High Time The FSA Cracked Down On Insider Trading

The Evening Standard  –  6 April 2010

There is only one surefire way of making money on the stock market and that’s to trade shares on the back of price-sensitive information that the public is not privy to. 

Buying stock in a company that you know is about to be taken over will generally produce a 25%-30% profit within a few days which, on a £10 million investment, pays for a few Ferraris. The only minor problem is that the practice of insider trading is illegal.

Fortunately for ruthless scoundrels across the Square Mile, the regulators have proved inept in the past at bringing wrongdoers to justice. There wasn’t a single successful prosecution prior to 2008 and this, of course, explains why the practice became so horrifyingly rife over my 12-year stockbroking career.

Cityboys assess risk and reward for a living, and when the rewards are vast and the risks are negligible, then the choice is what we commonly used to refer to as a “no-brainer”.
However, things might be changing. The Financial Services Authority has just raided 16 addresses and arrested seven City high-flyers (one of whom was an ex-client of mine) in the culmination of a two-year investigation involving 143 watchdog employees. The authorities obviously hope that Cityboys will take note of their “crackdown” and cease their nefarious sideline. They haven’t got a hope.

I worked as a City analyst between 1996 and 2008. It was around 2003 that certain dubious hedge-fund clients of mine began to ask me quite blatantly for inside information. It would always be done in a slightly jokey way, usually face to face over a £300 meal at some Michelin-starred restaurant but occasionally over the mobile (though, of course, never over the fixed line to my bank as all those calls are recorded).

The hedge funds had grown in size and multiplied after the 2000-03 bear market and some of these big-hitting guys (and I’m afraid it was always guys) had the scruples of a hyena.

These chaps were also hyper-competitive and wanted their fund to have the best annual performance so they could brag about it to their peers over a glass or 10 of Cristal every January. Hence, you were not deemed criminal if you had access to insider information just lucky.

In 2007, the then head of the FSA, John Tiner, said that insider trading was rife and the FSA’s own analysis suggests that 29% of public takeovers in 2008 were preceded by “suspicious share price movements”.

Frankly, I’m surprised the number is that low. Every single company that was acquired in the sector I covered (UK utilities) experienced dramatic share price rises just before being forced by the Takeover Panel to announce that they had received an approach “that may or may not lead to an offer”. This can only be explained by a massive amount of insider trading.

I believe that the incessant insider trading I witnessed over my career was symptomatic of what Gordon Brown referred to as “the age of irresponsibility” (a period which just happened to coincide exactly with my time in the City). It went hand-in-hand with other dubious City practices that became ubiquitous over the past decade: market manipulation, the spreading of false rumours and tax avoidance.

Two decades of deregulation and the “victory” of Thatcherite ideals after the fall of the Berlin Wall resulted in Europe’s financial capital becoming a Wild West casino. We all knew that we were in the middle of a boom that had to finish at some point and we interpreted every downturn (the 1998 Asia Crisis, the 2000 bursting of the tech bubble) as the beginning of the end. These short-lived threats just spurred us to make as much cash as quickly as possible because the party was so clearly going to be over.

I lost count of the number of times I heard a smug client voice the age-old City phrase that “a long-term investment is just a short-term bet that’s gone wrong”. It is this attitude that helps explain why certain bankers created financial products that were bound to explode and, in so doing, create the credit crunch. These chaps were well aware that they would reap several huge bonuses before it might go wrong.

Some believe that insider trading is a “victimless crime” (a description I heard regularly in the City) but it isn’t. Every time some scallywag uses his inside knowledge to make a fast buck, the sucker he bought the shares off suffers as a result of no longer owning shares that would have benefited from the premium that a predator is willing to pay.

Since these schmucks are often running your pension or ISA, the insider traders are stealing directly off you. That is why it’s high time the FSA began to turn itself into a credible deterrent.

Unfortunately, proving this particular crime is extremely difficult. Even if the FSA had definite proof that a notoriously loose-tongued corporate financier involved in a specific takeover had a candle-lit dinner with some greedy investor the night before the latter bought shares in the target company it would be hard to secure a conviction.

If there were no witnesses or tape recordings, how can it be proved that they talked about anything more damaging than which one of the Pussycat Dolls floats their boat? That’s why Martha Stewart’s insider-trading conviction was the exception that proves the rule and why most insider traders can sit at home counting their ill-gotten gains.

While the FSA is beginning to use wire taps (as the US Securities and Exchange Commission has done in successfully pursuing an insider-trading ring in New York), the City is populated by cunning, ruthless people who will simply take note of the new approach and adapt their behaviour accordingly.

I became so disgusted with the greed and fathomless corruption in the City that I left my job and wrote a book warning people about the horrors I’d witnessed.

Some people think that this recession may even result in greed not being “cool” any more. Well, I put my email address at the back of my book and I can say that 90% of the emails I receive are sent by young men desperately seeking advice on how to become a stockbroker. There may be trouble ahead.