On 04 February 2019, the FCA issued a final notice imposing a £32,200 financial penalty against Paul Stephany, former portfolio fund manager at Newton Investment Management (Newton) for undermining the integrity of markets and failing to exercise reasonable skill, care and diligence. The FCA found that on 21 September 2015 (on the day of book closing) and in relation to an initial public offering of online retailer “On the Beach Group plc”, Stephany had communicated with external fund managers at competitor firms and attempted to influence them to cap their own orders at the same price as Newton’s. These communications involved Stephany emailing himself, whilst blind copying at least eleven competitor firms stating: “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 17m order”. More than three fund managers responded to Stephany identifying concerns that this language could come across as organised and/or concerted attempts to collectively drive the price down. The FCA emphasised that Stephany’s communication was an attempt to undermine the proper price formation process of the IPO, thereby risking harm to other market participants.
The FCA also concluded that in July 2015, Stephany attempted similar offences in relation to a placing by Market Tech Holdings Limited. One particular exchange with competitors was identified by the FCA in which Stephany stated “…I think push them for it to kind of 220 price rather than 230 plus they’re talking about”. “[I] will be submitting a chunky order at that 220 level”.
Breaches of the FCA Handbook
The FCA found that Stephany’s communications were in contravention of Statement of Principle 3, by (1) failing to observe proper standards of market conduct and (2) attempting to drive collective competitor power to benefit the four funds he was lead manager of at the time - including Newton UK Equity Fund and Newton UK Opportunities Fund. In addition, and in contravention of Principle 2, Stephany was found to have demonstrated a lack of due skill, care and diligence by not accounting for the market risks when sharing such information with competitors.
The FCA found that Newton had policies and procedures in place for employees to refer to on issues such as investor collaboration, fair dealing with competitors and how to escalate risks and concerns. Whilst Stephany had given brief consideration as to whether his emails were appropriate, he had failed to search for Newton’s internal guidance and had failed to consult the firm’s compliance department to clarify whether his conduct was appropriate, before proceeding with the communications.
More detail regarding the FCA’s financial penalty can be found here.
The FCA’s consideration of competition law
The FCA’s competition powers do not permit it to fine individuals for breaches of competition law; only its FSMA 2000 powers allow it to take steps against individuals. Stephany’s fine was imposed under the latter.
The behaviour that is the subject of the fine - communicating with competitors in relation to bidding and pricing intentions – is the sort that commonly attracts the attention of competition law regulators. Yet the FCA is very clear that although Stephany’s conduct could have been a breach of competition law, it did not matter in any case as “[t]he case against Mr Stephany [did] not require an analysis of competition law. Market participants know, or ought to know, that [coordinating market participants] is improper”. It seems that the FCA would be willing in future cases to consider breaches of competition law as conduct which could warrant a fine for an individual under its regulatory powers, even if it could not take any steps against the individual under its competition powers.
Although the case relates to the pricing of IPOs and placings, it has much wider implications, in particular, in relation to the manner in which asset management firms interact with each other generally. Firms will need to consider whether their policies and procedures in relation to such issues are adequate and whether they have provided adequate training to their staff.
For further information, please contact Satyen Dhana, Peter Broadhurst or your usual contact at Simmons & Simmons.
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