UK: Court Of Appeal Upholds Regulatory Penalty For Market Abuse

Last Updated: 27 January 2014
Article by Maeve Healey

The Court of Appeal recently upheld the decision of the Upper Tribunal (Tax and Chancery Chamber) in relation to 7722656 Canada Inc (formerly carrying on business as Swift Trade Inc) (Swift Trade). Swift Trade had been fined GBP 8 million by the Financial Services Authority (FSA) for market abuse pursuant to section 118 of the Financial Services and Markets Act 2000 (FSMA).

The Court confirmed the Tribunal's finding that Swift Trade engaged in market abuse in relation to shares traded on the London Stock Exchange (the LSE). The conduct concerned was layering, a trading activity which distorts the market by placing and then deleting large orders on both sides of the order book to manipulate the apparent supply and demand.

The appeal

There were two substantive grounds of appeal:

  1. The first argument was that the company had been dissolved before the FSA's decision notice in the enforcement proceedings had been issued
  2. The second argument was the technical contention that the company's conduct should not be construed as market abuse because it related to contracts for difference (CFDs) rather than shares and so the definition of "qualifying investments" for the purposes of s.118 FSMA was not met. CFDs are agreements between two parties to settle at the close of their contract the difference between the price of a company's share when the market opens and when it closes. The value of CFDs is therefore linked to the value of shares although they are strictly a separate financial instrument.

The first ground: Did the company exist?

This was an important ground of appeal for the company because if successful the decision of the Upper Tribunal would have had to have been set aside. It concerned issues of foreign law because Swift Trade is a Canadian company.

It goes without saying that appeals to the Court of Appeal are only on points of law and foreign law is of course a question of fact. However, counsel for Swift Trade submitted that the conclusion of the Tribunal on this issue was not based on evidence. As it is an error of law to come to a conclusion for which there is no evidence, the Court had to examine the expert's evidence on Canadian law as well as the statutory background.

Somewhat embarrassingly for the regulator, the Court of Appeal's judgment highlights the fact that the FSA had posed the wrong question to its expert on Canadian law. The FSA had asked whether the enforcement proceedings were invalid by reason of the company's dissolution to which the expert replied that the proceedings against the company were valid under Canadian law. However, the right question was whether, as a matter of Canadian law, the company existed at the relevant time. Nevertheless, despite this error, the majority view of the Court was that this did not necessarily mean that there had been no evidence about the answer to the right question. On the basis of the expert's evidence and a Canadian case cited by him (material which was not rebutted), the Court held that the Tribunal had been entitled to find that the company still existed as a matter of Canadian law and proceedings could continue against it.

The second ground: Conduct "in relation to qualifying investments"

At the appeal hearing, Swift Trade repeated the argument it had made before the Tribunal that it did not effect transactions or orders to trade in shares because it used Merrill Lynch International and then Penson Financial Services Ltd to place the trades. The Court rejected this argument and held that, as these direct market access providers had hedged the orders automatically, Swift Trade had effected the transactions as much as they had.

Swift Trade's main argument however was that the Tribunal had erred in finding that its behaviour amounted to market abuse. It argued that the transactions had not been effected in relation to "qualifying investments" as defined in s.118 FSMA because CFDs were not "qualifying investments" so the definition of market abuse was not satisfied. The Court rejected this argument and held that even if CFDs were not qualifying investments, nevertheless Swift Trade's behaviour occurred "in relation to qualifying investments" because the CFDs were placed in relation to shares quoted on the LSE. The Court held that the words "in relation to" should be interpreted widely.


This is another significant penalty for market abuse in the regulatory arena. This case confirms the wider definition of market abuse which encompasses conduct not only relating to shares themselves but also to financial products which are linked to shares.

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.

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