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Insider dealing



1. The Court of Appeal have issued core sentencing guidelines for insider dealing cases and commented upon the policy for the appropriate forum for cases of insider dealing being heard within the criminal courts rather than before regulatory tribunals.

2. The Appellant was a solicitor and former General Counsel of a telecommunications company. In the course of his employment, he had become party to inside information about a proposed takeover and passed the information to his father-in-law through whom he procured the purchase of a number of shares on the 30th May 2006. On the 1st June 2006, the takeover was made public and the Appellant sold the shares realising a profit of £48,919.00 and split the proceeds between himself and his father-in-law. This resulted in a substantial profit for himself and his father-in-law as a consequence of the breach of trust placed on him by his employer. Their Lordships stressed that such conduct did not merely contravene regulatory provisions and if there was ever an impression that insider dealing was merely a matter to be covered by regulatory proceedings rather than criminal law, that impression should be rapidly dissipated. The Court was clear that when insider dealing was committed deliberately, it was a species of fraud. In such cases prosecution in open and public court would often and perhaps much more so now than in the past, be the appropriate approach.
3. The Appellant submitted that his sentence should be reduced because his case happened to be under consideration by the Financial Services Authority when it decided to change policy in relation to whether to proceed by way of prosecution rather than as had previously been the case by regulatory proceedings. Although the Appellant was the first, others who had been dealt with by regulatory proceedings beforehand were no less culpable and could consider themselves fortunate. But the court stressed that such good fortune could not translate to the benefit of the Appellant as a matter of principle. It was not appropriate to suggest that the FSA’s former policy misled the Appellant into thinking that insider dealing had ceased to be a criminal offence or that he may have had a reasonable expectation that these matters should have been dealt with otherwise than through criminal courts.

Sentencing Guidelines
4. Their Lordships chose to offer some general sentencing guidelines about the considerations relevant in such cases, noting first that the maximum prison sentence on conviction for this offence was 7 years. The guideline features to be taken into consideration suggested by the courts were as follows:

(1) The nature of the defendant’s employment or retainer or involvement in the arrangements which enabled him to participate in the insider dealing of which he was guilty;

(2) The circumstances in which he came into possession of the confidential information and the use he made of it;

(3) Whether he behaved recklessly or acted deliberately and almost inevitably therefore dishonestly for the level of planning and sophistication involved in his activity as well as the period of trading and the number of individual trades;

(4) Whether he acted alone or with others and if so, his relative culpability;

(5) The amount of anticipated or intended financial benefit or loss avoided as well as the actual benefit or loss avoided;

(6) The absence of any identified victim was not normally a matter giving rise to mitigation;

(7) The impact of the offence on overall public confidence in the integrity of the market; because of its impact on public confidence, it was likely that an offence committed jointly by more than one person trusted with confidential information, would be more damaging to public confidence than an offence committed in isolation by one person acting on his own.

5. Age and guilty plea would always be relevant in mitigation, as would good character. However, it must be borne in mind that it would be often be the case that it was the individual of good character who had been trusted with information just because he or she was an individual of good character. By misusing the information, the trust reposed as a result of the good character had been breached.

6. In assessing sentence full weight must be given to the impact of the Appellant and his family, as well as the destruction of his professional reputation.

7. The Court of Appeal’s remarks in this case will inevitably spur the FSA to consider criminal proceedings more frequently in cases of clear insider dealing rather than adopting the regulatory proceedings under the Financial Services and Markets Act 2000. Budgets for this purpose have recently been increased for the purposes of conducting criminal proceedings and expanding the FSA’s use of external resources for that purpose. Enforcement will still form an important part of the FSA’s function going forward in the implementation of the Turner Review and the supporting FSA discussion paper. There is likely to be an increase of focus not only on the firms but those individuals occupying significant influence functions and senior management functions within those firms for the purposes of enforcement action and if necessary criminal proceedings.
Andrew Carnes


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