The Cost of Failing to Identify Insider Trading

The UK Financial Services Authority (FSA) issued a fine yesterday to a former stock broker for £20,000 for failing to observe proper standards of market conduct. Mark Lockwood, a former trading desk manager at Hoodless Brennan failed to identify and act on a suspicious client order that allowed the firm to be used to facilitate insider dealing.

The fine related to a transaction of shares in the oil and gas exploration company, Amerisur Plc (formerly known as Chaco Resources Plc). The client had been told by Blue Oar Securities Plc that Amerisur would offer new shares the next day at a substantial discount to the trading price. The client then acted on this non-public information although he told Mark Lockwood that he had received a phone call from Amerisur’s brokers with information and that he was ‘in a bit of quandary’ to which Lockwood replied ‘best to say nothing on that one’.  The client further stated that he ‘didn’t want to break any rules’ and Lockwood replied ‘you’re not breaking any rules by that. That’s fine basically.’

Lockwood essentially knew that the client was acting on insider information having actually made a report internally that he had been ‘made party to non-public information’ regarding Amerisur’s share placing the next day by another client call earlier that morning. Lockwood failed to submit a Suspicious Transaction Report (STR) and the trade only came to light following an STR from another broker.

Margaret Cole of the FSA enforcement division said:

“This fine emphasises the importance of the STR regime. Tackling market abuse and insider dealing is not just an issue for the regulator. Broking firms are the front line of defence against people who seek to misuse and profit from their possession of privileged information. STRs are a key tool for the FSA in detecting market abuse.”

The investors involved in this case, Stewart McKegg and Brian Valentine Taylor were fined in December 2008.  The FSA are taking a hard line on insider trading and in March 2009 the FSA succeeded in sending the first person to jail in another case. To some extent Lockwood was fortunate that the FSA took into consideration that he was starting up his own brokerage firm (City Capital Markets Ltd) and had clearly learnt from his mistakes.  He had also fully co-operated with the FSA through the course of the investigation and did not make any profit personally from the trades.

These cases highlight the importance of on-going training and continuous professional development for all ‘approved persons’.

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