FSA could adopt tougher penalties post-Rajaratnam

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LegalOperational Risk
10 Nov, 2011

The UK’s Financial Services Authority (FSA) is likely to take an even tougher line and impose harsher penalties for market abuse especially following the record $92.6 million fine doled out to former Galleon Group hedge fund founder Raj Rajaratnam, it has been warned.

The FSA has faced criticism for its handling of white collar crime in recent years with detractors accusing the agency of lacking teeth. One lawyer said the FSA would certainly “take note” of the fine issued to Rajaratnam.

Consultancy firm The IMS Group agreed that the FSA was changing tack. “The SEC has historically adopted a rules-based approach to regulation whereas the FSA tended to adopt a principles-based approach. However, based on conversations with clients in London, I believe this is changing and the FSA is going to start adopting a US-style approach to market abuse enforcement following the Galleon case,” said Micah Taylor, managing director at IMS in New York.

“If that happens, I believe the British regulators will start imposing bigger fines and tougher penalties on firms that break the rules,” added Taylor.

The FSA has imposed some high-profile fines over the last year. In June 2010, it fined JP Morgan £33 million for failing to properly segregate client assets. FSA fines have jumped from £35 million in 2009 to a total of £89.3 million in 2010 although the figure for 2011 is just shy of £50 million. Nevertheless, Peter Moore, head of regulation and compliance at IMS, reckons the FSA is going to clamp down further on market abuse.

“The FSA has imposed some tough penalties recently. A Dubai-based investor, for example, was given a record $9.6 million fine for market abuse this week. The fine was triple the amount of the proven wrongdoing and calculated in accordance with a new formula for fines introduced by the FSA in early 2010,” said Moore.

“I believe that this trend of fines representing multiples of the benefit of the wrongdoing will continue and will help the FSA achieve its objective of credible deterrence. Furthermore, fines under the European Union’s (EU)enhanced Market Abuse Directive, due into force in around 2014, are set to rise further. They will be modelled on EU competition law penalties with levies of 10% of a company’s turnover being the reference point. The record fine in that space is in excess of €1 billion” he added.

Nevertheless, the $9.6 million fine the FSA doled out to Dubai investor Rameshkumar Goenka is dwarfed by the combined punishment meted out to Rajaratnam. “The UK still lags behind in terms of prison sentences. For example, the maximum sentence the FSA can ask for is seven years, while Rajaratnam was sentenced to 11 years. Furthermore, UK law limits the use of wiretap evidence in court – something, which US prosecutors are not fettered with,” highlighted Moore.

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