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A Greenlight for FSA intervention

Thu, 24 May 2012 11:08:00 +0100

The seriousness with which the Financial Services Authority (FSA) regards market abuse can be seen from its actions in the Greenlight Capital case. The size of the fines and the number of persons affected clearly demonstrate the FSA’s commitment to take tough action where it thinks that necessary.

What happened?

At the relevant time, funds managed by Greenlight Capital Inc., a US investment manager owned by David Einhorn (E), held 13.3% of the issued share capital of Punch Taverns Plc. On 8 June 2009, Merrill Lynch, Punch’s broker, raised with Greenlight the possibility of a share issue by Punch and invited Greenlight to be wall crossed.

“Wall crossing” is a common practice under which inside information is given to a third party, such as a large institutional shareholder, in order to obtain that party’s view on a proposed transaction. If a party is wall crossed, it is restricted from trading in the shares of the company concerned until the information it has been given is made public.

E did not agree to Greenlight being wall crossed. Nonetheless, a call took place the following day between Greenlight, Punch management, and Andrew Osborne (O) from Merrill Lynch. In that call, O stated that Punch was considering an equity issue of £350 million; that there had been general support for an equity issue among Punch’s major shareholders; and that if Greenlight agreed to be wall crossed, any non-disclosure arrangement would last less than a week.

Following the call, E gave instructions to sell all the Greenlight funds’ holdings in Punch. Between 9 and 12 June 2009 Greenlight reduced the funds’ holding to 8.98%. On 15 June 2009 Punch announced a £370 million share issue and the Punch share price fell 29.9%. Greenlight’s sale of Punch shares avoided losses of approximately £5.8 million.

What action did the FSA take?

The FSA accepted that E did not deliberately commit market abuse. However, as an experienced professional, he should have realised that he was receiving inside information. Accordingly, he was fined £3 million. Greenlight was fined a similar amount. Since E owns Greenlight he was in effect being fined twice for the same offence. Both E and Greenlight were also required to disgorge the benefit that they had received from the sale of Punch shares.

The FSA fined the Greenlight compliance officer who had taken the instructions to trade £130,000, and the person at JP Morgan whom Greenlight had instructed to sell the Punch shares £65,000. Both had breached their obligations as approved persons to act with due skill, care and diligence. The Greenlight trader was also banned from acting as a compliance officer.

In addition, the FSA fined O £350,000 for improperly disclosing inside information in the call with Greenlight.

What’s the significance of this case?

Although on one level the Greenlight case is a straightforward example of insider trading, it has a number of interesting aspects:

O took legal advice before making the call, but the FSA took the view that that was not sufficient: he should have consulted them after the call also. This suggests that it would be sensible to have lawyers or compliance officers in attendance on similar calls to intervene if the call moves away from a prearranged path (as calls often can). O actually said very little during the call, but that little caused the problem for all the parties.
Greenlight and E were in the US. This shows that the FSA will not be deterred from pursuing those who it believes have committed market abuse, even if they are based overseas.

Although it was not an issue here, Greenlight raises the question of whether the invitation to be wall crossed could, of itself, convey inside information depending on the circumstances of the case. The Financial Times, for one, took the view that the very fact that the question was asked in Greenlight would have indicated to an experienced investment manager that something major was up. The statute requires inside information to be “precise”, and an invitation to be wall crossed without more would not seem to satisfy that definition. But given the increased aggression by the FSA in taking on enforcement cases, one wonders what its attitude would have been if the Greenlight call had never taken place, but E had decided to sell all the Punch shares on the basis of the information conveyed in the initial approach from Merrill Lynch.

For more information about these issues please contact Owen Watkins or your usual Lewis Silkin contact.

Do you have the energy?

Mon, 30 Jan 2012 12:26:00 Z

Energy Performance Certificates (EPCs) were introduced under The Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations 2007 (the Regulations) to help improve the energy efficiency of buildings. As with most domestic electrical goods, EPCs rate buildings “A” to “G” (with “A” being the most energy efficient and “G” being the least). The EPC is also accompanied by a report which makes recommendations to make a building more energy efficient.

The Department for Communities and Local Government (DCLG) had proposed changes to the Regulations which were meant to come into force on 1 July 2011. These have now been pushed back to come into force on 6 April 2012.

The DCLG’s proposed changes now have a further impact on non-residential buildings including:

The requirement to commission EPCs before marketing properties for sale or rent (previously applicable to residential properties) is to apply to all buildings;
The seller/landlord must ensure that a valid EPC is provided within 7 days of the start of marketing. (The regulations currently allow for 28 days). A further 21 days is permitted if, despite reasonable efforts are made, the EPC is not provided within the 7 day time limit;
EPCs can no longer be delayed until just before the parties enter into a contract for sale or rent;
All agents/sellers/landlords are to ensure that a full EPC is included in all marketing material, including sales particulars and written particulars which are produced for rented out buildings and commercial properties;
Trading standards officers are to have increased powers of enforcement to ensure that properties being marketed have an EPC in place. The powers to require production of the EPC documentation is to also cover persons acting on behalf of sellers/landlords, e.g. estate and letting agents. This means that trading standards officers will be authorised to require estate agents to produce evidence showing that an EPC has been commissioned where they are marketing a building without one.

Failure to comply with these rules will enable trading standards to issue potential fines to sellers/landlords of £200 for each tenant or purchaser that has rented/purchased the property during the period of non-compliance. It is therefore arguable as to whether the proposed fines will actually incentivise compliance with the regulations. In fact, research has shown that as at April 2011, approximately £7.2 million was provided to English and Welsh local authorities to enforce The Energy Performance of Buildings regulations but that there were less than 7,000 enquiries made by trading standards over the 3 year period. Also, it appears that no enforcement action has ever been undertaken by local trading standards.

Notwithstanding the changes referred to above, it is reported that further EPC changes in line with European Union legislation are expected this year. EU legislation requires energy ratings to be included in all ‘property adverts’ but it is likely that there will have to be consultation as to what constitutes a ‘property advert’. So watch this space for further changes to the Regulations!

Taming the cookie monster

Thu, 14 Jul 2011 17:47:00 +0100

Online service-providers are choking on their custard creams as a result of new legislation introducing a number of revisions to the UK’s Privacy and Electronic Communications Regulations.

That’s the way the cookie crumbles...

The revised Regulations, in force from 26 May 2011, make clear that in order to store a cookie on a user’s PC or mobile device marketers must obtain the informed, positive consent of their users. The use of “opt-outs” will no longer suffice.

There are some limited exceptions where use of cookies is strictly necessary to deliver a service a user has requested (e.g. shopping basket technology). However, in the majority of cases the new rules will require a complete rethink, to ensure that the use of cookies is transparent and meaningful consent obtained.

No slam-dunk for browsers

Marketers are offered some crumbs of comfort, in that browser settings can in theory be used to indicate consent. However, the soggy residue at the bottom of the tea-cup is that the Information Commissioner’s Office (ICO) deems current browser setting technology too inflexible to comply with the Directive. The Government is encouraging browser manufacturers to produce enhanced versions that can give consumers the necessary control over their personal privacy. But until such time as such new technological measures are wide-spread this is unlikely to provide a practical solution to the requirements of the Regulations.

Digestive pause

Official guidance for website operators in the months preceding implementation of the Regulations was distinctly halfbaked. In recognition of this, the ICO has announced a 12 month “lead-in” period (ending in May 2012) during which it will take no enforcement action provided that an organisation is taking proactive steps to review its existing use of cookies and to develop a compliance plan 1.

1 You can read the ICO guidance on planning for compliance here.

Supping with the devil?

Mon, 11 Jul 2011 17:39:00 +0100

The lead-up to implementation of the Bribery Act 2010 has received almost as much hype as the Royal Wedding, but as from 1 July 2011 it is now in force. The Act aims to ensure that businesses have robust anti-corruption procedures in place, as well as to combat the kind of palm-greasing that certain FIFA officials are alleged to encourage.

Bung-full of offences

The principle offences are: paying and receiving bribes, bribing foreign officials and the failure of commercial organisations to prevent bribery. Penalties include up to 10 years imprisonment for individual offenders and unlimited fines for corporate offenders.

Guilt by association

Perhaps the most significant addition to pre-existing law is the new offence (aimed specifically at commercial organisations) of failing to prevent bribery. This is committed when a “person associated” with the organisation – potentially a wide range of people such as agents, contractors and employees – is involved in bribery.

Proceed with caution

Crucially however, there is a defence available if the organisation can show that it had “adequate procedures” in place designed to prevent or deter bribery. So the onus is upon each organisation to work out what its own procedures should be given the particular risks it faces.

Inhospitable climate?

Corporate hospitality is arguably part of the life-blood of the marketing sector, but some felt it was under threat from the Act. Ministry of Justice Guidance has thankfully confirmed that reasonable and proportionate hospitality is not prohibited, provided it is for genuine business development purposes and falls within industry norms. Transparency and the maintenance of proper records of client entertainment and gifts will be crucial, with particular caution being needed around the time of pitches and reviews.

However, it looks like client lunches at the Ivy are here to stay – provided it is the norm for your industry of course...