England and Wales Court of Appeal (Civil Division) Decisions

“4. The applicant, was a Senior Cash Arbitrage Trader employed at the time by JP Morgan Securities Ltd. It is alleged that on 28 November 1997, with another, his immediate boss, he manipulated the FTSE 100 Index so as to ensure that JPM did not have to make a payment under a binary option. Under the option JPM were obliged to make a payment to the counter-party if both the FTSE 100 Index and the S & P 500 Index were higher at the end of the month than at the beginning. The S & P Index was significantly higher than it had been at its November opening, but by the end of November 28, the last trading day of that month, the FTSE 100 was closer to the ‘strike level’ of 4842.3; that is, the level above which payment would have to be made by JPM. At 4.10 p.m., the FTSE 100 stood at 4856.56 points, and at 4.29 p.m., 4869.856. The FTSE 100 closes at 4.30 p.m. and, during the last six seconds of trading, the Index dropped by 38.08 points to below the strike level. The binary option was ‘out of the money’ and JPM relieved of an obligation to pay approximately £475,500.

6. The reason for the sudden fall in the Index just before close of business was immediately investigated by the London Stock Exchange [LSE], which concluded that it had stemmed from substantial sales by JPM in the cash market during the last ten minutes. JPM carried out their own investigation and acknowledged that the trading activities of its Equity Derivative Group, of which Mr. Fleurose was a member, had breached the provisions of paragraph 2.10 of the Rules of the LSE, which prohibits a member firm, such as JPM, from doing an act or engaging in a course of conduct the sole intention of which was to move the index value. As a result of this breach, JPM were fined £350,000 by the LSE. The applicant was not, at the material time, a member of the LSE, and, therefore, not within the LSE’s disciplinary reach.

7. The regulatory authority, [the first respondent, the SFA] to whose jurisdiction both the applicant and his manager were subject, commenced disciplinary proceedings against each of them. The cases were heard, separately because there was, at that time, no power to conjoin them. The case against the manager was heard by a Disciplinary Tribunal over a period of 13 days between 16 March and 7 April 1999. The applicant gave evidence at that hearing, and, in due course, the Tribunal found that the two charges of misconduct had been proved, and the manager was also found no longer to be a fit and proper person to be registered by the SFA. The Tribunal concluded that the manager’s sole intention in ordering these sales to be effected by the applicant was to drive the Index down.

8. Between 12 April and 4 May 1999, the charges against the applicant, which were in similar terms to those against his manager, were tried and he was found guilty of the two charges of misconduct; but the Tribunal refused to declare that he was unfit to retain his registration; and he was suspended and ordered to make a contribution towards the SFA’s costs. The charges brought against him were in this form:

“THE SECURITIES AND FUTURES AUTHORITY LIMITED (“SFA”) pursuant to Rules 7-60 and 7-61 of SFA’s Rules, hereby institutes disciplinary proceedings against Mr. Bertrand Fleurose on the grounds that:

A. He has committed that following acts of misconduct;

(1) In breach of Principle 1 of the FSA’s Statements of Principle, Mr. Fleurose failed to observe high standards of integrity and fair dealing in his involvement in the trading activities of the Equity Derivatives Group of J P Morgan Securities Limited on 28^th November 1997.

(2) In breach of Principle 3 of the FSA’s Statement of Principle, Mr. Fleurose failed to observe high standards of market conduct in trading for J P Morgan Securities Limited on the London Stock Exchange on 28^th November 1997.

B. He has ceased to be fit and proper to be registered by SFA”

There followed 11 pages of a document headed “Summary of Facts” giving extensive details of the case and evidence relied upon.

9. The essence of the case against him was that although he acted on the orders of his manager, he knew the true purpose of what he was doing, and, under both his employment contract and the rules of the SFA it was his responsibility to refuse to carry out instructions which he knew to be unlawful and to refer the issue to the compliance officer.

“His willing co-operation in effecting transactions solely designed to depress the Index and his failure to question his orders or to make any reference to the Compliance Department constituted the misconduct alleged against him.”

10. The applicant accepted that it would have been improper for him to effect trades whose sole purpose was to manipulate the Index. His case was that he had no knowledge or suspicion that his manager was manipulating the market and thought that the deals he executed were legitimate deals to unwind a hedge in connection with the binary option. Thus, it was said, he had no knowledge or intent to act unlawfully; he was merely executing his superior’s instructions which he had no reason to believe were unlawful.

11. The Tribunal, presided over by a QC sitting with a market man and an independent person, concluded that the applicant had participated in the sales.

“in the knowledge that they were intended to depress the market below the strike level of the binary option”.

In support of their conclusions, the Tribunal relied, amongst other matters, on a statement which the applicant had made very soon after the material events during the course of the LSE investigation. If what he was alleged to have said was said, then his case that he did not know the true purpose of his deals that afternoon became less than credible. Second, they relied on events which had taken place earlier in the afternoon which, as the SFA contended, showed that the applicant knew, at an early stage, of the plan to manipulate the Index. Third, they relied upon the evidence of a witness who described how she observed the traders especially the applicant, to be happy and celebrating at the close. Her evidence was contradicted by the applicant but the Tribunal preferred hers to his and noted that the applicant had taken a close interest in the effect that the sales were having on the Index.

“If, as he says, he was simply unwinding a hedge, there would be no reason to follow these sales so closely.”

And they rejected his explanation that it was merely “natural curiosity”, as unconvincing.

“We are satisfied that, with the knowledge he had acquired earlier in the day, especially at the time of his second telephone conversation with SBC Warburg, Mr. Fleurose understood [his manager’s] objectives, which were to depress the FTSE to below the strike level of the binary option, if market conditions made this possible. Mr. Fleurose was clearly a willing participant. He made no attempt to dissuade [his manager] from pursuing this course; rather, he assisted with enthusiasms. The inevitable consequence was that we found Charges 1 and 2 proved against Mr. Fleurose.”

14. For present purposes, it is relevant to note that it was not the appellant’s case that he knew that he was being asked to do something which was wrong, and, for one reason or another, either was not in a position to refuse to do what he was told, or to seek guidance from the compliance officer. Second, it was not suggested that the applicant did not know that manipulating the market to depress it below the strike level was improper.

15. The Disciplinary Tribunal’s judgment on the charges and sentence dated 29 June and 12 July 1999 were the subject of appeal by both the applicant and the SFA. The applicant appealed his convictions on the two charges against him, and the SFA appealed the decision that the applicant was not unfit to be a registered person. The appeals were heard separately by the Disciplinary Appeal Tribunal. The applicant’s appeal was dismissed on 16 December 1999, and the SFA’s appeal was dismissed on 13 March 2000.

The SFA

16. The Financial Services Act 1986 [the 1986 Act] created a two tier system of regulation. The Securities and Investment Board Limited [SIB] was the principal body responsible for regulation of the financial services industry. It changed its name in 1997 to the Financial Services Authority [FSA]. The SIB/FSA were responsible for authorising and recognising the second tier authorities, typically, self regulating organisations [SROs] of which the SFA is one. The SROs had front line responsibility for particular sectors of the market., The SFA was created in 1991 as a result of the merger of two other SROs. It has brought into effect various rules which apply to its members by contract and which include rules covering the admission and expulsion of members and their conduct of investment business.

17. No person is allowed by law to carry on investment business in the UK without being either an ‘authorised person’ or an ‘exempted person’. A member of an SRO is an ‘authorised person’ by virtue of his membership. The SFA exercises its regulatory powers over its members by enforcing rules which conform to the statutory requirements laid down in Schedule 2 to the 1986 Act. It is a requirement of the Act that the rules:

“must be such as to secure that its members are fit and proper persons to carry on investment business;

so far as they relate to the admission and expulsion of members are fair and reasonable and provide adequate provision for appeals;

the carrying on of investment business must be such as afford an adequate level of protection for the investing public.”

18. The SRO must have adequate arrangements in place for effective monitoring and enforcement of compliance with its rules and with the Statement of Principles. That Statement was issued by the SIB on 15 March 1990 under section 47A of the 1986 Act and the Principles

“are intended to form a universal statement of the standard expected.”

These Principles were adopted by the SFA. Two of them, in particular, are relevant to this case: Principle 1 “Integrity” which provides that

“A firm should observe high standards of integrity and fair dealing.”

And Principle 3 “Market Practice” which provides that

“A firm should observe high standards of market conduct. It should also, to the extent endorsed for the purpose of this Principle, comply with any code or standard as in force from time to time and as it applies to the firm either according to its terms or by rulings made under it.”

19. Under SFA rules, the Principles apply directly to registered individuals as well as to “firms”. The applicant became bound by them by completing an Application Form for Individual Registration. The Form, which must be fully completed, asks searching questions about the applicant under the heading “Good Reputation and character”. There are various grounds for being an exempted person, including proof of experience and the holding of an appropriate diploma. At the end of the form is a declaration which reads:

“I declare that the information supplied is complete and correct and that I have read and understood SFA’s guidance and notes on fitness and propriety… I further declare and agree that in consideration for my admission to the Register(s) I shall, within the scope of my authority and duties within a member firm of SFA, commit no act or omission which places the firm in breach of any rule of SFA for the time being in force and I acknowledge and agree that I shall be fully bound by and subject to the rules of SFA for the time being in force, and as amended from time to time".

20. Thus, it can be seen that no person may lawfully carry on investment business within the UK without being a registered person; and by becoming registered for this purpose every individual is bound by the rules of the SFA, which is the regulatory authority for this sector of the financial services industry. It is a criminal offence for a person to carry on business without registration; it is a disciplinary offence for a registered person to conduct such business in breach of the rules, The manifest purpose of the regulatory regime is to protect the investing public from traders who have either evaded the regulatory system or have failed to carry on their activities in accordance with the rules designed to give this protection.

Right to a fair trial.

1. In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Judgment shall be pronounced publicly but the press and public may be excluded from all or part of the trial in the interest of morals, public order or national security in a democratic society, where the interests of juveniles or the protection of the private life of the parties so require, or to the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice.

2. Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law.

3. Everyone charged with a criminal offence has the following minimum rights:

(a) to be informed promptly, in a language which he understands and in detail of the nature and cause of the accusation against him;

(b) to have adequate time and facilities for the preparation of his defence;

(c) to defend himself in person or through legal assistance of his own choosing or, if he has not sufficient means to pay for legal assistance, to be given it free when the interests of justice so require;

(d) to examine or have examined witnesses against him and to obtain the attendance and examination of witnesses on his behalf under the same conditions as witnesses against him;

(e) to have the free assistance of an interpreter if he cannot understand or speak the language used in court.”

6. The grounds of attack on the decision of the Appeals Tribunal which were advanced before the judge and before us fell into the following categories:-

1. The hearings before the Disciplinary Tribunal and the Appeals Tribunal constituted the determination of a criminal charge against M Fleurose and what happened there infringed article 6(1),(2) and (3) and article 7

2. Those hearings constituted the determination of M Fleurose’s civil rights and infringed article 6(1) but he did not receive a fair hearing because

a. it was not permissible to use in the evidence against him answers which he had allegedly given under compulsion;

b. during the hearing before the Disciplinary Tribunal M Fleurose, since he had neither Legal Aid nor private means, represented himself whereas the SFA was represented by a number of lawyers; and

c. the charges which he had to meet were expressed with an unacceptable degree of vagueness.

DID THE HEARING BEFORE THE DISCIPLINARY TRIBUNAL CONSTITUTE THE DETERMINATION OF A CRIMINAL CHARGE?

WAS THE RIGHT TO A FAIR TRIAL INFRINGED?

1. These were not criminal proceedings. In the circumstances, neither under our old domestic law nor under any Convention law, is there any question of the evidence being inadmissible in the absence of objections. In civil proceedings the question of admissibility is one of discretion in the Tribunal of first instance.

2. The Disciplinary Tribunal was not asked by Leading Counsel on behalf of M Fleurose to exclude the relevant evidence with which M Fleurose had been served in advance. Nor was there an objection to the questioning before the Disciplinary Tribunal.

3. Mr Speaight rightly accepts that the Leading Counsel presiding over the Disciplinary Tribunal could not be expected of his own motion to exclude the evidence. Indeed it seems to us that for him to have done so would probably have given rise to a complaint of unfairness.

4. In his notice of appeal to the Appeal Tribunal M Fleurose argues that not enough of the interview had been admitted by the Disciplinary Tribunal. This bears out our comment in relation to the third point.

5. M Fleurose, appearing for himself and not averse to making allegations of unfairness, did not make the allegation that it was unfair to admit the contents of the interview.

6. M Fleurose, although under undoubted practical pressures, was under no legal compulsion to answer the questions in the LSE interview which was being conducted not by his regulator but by his firm’s regulator. Nor was he under any compulsion to answer the question in cross-examination before the Disciplinary Tribunal.

7. The allegedly compelled evidence was but a part of the total evidence against M Fleurose. It is not inconceivable that the Disciplinary Tribunal would have come to the same conclusion even had it never seen that evidence.