Two Dresdner Kleinwort bond traders were publicly censured for market abuse by the Financial Services Authority on Wednesday, in a case that could lead to more challenges to the watchdog’s decisions.
In a statement, the FSA said Darren Morton, a director and Christopher Parry, a vice-president at Dresdner Kleinwort (now part of Commerzbank) committed market abuse in relation to a new issue of Barclays’ bonds.
Mr Morton and Mr Parry were portfolio managers with K2, a Dresdner structured investment vehicle that had $65m of Barclays floating rate note bonds in its portfolio.
According to the FSA, at 10.02 on March 15 2007, Mr 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 Mr Parry. The pair 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, which was announced later that day. The counterparties made mark to market losses of $66,000 and independently complained to K2.
Margaret Cole, the FSA’s director of enforcement said: “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.
“Mr Morton and Mr Parry’s abuse of the privileged information they had directly resulted in K2’s counterparties recognising losses.”
The FSA said it had taken into account that the two men did not make a personal profit from the trades.
The pair escaped both a fine and ban from the finance industry after taking the relatively unusual step of fighting the market abuse case against them at a committee that oversees FSA decisions, people familiar with the matter said.
The action – which relates to the way the pair handled sensitive information around a debt deal – is likely to be studied closely by the growing number of finance industry workers facing scrutiny as the watchdog steps up its enforcement work.
The two men have suffered only a light sanction after adopting the relatively rare strategy of contesting the case at the FSA’s Regulatory Decisions Committee, according to people with knowledge of the matter.
Many individuals – including some who maintain their innocence – choose to settle for an agreed fine to conclude market abuse investigations, which can be punished by industry bans or criminal prosecution in the most serious cases.
The case is likely to interest finance industry managers and their lawyers faced with the question of whether it is better to settle with the FSA or take their chances before the committee, at a time when the watchdog is expanding its enforcement activity to inspire more fear in the City.
Lawyers say that historically only a small proportion of individuals under investigation have chosen to go before the tribunal, which has an FSA-appointed chairman but is otherwise staffed by lawyers, accountants and finance industry figures.
The bond trader investigation relates to suspicions that the two men improperly used market-sensitive information to make a sale in May 2007, according to people familiar with the situation.
The suspected conduct – which is less serious than in cases of insider share dealing that the watchdog has criminally prosecuted – predates the takeover of Dresdner in August last year by Commerzbank.
The FSA is not taking any action against Commerzbank, people with knowledge of the matter said. Commerzbank declined to comment.