Mark guilty of any offences?

Rule: Financial Services Act 2012, s. 89 (misleading statements) s. 90 (misleading impressions)

Application:

This conduct is a form of market abuse, and may also be a kind of fraud. Potentially Mark might face
criminal penalties under s.89 and 90 FSA 2012 (see above). Alternatively, he might face civil penalties for
market abuse under the Market Abuse Regulation (Reg (EU) No 596/20) which
Article 14 prohibits insider dealing or encouraging insider dealing or making unauthorised disclosure of
inside information – information must be precise, not made public and likely to affect price. Article 15
prohibits market manipulation – likely to give false signals as to supply or demand or price of securities –
unless proved to be for ‘legitimate reasons’ related to market practice. There are limited exceptions.

Mark has misrepresented company Z’s fortunes which is both making misleading statements, as well as
giving false signals as to the health of the company which could make hi liable under the FSA 2012 and the
Market Abuse Regulation (Reg (EU) No 596/20).

Conclusion: Mark may be in breach of the FSA 2012, and the Market Abuse Regulation (Reg (EU) No
596/20).

2. XYZ & Co, a firm of stockbrokers, has a new client, Daniel, who has walked in off the street, and wants
to invest £500,000 in shares in Jack-in-a-Box plc, a listed company. Daniel gives the stockbrokers a false
name and address, produces the money in bundles of used £50 notes, and asks for the shares to be bought
immediately in the name of Globeco Ltd, a company registered in the Cayman Islands.

Advise XYZ & Co in terms of relevant law what they have to do before deciding whether they can act for
Daniel, and on the potential legal consequences if they proceed immediately to process this transaction.

Issue: Has XYZ & Co. breached any rules relating to money laundering?

Rule: Proceeds of Crime Act 2002, s. 327-334

Market Abuse Regulation (Reg (EU) No 596/20). Article 16 (reporting requirements)

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer)
Regulations 2017, incorporates Directive on the prevention of the use of the financial system for the
purposes of money laundering or terrorist financing, Directive (EU) 2015/849 into UK law.

Application:

XYZ & Co is in the regulated sector and needs to take care that they do not breach various rules which
control money-laundering, and that they do not lose their licence from the Financial Conduct Authority in
the process. Under s.330 of the Proceeds of Crime Act 2002, if the staff of XYZ & Co are suspicious that this
money may be criminal in origin, they must pass on their suspicions to the regulatory authorities, at the risk
of themselves committing a criminal offence if they do not do so. The National Crime Agency is the main
agency that investigates money-laundering since 2013.

XYZ & Co also have obligations under the Money Laundering Terrorist Financing and Transfer of Funds
(Information on the Payer) Regulations 2017. This includes

 Risk assessment and training of relevant employees (Reg.16-25)

Regulation 86 also provides for criminal penalties:

 on summary conviction, to a fine not exceeding the statutory maximum;

Defences include that the person took all reasonable steps and exercised all due diligence to avoid the
breach.

In this case the desire to pay in cash, using a company name registered in the Caymans should be a huge red
flag. It will be required that the person’s identity is confirmed, and the origin of the money needs to be
enquired after. This is a transaction that should be subject to enhanced customer due diligence under rule
33.

Conclusion: XYZ & Co may face the following sanctions: criminal penalties with defences including due
diligence defence, and civil penalties with defences, including due diligence defence, and loss of licence from
FCA.