Financial Watchdog’s new laws fail to halt insider dealings

INSIDER dealing is widespread in the City and getting worse despite new rules designed to crack down on it, the Financial Services Authority admitted yesterday. As the FTSE 100 index of blue chip share prices passed 6,000 yesterday, its highest level in five years, the chief City regulator revealed that cheating was rocketing. More people were getting forewarned of takeover bids and exploiting their knowledge to profit at the expense of honest investors including the institutions running pension funds and endowment mortgage investments.

In figures suggesting rampant abuse, the FSA found evidence that insider dealing was taking place before 29 per cent of the takeover announcements it investigated and before 22 per cent of company trading statements.

Insider dealers profit by buying shares before bids they know are coming. Once the bid is announced and the share price rises, they sell, bagging handsome, assured profits. The cheats can also profit at no risk to themselves if they buy shares before positive trading statements or “short-sell” — in effect bet on a share price fall — before company profit warnings

There are strict rules barring executives and advisers from exploiting this advantage, but there have been very few successful prosecutions.

New powers from December 2001 theoretically made it much easier to nail insider dealers through the FSA’s civil enforcement arm, where the standard of proof was lower. However, before 2003 no significant cases were brought and it is only in the past two years that the FSA has started to catch and fine culprits.

Even now, the FSA’s 2,000 officials have been accused of failing to catch the big fish, while enmeshing the innocent in copious red tape.

Hector Sants, the FSA’s managing director, said: “Effective deterrance requires successful enforcement cases.”

Last month, the FSA meted out fines of £750,000 each to one of London’s biggest hedge fund groups, GLG, and its former star trader Philippe Jabre for insider dealing. But this was regarded by some as a failure because it amounted to just a few weeks pay for Mr Jabre and a few days’ profit for GLG.

Public interest in stock market investment has reawakened recently as share prices surge. A flurry of takeover approaches for companies including the airports operator BAA and the ports group P&O have boosted investor sentiment.

The FTSE 100, which reflects the 100 biggest London-listed companies, soared by as much as 50.8 points to 6,044 yesterday, though by the close of trading it retraced most of its gains to end at 5,999.4. It has now bounced by 82.5 per cent since its nadir in the spring of 2003.

Patrick Hosking