Market Abuse

This is a recent case in the UK. FSA fined hedge fund manager GLG Partners LP (GLG) and its former managing director Philippe Jabre £750,000 each for market abuse and breaching FSA principles. This is the largest fine the FSA has issued against an individual.

According to FSA's report, Jabre was "wall crossed" on 11 February 2003 by Goldman Sachs International (GSI) as a pre-marketing exercise of a new issue of convertible preference shares in Sumitomo Mitsui Financial Group Inc (SMFG). Jabre was given confidential information and agreed to be restricted from dealing SMFG securities until the issue was announced.

However, Jabre breached this restriction by short selling around $16 million of SMFG ordinary shares on 12-14 February 2003. When the new issue was announced on 17 February 2003, he made a substantial profit for the GLG Market Neutral Fund.

The following facts are also remarkable:

• Before Jabre was informed by GSI of the information on the perspective issue, he had already maintained a trading strategy of borrowing and short selling the shares of SMFG.
• "Wall crossing" was formally agreed between Jabre and GSI salesman during their communications. Jabre clearly accepted the restriction so that he could not trade the name of SMFG at all, even just for following his "existing trading pattern".
• There are no tape recordings of conversations between Jabre and GSI saleman on 11 February 2003. FSA has considered other materials such as internal GSI emails and transcripts of interviews.
• Jabre failed to consult GLG's Compliance Department on this wall-crossing issue.

FSA considers this guy is a prominent figure in the hedge fund industry. Obviously it was perceived he understood the rule but still decided to take the regulatory risk. £750,000 is quite a huge penalty at individual level.

Monitoring of wall-crossing activities between a fund manager and an outside investment banker is also a challenge to compliance officers.