Winterflood is the largest market maker in AIM securities, but the watchdog has been successful in its legal action against the firm and two of its traders.
As a result of the firm’s crimes, the FSA decided to impose fines of £4m, on Winterflood and £200,000 and £50,000 on two of its traders.
In June 2008, the FSA found that Winterflood and its traders had played a pivotal role in an illegal share ramping scheme relating to Fundamental-E Investments, an AIM listed company. In particular, the market maker had misused rollovers and delayed rollovers thereby creating a distortion in the market for FEI shares and misleading the market for about six months in 2004.
The FSA found that the FEI share trades executed by Winterflood had a series of unusual features, which should have alerted the market maker to the clear and substantial risks of market manipulation. Rather than taking steps to ensure that the trades were genuine, the regulator discovered that Winterflood continued the highly profitable trading. Winterflood made about £900,000 from trading in FEI shares, its single most profitable stock at the time.
The share ramping scheme led to the FEI share price increasing from 4p in December 2003 to a high of 12.25p in June 2004. The London Stock Exchange suspended trading in shares in FEI on July 15 2004. Following the resumption of trading on July 23 2004, the price dropped back to 4p and has never recovered.
FSA director of enforcement Margaret Cole says: “The FSA expects market professionals to always be alert to obvious indications of wrongdoing. There were clear warning signs that should have made Winterflood think something was amiss but it failed to recognise and react to them. Instead of challenging the trades, Winterflood allowed them to go ahead and made large profits as a result.
“Winterflood’s failure to properly carry out its duties as an authorised market maker led to serious losses for investors and damaged confidence in the market. Taking this action against Winterflood shows that we are determined to tackle abusive behaviour and to deter market participants from threatening the integrity of our markets.”