The Financial Services Authority (FSA) has today censured Darren Morton, a director and Christopher Parry, a vice president at Dresdner Kleinwort (now part of Commerzbank) for committing market abuse in relation to a new issue of Barclays’ bonds.
Morton and Parry were portfolio managers with Dresdner’s Structured Investment Vehicle, K2 which had $65 million of a Barclays’ floating rate note issue (FRNs) – bonds with a variable coupon – in its portfolio.
At 10:02 on 15 March 2007, Morton was given inside information about a potential new issue of Barclays FRNs, on more favourable terms than the previous issue, which he shared with Parry. Acting on this inside information, Morton and Parry then agreed to sell K2’s entire holding of the previous issue to two separate counterparties.
Both counterparties to the trades were unaware of the proposed new issue of FRNs. At 15.16 on that day, a new issue of FRNs was announced and the counterparties made mark to market losses of $66,000 and independently complained to K2 about the circumstances of the trades.
Morton and Parry committed market abuse because they sold the FRNs
based on inside information about the new issue. The FSA found that Morton and
Parry believed they were acting in accordance with market practice when selling
the FRNs. The FSA does not accept that such a belief is reasonable.
Margaret Cole, FSA director of enforcement said:
“Insider dealing is cheating, whatever market it is in. It was argued that practices in the debt market meant it was always acceptable to trade after being “sounded out” on a new issue. This is not the case. Market participants must always be alert to the possibility that inside information is being passed, and where it is they must not trade.
“Morton and Parry's abuse of the privileged information they had directly resulted in K2's counterparties recognising losses.
“Our action reflects the fact that some market participants may, in the past, not have paid sufficient attention to their obligations in this area. Future offenders will be likely to face significantly more severe sanctions. We will be following up this case with future work with the industry to ensure that firms, and their staff, are fully aware of their obligations.”
In determining the right action to take, the FSA took into account that Morton and Parry did not make a personal profit from the trades.