Financial Services Authority FSA STATEMENT OF CASE Reference FIN/2008/0012 FIN/2008/0013 FIN/2008/0014 IN THE FINANCIAL SERVICES AND MARKETS TRIBUNAL WINTERFLOOD SECURITIES LIMITED (1) STEPHEN SOTIRIOU (2) JASON ROBINS (3) and The Applicants THE FINANCIAL SERVICES AUTHORITY The Authority STATEMENT OF CASE THE PARTIES 1. At all material times: 1.1 The First Applicant ("Winterflood") was a London based market maker, specialising in smaller company securities, including those listed on the Alternative Investment Market ( AIM ) of the London Stock Exchange ("the Exchange"). 1.2 Winterflood provided a market making service in the shares of Fundamental-E Investments Plc ("FEI"), a company listed on AIM. 1.3 Winterflood was managed by its Board of Directors. The Board included Winterflood's Chief Executive, Michael Hines. It also included two directors with responsibility for the oversight of Winterflood's AIM market making trading books, Richard Meaney and Ian Throssell.
2 1.4 The Second Applicant, Stephen Sotiriou, was employed by Winterflood as a market maker. Mr Sotiriou had 9 years experience of making markets in AIM listed securities. He was responsible for Winterflood's market making activities in relation to FEI until 3 February 2004. 1.5 The Third Applicant, Jason Robins, was employed by Winterflood as a market maker. Mr Robins had 4 years experience of making markets in AIM listed securities. He was responsible for Winterflood's market making activities in relation to FEI between 3 February 2004 and 15 July 2004. 2. Further, at all material times: 2.1 The Authority was the organisation responsible for the regulation of the financial services industry in the United Kingdom. 2.2 Winterflood was authorised by the Authority pursuant to section 31 of the Financial Services and Markets Act 2000 ("FSMA"). 2.3 Mr Sotiriou was approved by the Authority pursuant to section 59 FSMA to carry out the CF26 (customer trading) controlled function on behalf of Winterflood. 2.4 Mr Robins was approved by the Authority pursuant to section 59 FSMA to carry out the CF26 (customer trading) controlled function on behalf of Winterflood. 3. Further, at all material times: 3.1 The Exchange was the organisation responsible for operating markets trading a wide range of securities, including AIM. 3.2 Winterflood was a member of the Exchange and was a registered market maker in FEI. THE REFERRED ACTION 4. On 18 October 2007, the Authority issued Warning Notices against Winterflood, Mr Sotiriou and Mr Robins pursuant to ss.123 and 126 FSMA because it proposed to take action against them on the grounds that they had engaged in market abuse within the meaning of s.118 FSMA. Furthermore in relation to Mr Sotiriou and Mr Robins the Warning Notices were also issued under Part V of FSMA pursuant to s.63 because it proposed to take action against them on the grounds that they were not fit and proper persons to perform the functions for which they had approval under s.59 FSMA. 5. Following an oral hearing before the Regulatory Decisions Committee ( RDC ) of the Authority, at which it considered both oral and written submissions from the parties, on 19 June
3 2008 the Authority issued Decision Notices against Winterflood, Mr Sotiriou and Mr Robins in which they were each found to have engaged in market abuse within the meaning of s.118 FSMA. The following financial penalties were imposed by the Authority: 5.1 Winterflood - 4 million; 5.2 Mr Sotiriou - 200,000; 5.3 Mr Robins - 75,000 (reduced to 50,000 on the grounds of personal financial circumstances). 6. By Reference Notices dated 17 July 2008, Winterflood, Mr Sotiriou and Mr Robins referred the matter to the Tribunal. Winterflood stated expressly (and Mr Sotiriou and Mr Robins, by adopting Winterflood s Reference, by implication) that they did not challenge the facts as found by the Authority set out in the Decision Notices. RELEVANT STATUTORY AND OTHER PROVISIONS 7. Market Abuse is defined in s.118 FSMA. The relevant provisions in force at the material times were as follows: 118(1) For the purposes of this Act, market abuse is behaviour (whether by one person alone or by two or more persons jointly in concert): (a) which occurs in relation to qualifying investments traded on a market to which this section applies; (b) which satisfies any one or more of the conditions set out in subsection (2); and (c) which is likely to be regarded by a regular user of that market who is aware of the behaviour as a failure on the part of the person or persons concerned to observe the standard of behaviour reasonably expected of a person in his or their position in relation to the market. 118(2) The conditions are that: (a) (b) the behaviour is likely to give a regular user of the market a false or misleading impression as to the supply of, or demand for, or as to the price or value of, investments of the kind in question; (c) a regular user of the market would, or would be likely to, regard the behaviour as behaviour which would, or would be likely to, distort the market in investments of the kind in question.
4 8. FEI shares were traded on AIM which is operated by the Exchange. They were therefore qualifying investments traded on a prescribed market and within the threshold test in s.118(1)(a) FSMA. 9. A regular user is defined in s.118(10) as a reasonable person who regularly deals on that market in investments of the kind in question. 10. The standard of behaviour to be reasonably expected of Winterflood, Mr Sotiriou and Mr Robins was high because they were all highly experienced market professionals with particular expertise in making a market in AIM shares. 11. As an authorised person, Winterflood was required to comply with the Principles for Businesses issued by the Authority pursuant to section 138 FSMA The Principles for Businesses included requirements that: 11.1 By Principle 1, a firm must conduct its business with integrity. 11.2 By Principle 2, a firm must conduct its business with due skill, care and diligence. 11.3 By Principle 5, a firm must observe proper standards of market conduct. 12. As an Exchange member firm, Winterflood was required to comply with the Rules issued by the Exchange ("the Exchange Rules"). 12.1 By Exchange Rule 3050, an Exchange member firm may carry out a rollover trade in respect of any position in a relevant security on one occasion only; for this purpose, a rollover trade is defined as a set of on-exchange transactions, the effect of which is to postpone the final settlement of a position in a security by closing an existing unsettled transaction and entering into a transaction in the same security which creates a new position for settlement at a later date. 12.2 By Exchange Rule 3300, an Exchange member firm shall not, in respect of its exchange business: 12.2.1 do any act or engage in any course of conduct which creates or is likely to create a false or misleading impression as to the market in, or the price or value of any security of any security; 12.2.2 cause or enter into any artificial transaction; 12.2.3 cause a fictitious transaction or false price to be input into the Exchange trading system; 12.2.4 effect a transaction at any price which differs to an unreasonable extent from any firm price displayed on the Exchange trading system in that security;
5 12.2.5 do any act or engage in any course of conduct which is likely to damage the fairness or integrity of the Exchange s markets; 12.2.6 do any act or engage in any course of conduct which causes, or contributes to, a breach of the Exchange s Rules by another member firm. 13. By s.63 FSMA, the Authority may withdraw approval given under s.59 FSMA if it considers the person in respect of whom it was given is not a fit and proper person to perform the function to which the approval relates. THE FEI SHARE RAMPING SCHEME The initial FEI transaction 14. As at May 2003, 85% of the issued share capital of FEI (140 million shares) was owned by two shareholders ( the original shareholders ). 15. In and/or prior to May 2003, Mr Eagle was and/or had been actively seeking to secure control of an AIM shell company as an investment vehicle to acquire electronic technology companies. In May 2003, he agreed with the original shareholders to arrange for their shares to be sold. 16. Mr Eagle proposed to buy a 10% stake in FEI himself but had to find buyers for the remaining 75%. As there was little or no current market demand for FEI shares (of which a total of 109,019 shares had been traded in May 2003), Mr Eagle had to generate significant demand in order to do so. 17. On 27 May 2003, Mr Eagle acquired SP Bell, an agency only stockbroking firm, using an investment vehicle. SP Bell was authorised by the Authority to conduct investment business and was a member of the Exchange. At all material times thereafter, Mr Eagle owned and controlled SP Bell. On 3 June 2003, Mr Eagle appointed Mr Betton as managing director of SP Bell, and on 4 June 2003, Mr Eagle became the chief executive of SP Bell. 18. Mr Eagle intended to find buyers for the remaining 75% of FEI shares by, for the most part, selling to clients of SP Bell. 19. In July 2003, Mr Eagle met with Mr Sotiriou and another market maker employed by Winterflood. Mr Eagle informed them that he intended to take over FEI, that the owners of 85% of the shares would approach Winterflood to sell their shares, and that Mr Eagle would then buy the stock from Winterflood. The market makers were surprised at this method being used rather than SP Bell carrying out internal agency crosses, but were prepared to go along with it and allow Winterflood to be used in this way. 20. Thereafter:
6 20.1 On 11 November 2003, Mr Eagle acquired a 10% stake in FEI via an investment vehicle. 20.2 On 19 November 2003, Mr Eagle was appointed director of FEI, and on 5 January 2004, Mr Eagle was appointed executive chairman of FEI. 20.3 Winterflood sold the FEI shares of the original shareholders as follows: 20.3.1 Between 13 August and 31 December 2003, SP Bell purchased 113,045,675 FEI shares from Winterflood, ostensibly on behalf of its clients. Specifically: 20.3.1.1 16.5 million shares were purchased on behalf of Mr Eagle, as further set out in paragraph 20.1 above; 20.3.1.2 35.9 million shares were purchased on behalf of existing clients of SP Bell; 20.3.1.3 60.7 million shares were purchased on behalf of new clients of SP Bell who had been introduced by Mr Eagle, as further set out in paragraph 23 below. 20.3.2 Mr Eagle procured the sale of 20,320,000 FEI shares to other brokers. 20.3.3 Winterflood sold the remaining 6,634,325 shares in the course of its normal market making business. 21. Winterflood received a total financial benefit of 204,403 from these transactions, in which its participation was largely risk-free. 22. Winterflood's intermediation of the sale of these shares allowed Mr Eagle to obscure the full extent of his financial interest and involvement in the FEI share sale from the employees of SP Bell, the clients of SP Bell to whom the purchases of shares were recommended, and the market generally. In particular, it allowed Mr Eagle to conceal the fact that he stood to earn a significant commission from the vendors. The rollover scheme 23. In order to procure sufficient purchasers for FEI shares in the initial FEI transaction, and to continue to buy FEI shares in the market thereafter as further set out below, Mr Eagle introduced 50 new clients to SP Bell during the period 18 July 2003 to 13 May 2004 ( the Eagle clients ). 24. A number of the Eagle clients did not have sufficient funds to pay for those shares. In order to avoid those clients being required to pay for their FEI shares, Mr Eagle instituted a scheme
7 whereby their FEI positions were purportedly rolled from one SP Bell client to another. This scheme required the involvement of a market maker to execute the rollover trades. 24.1 Specifically, the method used was that: 24.1.1 SP Bell bought FEI shares for the account of a client on credit from the market maker on a T+10 settlement basis; and 24.1.2 SP Bell sold those shares via the market maker to the account of another client at or before the date of settlement, typically on a T+2 settlement basis. 24.2 The cost of purchase was covered by a rise in share price during the intervening period. This rise also left an apparent profit on the first account which could then be used to purchase further FEI shares. 24.3 The effect of the rollover scheme was to defer settlement, potentially indefinitely. However, the rollover scheme required a rising share price in order to operate successfully. 25. By executing rollover trades, SP Bell deliberately deferred settlement of the trades and deliberately concealed from the market that a significant number of FEI shares had not been paid for. In many cases, they were not authorised by the underlying clients to make any of the trades. The rollover trades were an essential element of the share ramping scheme. Winterflood s participation in the rollover scheme 26. Mr Eagle first used the rollover scheme to complete the initial FEI transaction. Between 24 September and 31 December 2003, Winterflood (specifically, Mr Sotiriou) executed 30 rollover trades for SP Bell, with a total volume of 69,984,000 shares, as follows: Month Number of FEI shares rolled over Number of rollover trades September 2003 4,572,000 2 October 2003 1,788,000 1 November 2003 11,370,000 13 December 2003 17,262,000 14 27. By 31 December 2003, the sale and purchase of the shares of the original shareholders had been completed. Thereafter, Mr Eagle used the rollover scheme so as to be able to continue deferring settlement of those shares and also to commence buying shares in the market as required in order to support and increase the FEI share price.
8 28. All of the rollover trades entered into on behalf of the Eagle clients were executed by Winterflood. In particular: 28.1 Between January and July 2004, Winterflood executed 239 rollover trades in FEI shares. The number and volume of rollover trades executed by Winterflood in each month, compared with the number of shares bought by SP Bell, were as follows: Month Number of shares bought by SP Bell from Winterflood Number of shares rolled by SP Bell through Winterflood (number of trades) January 3,015,000 68,059,000 (24) February 4,655,000 81,809,000 (36) March 2,688,300 87,300,000 (21) April 785,000 130,684,000 (34) May 4,360,250 130,365,000 (21) June 8,700,000 235,851,018 (90) 1-14 July 1,300,000 87,599,786 (32) 28.2 Of the rollover trades executed by Winterflood: 28.2.1 Mr Sotiriou executed 24 rollover trades, between 2 January and 3 February 2004; and 28.2.2 Mr Robins executed 215 rollover trades, between 3 February and 15 July 2004. The delayed rollovers 29. From 5 January 2004, Mr Eagle refined the rollover scheme by the use of delayed rollover trades, whereby: 29.1 The size and price of the buy and sell legs of the rollover trade were agreed at the outset; but 29.2 The two legs of the transaction were then executed at different times of day. 30. The volume and frequency of delayed rollover trades were substantial. In particular: 30.1 Between 5 January and 18 March 2004, Winterflood executed 27 delayed rollover trades. The number and volume of delayed rollover trades on the relevant dates were as follows:
9 Date Number of delayed rollover trades Delayed rollover trade volume Other rollover trade volume 05.01.04 1 4,970,000 1,150,000 08.01.04 1 10,000,000 12.01.04 1 12,000,000 3,626,000 14.01.04 1 15,000,000 02.02.04 1 3,600,000 12,000,000 03.02.04 1 5,000,000 5,670,000 04.02.04 3 12,320,000 460,000 05.02.04 2 18,320,000 06.02.04 2 15,750,000 09.02.04 1 4,050,000 19.02.04 1 6,400,000 20.02.04 1 9,000,000 23.02.04 1 8,000,000 1,030,000 24.02.04 1 7,470,000 25.02.04 1 4,580,000 26.02.04 1 8,000,000 2,500,000 27.02.04 1 4,000,000 01.03.04 1 4,000,000 02.03.04 1 6,400,000 03.03.04 2 10,500,000 05.03.04 1 10,000,000 18.03.04 1 11,000,000 Total 27 190,360,000 22,446,000 30.2 Of the 27 delayed rollover trades executed by Winterflood: 30.2.1 Mr Sotiriou executed 6 delayed rollover trades, between 2 January and 3 February 2004; and 30.2.2 Mr Robins executed 21 delayed rollover trades, between 3 February and 18 March 2004. 30.3 All of SP Bell s delayed rollover trades were executed by Winterflood. Profits from the rollover scheme 31. Winterflood received financial benefits of 777,652 from its execution of the rollover trades and delayed rollover trades referred to in paragraphs 28 and 30 above. SP Bell s consistent purchasing of shares in the market 32. Between January and July 2004, SP Bell bought 25,703,550 FEI shares from Winterflood. SP Bell bought the FEI shares in order to support and increase the FEI share price. In many cases,
10 this trading was unauthorised by the underlying clients, and shares bought were not paid for but were simply added into the rollover scheme. This trading did not represent genuine market demand for the shares. The trading was part of the FEI share ramping scheme orchestrated by Mr Eagle. 33. As to the purchases of shares from Winterflood: 33.1 If Winterflood found itself with a long position in FEI stock, Winterflood, Mr Sotiriou and Mr Robins were always able to, and did, sell such stock to SP Bell. Moreover, they were able to, and did, sell such stock regardless of market conditions, including the current share price, any negative market information or a preponderance of sellers. 33.2 The trading by SP Bell clients represented by these purchases did not conform to the usual trading patterns of private clients. In particular, the trading activity of SP Bell s clients did not occur in reaction to market movement, comment or announcements. For example, on days when FEI stock had been tipped in the press (e.g. 5 January 2004, 5 April 2004, 10 May 2004 and 31 May 2004), or when there had been significant moves in the share price (e.g. 5 May 2004), there was very little if any trading by SP Bell clients. 33.3 SP Bell did not take time to obtain instructions from its clients prior to trading when approached by Winterflood to buy stock, nor did it do so when its brokers were asked by Winterflood to make significant changes to the scope of an order. 33.4 SP Bell never declined to purchase FEI shares from Winterflood, and maintained a substantial and continuous demand for FEI shares. Relationship between Mr Eagle and Winterflood 34. There was an unusually close relationship between Mr Eagle and Winterflood, and between Mr Eagle and Mr Sotiriou in particular. In particular: 34.1 There was a high degree of sharing of confidential information between Mr Eagle and Winterflood. 34.2 SP Bell brokers were instructed by Mr Eagle to deal only with Winterflood when trading FEI shares. 34.3 There was obvious and frequent pre-arranging of trades, whereby Winterflood traders spoke first to Mr Eagle on an untaped line and then conducted the trade with SP Bell on a taped line.
11 35. There was an unusually high level of communication between Mr Eagle and Winterflood, and in particular between Mr Eagle and Mr Sotiriou, on untaped lines. In particular: 35.1 Between January and July 2004, Mr Sotiriou made 41 calls on his mobile to Mr Eagle and sent one text message, and Mr Eagle made 81 calls to Mr Sotiriou s mobile. 35.2 Mr Sotiriou s mobile telephone records do not show a similar level of communication with other brokers. 35.3 It is to be inferred that at least some of these calls were undertaken on mobile telephones in order to avoid those conversations being taped. Effects of the FEI share ramping scheme 36. The FEI share ramping scheme had the effect of misleading the market as to the demand for, or as to the price or value of, FEI shares, and of distorting the market in FEI shares, and the scheme caused the positioning of the FEI share price at an artificially high level. As at May 2003, FEI shares were trading at around 2.5p. As a result of the FEI share ramping scheme, by the end of December 2003 the share price had increased to 4.13p, and between January and July 2004, the share price increased from 4.13p to a high of 11.75p by 5 July 2004. A chart showing the movement in the price of FEI shares and volume of shares traded by SP Bell, by all other firms and in total, between 2 January and 15 July 2004, is set out below:
12 60 14 50 12 Volum e [m illions] 40 30 20 10 8 6 4 Share Price [pence] 10 2-02/01/2004 23/01/2004 13/02/2004 05/03/2004 26/03/2004 20/04/2004 12/05/2004 03/06/2004 24/06/2004 0 15/07/2004 Volume - SP Bell Volume - Other Firms FEI share price 37. The trading in FEI was highly profitable for Winterflood: 37.1 The financial benefit received by Winterflood from its trading in FEI shares overall was some 1.2 million, and from its trading in FEI shares between January and July 2004 was approximately 941,133. 37.2 FEI was the single most profitable stock for each of Winterflood, Mr Sotiriou and Mr Robins. 38. The profitability of trading in FEI had a direct impact on the level of bonus awarded to Mr Sotiriou and Mr Robins. 39. At 10.35am on 15 July 2004, the Exchange temporarily suspended trading in FEI shares because it was of the view that the market was disorderly. The Exchange had arrived at this view having noted that the share price of FEI had fallen sharply that morning from 11.75p to 7.5p as a result of sustained selling, and following the receipt of information that substantial unsettled positions in FEI shares had accumulated within SP Bell. Trading in FEI resumed on 23 July 2004. The close of business price on 23 July 2004 was 4p, and the price then fell steadily thereafter.
13 40. The suspension of trading caused the unsettled positions in FEI shares at SP Bell to crystallise. Neither the clients of SP Bell nor SP Bell itself had sufficient funds to settle the resulting debt of over 9 million. On 23 July 2004, SP Bell ceased trading and was placed into administration. Its business and assets were subsequently sold to another FSA authorised firm. MARKET ABUSE BY WINTERFLOOD, MR SOTIRIOU AND MR ROBINS 41. The Authority s case is that the behaviour of Winterflood between 5 January and 14 July 2004, of Mr Sotiriou between 5 January and 3 February 2004, and of Mr Robins between 3 February and 14 July 2004, in particular their behaviour in executing rollover trades, executing delayed rollover trades and/or consistently selling FEI shares to SP Bell in the circumstances set out above, amounted to market abuse contrary to s.118 FSMA in that: 41.1 It occurred in relation to a qualifying investment (FEI shares) traded on a prescribed market (AIM). 41.2 As further set out in paragraphs 43-46 below, it was: 41.2.1 likely to give a regular user of the market a false or misleading impression as to the demand for, or as to the price or value of, FEI shares; and/or 41.2.2 such that a regular user of the market would, or would be likely to, regard the behaviour as behaviour which would, or would be likely to, distort the market in investments of the kind in question. 41.3 As further set out in paragraph 51 below, it was likely to be regarded by a regular user of AIM who was aware of the behaviour as a failure on the part of Winterflood to observe the standards of behaviour reasonably expected of a market maker in the position of Winterflood. 41.4 It occurred in the United Kingdom. False or misleading impression: s.118(2)(b) condition 42. Both individually and cumulatively, the behaviours of Winterflood, Mr Sotiriou and/or Mr Robins in executing the rollover trades set out in paragraph 28 above, executing the delayed rollover trades set out in paragraph 30 above and/or consistently selling shares to SP Bell as set out in paragraphs 31-33 above were behaviours likely to give a regular user of the market a false or misleading impression as to the demand for, or as to the price or value of, FEI shares, contrary to s.118(2)(b) FSMA. 43. Rollover Trades
14 The behaviour of Winterflood, Mr Sotiriou and Mr Robins in executing the rollover trades set out in paragraph 28 above was likely to give a regular user of the market a false or misleading impression as to the demand for, or as to the price or value of, FEI shares, contrary to s.118(2)(b) FSMA. PARTICULARS 43.1 Rollover trades are reported to the market as separate transactions. They are not identified specifically as rollovers. Where the two sides of a rollover trade are executed simultaneously and are entirely symmetrical, it may be possible for a regular user to identify the trades as rollovers. However: 43.1.1 trades are not visible to a regular user as rollovers in circumstances where one leg of the rollover is delayed, or where a number of shapes are used to book the total size of one leg or both legs of the rollover, such that the trade is not presented as two symmetrical transactions; 43.1.2 even where trades are potentially visible, a regular user may not necessarily identify a rollover trade as such, but as two or more separate transactions. 43.2 The purpose of Exchange Rule 3050 is to ensure that all trades are settled promptly, thus protecting the proper operation and integrity of the market. Whilst it is part of the regular user s reasonable expectation that there will be some rollover trades and that these may form part of the reported trades on any particular day, the regular user expects that such trades are in conformity with LSE Rule 3050 and that a trade will only be rolled over once. 43.3 The volume of rollovers of FEI shares executed by Winterflood was extremely high. Between January and July 2004 Winterflood carried out 239 rollover trades, in which it rolled over nearly 822 million shares (a total volume of over 1.6 billion shares), as further set out in paragraph 28 above. This represented some 84% of the volume of FEI trades reported by all firms during this period, and represented almost 10 times the total issued share capital of FEI. 43.4 SP Bell breached LSE Rule 3050, in that individual positions were rolled over more than once (on the instructions of Mr Eagle). 43.5 The rollover trades were not genuine and proper transactions, as further set out in paragraphs 24-25 above. 43.6 In the circumstances: 43.6.1 the execution and subsequent reporting of the rollover trades was likely to give a regular user the impression that there was a substantial and
15 continuous demand for FEI shares in circumstances where this was not in fact the case, further or alternatively that the demand for FEI shares was significantly more substantial and continuous than was in fact the case; 43.6.2 even if a regular user were to have interpreted the rollover trades as such, the regular user would be likely to assume these to be a number of individual, short term rollovers following which the trade was settled and thus that there was considerably more genuine demand for the stock than was in fact the case; 43.6.3 the rollover scheme concealed from the market that a significant number of FEI shares had not been paid for. Had this been known to the market it is highly likely that it would have caused a significant fall in the FEI share price; 43.6.4 the execution and subsequent reporting of the rollover trades was likely to give a regular user a false and misleading impression as to the demand for, and/or as to the price or value of, FEI shares; 43.6.5 would, or would be likely to, be regarded by a regular user of AIM as behaviour which would, or would be likely to, distort the market in FEI shares. 44. Delayed Rollover Trades Further or alternatively, the behaviour of Winterflood, Mr Sotiriou and Mr Robins in executing the delayed rollovers set out in paragraph 30 above was likely to give a regular user of the market a false or misleading impression as to the demand for, or as to the price or value of, FEI shares, contrary to section 118(2)(b) FSMA. PARTICULARS 44.1 Paragraph 43.1 above is repeated. In relation to delayed rollovers in particular: 44.1.1 the time lapse between the execution of the two legs of the trade makes it impossible for a regular user to identify the trades as rollovers with any degree of certainty. Such trades will appear to a regular user to be genuine and unrelated trades; 44.1.2 the difficulties of identifying a delayed rollover are further exacerbated where the delayed rollover is also asymmetrical, as the trade is reported as unmatched multiple transactions; 44.1.3 delayed rollover trades are thus highly misleading. They are also highly unusual and rare.
16 44.2 The volume of delayed rollovers was extremely high. Between 5 January and 18 March 2004, Winterflood executed 27 delayed rollover trades, in which it rolled over almost 190.4 million shares, as further set out in paragraph 30 above. This was in excess of the entire issued share capital of FEI, and represented 40.5% of the volume of FEI trades reported by all firms during this period. 44.3 Moreover: 44.3.1 the delayed rollovers were consistently transacted at the top end of the touch price; 44.3.2 of the 27 delayed rollovers, only seven were completely symmetrical. For 18 trades, the buy side and the sell side were executed in differing shapes. For a further two trades, the buy side and the sell side did not match. 44.4 The delayed rollover trades were not genuine and proper transactions, as further set out in paragraphs 24-25 above. 44.5 In the circumstances, the execution and subsequent reporting of the delayed rollover trades was likely to give a regular user: 44.5.1 the impression that there was a substantial and continuous demand for FEI shares in circumstances where this was not in fact the case, further or alternatively that the demand for FEI shares was significantly more substantial and continuous than was in fact the case; 44.5.2 the impression that there was sustained buying interest at higher prices in circumstances where this was not in fact the case; and/or 44.5.3 a false and misleading impression as to the demand for, and/or as to the price or value of, FEI shares; 44.5.4 would, or would be likely to, be regarded by a regular user of AIM as behaviour which would, or would be likely to, distort the market in FEI shares. 45. Consistent selling to SP Bell The behaviour of Winterflood, Mr Sotiriou and Mr Robins in consistently selling shares to SP Bell as set out in paragraphs 31-33 above was likely to give a regular user of the market a false or misleading impression as to the demand for, or as to the price or value of, FEI shares, contrary to s.118(2)(b) FSMA.
17 PARTICULARS 45.1 If Winterflood, Mr Sotiriou and Mr Robins had FEI stock available, whether being offered to the market or as a long position accumulated by Winterflood which it wished to sell down, Winterflood, Mr Sotiriou and Mr Robins were always able to, and did, sell such stock to SP Bell, and to do so regardless of market conditions, as further set out in paragraph 33.1 above. 45.2 SP Bell s purchases did not represent genuine demand for FEI shares, but were intended to support and increase, and had the effect of supporting and increasing, the FEI share price at an artificially high level. 45.3 In the circumstances, the consistent selling of shares by Winterflood to SP Bell as set out in paragraphs 31-33 above: 45.3.1 was likely to give a regular user the impression that there were a significant number of genuine buyers actively seeking to acquire FEI shares, in circumstances where this was not in fact the case; 45.3.2 was likely to give a regular user a false or misleading impression as to the demand for, and/or as to the price or value of, FEI shares; and/or 45.3.3 would, or would be likely to, be regarded by a regular user of AIM as behaviour which would, or would be likely to, distort the market in FEI shares. Distortion: s.118(2)(c) condition 46. Both individually and cumulatively, the behaviours of Winterflood, Mr Sotiriou and Mr Robins in executing the rollover trades set out in paragraph 28 above, executing the delayed rollover trades set out in paragraph 30 above and/or consistently selling shares to SP Bell as set out in paragraphs 31-33 above were behaviours that a regular user of the market would, or would be likely to, regard as behaviour which would, or would be likely to, distort the market in FEI shares contrary to s.118(2)(c). The Authority relies on the same Particulars as set out in paragraphs 42-45 above. Regular user test: s. 118(1)(c) 47. In relation to the initial FEI transaction:
18 47.1 As market maker in FEI shares, Winterflood and Mr Sotiriou knew that there had been little or no active market before Mr Eagle s proposal to arrange the sale of FEI shares by the original shareholders. 47.2 Further, Winterflood and Mr Sotiriou knew, alternatively ought to have known, that: 47.2.1 as owner of SP Bell and an intended director of FEI, Mr Eagle was acting on both sides of the sale by the original shareholders of their shares; 47.2.2 there was no reason why this stock could not be crossed internally at SP Bell rather than being put through a market maker, which process involved a cost to the underlying clients taking up the shares with no compensating benefit; 47.2.3 routing this trading through a market maker was not the normal way of conducting this sort of business; 47.2.4 trading via Winterflood would result in the dealings being reported to the market as ordinary trades rather than as agency crosses; 47.2.5 Mr Eagle himself proposed to take, and did take, a 10% stake in FEI, as further set out in paragraphs 16 and 20.1 above. 47.2.6 the circumstances set out above were highly unusual. 48. By 5 January 2004 Winterflood and Mr Sotiriou knew, alternatively ought to have known, and from 3 February 2004 Mr Robins knew, alternatively ought to have known, that: 48.1 (In relation to Winterflood and Mr Sotiriou only) The circumstances of the initial FEI transaction had been undertaken in unusual circumstances, as further set out in paragraph 47 above. 48.2 As a result of the initial FEI transaction, Mr Eagle was in the very unusual position of having effective control of and being senior executive of both FEI, an AIM quoted company, and SP Bell, a stockbroking firm which traded on AIM, as further set out in paragraphs 17-20 above. This gave rise to a conflict of interest: 48.2.1 As a director of and substantial shareholder in FEI, Mr Eagle had an interest in attracting investors to invest in FEI and in securing increases to the FEI share price. 48.2.2 As a director and controller of SP Bell, Mr Eagle was obliged to act in the best interests of SP Bell clients. 48.2.3 When recommending that SP Bell clients invest in FEI shares, Mr Eagle and SP Bell were required to take reasonable care to ensure the suitability of their advice and discretionary decisions for those clients.
19 48.2.4 When buying shares in FEI on behalf of SP Bell clients, Mr Eagle and SP Bell were subject to a duty of best execution which required them to do so at the lowest price reasonably available. 48.3 (In relation to Winterflood and Mr Sotiriou only) Mr Eagle preferred to discuss all matters, including and in particular those relating to trading by SP Bell in FEI, a quoted company controlled by him (in which he had a personal financial interest and in relation to which he had an inevitable conflict of interest), on untaped lines, and in particular preferred to discuss matters in mobile to mobile telephone conversations, as further set out in paragraphs 34-35 above. 48.4 SP Bell had already conducted a very significant volume of trading in FEI shares, including a significant number of very large rollover trades, as further set out in paragraphs 20-26 above. 49. Thereafter Winterflood, Mr Sotiriou and Mr Robins knew, alternatively ought to have known, that: 49.1 From January 2004 onwards, SP Bell wished to conduct, and did conduct via Winterflood, a high and increasing number of rollover trades involving an unusually large volume of shares, as further set out in paragraph 28 above. 49.2 Between January and March 2004, SP Bell wished to conduct, and did conduct via Winterflood, rare and highly unusual delayed rollover trades, and moreover wished to and did conduct a significant volume of trading by means of such trades, in terms of both number of trades and volume of shares rolled, as further set out in paragraph 30 above. 49.3 The trading of SP Bell clients was under the complete control of Mr Eagle as further set out in paragraph 33 above, and SP Bell consistently purchased FEI shares in the unusual circumstances set out in paragraph 33 above. 49.4 Mr Eagle wished to secure an increasing share price. 50. In further support of the matters set out above in relation to Winterflood s knowledge (in addition to the attribution of Mr Sotiriou s and/or Mr Robins knowledge) the Authority will rely on the fact that the two Winterflood directors responsible for trading matters (referred to in paragraph 1.3 above) reviewed trading in FEI on most days from February 2004, and knew, alternatively ought to have known, of the following: 50.1 The volume of rollover trades in FEI shares. 50.2 The volume of purchases of FEI shares by SP Bell. 50.3 The volume of non-sp Bell trading.
20 50.4 The increases in the share price. 51. The behaviour of Winterflood between 5 January and 14 July 2004, of Mr Sotiriou between 5 January and 3 February 2004, and of Mr Robins between 3 February and 14 July 2004, was behaviour which was likely to be regarded by a regular user of the market as a failure on Winterflood s part to observe the standard of behaviour reasonably expected of a market maker in Winterflood s position, contrary to section 118(1)(c) FSMA: PARTICULARS 51.1 By 5 January 2004 Winterflood and Mr Sotiriou knew, alternatively ought reasonably to have known, and from 3 February 2004 Mr Robins knew, alternatively ought reasonably to have known, that: 51.1.1 Mr Eagle s unusual position would inevitably present him with a conflict between his personal interest in seeing an increasing FEI share price and his responsibility to act in his clients best interests, in relation to buying by complying with his duty of best execution and purchasing at the lowest price reasonably available and in relation to selling by advising his clients at some point to realise profits by selling shares (which would potentially depress the FEI share price); 51.1.2 Mr Eagle s apparent authority to commit SP Bell clients to trades gave rise to the risk that he would use rollover transactions between client accounts to breach Exchange rule 3050 or to undermine its purpose; 51.1.3 (in relation to Winterflood and Mr Sotiriou only) Mr Eagle s apparent desire for his conversations to be conducted on mobile telephones by him and Mr Sotiriou was suspicious and represented a risk of impropriety; 51.1.4 the pattern of trading, that is rollovers, delayed rollovers and consistent selling to SP Bell, was highly unusual; 51.1.5 settlement of transactions of itself was not conclusive as to the propriety of those transactions. 51.2 As to Winterflood s, Mr Sotiriou s and Mr Robins execution of the rollover trades referred to in paragraph 28 above between 5 January and 14 July 2004, between 5 January and 3 February 2004, and between 3 February 2004 and 14 July 2004 respectively: 51.2.1 The rollover trades took place in the context of the matters set out in paragraphs 47, 48, 49 and/or 51.1 above, which matters and each of them
21 were known, alternatively ought to have been known, to Winterflood, Mr Sotiriou and Mr Robins to the extent set out therein. 51.2.2 A market maker acting in accordance with the standards reasonably expected of him would have concluded that: 51.2.2.1 these trades were rollover trades within the meaning of Exchange Rule 3050; 51.2.2.2 there was a clear and substantial risk that the rollovers were not genuine and proper trades; 51.2.2.3 these trades gave, or were likely to give, a false or misleading impression as to the demand for, or as to the price or value of, FEI shares; 51.2.2.4 a regular user of the market would, or would be likely to, regard these trades as being likely to distort the market in FEI shares. 51.2.3 Having been alerted to the risks associated with this pattern of trading, a market maker acting in accordance with the standards reasonably expected of it should have reviewed its relationship with SP Bell and Mr Eagle, taken all reasonable steps to satisfy itself that the trades were genuine and proper, including asking questions of SP Bell and/or Pershing Securities Ltd ("Pershing")(who provided SP Bell with clearing and settlement services), and declined to execute further trades if it was not so satisfied. 51.2.4 Winterflood failed to act as set out in sub-paragraph 51.2.3 above adequately or at all. In particular, when in May 2004 a Winterflood trader escalated concerns regarding the trading in FEI to Winterflood s directors, he was instructed by the directors to continue trading. 51.3 As to Winterflood s, Mr Sotiriou s and Mr Robins execution of the delayed rollover trades referred to in paragraph 30 above between 5 January and 18 March 2004, between 5 January and 3 February 2004, and between 3 February and 18 March 2004 respectively: 51.3.1 The delayed rollover trades took place in the context of the matters set out in paragraphs 47, 48, 49 and/or 51.1 above, which matters and each of them were known, alternatively ought to have been known, to Winterflood, Mr Sotiriou and Mr Robins to the extent set out therein. 51.3.2 A market maker acting in accordance with the standards reasonably expected of him would have concluded that:
22 51.3.2.1 these trades were rollover trades within the meaning of Exchange Rule 3050; 51.3.2.2 these trades involved risks beyond the immediate one of whether the second leg of the transaction would actually be executed by the counterparty; 51.3.2.3 there was a clear and substantial risk that the delayed rollovers were not genuine and proper trades; 51.3.2.4 these trades gave, or were likely to give, a false or misleading impression as to the demand for, or as to the price or value of, FEI shares; 51.3.2.5 a regular user of the market would, or would be likely to, regard these trades as being likely to distort the market in FEI shares. 51.3.3 Having been alerted to the risks associated with this pattern of trading, a market maker acting in accordance with the standards reasonably expected of it should have reviewed its relationship with SP Bell and Mr Eagle, taken all reasonable steps to satisfy itself that the trades were genuine and proper, including asking questions of SP Bell and/or Pershing, and declined to execute further trades if it was not so satisfied. 51.3.4 Winterflood failed to act as set out in sub-paragraph 51.3.3 above adequately or at all. In particular, Winterflood did not ask any questions of SP Bell about any of the delayed rollovers and continued to execute such trades until 18 March 2004. 51.4 In relation to SP Bell s consistent purchasing of shares in the market from Winterflood between January and July 2004: 51.4.1 SP Bell s consistent purchasing of shares took place in the context of the matters set out in paragraphs 47, 48, 49 and/or 51.1 above, which matters and each of them were known, alternatively ought to have been known, to Winterflood, Mr Sotiriou and Mr Robins to the extent set out therein. 51.4.2 A market maker acting in accordance with the standards reasonably expected of him would have concluded that: 51.4.2.1 there was a clear and substantial risk that these trades were not genuine and proper trades;
23 51.4.2.2 these trades gave, or were likely to give, a false or misleading impression as to the demand for, or as to the price or value of, FEI shares; 51.4.2.3 a regular user of the market would, or would be likely to, regard these trades as being likely to distort the market in FEI shares. 51.4.3 Having been alerted to the risks associated with this pattern of trading, a market maker acting in accordance with the standards reasonably expected of it should have reviewed its relationship with SP Bell and Mr Eagle, taken all reasonable steps to satisfy itself that the trades were genuine and proper, including asking questions of SP Bell and/or Pershing, and declined to execute further trades if it was not so satisfied. 51.4.4 Winterflood failed to act as set out in paragraph 51.4.3 above adequately or at all. 51.5 Further or alternatively: 51.5.1 A regular user would reasonably expect a market maker to comply with Exchange Rule 3300 (set out in paragraph 12.2 above). 51.5.2 However Winterflood s behaviour between January and July 2004 was contrary to the standards set out in Exchange Rule 3300, in that: 51.5.2.1 its behaviour created or was likely to create a false or misleading impression as to the market in, or the price or value of, FEI shares; 51.5.2.2 its behaviour contributed to a breach of Exchange rules by SP Bell, another Exchange member, being the market abuse conducted by Mr Eagle through SP Bell. 51.6 Further or alternatively, a regular user would expect an authorised person and its employees to comply with the Principles for Businesses (set out in paragraph 11 above). By reason of any or all of the matters set out in sub-paragraphs 51.1 51.5 above, Winterflood behaved contrary to the standards set out in the Principles for Businesses. NOT FIT AND PROPER 52. Pursuant to section 63 FSMA, the Authority may withdraw an approval given under section 59 FSMA if it considers that the person in respect of whom it was given is not a fit and proper person to perform the functions to which the approval relates.
24 53. Mr Sotiriou is not a fit and proper person to carry out the CF26 (Customer Trading) controlled function on behalf of Winterflood. PARTICULARS 53.1 The Authority repeats paragraphs 1-51 above. 53.2 In the premises, Mr Sotiriou engaged in market abuse. 53.3 Mr Sotiriou s actions were particularly serious in the light of the fact that his conduct was reckless, alternatively grossly negligent, as further set out in paragraphs 56-57 below. 54. Mr Robins is not a fit and proper person to perform the CF26 (Customer Trading) controlled function on behalf of Winterflood. PARTICULARS 54.1 The Authority repeats paragraphs 1-51 above. 54.2 In the premises, Mr Robins engaged in market abuse. 54.3 Mr Robins actions were particularly serious in the light of the fact that his conduct was reckless, alternatively grossly negligent, as further set out in paragraphs 56-57 below. SANCTION 55. The Financial Services and Markets Tribunal must, pursuant to section 133(4) FSMA, determine what (if any) is the appropriate action for the Authority to take in relation to the matter referred to it and remit the matter to the Authority with such directions (if any) as the Tribunal considers appropriate for giving effect to its determination. 56. The actions of Winterflood, Mr Sotiriou and Mr Robins were particularly serious in the light of the fact that their conduct was reckless. The Authority will say that: 56.1 In light of their experience, the nature of their role as market makers, and/or their knowledge of the matters set out in paragraphs 47, 48 and/or 49 above to the extent set out therein, Winterflood, Mr Sotiriou and Mr Robins must have known and did know: 56.1.1 the matters set out in paragraphs 51.1 and/or the sub-paragraphs of 51.2.2, 51.3.2 and/or 51.4.2 above; and/or 56.1.2 that there was a considerable risk that the rollovers, delayed rollovers and/or apparently unlimited demand for FEI shares from SP Bell clients did not
25 represent genuine and proper trading and that in executing the same each was participating in a share ramping scheme. 56.2 Winterflood, Mr Sotiriou and Mr Robins knowingly disregarded, or deliberately closed its/his mind, to the same. 57. If (which is not the Authority s primary case) Winterflood, Mr Sotiriou and/or Mr Robins was not reckless by reason of failing to recognise any or all of the matters set out in paragraphs 56.1.1 and 56.1.2 above, the Authority will say in the alternative that they ought to have recognised such matters and that: 57.1 By reason of their experience, the nature of their role as market makers, and their knowledge of the matters set out in paragraphs 47, 48 and/or 49 above to the extent set out therein, such failure was grossly negligent. 57.2 The actions of Winterflood, Mr Sotiriou and/or Mr Robins were particularly serious in light of the same. 58. Further or alternatively, the actions of Winterflood, Mr Sotiriou and Mr Robins were particularly serious by reason of any or all of the following. PARTICULARS 58.1 The market abuse continued over a sustained period of six and half months. 58.2 The market abuse had a significant impact on the market, as further set out in paragraphs 36 and 39 above. 58.3 The market abuse had the potential to cause serious loss to investors and to damage confidence in the AIM market. Ultimately it caused substantial potential and actual loss to retail investors. 59. Further or alternatively, the actions of Winterflood were particularly serious by reason of any or all of the following. PARTICULARS 59.1 Winterflood received a substantial financial benefit from its trading, as further set out in paragraph 37 above. 59.2 Directors of Winterflood were directly involved in approving the trading and allowing it to continue. 60. It is the Authority's case that the Tribunal should direct the Authority to impose a substantial financial penalty on Winterflood for the market abuse set out above.
26 61. It is the Authority s case that the Tribunal should direct the Authority to withdraw the approval of Mr Sotiriou and Mr Robins to carry out the CF26 (Customer Trading) controlled function on behalf of Winterflood. 62. If, contrary to the Authority s main case, the Tribunal was minded not to withdraw the approval of Mr Sotiriou and Mr Robins, the Tribunal should direct the Authority to impose a substantial financial penalty on Mr Sotiriou and Mr Robins for the market abuse set out above. 12 September 2008