Law firm warns CCOs on compliance with FSA insider trading rules

InvestorsLegalOperational Risk
23 Feb, 2012

Chief compliance officers (CCOs) at hedge funds have been advised to read up on UK Financial Services Authority (FSA) insider trading rules in light of the David Einhorn case.

Einhorn, founder of the US hedge fund Greenlight, was fined £3.6 million, for selling shares in Punch Taverns after being made privy to what the FSA said was insider information. The case has angered managers, particularly in the US as Greenlight had asked not to be wall-crossed, which in the US would have exempted him from the charges. However, the FSA said this counts for nothing and argued Einhorn should have known he was being made aware of material, non public information.

“CCOs and COOs need to get to grips with the requirements. Einhorn’s hedge fund had asked not to be wall crossed by the broker but the FSA concluded Greenlight committed market abuse and insider dealing. The FSA has argued that there were warning signs to the trade that should have been investigated by compliance. Compliance professionals at hedge funds are going to have to up the ante. Having an honest belief that you are not doing anything wrong is not enough to prevent the FSA bringing charges for market abuse,” said one lawyer, speaking under Chatham House Rules.

“Acknowledging that no wall crossing will take place is not enough. Compliance professionals are going to have to review the trades which portfolio managers are going to make. There is going to be a renewed emphasis on pre-trade compliance therefore to ensure information provided does not constitute insider information,” added the lawyer.

The FSA has repeatedly said it intends to step up the level of fines they dish out to people suspected of market abuse. Compliance professionals will not to be exempt from their wrath. “The fines levied on compliance professionals is not as much on average as that given out to a portfolio manager or founder. However, the average fine for compliance professionals stands at around £20,000 depending on the offence,” the lawyer said.

Alexander Ten-Holder, compliance officer at Greenlight was fined £130,000 for not spotting the market abuse. “The FSA is getting more aggressive has repeatedly said the organisation is going to clamp down on individual offences,” commented the lawyer.