Director Darren Morton and vice president Christopher Parry acted on inside information as portfolio managers with Dresdner’s Structured Investment Vehicle, K2.
The vehicle had $65m of a Barclays’ floating rate note issue – bonds with a variable coupon – in its portfolio.
On March 15, 2007, the FSA says Morton was given inside information about a potential new issue of Barclays FRNs, on more favourable terms than the previous issue, which he shared with Parry.
Acting on this inside information, Morton and Parry then agreed to sell K2’s entire holding of the previous issue to two separate counterparties.
Both counterparties to the trades were unaware of the proposed new issue of FRNs.
Later that day, a new issue of FRNs was announced and the counterparties made mark to market losses of $66,000 and independently complained to K2 about the circumstances of the trades.
Morton and Parry committed market abuse because they sold the FRNs based on inside information about the new issue.
The FSA found that Morton and Parry believed they were acting in accordance with market practice when selling the FRNs. The FSA does not accept that such a belief is reasonable.
FSA director of enforcement Margaret Cole says: “Insider dealing is cheating, whatever market it is in.
“It was argued that practices in the debt market meant it was always acceptable to trade after being “sounded out” on a new issue.
“This is not the case. Market participants must always be alert to the possibility that inside information is being passed, and where it is they must not trade.
“Morton and Parry’s abuse of the privileged information they had directly resulted in K2’s counterparties recognising losses.”
Cole says the FSA’s action reflects the fact that some market participants may, in the past, not have paid sufficient attention to their obligations in this area.
She warns that future offenders will be likely to face significantly more severe sanctions.
The FSA also took into account the fact Morton and Parry did not make a personal profit from the trades.
CMS Cameron McKenna partner Simon Morris says: “FSA was less sure of its ground than usual, as is reflected by a mere censure and not the normal fine or prohibition. Firms and individuals should always scrutinise FSA’s market abuse allegations, calling in market evidence to rein in its wilder claims. While resulting in a censure, the outcome in this case vindicates the two individuals’ refusal to roll over and accept all of FSA’s allegations.”