Summary and implications

On 27 May 2014, the Upper Tribunal (Tribunal) handed down its eagerly awaited judgment in the Ian Hannam market abuse case. For those familiar with the case, this article summarises some practical consequences from the judgment below. It then briefly summarises the now well-known facts of the case and looks in more detail at some of the key points of the judgment.

We have been conducting numerous refresher training sessions since the Hannam Decision Notice, which many have found helpful. Please contact us if you think this would also be helpful for your firm.

Practical consequences

  • (Explicit) Confidentiality is king! Mr Hannam did not ensure the recipient of inside information (Dr Hawrami) was aware that it was confidential and price sensitive. He thought Dr Hawrami would have known, but the Tribunal concluded this was not enough. Best practice is to obtain prior permission before bringing someone inside. The Tribunal was explicit that persons in possession of (even potential) inside information should think carefully before disclosing it. The FCA said Mr Hannam made a "serious error of judgement" – others do not want to fall into the same trap.
  • "Inside information" covers a wide range of information – very high-level, initial discussions that may never lead to anything, could still be inside information. The Tribunal also concluded that inaccurate information could still be inside information. An event does not have to be more likely than not to occur to be inside information, there simply has to be a realistic prospect of it occurring. This sets a low threshold sitting just above "merely fanciful".
  • Keep insiders to a minimum – the Tribunal said people should only be brought inside if it is strictly necessary, which suggests a higher test should be applied beyond merely considering whether it is reasonable to do so. Insiders should think carefully before bringing others inside and properly justify their reasons for doing do.
  • Follow your internal procedures – if you don't, it will be difficult to argue that you are acting in the proper course of your employment, which removes a key market abuse defence. Insiders also need to consider the interests of their client, who may not want certain information to be disclosed or certain people to be brought inside.

Facts

Ian Hannam was a senior person at J.P. Morgan Cazenove (JPMC). He was close friends with Mr Anthony Buckingham, the CEO of Heritage Oil plc (Heritage), which was a client of JPMC.

Heritage instructed JPMC to advise on a corporate transaction. In seeking to do this, on his account, Mr Hannam sent two emails to Dr Ashti Hawrami (Dr Hawrami), the Minister for Oil in the Kurdish Regional Government (KRG) – a person Mr Hannam described as "the first point of contact for any business concerning oil in the region." The emails said:

The September email

"I thought I would update you on discussions that have been going on with a potential acquirer of Tony Buckingham's business. Tony, advised by myself, has deferred engaging with the client until Thursday of next week although we know they are very excited about the recent drilling results of Heritage Oil and today's announcement by Tullow. I believe that the offer will come in in the current difficult market conditions at £3.50 – £4.00 per share."

The October email

"PS – Tony [Buckingham] has just found oil and it is looking good."

The emails followed previous meetings between Mr Hannam, Mr Buckingham and Dr Hawrami where they discussed the possibility of the KRG taking a stake in Heritage. At the time of the September email, Heritage was also subject to a possible bid by another company, Perenco SA, although Perenco's interest had cooled whilst it awaited the results of Heritage's oil drilling in Uganda. Perenco subsequently made an offer that Heritage rejected and a public announcement to that effect was released in late September.

Allegations

The FCA fined Ian Hannam £450,000 for engaging in market abuse in a decision notice published in 2012. It argued that Mr Hannam had improperly disclosed inside information. Mr Hannam challenged the decision notice and referred the case to the Tribunal.

It should be noted that no trades were carried out on the back of this information and Mr Hannam's honesty and integrity was not in question.

The law

A much-simplified summary of the relevant law in this case is as follows:

  • Section 118 of the FSMA makes it an offence to disclose inside information to another person otherwise than in the proper course of the exercise of his employment, profession or duties (see points 5. and 6. below).
  • Inside information has to be precise (see point 1. below) and, to phrase it simply, price-sensitive.
  • Precise information will:

    • indicate "things" which have happened or may reasonably be expected to happen (see point 2. below); and
    • be specific enough to enable a conclusion to be drawn as to the possible effect it will have on the price (see point 3. below).
  • Information is price sensitive if a reasonable investor would be likely to use it as part of his investment decisions (see point 4. below).

The Tribunal also confirmed that the civil burden of proof is the appropriate standard in market abuse cases, at least under section 118 of the FSMA. Mr Hannam sought to argue that the higher criminal burden (or something close to it) should apply, but the Tribunal rejected this. The civil standard (balance of probabilities) is clearly easier to prove than the criminal standard (beyond all reasonable doubt).

Mr Hannam's defence

Mr Hannam argued that:

  • the two emails did not contain "inside information" – the information disclosed was not wholly accurate and, therefore, was not "precise" enough to be price-sensitive; or
  • alternatively, he was acting in the proper course of the exercise of his employment, profession or duties - he was acting in his client's best interests by trying to facilitate a substantial corporate transaction.

Key points from the judgment

Law (s. 118 FSMA)

The Tribunal's findings
1.

Inside information has to be precise

Information can still be "precise" even if it is inaccurate

The Tribunal confirmed that information does not have to be wholly accurate before it can be precise. If the information conveys an accurate message (i.e. a potential acquisition, an oil discovery or an equity raise), it does not matter that a statement within that message was, or turns out to be, inaccurate (i.e. the acquisition price was stated to be £4/share, and it turns out to be £2/share; or the quantity of oil was 3X, when it was in fact X; or a fund raise is for £500m and it turns out to be £250m). The message is still likely to enable a reasonable investor to draw a conclusion as to the possible effect it will have on the share price. As such, "if the correct facts are still recognisable despite the inaccuracies... the information would still be inside information."

2.

The information must indicate events which have happened or may be reasonably expected to happen

There has to be a "realistic prospect" of future events occurring

Past events or circumstances must be proved as a matter of fact to be precise. However, future events or circumstances must have a "realistic prospect" of occurring; namely, there is a realistic prospect that they will come into existence or occur based on an overall assessment of the factors existing at the time – it does not require more than an even chance, but cannot be fanciful.

Mr Hannam argued that because Perenco's potential bid for Heritage was only very preliminary and essentially dependent on the drilling results, there was not a "realistic prospect" of the bid materialising. The Tribunal rejected this argument. It found that even information concerning very early discussions which may never develop, can be inside information.

3.

The information must be specific to enable one to determine its effect on the price

"Specific" enough to conclude which direction the price will move

The Tribunal held that the information must enable a reasonable investor to draw a conclusion on the direction a price would move. The information does not need to indicate the extent of that price movement; a reasonable investor just needs to conclude that it might move and in which direction.

4.

Information is price sensitive if a reasonable investor would be likely to use it as part of his investment decisions

"Likely" effect on the price

The Tribunal linked the meaning of the word "likely" (i.e. whether a reasonable investor would be likely to use the information as the basis of his investment decisions) to the "realistic prospect" test (in 2. above). It means more than merely fanciful and not more likely than not, which is a higher threshold.

5.

Defence if you are acting in the proper course of your employment

Cannot be acting in the proper course of employment if no duty of confidentiality is imposed

The Tribunal could not conceive of a situation where an insider would be acting in the proper course of the exercise of his employment, profession or duties in disclosing inside information if he does not subject the recipient of inside information to a duty of confidentiality. However, simply imposing a duty of confidentiality does not mean an insider will be acting in the proper course of his employment. The rule on selective disclosure must be interpreted narrowly such that disclosure can only be justified if it is "strictly necessary".

The Tribunal brought into question the FCA's own guidance in MAR 1.4.5, which provides that the reasonable disclosure of inside information to facilitate a commercial, financial or investment transaction when the recipient is under a duty of confidentiality, will be deemed to be in the proper course of exercise of the insider's employment. The Tribunal said it was not clear how reasonable disclosure (in MAR) could be aligned with being "strictly necessary".

The Tribunal was also clear that the number of insiders must be kept to a minimum and that disclosure to persons not involved in the transaction must be very strictly controlled; such persons should not be given access to inside information if at all possible. The Tribunal also suggested that the FCA requires mandatory record keeping of insiders, their understanding of confidentiality and the information disclosed. Insider lists should already be widely used by the industry, but this administrative obligation could well be enhanced in the near future.

Not following a firm's procedures can never be in proper course of employment.

Linked to the above, the Tribunal held that an insider would almost certainly not be acting in the proper course of his employment if he does not follow the firm's own procedures or if it results in a breach of the Takeover Code. The Tribunal was also of the view that an insider ought not to pass on any type of information (whether insider or not) confidential to his/her client without the consent of the client.

As such, it is important to think carefully before disclosing any information on a client to another person. The information may be confidential and it belongs to the client, not the adviser. Disclosure should be with the client's consent (express or implied) and in accordance with your firm's procedures. If the information is inside information, you should be even more cautious.

A version of this article was first published on 10 June 2014 on Thomson Reuters Accelus" Compliance Complete.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.