On 28 May 2014, the Upper Tribunal published its decision in a reference brought by Ian Hannam challenging a decision of the Financial Services Authority (now the Financial Conduct Authority, the “FCA”) to impose a penalty of £450,000 for market abuse. The Tribunal’s decision provides the most extensive analysis to date by any judicial tribunal of the market abuse provisions of the Financial Services and Markets Act 2000 (“FSMA”), including the definition of “inside information”.
One Essex Court barristers acted for both parties: Mr Hannam instructed Laurence Rabinowitz QC and Emma Jones; the FCA instructed Richard Boulton QC and Ben Strong (now QC).
The case concerned two emails sent in 2008 by Mr Hannam, Global Co-Head of UK Capital Markets at JP Morgan Cazenove at the time, while acting for Heritage Oil plc (“Heritage”). The first email related to discussions about a possible acquisition of Heritage and the second included as a post script a statement that Heritage’s Chief Executive had “just found oil and it is looking good”. Both emails were sent to the Oil Minister of the Kurdistan Regional Government. The Tribunal found that the first email was sent in an attempt to progress the concept of a proposed transaction between Heritage and the Kurdish Regional Government, and the second was sent to maintain the Minister’s interest in that transaction.
The Tribunal found that, by sending those emails, Mr Hannam disclosed inside information otherwise than in the proper course of the exercise of his employment, profession or duties. It deferred consideration of any penalty pending further submissions.
The Tribunal was chaired by Mr Justice Warren. Important conclusions reached include:
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The burden is on the FCA to prove all necessary facts. The standard of proof is the balance of probabilities, not beyond reasonable doubt.
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A statement can be inside information even if not wholly accurate provided it indicates circumstances or events which actually exist or have occurred or which may reasonably be expected (objectively) to come about or to occur.
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Where the statement indicates past circumstances or events, the FCA must prove that they exist or have occurred.
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Where the statement indicates future circumstances or events, the FCA must prove that there is a realistic prospect that they will occur, but it need not be more likely than not that they will occur.
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A statement by an insider which indicates a genuinely and reasonably held belief on the part of the insider is capable of constituting inside information even if the belief subsequently turns out to be mistaken.
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In order for the information to satisfy the requirement that it is specific enough to enable a conclusion to be drawn as to the possible effect on price, the information must indicate the direction of movement in price which would or might occur if it were made public, but an investor does not need to know with confidence that the price would move.
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There must be a real prospect of the information having a significant effect on price i.e. a more than de minimis effect.
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The exception permitting disclosure of inside information in the proper course of the exercise of a person’s employment, profession or duties is to be strictly construed.
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A person cannot rely on the exception unless the recipient is under an obligation of confidentiality and that person knows that the recipient will owe a duty of confidentiality. An unspoken understanding would not be enough, even where the disclosure is to a person of accepted integrity.
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It would only be in the most unusual of circumstances that disclosure of inside information in breach of the Takeover Code was in the proper course of a corporate finance adviser’s employment.
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If disclosure is outside the FCA’s guidance in MAR 1.4.5, it is not necessarily outside the proper course of employment, but non-compliance, at least where compliance so far as confidentiality is concerned would have been easy, is a factor to be taken into account.
The Tribunal’s decision can be found at:
http://www.tribunals.gov.uk/financeandtax/Documents/decisions/Hannam-v-FCA.pdf