Cornhill Capital Limited has been publicly censored by the
Disciplinary Committee of the London Stock Exchange. It was
also fined £300,000, discounted for early settlement to
The censure relates to breaches of the Rules of the London Stock
Exchange between April 2015 and July 2015, when Cornhill was the
placing agent for a placing of shares by for New World Oil and Gas
Plc ("New World"), an AIM company. The
placing was conditional on shareholder approval at a general
meeting to be held on 19 May 2015. Following the
placing announcement, Cornhill forward sold, on behalf of its
underlying customers, a significant quantity of placing shares for
settlement on 20 May 2015. These sales were on Exchange and
were unconditional, so Cornhill became wholly reliant on the
placing being approved by New World shareholders in order to settle
its position. However, the New World shareholders did not
approve the placing.
The Disciplinary Committee found that Cornhill had
breached Rule 1020.3 and the guidance to Rule 1400, as it did
not have adequate internal procedures and controls in place to
manage its forward selling of New World shares to an amount of
shares that it would be able to settle if the placing was not
approved by shareholders, or have a clear and viable strategy in
By entering into its forward sales of New World shares and
failing to ensure that these trades were able to be duly settled,
Cornhill engaged in a course of conduct which was likely to damage
the fairness or integrity of the Exchange's markets and caused,
or contributed to, a breach of the Exchange's Rules by other
member firms in breach of Rules 1400.4 and 1400.5.
When the placing was not approved, Cornhill was unable to settle
its forward sales, in breach of Rule 5000. As a result,
other member firms were unable to settle their own onward sales
where settlement was dependent on the receipt of stock from
Cornhill (thereby also breaching Rule 5000).
The settlement situation in New World shares had a detrimental
impact on the company, its shareholders and other market
participants, as it caused trading in the shares to be suspended
for approximately eight weeks until a second placing and open
offer had concluded and the settlement situation had improved.
In addition, Cornhill breached Rule 1060 in that some of its
trade confirmations stated that the trade was subject to the Rules,
when the trades themselves were not executed on Exchange.
Rule 1060 requires member firms not to inform a customer that a
trade is subject to the Rules unless the trade is on Exchange.
The Exchange agreed to settle the disciplinary action by way of
a Consent Order, taking into account that:
there was no intent by Cornhill, rather the issues arose as a
result of inadequate systems and controls;
Cornhill co-operated fully with the Exchange's
Cornhill does not have any historic issues on its compliance
Cornhill provided assurances that substantive remedial measures
have been taken to ensure that such breaches do not reoccur,
including extensive remedial work to its systems and controls;
Cornhill voluntarily compensated those of its advisory clients
that suffered losses as a result of their trades in New World, at a
The Exchange took the opportunity to give guidance to member
firms in relation to the monitoring of trading and settlement
positions. Member firms should ensure that their internal
systems and controls are sufficiently robust so as to be able
to identify and alert the firm when a trading position in a
security becomes mismatched with the firm's settlement position
in that security. For example, a member firm may have a
relatively flat trading position in a security but at the same time
have a severe settlement backlog, either because the firm has not
received delivery of stock due to failed purchases, or is awaiting
settlement of purchases which were traded for extended
Monitoring of positions should also:
reference the number of shares in issue; and
be undertaken regardless of the monetary value of a particular
Even if an unsettled position is of low monetary value to a
firm, it may, in terms of the number of shares in issue, be
significant in terms of the impact it has on the firm's
counterparties and the overall settlement situation in the
market. This is particularly relevant where the company may
have an upcoming corporate action which is subject to a shareholder
Member firms should have a clear strategy for ensuring
settlement of any short position.
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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