FSMA: MARKET ABUSE - restrictions on share dealing by an auditor - expert evidence - misuse of information - qualifying investments - information not generally available to those using the market - "based on" - relevant information - failure to observe reasonably expected standard of behaviour - penalty
THE: FINANCIAL SERVICES AND MARKETS TRIBUNAL
Tribunal: WILLIAM BLAIR QC (Chairman)
Sitting in London on 7, 8 and 9 March 2005
Applicant in person
Andrew George, instructed by the Respondent, for the Respondent
© CROWN COPYRIGHT 2005
The Tribunal's approach
The evidence before the Tribunal
"Can I re-enforce that nobody at the Electrical division is aware of Project Spark (the proposed disposal of the division) except for Mike Galley [the Managing Director of the electrical division]. It must not be discussed with company officials in any circumstances."
The e-mail was copied to MrHarrold, a Midlands-based PwC partner in charge of managing the audit of the UK-based entities in Delta's electrical division, Mr Watson leaving it to the two of them how they would coordinate the work.
Responsibility for the audit work
What the Applicant knew about the ongoing sale
"Gents, I have just had a chat with John Priggen from PwC London. I have asked him to communicate to the team in Birmingham (Arif is in the loop already but no one else) that the interim audit work that usually takes place in October/N ovember should be cancelled in light of Project Spark. John, you also please communicate to your team covering L VR as well."
"The sales pitch for your teams should be that I have a problem with interim work being done before December as I want the end of November balances looked at to lessen the extent of the post year end work in the [first quarter of] 2003. As I am new to this business, this the first time that this approach is being adopted etc etc."
This "cover story", as Mr George for the FSA described it, shows that the sale was proceeding under conditions of secrecy, since it was intended to provide an explanation to Delta staff why the usual audit work at this time of year was not taking place.
"Local management are not aware, except John Howard .... We've been advised to tell local management that the Group FC [ie Mark Luton] would prefer us to look at November ytd numbers and therefore would rather we went in December. You should therefore try and book some staff for Mid-December for planning etc in case sale does not go ahead and we need to complete an audit in January 2003."
The Applicant's dealing in the Delta shares
Applicable restrictions on share dealing by an auditor
" ... practice staff, including audit managers, should not purchase interests, including shares, in any entity on PwC's worldwide restricted entity list. In addition PwC staff may not keep such interests if they already hold them on joining or if they held them before the entity joined the restricted list. There are dispensations available for investments held prior to working for the firm or acquired involuntarily, for example, through marriage or inheritance. However; a dispensation is conditional on the person not working on the audit client concerned. New securities holdings and complete disposals of securities holdings must be reported within fourteen days. These restrictions also apply to employees' spouses or equivalents and their dependents. "
"The restricted entities list, also known as the independence list, is updated on an ongoing basis and available electronically to PwC member firms on a global basis. The independence list does not include all clients of PwC, but rather those entities with publicly available securities from whom independence (in accordance with PwC's policy) is required. These will largely comprise audit clients of PwC member firms including the UK firm and affiliates of those clients or other related entities where independence is required."
The Applicant's failure to comply with these restrictions
Market abuse: the statutory test
(1) For the purposes of this Act, market abuse is behaviour (whether by one person alone or by two or more persons jointly or in concert)
(a) which occurs in relation to qualifying investments traded on a market to which this section applies;
(b) which satisfies anyone or more of the conditions set out in subsection 2; and
(c) which is likely to be regarded by a regular user of that market who is aware of the behaviour as a failure on the part of the person or persons concerned to observe the standard of behaviour reasonably expected of a person in his or their position in relation to the market.
(2) The conditions are that-
(a) the behaviour is based on information which is not generally available to those using the market but which, if available to a regular user of the market, would or would be likely to be regarded by him as relevant when deciding the terms on which transactions in investments of the kind in question should be effected;
The market abuse allegation
The expert evidence
The elements of the market abuse allegation
(1) Qualifying investments
(2) Information not generally available to those using the market
(4) Relevant information
Code as follows:
"Whether, in a particular case, a particular piece of information would, or would be likely to, be regarded as relevant information by the regular user will depend on the circumstances of the case. In making such a determination, the regular user is likely to consider the extent to which:
(1) the information is specific and precise;
(2) the information is material;
(3) the information is current;
(4) the information is reliable, including how near the person providing the information is, or appears to be, to the original source of that information and the reliability of that source;
(5) there is other material information which is already generally available to inform users of the market; and
(6) the information differs from information which is generally available and can therefore be said to be new or fresh information."
(5) Failure to observe reasonably expected standard of behaviour
Conclusion as to market abuse
WILLIAM BLAIR QC
Date: 29 March 2005