Winterflood Securities Ltd & Ors v The Financial Services Authority

The Court of Appeal upheld the Tribunal's decision that market abuse under section 118 of the Financial Services and Markets Act 2000 is governed by an objective test and does not, as a matter of law, require proof of an "actuating purpose" to mislead or distort the market. The court analysed the relationship between the statutory definition in section 118 and the Code of Market Conduct prepared under sections 119 and 122, holding that only those provisions of the Code designated as safe harbours under section 122(1) are conclusive. Other Code provisions (the evidential "E" provisions such as MAR 1.5.8E, MAR 1.5.9E and MAR 1.6.9E) have persuasive or evidential value but do not create implied safe harbours or exhaustively define conduct that may amount to market abuse.

Applying those principles, the court found no basis to read the Code as requiring an actuating purpose for behaviour said to create a false or misleading impression or to distort the market, and dismissed the appeal.

Background and facts:

• Between August 2003 and July 2004 Winterflood Securities and two of its market-makers were involved in trading shares in Fundamental-E Investments plc (FEI) on AIM during a share ramping scheme organised by Mr Simon Eagle. The scheme used SP Bell and a sequence of "rollover" and delayed rollover transactions to create apparent demand, inflate the FEI price and defer settlement, culminating in a market collapse and SP Bell's insolvency.
• Winterflood executed most of the rollover trades and sold the majority of the original shareholders' shares to SP Bell; the Trading produced an artificially high FEI price.

Procedural posture: The Financial Services Authority (FSA) issued decision notices finding market abuse and imposing financial penalties on Winterflood and the two individuals. Each appellant referred the matter to the Financial Services and Markets Tribunal (the Tribunal). The Tribunal directed a preliminary issue: whether, in light of the Code of Market Conduct, an "actuating purpose" to mislead or distort the market is required for artificial transactions or price positioning to amount to market abuse. The Tribunal held that no actuating purpose was required and dismissed the references. The appellants appealed to the Court of Appeal.

Nature of the claim and issues: The appellants sought to overturn the FSA's penalties. The central legal issue on appeal was the proper construction of section 118 of the Financial Services and Markets Act 2000 and of relevant provisions of the Code (notably MAR 1.2.5E, MAR 1.5.8E, MAR 1.5.9E, MAR 1.6.9E), specifically whether an actuating purpose to mislead or distort the market is a necessary element of the market abuse offences described in the Code and statute.

Court's reasoning and conclusion:

• The court began with the statute: section 118 defines market abuse by reference to objective effects on the market and the standard of behaviour a regular user would expect; it does not require a particular mental element.
• The Code is an integral part of the regulatory regime, but only those Code provisions designated under section 122(1) as not amounting to market abuse are conclusive safe harbours. Other Code provisions carry evidential or persuasive weight under section 122(2) but do not, by implication, create additional safe harbours.
• The court analysed MAR 1.5.8E/1.5.9E (artificial transactions) and MAR 1.6.9E (price positioning) and concluded they identify types of conduct that will normally or specifically constitute abuse but do not exclude other objectively abusive conduct absent an actuating purpose. If the FSA had intended to make actuating purpose a necessary element it could have drafted the Code differently and expressly designated such exceptions.
• The court therefore dismissed the appeal, holding that the objective test of section 118 may capture conduct that creates a false or misleading impression or distorts the market even where no actuating purpose is proved; the Code's evidential paragraphs do not change that rule.

Appeal dismissed. The Court of Appeal held that market abuse under section 118 is governed by an objective test and does not require proof of an actuating purpose to mislead or distort the market; provisions of the Code designated as evidential (MAR 'E' paragraphs) have persuasive weight but do not create implied safe harbours and do not alter the statutory, objective test. Only Code provisions expressly declared under section 122(1) are conclusive safe harbours.

This appeal was from consolidated references to the Financial Services and Markets Tribunal (Sir Stephen Oliver Q.C. and Mr Terence Mowschenson Q.C.), which had determined as a preliminary issue that an actuating purpose was not required and dismissed the references. The Tribunal's decision was appealed to the Court of Appeal, which delivered judgment on 22 April 2010 ([2010] EWCA Civ 423).