U.K. Defends Conviction Rate After $20 Million Insider-Trading Case

Biggest U.K. Insider Trading Case Wraps Up
  • Two defendants convicted, three acquitted Monday after trial
  • Case was regulator's largest-ever over insider trading

The U.K. markets regulator says its most expensive insider-dealing prosecution paid off -- even if three of the targets walked.

The Financial Conduct Authority spent almost 14 million pounds ($20 million) on the four-month trial and eight-year investigation, which led to the conviction of two men Monday by a London jury. That gave the FCA five convictions out of 8 men prosecuted in the case.

The verdicts will help burnish the regulator’s record in fighting insider trading, behavior the agency only began prosecuting a decade ago. The probe involved bankers at some of the world’s most prestigious firms, and sent shockwaves through the industry when seven men were arrested in a series of dawn raids in 2010.

"Five out of eight convictions is a good result,” said Guy Wilkes, an attorney at Mayer Brown who worked at the FCA until this year. “The mixed verdict demonstrates the difficulty of bringing prosecutions in this area. The FCA can’t let acquittals put them off pursuing these cases or it would be open season for insider traders."

Former Deutsche Bank AG managing director Martyn Dodgson and accountant Andrew Hind were convicted by the panel, which acquitted three other defendants: Andrew "Grant" Harrison, a former broker at Panmure Gordon & Co., and day traders Benjamin Anderson and Iraj Parvizi.

Operation Tabernula

The result in the investigation dubbed Operation Tabernula adds to the convictions of three other men -- former Moore Capital Management LLC trader Julian Rifat, ex-Novum Securities Ltd. stockbroker Graeme Shelley, and Paul Milsom, a former Legal & General Group Plc equities trader -- who pleaded guilty in offshoots of the probe.

Nearly a third of the probe’s total cost -- 4.5 million pounds -- paid for non-permanent staff to review and analyze evidence, while 2.25 million pounds was spent on outside counsel, according to a freedom-of-information request by Bloomberg. A core staff of between 10 and 12 were on the investigation full-time, growing to as many as 40 when needed. The FCA recoups costs for its investigations from fines levied against the industry.

"The burden of proof is very high and so that means the chances of not getting the outcome that the evidence suggests is commensurably high," FCA Head of Enforcement Mark Steward said in an interview with Bloomberg last month. "I don’t think we should feel that we haven’t done our job properly or effectively simply because the jury decide to acquit" some of the defendants.

Small Start

The FCA’s predecessor secured its first conviction for insider dealing in 2009, and has since racked up 30 successful prosecutions. After starting small with a solicitor and a dentist, the agency quickly progressed, with Malcolm Calvert, a former partner at JPMorgan Chase & Co.’s Cazenove unit, becoming the first conviction of a finance worker for the behavior in 2010. While the maximum sentence for insider dealing is seven years, the longest prison term in an FCA case is four years handed to a self-employed London trader in 2013.

Dodgson and Hind are scheduled to be sentenced on Thursday.

U.S. Attempts

The FCA’s success comes as its peers across the Atlantic stumbled in its insider-trading prosecutions in recent years, after a New York federal appeals court narrowed the definition of the offense. In a 2014 ruling, the court said a trader must know their tipster received a benefit for leaking the information.

The decision upended the convictions of 14 individuals. The U.S. Supreme Court will consider a California case that could resolve what sort of benefit a defendant must receive to make insider trading a crime.

The FCA has largely been viewed by the legal industry as a more competent body than  the U.K. Serious Fraud Office, which has been plagued by criticism over the years after a number of high-profile failures and losses. While its prosecuting powers are much narrower than the SFO, limited mainly to market abuse, the FCA has won far more cases than it’s lost.

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