The recent fine imposed by the Financial Conduct Authority (FCA) on Paul Stephany, the former fund manager at Newton Investment Management, provides valuable lessons for all those engaged in employee training on both market abuse and competition law. Find out more in this blog from Principal Consultant, Liz Hornby.
In February 2019, Stephany was fined £32,200 (10% of his 2015 salary) by the FCA for attempting to collude with other fund managers during a public share sale. In its Final Notice, the regulator stated that Stephany had “failed to observe proper standards of market conduct” and “acted without due skill, care and diligence” when communicating with other fund managers. It also found that his behavior “risked undermining the integrity of the market”.
One email was a key piece of evidence in the case. In relation to the Initial Public Offering (IPO) of ‘On the Beach’ (OTB), Stephany emailed himself, blind-copying in 14 fund managers at 11 rival firms urging them to follow his pricing approach (although none of them ultimately did so).
In the email, he used the words, “Sorry for the out the blue email but I wanted to urge those considering or in for the OTB IPO to think about moving to a 260m pre-money valuation limit. I have done that first thing this morning with my GBP17m order.” He went on to say he did not normally do “last minute brinkmanship on IPOs” but highlighted market weakness concerns and the fact that the book coverage was thin.
Stephany had conducted his own online research into permissible practice in relation to IPO pricing before sending the email, but had not consulted his Compliance Department or his line manager; only revealing his email to his line manager a day after sending it.
This was not the first time that Stephany had engaged in this type of communication. Several months before the OTB IPO, the FCA also found that Stephany had called two fund managers about Market Tech’s placing, stating that, [sic] “…I think push them for it to kind of 220 price rather than 230 plus they’re talking about.” He continued: “[I] will be submitting a chunky order at that 220 level.” He later told another fund manager he had contacted others to push the price down but “they didn’t help me out”.
This case gives rise to two key questions for all those engaged in training employees on market abuse and competition law:
- Would one of your employees have sent that email?
- How would your employees have responded?
1. Would One of Your Employees Have Sent That Email?
Interestingly, the FCA commented that Stephany “did not intend to breach, and did not foresee that his actions would result in a breach” of the rules. As a result, the financial penalty imposed on him was set at the lowest level available and he was permitted to continue to work in the financial sector. However, he subsequently lost a case against his employer for unfair dismissal.
This is the second case in recent times, where the employee fined by the FCA has claimed that they did not know that they had acted wrongly and therefore that their actions were not deliberate and the second time that this claim has been accepted by the regulator (although in neither case the individual escaped punishment).
These cases demonstrate the importance of good quality, role-specific compliance training on market abuse and competition law. In this age of personal accountability, employees cannot hide behind ignorance of the law and the rules and firms must be able to demonstrate that their training is fit for purpose in terms of both content and effectiveness.
2. How Would Your Employees Have Responded?
In their Final Notice, the FCA made the point that “the great majority of the external fund managers who received the... email did not express any concerns. Some of them clearly approved of it.”
Only two fund managers contacted by Stephany escalated their concerns about the email within their firms. Six managers emailed or attempted to call Stephany with responses ranging from caution to support.
One fund manager did react by stating that they were not participating in the IPO due to compliance concerns. Several days after the IPO, another fund manager told Stephany that they would not like to be canvassed on pricing in future. A further fund manager instructed their employees not to “disclose Newton’s investment intentions or expectations”, warning it could be “deemed to be acting in concert” if any fund managers did so.
What the Case Tells Us About Compliance Training
This case clearly highlights that many recipients of Stephany’s email were ill-equipped to respond appropriately. Either they failed to spot the ‘red flag’ or did not know how to respond. This is a concern for employees and their employers alike. Again, it demonstrates the importance of effective compliance training.