In The Financial Conduct Authority v Da Vinci Invest and others, the High Court granted the Financial Conduct Authority (“FCA”) a permanent injunction and imposed penalties of £7.75 million against two companies and three individual traders for committing market abuse. This is the first time that the FCA has sought a permanent injunction from the court to restrain such abuse.
The first defendant, Da Vinci Invest Limited (“DVI”), was an English company that operated as an independent asset manager from a branch office in Switzerland. DVI entered into a joint venture with the fourth to sixth defendants (Szabolcs Banya, Gyorgy Szabolcs Brad and Tamas Pornye) who were three individual traders based in Hungary. The joint venture gave the traders capital to trade in stocks listed on the London Stock Exchange (“LSE”) using Contracts for Differences (“CFDs”). This enabled the traders to split the profits of their trading with DVI. The traders also owned and controlled the third defendant, Mineworld, a Seychelles company, and they used it as a vehicle for derivatives trading on their own account and for the sharing of profits between them.
The FCA sought a final injunction and a financial penalty against the defendants for market abuse of a type commonly known as “layering” or “spoofing”. This involves creating a false or misleading impression as to the supply of, and demand for, shares which enables one to trade at an artificial price, and is contrary to section 118(5) of the Financial Services and Markets Act 2000 (“FSMA”). In this case, the market manipulation was alleged to have taken place in 2010 and 2011 in the course of high-volume trading in CFDs in relation to shares traded on the LSE. The traders successfully altered the price of shares by entering large orders on the LSE’s electronic trading platform which they had no intention of executing. They then took advantage of the price alteration by either selling or buying and then quickly cancelling the orders.
Issues and decision
The issues that the High Court had to consider included the following:
- Could the FCA invoke the jurisdiction of the court under sections 129 and 381 of FSMA?
Section 381 of FSMA provides that the court has power to grant an injunction restraining market abuse. The court will grant an injunction if it is satisfied that: (1) there is a reasonable likelihood that any person will engage in market abuse; or (2) a person is engaging in or has engaged in market abuse and there is a reasonable likelihood that the market abuse will continue or be repeated.
Section 129 of FSMA also gives the court power to impose a penalty on a person against whom an injunction is sought under section 381. The penalty is payable to the FCA.
DVI argued that it was “ultra vires and an abuse of process” for the FCA to seek the imposition of financial penalties by the court under section 129, either at all, or without having first given a warning notice and a decision notice, as the FCA would have been required to do if it were exercising its own power to impose penalties for market abuse under section 123 of FSMA. Snowden J rejected that argument. The court’s power under section 129 was entirely separate from the requirements for the exercise of the FCA’s own power under section 123. There was no requirement for the FCA to issue warning and decision notices first.
Snowden J also rejected DVI’s argument that that the court’s power to impose a penalty under section 129 was only exercisable in a case where it had actually granted an injunction under section 381. It was clear from the wording of section 129 that the court’s power arose where the FCA applied for an injunction under section 381. The judge commented that it would have been easy, had that been the legislative intention, to provide that the power to impose a penalty only arose “if the court grants an injunction on an application under section 381”.
- Could the traders’ activities be attributed to DVI and Mineworld?
In answer to this question, the court considered the definition of behaviour amounting to market abuse in sub-sections 118(1) and (5) FSMA. It held that such behaviour did not require a mental element on the part of the person alleged to have engaged in market abuse. In the case of a corporate entity, the general rules of attribution applied, and therefore, for the purposes of section of 118 FSMA, the behaviour of the traders was also the behaviour of DVI and Mineworld, as the traders had been authorised by the companies to place orders on their behalf.
- Did the traders engage in market abuse as defined in section 118 of FSMA? If so, what defences were available to the defendants?
The court held that by placing numerous orders on one side of the order book, the traders had created a false or misleading impression that there was an increased supply of, or demand for, the shares in question. Snowden J also held that section 118(5) of FSMA did not require actual evidence to be adduced from any market participant. This was because, in the context of high-speed trading, it would have been wholly impracticable to require the FCA to find and adduce subjective evidence from individuals who had actually been engaged in the relevant market and who had responded to the offending behaviour at the time in question.
Given the scale and nature of the market manipulation, the court rejected the traders’ submissions that they had been unaware that their trading activities were wrongful in any way. Similarly Mineworld, being owned and controlled by the traders, could not claim that it was unaware of the market abuse. As for DVI, the court held that it had not made out a defence to an order imposing penalties under section 129 of FSMA as it had not done all that it reasonably could to prevent the traders from engaging in market abuse. Nor had DVI established that it had believed on reasonable grounds that the traders’ behaviour did not constitute market abuse. It was clear that no thought had been given to the issue of the traders’ potential misconduct at the relevant time.
- Was it appropriate for the court to grant a permanent injunction and/or impose financial penalties?
The legislative intention behind section 381 of FSMA had been to enable the court to grant an injunction if the risk of repetition was a real possibility that could not sensibly be ignored. The judge held that there was a reasonable likelihood that the market abuse would be repeated as the evidence showed that the traders were serial market abusers, and therefore granted a final injunction against each of the defendants. The judge, however, gave each defendant express permission to apply to the court, on written notice to the FCA, to have the injunction varied or discharged in the event that there was a material change of circumstances which made continuation of the order unnecessary or inappropriate.
In determining any penalty under section 129 of FSMA, the FCA’s starting point should be to consider the penalty framework set out in its Decision Procedure and Penalties Manual (“DEPP”). For the most part, Snowden J followed the provisions of the DEPP despite holding that the court was not bound by this framework or by the FCA’s view of how it should be applied. In doing so, the judge imposed higher penalties on the traders than the FCA said it might have imposed (£410,000 on Mr Banya and Mr Pornye and £290,000 on Mr Brad).
This is the first time that the FCA has asked the High Court to impose a permanent injunction to prevent market abuse. It shows that the pursuit of market abuse cases remains a priority for the regulator. Further, whilst in the past the FCA has tended to apply for market abuse injunctions against individuals, this case shows that the regulator is equally willing to use sections 129 and 381 of FSMA against companies.