Market Abuse or Regulatory & Exchange Failure

LONDON (Dow Jones)--The U.K. Financial Services Authority, or FSA, said Thursday that it has won its market abuse case at the Financial Services and Markets Tribunal against Winterflood and two of its traders, Mr Sotiriou and Mr Robins.

Winterflood is an FSA authorised firm and the largest market maker in AIM securities.

In June 2008, the FSA found that Winterflood and its traders had played a pivotal role in an illegal share ramping scheme relating to Fundamental-E Investments (FEI), an AIM listed company.

In particular, the market maker had misused rollovers and delayed rollovers thereby creating a distortion in the market for FEI shares and misleading the market for about six months in 2004, the FSA said.

The FEI share trades executed by Winterflood had a series of unusual features which should have alerted the market maker to the clear and substantial risks of market manipulation. Rather than taking steps to ensure that the trades were genuine, Winterflood continued the highly profitable trading.

Winterflood made about GBP900,000 from trading in FEI shares, its single most profitable stock at the time.

As a result of their conduct, the FSA decided to impose fines of GBP4 million, GBP200,000 and GBP50,000 on Winterflood, Mr Sotiriou and Mr Robins respectively, the regulator said.

Winterflood did not challenge the findings of the FSA investigation at the Tribunal but referred the matter on a point of legal interpretation.

Winterflood, Sotiriou and Robins are now seeking permission to appeal the decision at the Court of Appeal, the FSA said.

Other parties involved in the scheme have referred their cases to the Tribunal.

Richard Hoblyn comments as follows;- Although it's impossible to deduce exactly the extent of the alleged market abuse as per above I, like many of my colleagues around the market, am dismayed at the sheer size of the penalties given here especially to the 2 individuals concerned. Throughout the period concerned the LSE & FSA conducted inadequate guidance to practitioners regarding the use of "roll-overs". Although personally I've never countenanced the use of roll-overs for any clients many brokers have sought to throughput business with market-makers on this basis. Perhaps if there had been stronger monitoring of roll-overs by LSE & FSA earlier and clearer guidelines set (I recollect seeing confusing and contradictory memorandums at the time) this situation would not have arisen. Furthermore, if as is alleged, there was a false market in the said shares then this is more pertinent to the fact that neither the LSE nor the FSA has sought to address the extraordinary poor liquidity in all AIM stocks. By allowing market-makers to put up firm quotes on the "yellow strip" in sometimes a few hundreds pounds of stock is it surprising then that volatile share price movements occurred whilst market-makers were conducting albeit profitable and at the time perfectly legal roll-over trading. Better leadership at the helm is what is required here and I fear that the current misguidance is here to stay unless brokers and market-makers unite and request a self-administered market place with rule books that are adhered to as per the old LSE dealing guidelines which appear to be generally ignored by the current crop of dealers/traders.