The recent dissolving of the appeals tribunal in the case of Paul “The Plumber” Davidson is probably the most bizarre and colourful story to shed light on the workings of the FSA since its inception.
Davidson's solicitors, Saunders & Co (represented in court by Bitu Bhalla, QC) reckon it is more than bizarre and colourful. They believe they have shown that there is something fundamentally wrong with the way the FSA has been set up.
The FSA, while accepting that something “inappropriate” happened, believes the lawyers are going way too far. Are they?
Here is a sketch of the story. Davidson is a self-made millionaire who acquired his nickname after he got rich by inventing and marketing a revolutionary radiator valve useful to plumbers because it allows them to seal off an individual central heating panel without draining the whole system.
A few years ago, he was looking to float on Aim a company he founded called Cyprotex. As we all know, it is not always easy to ensure that flotations come off. There is not always sufficient demand for the shares.
The Plumber staked millions of pounds on the shares rising, but not by buying shares. Instead, he placed a spread bet with a firm called City Index.
Now, no bookie wants to carry that level of risk by itself. So City Index looked to pass on the risk of losing the spread bet to a merchant bank.
The merchant bank that ended up with the risk, DKWS, could have taken on the risk itself but, as is common in these matters, it instead looked to hedge.
To minimise its liability, if the Cyprotex shares did rise as Davidson was betting, the best method was to buy Cyprotex shares. Result – plenty of demand for Cyprotex shares and the flotation went swimmingly.
The FSA suspected Davidson of market abuse. Its staff spent months collecting evidence and presented it to the regulatory decisions comm-ittee, the very powerful body at the top of the FSA which approves or disallows fines.
Because this was a civil matter, the RDC only needed to find that Davidson had manipulated the market “on the balance of probabilities”.
They did so in March and Davidson copped the biggest fine the FSA has ever meted out to an individual – £750,000. He appealed.
Readers are probably familiar with the next part from newspaper articles. Late at night, at 12.30am on June 16, Christopher Fitzgerald, who as chairman of the RDC has app-roved most if not all the fines meted out since 2001, met his old friend Terence Mowschenson, QC, outside Fitzgerald's home in Notting Hill in West London Mowschenson was one of two legal members of the four-person tribunal that judges appeals against FSA fines. To those who believed the FSA was being given too much arbitrary power, the tribunal was a crucial check and balance. It was given quasi-legal status, the idea being that it would prevent vexatious litigants choking up the courts with unwarranted appeals against FSA decisions. Its own decisions can be taken to the Appeal Court.
Now if an Appeal Court judge met a High Court judge whose ruling he was being asked to consider and discussed the case, the Bar would regard that as seriously damaging to the integrity of the legal system. If they found out about it, both parties would be in serious trouble.
Davidson's lawyers believe the two lawyers' accounts of how they met that night differ somewhat. Both say that Mow-schenson was out walking his dog. In Mowschenson's account, he spied Fitzgerald's door open and a light on in an upstairs window and then called upstairs saying: “Your front door is open.”
Fitzgerald's account says he spotted Mowschenson first. Fitzgerald apparently came down to shut his front door. Then a four to five-minute conversation took place in which Mowschenson mentioned that a lay member of the tribunal on which he sat could not believe that spread betting was a market abuse.
Here the story takes an extraordinary twist. Mowschenson does not mention the meeting to his colleagues on the tribunal, later saying he thinks the incident was blown out of proportion.
The next afternoon, Fitzgerald mentions their latenight encounter to someone in the FSA's enforcement division. The next day, he resigns with immediate effect. The FSA puts out a statement saying it regards Fitzgerald's actions as inappropriate.
Davidson's lawyers fired off 37 questions to the FSA and have still not received what they regard as satisfactory answers. On Monday, June 28, they were due to seek a court order requiring the FSA to disclose records and materials linked to the encounter. They also wanted to quiz Mowschenson further on his account of their encounter. However, they never got that far. On the same day, the entire tribunal “recused itself” – in plain English, it decided it could not rule on the case. Another will be set up in its place.
Now the Plumber says he has scored an amazing victory against a regulator that has been trying for years to crush him. Both the FSA and the tribunal (for which it does not speak) reject that completely and say that, far from undermining the integrity of the regulatory system, the dissolution of the tribunal and the resignation of Fitzgerald demonstrate its integrity.
It is an interesting argument. But here we are talking about lawyers who have to observe legal proprieties and be able to refute even a hint of an accusation of bias.
But a few questions remain. How do two lawyers who have been friends for years and frequently meet get appointed in the first place to two such positions, with one of them judging appeals against the others' actions?
Is there enough distance between the FSA and the tribunal which hears appeals against its decisions?
Andrew Verity is a financial correspondent at the BBC