Andrew Procter, Director of Enforcement at the FSA, said:
“The serious distortion in the Alternative Investment Market led to numerous investors being disadvantaged and was a direct result of the trading strategy engaged in by EBG and Mr Potts.“The FSA expects firms and individuals to ensure their business activities do not interfere with the smooth operation of the market or unfairly damage the interests of investors, and the FSA will not hesitate to take action in any instance where this occurs.
“The FSA has now taken action against all three categories of market abuse. Market users should be clear; we will not tolerate conduct that undermines the UK's reputation for maintaining clean, fair and efficient markets."
EBG's Actions
From 25 September to 21 October 2003, EBG, through Mr Potts, implemented a strategy to short sell shares in Room Service, which resulted in EBG short selling 252% of the issued share capital of Room Service. The strategy was undertaken without a reasonable settlement plan in place to ensure delivery of the shares sold, but in anticipation of Room Service issuing new shares following its AGM on 20 October 2003 thereby allowing demand to be met. The anticipated issue of shares failed to take place and Room Service shares were suspended from AIM on 22 October 2003.
EBG's short selling of Room Service shares went beyond a level where it was capable of delivering those shares, resulting in the supply side of the market being distorted and leading to EBG's failure to deliver shares to 250 investors. EBG has cooperated with the FSA throughout the investigation, and has paid out approximately £150,000 to disadvantaged investors.
This is the first occasion where the FSA has taken action against a firm or individual for distorting the market. The FSA has previously taken action in respect of misuse of confidential information and for making false and misleading statements.
Background
- The full text of the Final Notice dated 12 November 2004 is on the FSA website. This includes the background to the case, the relevant statutory provisions, the regulatory requirements contravened and the factors taken into account by the RDC when setting the level of the fine.
- Room Service is now known as Azure (Holdings) plc.
- Financial penalties are not treated as income by the FSA. They are applied for the benefit of authorised persons (or the issuers of securities admitted to the official list) as appropriate, and so given back to the industry in subsequent years.
- The market abuse regime was first introduced by the Financial Services and Markets Act and applies to conduct on or after 1 December 2001. Under the Act the FSA has power to impose financial penalties for market abuse, which is defined as one of three types of behaviour:
- Misuse of information (previous cases include Peter Bracken, James Middlemiss and Michael Davies)
- Misleading statements and impressions (Shell)
- Market distortion
- The proceedings in this case relate to the third category of behaviour – market distortion. Distortion is improper conduct which manipulates the marketplace to the detriment of investors. It can, as in this case, involve interference with the normal process of supply and demand of shares or it can involve improper interference with the price of shares by the manipulation of their price to a distorted level.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
