In this decision report we review the FCA's final notice issued to Gavin Duncan Paul Breeze on 15 July 2016.

Mr Breeze was an investor in, and a former non-executive director (NED) of, a mobile payment software applications company, MoPowered plc, which was admitted to trading on the London Stock Exchange's Alternative Investment Market (AIM). After becoming aware that MoPowered was due to undertake a placing, Mr Breeze disposed of some of his shareholding in MoPowered and also informed another of MoPowered's shareholders that it was intending to undertake a placing. As a result, Mr Breeze was found to have committed market abuse contrary to section 118(2) (insider trading) and 118(3) (improper disclosure) of the Financial Services and Markets Act 2000 (FSMA).

Background

The FCA described Mr Breeze as "an experienced individual in the field of mobile payment software applications". He has held several directorships of private companies and, as at the date of the final notice, was a non-executive director (NED) of two listed companies. In these roles, Mr Breeze had received training on inside information and the obligations on those who hold such information. In particular, Mr Breeze had been made an insider on a number of occasions and confirmed to the FCA that he was familiar with this concept and the relevant rules associated with it.

MoPowered plc is a company that designs mobile payment software applications. Since December 2013, its shares have been admitted to trading on the London Stock Exchange's Alternative Investment Market (AIM).

Mr Breeze became involved in MoPowered in 2008 as a significant seed investor. He invested over £800,000 in the company. In December 2008, Mr Breeze was appointed as a NED of MoPowered, and between 2009 and mid-2013 (when he resigned and ceased his involvement with MoPowered), he was the non-executive chairman of MoPowered.

The placing

In June 2014, MoPowered decided to raise £3.5 million in capital through a share placing. A share placing involves the private offering of a company's shares to certain chosen investors. The new shares are not offered to the general investing public. A share placing is usually priced at a discount to a company's current share price. As a result, the price of a company's shares following a placing is generally expected to fall. The price of a share issued in a share placing is largely determined by the price at which the investors are willing to subscribe for shares. The pricing negotiations are handled by the company's broker, with the company being the ultimate decision maker. The exact price of a placing is often not determined until late in the process. Where shares in a placing are to be listed on AIM, the company must work closely with its nominated adviser in respect of the arrangements and the listing.

Informing Mr Breeze about the placing

Information about the placing was classified as price sensitive and, as such, was tightly controlled. The number of existing shareholders approached by MoPowered was intentionally limited to minimise the risk of someone trading on the basis of information about the placing.

As a significant shareholder of MoPowered, Mr Breeze was selected as a shareholder who would be approached about the placing. On 12 September 2014, the Chief Executive Officer of MoPowered called Mr Breeze and informed him of the proposed placing at a discounted price. Following this discussion:

• MoPowered's nominated adviser was told to add Mr Breeze to the insider list for the placing, which had been set up to keep a record of those who were privy to price sensitive information about the placing.

• MoPowered’s Chief Executive Officer sent Mr Breeze an email that attached information about the placing, including its proposed timetable and announcement, and MoPowered's plans for using the money it raised. As for pricing, the email stated that "regrettably, the placing is likely to be priced at a discount to the current share price". The information attached to this email also included wording that reminded recipients that:

  • the information set out was confidential;

  • the information set out may constitute inside information for the purposes of section 118 of FSMA, or the Criminal Justice Act 1993 (CJA), or both;

  • by agreeing to receive the information, recipients had agreed to be treated as an "insider"; and

  • as a result, recipients of the information should not deal in any securities of MoPowered until the date of a formal announcement by MoPowered in connection with such information.

Mr Breeze's reaction to the placing

Mr Breeze did not respond to the email he received from the Chief Executive Officer of MoPowered. However, four minutes after receiving the email, Mr Breeze forwarded the email to another shareholder of MoPowered, who had not been made an insider and was not aware of the placing, and said "What do you think?".

On 18 September 2014, MoPowered's Chief Executive Officer sent Mr Breeze a further email informing him that, while MoPowered had succeeded in obtaining commitments to raise the full £3.5 million, one institutional investor was only willing to purchase additional shares at an "enormous discount to the current market price". Just over an hour after he received this email, Mr Breeze emailed his broker with an instruction to "Please sell all my MoPowered at any price".

Shortly after contacting his broker, Mr Breeze responded to the Chief Executive Officer's email, expressing his frustration with the placing process and informing him that he would not be taking part in any placing at any price.

Later that morning, Mr Breeze's broker informed him that they would not be able to sell Mr Breeze's entire MoPowered shareholding in one order due to the relative lack of liquidity. He suggested starting with an order of 10,000 shares and warned Mr Breeze that this order could have a negative impact on MoPowered's share price. Notwithstanding this advice, Mr Breeze responded that he "would like to sell as much as I can, as soon as I can".

Announcement of the placing

By the close of the market on 19 September 2014, Mr Breeze's broker had sold 10,000 of his 1,273,500 shares at a price of 26 pence per share (the closing price of MoPowered's shares that day was 20.25 pence per share).

At 17.45 on 19 September 2014, MoPowered announced its interim results for the six months ending 30 June 2014 and that it intended to undertake the placing. The announcement also included certain information about MoPowered's financial performance, which had also been included in the information attached to the email sent by MoPowered's Chief Executive Officer to Mr Breeze on 12 September 2014.

On 22 September 2014, MoPowered announced that it had raised approximately £3.5 million through the placing at an issue price of 5 pence per share.

As a result of these announcements, MoPowered's share price fell from a closing price of 20.25 pence prior to the announcement on 19 September 2014 to approximately 8 pence within the first hour of trading following the announcement on 22 September 2014. It had fallen to 7 pence by the close of trading on 22 September 2014, representing a fall of 65% from the previous day's close price of 20.25 pence.

On 22 September 2014, Mr Breeze instructed his broker not to continue selling his shareholding in MoPowered as he thought there would "be no demand at this price".

Loss avoided

Mr Breeze's sale of 10,000 shares on 19 September 2014 allowed him to avoid a loss of £1,900. Had Mr Breeze been able to sell his entire shareholding in MoPowered at the same price (26 pence per share), he would have avoided a loss of up to approximately £242,000.

Findings

The FCA found that the information Mr Breeze had received about the placing on 12 September 2014 constituted inside information for the purposes of section 118C of FSMA. As a result, the FCA found that Mr Breeze had committed two types of market abuse contrary to section 118 of FSMA through his conduct relating to MoPowered in September 2014, namely:

• Improper disclosure of inside information other than in the course of his employment, profession or duties contrary to section 118(3) of FSMA as a result of him disclosing inside information about the placing (that he received from MoPowered's Chief Executive Officer) to another shareholder on 12 September 2014. The FCA found no evidence to suggest that the other shareholder who received this information acted or traded on it.

• Insider trading contrary to section 118(2) of FSMA as a result of him instructing his broker to sell his shareholding in MoPowered on 18 September 2014, which resulted in him avoiding a loss of £1,900.

Sanction

The sanction imposed on Mr Breeze was comprised of the following three elements:

• Restitution: Under section 384 of FSMA, the FCA has the power (if it is satisfied that a person has engaged in market abuse and that one or more persons have suffered loss as a result of the market abuse), to require restitution to be paid to the appropriate person of such an amount as appears to the FCA to be just, having regard to the extent of the loss. The FCA decided to require Mr Breeze to pay restitution. The amount of restitution that Mr Breeze was required to pay (£1,850 plus interest at a rate of 8% per annum) was calculated by comparing the price paid by those who purchased Mr Breeze's 10,000 MoPowered shares. This is because the FCA determined that the loss avoided by Mr Breeze's market abuse was borne by the purchasers of Mr Breeze's MoPowered shares. The FCA said that it would pass this restitution onto the purchasers of Mr Breeze's shares.

• Financial penalty: The FCA imposed a financial penalty of £59,557 on Mr Breeze as a result of him having committed market abuse contrary to section 118(2) of FSMA (insider trading). Mr Breeze received a 15% discount on his financial penalty due to the co-operation he provided during the FCA's investigation. In particular, the FCA noted that Mr Breeze made various voluntary admissions during his interview with the FCA, which reduced the time and cost of the FCA's investigation, and that he offered to pay restitution to the investors who had purchased his 10,000 MoPowered shares.

• Public censure: The FCA decided to only impose a public censure on Mr Breeze as a result of him having committed market abuse contrary to section 118(3) of FSMA (improper disclosure). The FCA took this course of action due to the lack of impact on the market this aspect of Mr Breeze's conduct had as the shareholder he passed information to about the placing did not trade on that information. However, the FCA stated its wish to nonetheless make clear that passing on inside information on the basis of an assumption that the recipient will receive it formally as an insider in due course may amount to serious misconduct in other circumstances.

Comment

The FCA's pursuit of Mr Breeze for market abuse is somewhat unsurprising. His conduct as explained in the final notice falls quite squarely within the bounds of section 118(2) and (3) of FSMA. It is, however, interesting that the FCA opted to use its rarely-used restitution powers in section 384 of FSMA and that it intends to return the (relatively small) sum Mr Breeze paid in restitution to investors who purchased his MoPowered shares. In market abuse cases, it is more common for the FCA to rely on its powers in DEPP 6.5C.1G to require a person to disgorge any financial benefits they derived directly from their market abuse. In those cases, any sums disgorged are not typically passed onto third parties who have suffered detriment as a result of the conduct in question. The FCA did not expressly state why it decided to use its restitution powers in this case, however, it appears that Mr Breeze proactively offered to pay restitution to those investors who had purchased his MoPowered shares.

At the end of the 2015/16 financial year, the FCA had 55 open market abuse investigations. However, during the same financial year, the FCA only managed to successfully conclude one market abuse investigation. During this financial year so far, the FCA has managed to successfully conclude two market abuse investigations, so is already beating its total for 2015/16. However, the FCA is still quite a way from replicating its performance in 2010/11, when the FSA (as it then was) successfully concluded 17 market abuse cases.

Last year, the FCA commented that the lower number of concluded market abuse cases was due to these cases being more complex, and therefore time-consuming, to investigate and conclude. At the same time, the FCA noted that it had a strong pipeline of market abuse cases. However, over a year later we are yet to see these cases being resolved (at least publicly). As a result, it looks like the FCA is still grappling with the issues it has encountered when it comes to concluding more sophisticated types of market abuse cases over the last few years.

However, leaving civil cases to one side, the FCA has enjoyed considerably more success over the past few years when it comes to prosecuting insider trading under the CJA. In particular, earlier this year, the FCA concluded its longest-running (and most costly) insider trading investigation, known as Operation Tabernula. This case resulted in the conviction of two of five defendants and the imposition of the longest custodial sentence imposed in the UK for insider trading, four and a half years. It appears, however, that the FCA is close to exhausting its current pipeline of criminal insider trading prosecutions (or at least those that it has publicised).

This article first appeared in Practical Law and is published with the permission of the publishers.