£700,000 Fines Against Stock Broker for Market Abuse

Jack Humphrey, Regulatory journalist
June 15, 2011 /

The UK financial watchdog has banned and fined a self-employed stock broker £700,000 for manipulating the prices of shares on the London Stock Exchange.

Under the Financial Services and Markets Act of 2000, the Financial Services Authority (FSA) is authorized to seek injunctions and restitution orders against persons who have engaged in market abuse.

In a court order obtained by the FSA, Barnett Michael Alexander was prevented from committing market abuse and ordered to pay £700,000 fine and £322,818 in restitution to injured firms as a result of his actions.

Tracey McDermott, FSA’s acting director of enforcement and financial crime, said: “The FSA views market manipulation extremely seriously. Alexander’s behaviour was deliberate and repeated over a significant period of time. He sought to conceal his trading and made substantial profits at the expense of the firms which allowed him to trade with them.”

Meanwhile, the Southwark Crown Court in London has heard that David Mason, a former stock broker from Essex, duped 32 investors to buy shares worth a total of £269,117.71 in his investment vehicle Eduvest after promising that the 20p shares price would rise to 30p once Eduvest was listed on the PLUS market. This never materialized.

In addition to the financial penalty and restitution to firms, Alexander was also banned from performing any function related to a regulated activity, and was made to transfer a further £306,312 to the firms. This amount was held in trading accounts that Alexander controlled.

Operating as a self-employed stock broker of shares and retail derivative products, Alexander allegedly entered multiple small orders to buy and sell shares to manipulate the prices of shares on the London Stock Exchange.

Alexander used Direct Market Access (DMA) provider, a service offered by some stockbrokers that are exchange member firms, to place orders for shares. DMA enables investors to place buy and sell orders directly on the order book.

The FSA advised “DMA providers to be aware of the risk that such access may be abused and to ensure they have adequate systems and controls in place to monitor for abusive trading strategies and to report any suspicious activity to the FSA in a timely manner.”

The stock broker manipulated the price of contracts for differences (CFDs) and spread bets when he was still active from January 1, 2009 to May 25, 2010, the FSA claimed.

According to the FSA, Alexander generated £629,130 from the trading, with prices that he created through his share price manipulation.

The stock broker “frequently used CFD and spread betting accounts in the names of third parties to disguise his behaviour,” the FSA continued.

Accordingly, this manipulation of the prices of shares and derivatives at the expense of the firms amounts to market abuse.

The FSA first obtained a temporary injunction in May last year that prevented Alexander from committing market abuse and froze £1 million of his assets, the first FSA injunction against such offense.

Under the terms of the settlement the order restraining Alexander from continuing his abusive trading strategy will remain in place, and the freezing order will be discharged after he has paid the FSA £700,000 in penalty and £322,818 for restitution to the three firms.

Alexander’s activity was detected after an authorized firm submitted a Suspicious Transaction Report to the FSA. By carrying out an internal investigation, the report identified examples of Alexander’s trading strategy.

The FSA said “Alexander had asked third parties to open CFD and spread betting accounts in their own names.

“The third parties would then provide him with the login details for these accounts, which he then used as if he were the account holder.”

CFDs and spread bets are both types of financial derivative instruments that expose investors to share price movements without requiring them to own the shares.

“Many retail brokers provide CFD and spread betting services by way of automated electronic trading systems, which often offer CFDs and spread bets at prices determined by direct and immediate reference to the best bid and offer prices in the underlying shares on the London Stock Exchange,” the FSA explained.

The financial penalty was determined by the FSA in accordance with the guidance given in Chapter 6 of the Decision Procedure and Penalties manual (“DEPP”) as drafted at the time the body of Alexander’s trading took place.

The method of calculating the restitution payable by the stock broker was determined by the FSA with input from Alexander’s legal advisors.

 

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