When the Financial Services Authority (FSA) said last week that it was
launching an investigation to catch the market manipulators behind the
spectacular bear raid on HBOS shares, the response from regulatory lawyers
was a near-unanimous and sceptical “Oh yeah?”.
The chances of the FSA identifying the shadowy figures responsible for
spreading malicious rumours about the Halifax and Bank of Scotland banking
group was seen as negligible. The chances of successfully proving guilt
beyond reasonable doubt was seen as little better than nil.
However, the announcement by Alistair Darling on Thursday that he was to allow
the FSA to offer immunity from prosecution to witnesses prepared to grass on
others responsible for market abuse is seen as a significant new weapon for
City regulators.
For at least 18 months, the FSA has been lobbying the Treasury for these
powers — until recently with no success. However, the threat that bear
raiders could destabilise a big financial institution such as HBOS appears
to have changed minds in Whitehall.
The Chancellor said: “I can't allow us to get into a situation where people
quite deliberately manipulate markets for personal gain and with the
potential to destabilise the financial system. We have a duty to ensure we
have clean and efficient markets.”
Under the Treasury proposals, the FSA will be given “specified prosecutor
status”, which will allow it in certain circumstances to offer US-style
immunity from prosecution to key witnesses. The Serious Fraud Office (SFO)
and HM Revenue & Customs (HMRC) already have these powers.
The FSA seized on the news enthusiastically yesterday, saying that the new
powers would be a useful tool in its work to tackle market abuse. Its
enforcement division, under Margaret Cole, a tough lawyer previously with
the American law firm White & Case, has grown frustrated over the
difficulty securing evidence sufficient to stand up in court.
In 2006 Ms Cole admitted that the FSA's success rate in convicting market
abusers was “sparse” and praised the US system as “a valuable tool” for
obtaining convictions. Offering plea-bargaining concessions needed to be
weighed carefully, but she did not share the distaste of some in Britain for
the practice.
With this week's Treasury U-turn, she has got her wish. Most regulatory
lawyers agree that it should help to win convictions. Robert Turner, a
partner in Simmons & Simmons, said: “I think this will probably help in
securing convictions against bad apples, so long as it is done responsibly.
When the FSA is investigating what it believes may be an insider-dealing
ring, these extra powers may be the difference that allows them a way in.”
Much market abuse involves more than one person. The classic insider-dealing
operation involves one person privy to price-sensitive information and an
accomplice who trades on it. So long as the two rogues insist that there has
been no communication between them, proving an offence is next to
impossible. Offering immunity to one or the other destroys the incentive
that both have to stay silent and protect each other. Indeed, the risk that
one may crack pushes both to rush to do a deal with prosecutors.
The same principal applies to the most high-level insider-dealing rings that
the FSA suspects exist in the City. It takes only one person in the ring to
cave in. The FSA is hoping that the new powers will flush out City
supergrasses or at least pose so great a risk of being caught that
insider-dealing rings disband.
Immunity from prosecution is not new in Britain. Under common law, prosecuting
authorities have been able to offer witnesses deals, but the practice has
been rare and sometimes frowned upon. It was the Serious and Organised Crime
and Police Act of 2005 that enshrined the practice in statute and made it
more widespread. The SFO has used these powers several times and is
understood to have adopted them in Operation Holbein, the investigation into
an alleged cartel that disadvantaged the NHS. []HMRC is understood to have
used the powers to win over a Canadian witness in a narcotics case.
Primary legislation is still required to add the FSA to the list of bodies
having the powers, the Treasury said.
However, the extra powers need to be handled carefully. “One drawback is that
you do a deal with rogues who walk away free,” Mr Turner said. “Another risk
is that the FSA does the deal with a principal culprit looking to lay the
blame elsewhere, leaving the FSA prosecuting lesser culprits — so it's a
power that will have to be used responsibly.”
Roger Best, of the law firm Clifford Chance, said that the FSA would have to
be seen to act fairly. Other prosecutors, such as the Crown Prosecution
Service, reserved immunity deals for exceptional cases with a strong public
interest factor. Moreover, the reliability of a witness on a promise of
immunity might not be of the highest quality, Mr Best said.
However, with latest figures suggesting that insider dealing takes place
before a third of bid announcements and with the HBOS saga putting abuse
back on to the front pages, the FSA will be grateful for any break it gets
in the difficult business of nailing clever, deep-pocketed, white-collar
rogues.
Breaking cover
Sherron Watkins is the Enron whistleblower. In 2001 she sent an
anonymous memo to her boss, which said: “I am incredibly nervous that we
will implode in a wave of accounting scandals.” She joined in 1993 and
reached vice-president level, although she was never a part of the inner
circle that ran the group. In July 2001 she became nervous of the accounting
methods it practised. She testified before Congress and was one of Time
magazine's three People of the Year in 2002.
David Donnelly worked in Severn Trent's finance department. In 2004 he
contacted a newspaper with concerns about a cover-up at the water company,
which was completing a five-year review of its finances with Ofwat, the
regulator. By mis-stating figures, Severn could charge customers more. The
company, which has changed its management team, now faces a criminal
prosecution and multimillion-pound fines. Mr Donnelly, 52, retired early
with a lump sum in recognition of Severn Trent's mishandling of his original
complaint.
Basil Brookes, finance director of Maxwell Communications Corporation
(MCC), was one of the first to blow the whistle on Robert Maxwell's
chicanery. He tried to quit in July 1991, but was persuaded to stay despite
his concerns at the cash that Maxwell was demanding from MCC. He was one of
the directors who forced Maxwell to return part of the £240 million that
vanished from MCC's treasury. Terrified at the implications of Maxwell's
actions, he resigned on October 31, 1991, and worried for years that his
career had been damaged by his links with the newspaper magnate. He became
finance director of Wilmington Publishing, a business magazine group bought
by Brian Gilbert, another former Maxwell executive.
David Radler was the right-hand man to Lord Black of Crossharbour, the
fallen press baron. He negotiated a plea bargain for testifying against his
former friend and boss. Radler, 65, received a more lenient sentence of 29
months and a $250,000 fine in exchange for testifying against Black and
three other executives in a four-month trial last year involving deals made
by the former Hollinger empire. Black and his lawyers fiercely attacked
Radler for choosing to testify and accused him of lying about Black's role
to secure his deal with prosecutors. Black dismissed his testimony, saying
outside of court: “I don't think any jury in the world would convict anybody
on the basis of what he said. This was never a criminal case, except
possibly against him.”
Mike Newell, ex-manager of Luton Town football club and a former
Everton forward, kicked off a fresh investigation into bungs in football in
January 2006 when he said that agents had offered him cuts of transfer
deals. Days later he was summoned to the FA's Soho Square HQ, where he
alleged that a bung culture was pervasive in the game. His remarks prompted
a Panorama investigation and kicked off the Stevens inquiry, which resulted
last November in the FA laying 55 charges against eight agents, four past
and present directors and Luton. Newell was sacked by his club for gross
misconduct and has not worked since.
Dr Jeffrey Wigand exposed the activities of the tobacco business in
1995. He had worked in research and development at Brown & Williamson,
the American cigarette maker owned by BAT. On the 60 Minutes television show
he revealed how tobacco companies had tried to minimise the harmful impact
of smoking when marketing their products. His evidence helped to bring
multimillion-dollar lawsuits against the big American tobacco corporations.
He was portrayed by Russell Crowe in the 1999 film The Insider.
