April 4, 2012 7:30 pm

City is right to crack whip on market abuse

The FSA is displaying a salutary determination to end casual sharing of insider information

My respect for the City of London’s enforcers has gone up a notch with their decision to impose a £450,000 fine on Ian Hannam, a senior banker at JPMorgan Cazenove and a pivotal figure in the commodities and mining boom that has transformed both London and the FTSE 100 index.

Mr Hannam’s friends among executives and investors in the close-knit – not to say inbred – natural resources industry say that he is a larger-than-life original whom they admire and trust. JPMorgan, which has had its own run-ins with the rainmaker who was its “global chairman” of equity capital markets, is less effusive. It does not seem too sad to see him resign.

Mr Hannam disputes the FSA’s finding against him of market abuse for leaking information about his client Heritage Oil to a Middle East businessman, and is appealing. He has a brand-new website, in the style of Rajat Gupta, the former Goldman Sachs director and head of McKinsey, the consultancy firm, who faces insider trading charges in the US and is showered with praise on the “Friends of Rajat” site.

The other day, I complained that the Financial Services Authority lacked the will to clamp down on miscreants in London by prosecuting them criminally, as the Department of Justice, with the Securities and Exchange Commission, does in the US. The Hannam case is civil – the FSA accepts he did not intend to break the law and does not question his integrity – but significant.

Even if he is cleared – and on the evidence thus far, I do not think he should be – the FSA was right. By tackling such a high-profile figure, following the £7.2m penalty imposed on David Einhorn and his Greenlight Capital in January, it is displaying a salutary determination to end the casual sharing of information among privileged City insiders.

Cracking the whip has another virtue. Along with investors such as Nat Rothschild, chief executives such as Tony Buckingham of Heritage Oil, and non-executives such as Robin Renwick, a vice-chairman of JPMorgan Cazenove (all of whom are close to him), Mr Hannam has attracted companies from Kazakhstan, Iraqi Kurdistan and other murky spots to the City.

Mr Hannam knows many go-getting adventurers from military backgrounds, who specialise in putting boots on the ground in conflict-torn regions with mineral wealth. He was a captain in the Territorial Army (part-time) Special Air Services. Mr Buckingham was in the special forces before joining Executive Outcomes, the former South African private military group.

Mr Hannam introduced companies such as Kazakhmys and African Barrick Gold to London to reassure investors that listings and corporate governance rules would be obeyed even if their minerals came from oligarch-rich countries with poor records on human rights. That promise has to be kept.

Resources groups and the bankers who promote them merit close scrutiny since minerals have been linked in the past with financial scandals and market manipulation, from the nickel bubble that captivated the City in the 1960s and ended in the Poseidon crash, to the Hunt brothers’ cornering of the silver market in 1980.

The case against Mr Hannam is less spectacular, since he was not out to profit illicitly by rustling up a possible takeover or partnership for Heritage Oil. He fed his man in Kurdistan information about an oil discovery and a potential rival bid for his client’s benefit, like an estate agent dropping hints about others wanting to buy a house.

The case turns on two emails, one mentioning a potential price for a Heritage bid, and the other trailing a find: “PS – Tony has just found oil and it is looking good.” They sound like the authentic voice of the City broker luring an investor with titbits of juicy, yet vague, gossip.

It is arguable whether the emails leaked specific enough inside information for the unnamed man in Kurdistan to have profited illegally (in practice, there is no evidence that he traded on it). I agree with the FSA’s panel that they did; Mr Hannam contests it and is taking his case to an appeals tribunal.

More broadly, however, there is little doubt Mr Hannam was at fault (he himself cites work pressure for any error of judgment) and that the FSA was correct to throw the rule book at him. The City is plagued by movements in share prices ahead of disclosure of deals – it affected 30 per cent of announcements between 2006 and 2009 – and this information leaks from somewhere.

A lot of it probably starts out with bankers and brokers who brief institutional investors or potential bidders, having persuaded them to “cross the wall” – to agree not to trade in relevant securities until the formal announcement. Yet such price-sensitive information has a habit of getting about.

So it is only logical for the FSA to hold the people who are routinely entrusted with such information, and pass it to others as part of their jobs, to high standards. Mr Hannam, one of the City’s best-known bankers, is a prime example. The FSA purge on the abuses of “wall-crossing” appears to be working, since the number of suspicious pre-announcement price movements has fallen.

Some London professionals are upset and complain that regulators do not grasp how investors get to hear about capital-raisings or how bidders are lured to auctions. It would be a less agreeable and productive place, they say, if people could not talk to each other and swap stories without lawyers being present.

Mr Hannam is Exhibit A: a loud, colourful, ex-military type known for walking around talking loudly on his mobile phone to a loyal and devoted group of clients and investors. The City of London, however, could do with a little less colour and rather more black and white.

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