UK: FSA Investigation Finds No Evidence Of Market Abuse In HBOS Share Raid

Last Updated: 29 August 2008
Article by Philip Rubens
  • False rumours may have contributed to share price collapse but other factors involved

  • FSA warns its investigations into false rumours to continue at "high level of intensity"

  • FSA will review firms' compliance policies for dealing with rumours

After a four-month investigation, the FSA has found no evidence of a "concerted attempt by individuals" to manipulate share prices in Halifax Bank of Scotland (HBOS) during the high-profile raid on its shares earlier this year.

On 19 March, the price of HBOS' shares fell by 17% in just 20 minutes after false rumours were spread that the bank had asked the Bank of England for an emergency loan. (Among other rumours circulating were that the governor of the Bank of the England had cancelled his Easter holiday and that the Bank had cancelled leave for members of the Monetary Policy committee). The rapid dive in share prices prompted the Bank of England and HBOS to issue immediate denials about the rumours, while the FSA issued a statement warning traders not to spread false rumours and deal on the back of them.

Many suspected that short-sellers, especially hedge funds, had circulated the rumours as part of a so-called "trash and cash" tactic to force down the price of shares.

Following its investigation, the FSA has concluded that while rumours may have contributed to the collapse in HBOS' share price, it could find no evidence of actual market abuse. In fact, says the FSA, although there were damaging rumours circulating in the market, there were significant other factors that could have contributed to the rapid drop in share value: the collapse of US bank Bear Stearns during the previous weekend, which meant traders gave undue credence to the rumours; a lack of liquidity in the shares; and "algorithmic" trading strategies that "amplified" the downward trend in the price of the shares.

In a statement, the FSA stressed the extent of its investigation, which included interviews with investment banks and hedge funds, including traders, senior management and compliance staff. Its Market Monitoring team also scrutinized trading records relating to HBOS shares and derivatives through its "centralized transaction monitoring database", and reviewed emails as part of an attempt to view the development of rumours over time and assess the impact on the HBOS share price.

Despite finding no evidence of abuse in this case - an outcome that many commentators predicted - the FSA warned that its surveillance and investigation of deliberate rumour-mongering would continue "at a high level of intensity," and if evidence was found it would take enforcement and possible criminal action.

In addition, the FSA revealed that it had launched a review of how firms should deal with rumours and whether firms have specific compliance policies to do so - in particular whether rumours are verified, whether traders are permitted to pass on rumours, and how firms ensure their staff do not pass on false rumours. The scope of its investigation will include hedge funds, the FSA said.

The HBOS episode was widely assumed to have spurred the FSA to launch its new code of conduct on disclosure of short positions for companies undergoing rights issues. Following introduction of the new code in June, several hedge funds revealed short positions in HBOS over the 0.25% threshold, led by US fund Harbinger Capital, which held a 3.29% short position.

For more information, see the FSA statement: FSA Concludes HBOS Rumours Investigation.

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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