7722656 Canada Inc & Anor v The Financial Conduct Authority & Ors

The Court of Appeal upheld the Upper Tribunal's conclusion that the appellant's trading activity amounted to market abuse under section 118(1) and (5) of the Financial Services and Markets Act 2000. The tribunal's factual findings established that Swift Trade (the appellant's predecessor) caused a pattern of manipulative trading (layering) in relation to shares admitted to trading on the London Stock Exchange, even though the immediate orders on the exchange were placed automatically by DMA providers. The court held that Swift Trade "effected" transactions or orders to trade because it caused the automated hedging orders to be generated and knew those orders would operate automatically; and that its activity occurred "in relation to" qualifying investments because the contracts for difference were contracts in particular shares.

The court also considered whether the appellant company, formed after amalgamation and later dissolved under Canadian law, existed for the purpose of the proceedings. The majority accepted expert evidence that, under the Canada Business Corporations Act (notably s.226), a dissolved Canadian corporation may have a continuing limited legal status sufficient to validate proceedings begun before dissolution; the dissenting judgment would have held that issue contrary to the majority. The tribunal's findings that the conduct was deliberate, manipulative and not protected by the statutory defence in section 123 were upheld, and the appeal was dismissed.

Background and parties: The appeal arose from an Upper Tribunal (Tax and Chancery Chamber) decision upholding a Financial Services Authority Regulatory Decisions Committee decision that Swift Trade (now the appellant) had committed market abuse by engaging in a systematic pattern of "layering" in relation to shares traded on the London Stock Exchange. The FSA imposed a fine of £8 million. Swift Trade and its principal, Mr Peter Beck, referred the decision notice to the Upper Tribunal. The appellant challenged the tribunal's findings on two legal points in this Court of Appeal hearing.

Nature of the application: This was an appeal on points of law from the Upper Tribunal. The relief sought was to set aside the tribunal's decision upholding the FSA decision notice and its findings of market abuse and liability (and, derivatively, the penalty).

Key factual matrix: Dealers placed contracts for differences (CFDs) through Swift Trade's DMA platform with UK DMA providers (first Merrill Lynch, later Penson). Those DMA providers automatically hedged the CFD orders by placing and then cancelling corresponding orders in the underlying LSE shares. Swift Trade's traders had real-time access to the LSE order book and timed trading to exploit the movements produced by the automated hedging. The Upper Tribunal found the activity constituted deliberate manipulative trading (layering) and that Swift Trade devised and encouraged the strategy.

Issues for decision:

• whether the Canadian successor company (formed by amalgamation and later dissolved) legally existed such that proceedings and the reference to the Upper Tribunal were valid;
• whether the appellant's conduct fell within section 118 of the Financial Services and Markets Act 2000 — in particular whether it "effected transactions or orders to trade" in qualifying investments under s.118(5) and whether its behaviour occurred "in relation to" qualifying investments where the appellant traded CFDs rather than the underlying shares.

Court's reasoning: On existence, the majority accepted the Canadian expert evidence that, by reference to the Canada Business Corporations Act (notably s.226 and related provisions), a dissolved corporation may continue to be subject to proceedings commenced before dissolution and that this provided a limited continuing existence sufficient to validate proceedings; a single Lord Justice dissented, preferring the view that s.226 is a procedural deeming provision and that English private international law requires the lex fori to determine procedural capacity, making the company non‑existent for the purposes of English procedure.

On market abuse, the court accepted the tribunal's factual findings. The automated hedging by DMA providers did not prevent Swift Trade from having "effected" the orders since Swift Trade caused the activity and knew the automatic mechanism would operate; jointly or concertedly effected behaviour is caught by s.118(1). The phrase "in relation to" qualifying investments was interpreted broadly: CFDs whose price depended on particular shares were behaviour occurring in relation to those qualifying investments. The tribunal's conclusion that no reasonable grounds for a statutory defence under s.123 existed was upheld.

Procedural posture and path: The decision before the Court of Appeal was an appeal from the Upper Tribunal (Tax and Chancery Chamber), following a referral of the FSA decision notice to that tribunal.

Notable observations: The court emphasised that findings on foreign law are treated as questions of fact in English law and may only be disturbed on appeal in limited circumstances (Edwards v Bairstow test). The appeal produced a split judgment on the foreign‑law point but a majority dismissal overall.

The appeal was dismissed by majority. The majority held that the Upper Tribunal was entitled to find that the appellant (through its predecessor Swift Trade) effected transactions or orders to trade in relation to qualifying investments for the purposes of section 118(1) and (5) FSMA 2000: the appellant caused the automated hedging orders and knew they would be executed; and the appellant's CFD trading occurred "in relation to" the underlying qualifying shares. The majority also accepted expert Canadian law evidence that under the Canada Business Corporations Act (notably s.226) a dissolved corporation may retain a limited existence sufficient to validate proceedings begun before dissolution. A single Lord Justice would have allowed the appeal on the company‑existence ground, concluding s.226 is a procedural deeming provision and that the company had ceased to exist for English procedural purposes, but that view did not command a majority.

Appeal from the Upper Tribunal (Tax and Chancery Chamber) (His Honour Judge Colin Bishopp). The Upper Tribunal had upheld the FSA Regulatory Decisions Committee decision (reported in [2013] Lloyd's L.R.(F.C). 381ff) and the appeal to the Court of Appeal was on points of law arising from that tribunal decision.