Three years ago the FSA warned of high levels of insider dealing in the UK. After studying the movement of shares in the two days prior to takeover announcements they concluded that almost 30% of takeover deals showed some characteristics of insider dealing.
The FSA are a prosecuting authority for the criminal offence of insider dealing (as defined in the Criminal Justice Act 1993). Insider dealing is where individuals use, or encourage others to use, information about a company which is not publicly available in order to deal for their own financial advantage.
In comparison to other forms of white collar crime (e.g. fraud) insider dealing is often described as a victimless crime. This may have contributed to the lack of appetite for prosecuting insider dealing. Historically, very few prosecutions were brought in the UK. Despite taking responsibility for the crime in 2001 it was 2009 before the FSA secured its first criminal conviction.
Perhaps also contributing to the lack of appetite are the difficulties faced by those mounting such prosecutions. To bring an insider dealing prosecution under the criminal code it is not sufficient merely to prove that a subject traded, and held inside information. It is also necessary to prove the element of intent, (that they intended to trade on the inside information), and of course the case must be proved 'beyond reasonable doubt'.
Despite these obstacles the FSA has in recent years shown a clear intent to take these cases on. Since arriving as Head of Enforcement at the FSA in 2005 Margaret Cole has sought to establish its Enforcement Division as a 'credible deterrent'. Across the breadth of their remit they have become tougher, driving investigations more swiftly, concluding them early where possible (often by reaching settlement with firms under investigation) and hitting firms with larger fines. But it is by taking on criminal cases, and especially insider trading cases, that the FSA has really bared its teeth.
Between 2009 and 2011 the FSA secured 10 convictions for insider dealing offences. They have met with some disappointment along the way, with a small number of cases being lost or dropped, but this underlines the fact that they are choosing to take on some very tough cases - not just the easy-wins.
In 2010, in order to aid their fight against market abuse the FSA were granted the ability to offer statutory immunity to witnesses. This move was intended to encourage whistleblowers to come forward. It swiftly proved its importance with the conviction of Malcolm Calvert for insider dealing. The conviction relied heavily on evidence provided by his accomplice, Bertie Hatcher, to whom the FSA had granted criminal immunity (although he still received a fine).
This type of plea-bargaining is common practice in the US, and accounts in part for the large number of successful convictions achieved by the SEC. Insider dealing is a crime where direct evidence (e.g. evidence of communication between the accused parties) is especially hard to come by, with insiders careful to leave little trace behind. The FSA have deliberately sought to interview employees at a very early stage of the investigation, whilst their memories are still fresh, and before their stories can be agreed with other suspects. This tactic has helped the regulator bring early focus to its cases, but it is really with the addition of whistle-blowing evidence that convictions in criminal cases become achievable.
Margaret Cole has confirmed her desire to maintain the recent surge of convictions in the UK for insider dealing offences, and the FSA has a significant pipeline of cases which are due to come to trial over the next 12 months. Yet just as the Authority is finding its rhythm, it faces upheaval. The coalition government has enforced the closure of the FSA, with enforcement work to be picked up by the new Financial Conduct Authority (FCA).
What fresh approach to insider trading can we expect to see from the new FCA?
Early signs are that the FCA will continue with the aggressive approach now seen at the FSA. At the FSA's Financial Crime Conference in June Tracey McDermott (Acting Director, Enforcement and Financial Crime Division) stated "I am proud of the diligent work our investigators perform to assemble cases against insider traders; these cases are difficult and challenging and require dedication, focus and sheer hard work. We are committed to retaining our focus on this through into the new regulatory world".
Margaret Cole clearly wants to keep the momentum up, and has been lobbying for stiffer sentences for inside traders, asking that the maximum sentence be raised from seven to ten years. This would bring the crime in line with sentencing for fraud, and certainly send a stronger message but while only five or ten insider cases are prosecuted per year it seems unlikely that this message will be sufficient. To present a truly credible deterrent this prosecution figure may need to double or even treble. This would be too much to expect with the FSA's present number of Enforcement staff.
To take down whole rings of insiders the FCA might consider greater levels of active surveillance, perhaps seeking to infiltrate the insider rings and develop real-time intelligence. This may require yet more new skills but could allow them to get one step ahead.
It is certain that the onus for preventing this type of crime will be placed firmly at the door of the financial institutions themselves. The FCA will continue to look hard at anti-market abuse systems and controls currently in place at firms, how effectively they are implemented and how tough a stance firms take when internal suspicions are aroused.
The regulator has made significant in-roads in the battle against insider dealing and now is not the time to ease up.