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Operation Tabernula nears conclusion, 11 years after investigation started

  • United Kingdom
  • Global
  • Financial services disputes and investigations

24-05-2018

 

Operation Tabernula, the UK Financial Conduct Authority's (FCA) largest and most complex insider dealing investigation, has almost reached a conclusion with agreed confiscation orders totalling £1.7 million.

The defendants, Martyn Dodgson and Andrew Hind, were convicted of conspiracy to commit insider dealing after a jury trial in May 2016, bringing the FCA's tally of successful insider dealing prosecutions to 28.

Investigation and trial

The FCA's investigation, conducted in partnership with the National Crime Agency (NCA), spanned eight years and occupied more than 40 specialist investigators. Forensic accountants, lawyers, market experts, intelligence analysts and digital forensic specialists all collaborated with the investigation team in a painstaking examination of the suspicious trading.

At trial, the prosecution focused on five separate instances of alleged insider dealing relating to five different stocks which were traded between 2007 and 2010. The defendants were said to have engaged in meticulous planning for the offences, using elaborate strategies designed to prevent the authorities from uncovering their activities, including unregistered mobile telephones, safety deposit boxes and encoded and encrypted records.

With 485 Regulation of Investigatory Powers Act (RIPA) applications, information from 120 trading accounts, 500,000 entries of telecom data information, 500 hours of telephone conversations, 320 hours of surveillance audio, 600 digital devices to interrogate and five terabytes of digital information, this was an investigation on an unprecedented scale.

Heralded by the FCA as demonstrating its "capability and determination to root out this kind of abuse and ensure [the] market and the investing public are properly protected", the convictions two years ago were considered by many to represent a roundly successful outcome for the regulator. They were seen to be a product of its dogged determination to pursue the insider dealing ring, no matter how complex the trail, and whatever the cost.

The FCA was naturally less keen to focus on the acquittal of the other three defendants, so any claim that it was an unmitigated triumph should be viewed in context. At the time, however, Dodgson's sentence of four and a half years' imprisonment was the longest ever handed down for insider dealing in a case brought by the FCA.

Confiscation proceedings

Following the convictions in 2016, a number of commentators reported that the FCA was set to pursue confiscation with a benefit figure of more than £7 million. During the confiscation proceedings, the FCA alleged that the two defendants might have benefited by as much as £3 million, if not more, from their criminal conduct. Since the confiscation orders were agreed, no oral evidence was heard. Hidden assets were not alleged, and much of the property that formed the available amounts had been under restraint for a long period and so was readily accessible to the prosecution to evaluate.

The FCA's official position was that the court need not be invited to make a formal determination as to the full extent of the benefit figure, and the available amounts were agreed in the sum of £1,074,236 for Dodgson and £624,521 for Hind. Sentences in default for failure to make payment within three months were fixed at seven and a half years and five and a half years for Dodgson and Hind respectively.

That the confiscation did not proceed to a contested hearing means the court was not required to rule on an interesting point concerned with profits from additional trading. This was alleged to be general criminal conduct for the purposes of the confiscation proceedings, compared with the narrower scope of trading alleged to be criminal insider dealing at trial.

The FCA's position was that the existence of the conspiracy was proved by evidence of insider dealing in relation to five stocks. For reasons of good case management, it seems, it was decided at the outset of the trial that the presentation of the case upon which the conspiracy was founded would relate only to those five instances.

Insider dealing offences require the prosecutor to overcome relatively onerous evidential hurdles. Not least of these is the requirement to show that the "inside" information concerned was price-sensitive information not generally available to the rest of the market. The prosecutor also needs to present the complex trail of the trades and resulting profits through the various data sources mined from the titanic quantities of evidence collected.

The requirement to ensure the trial remained manageable therefore operated against the detailed exploration of other trades —of which the FCA asserted there were plenty — during the trial process.

The FCA argued, however, that the restriction to five trades did not apply to the confiscation proceedings. It asserted during the period post-conviction that the total amounts to be confiscated should include profits generated from trading in a further 23 stocks.

As both defendants were deemed to have a criminal lifestyle due to the extent of their offending, it said, the court was required to assume that the profits made from other trading within a defined period also represented the proceeds of insider dealing, and therefore their benefit from general criminal conduct. 

Ultimately, in the agreed confiscation put forward to the court for approval, Dodgson and Hind did not challenge that assumption in relation to their trading in the additional 23 stocks and so the issue was never fully explored during the proceedings. Had the point been pursued, the defendants would doubtless have found the process of discharging the reverse burden in relation to the assumptions regarding a further 23 stocks an onerous, if not impossible, responsibility.

Legal argument on this issue was never heard, and similarly the court never had to consider the question of whether criminal lifestyle (and therefore a large number of other trades which were not proved to be criminal insider dealing at the trial) might allow for a benefit figure substantially higher than the gross profit of the five trades for which evidence was called.

It remains to be seen whether, if this point were to arise in relation to future insider dealing cases (particularly where more substantial available assets were identified) the court would fix a benefit figure for profits from additional trading, the criminality of which was not explored during the trial.

Many have seen this investigation, and the vast sums spent on it, as evidence of the FCA's willingness to flex its muscles in relation to the prosecution of insider dealing. The sophisticated conspiracy in this case was very much at the other end of the spectrum from earlier, more rudimentary instances of insider dealing such as Neil Rollins and Thomas Ammann.

When viewed against the reported costs of the investigation, the confiscation amount of £1.7 million seems modest, but the determined stance adopted by the FCA, and its confident insistence that the investigation was a huge success, means this is unlikely to be the last of its type. We should expect to see similar prosecutions, pursued with equal vigour, in the future.

CORRECTION AND UPDATE AT 1511 LONDON TIME: The FCA has pointed out that it has one remaining investigation outstanding into Operation Tabernula

 

Investigation and trial
The FCA's investigation, conducted in partnership with the National Crime Agency (NCA), spanned eight years and occupied more than 40 specialist investigators. Forensic accountants, lawyers, market experts, intelligence analysts and digital forensic specialists all collaborated with the investigation team in a painstaking examination of the suspicious trading.
At trial, the prosecution focused on five separate instances of alleged insider dealing relating to five different stocks which were traded between 2007 and 2010. The defendants were said to have engaged in meticulous planning for the offences, using elaborate strategies designed to prevent the authorities from uncovering their activities, including unregistered mobile telephones, safety deposit boxes and encoded and encrypted records. 
With 485 Regulation of Investigatory Powers Act (RIPA) applications, information from 120 trading accounts, 500,000 entries of telecom data information, 500 hours of telephone conversations, 320 hours of surveillance audio, 600 digital devices to interrogate and five terabytes of digital information, this was an investigation on an unprecedented scale. 
Heralded by the FCA as demonstrating its "capability and determination to root out this kind of abuse and ensure [the] market and the investing public are properly protected", the convictions two years ago were considered by many to represent a roundly successful outcome for the regulator. They were seen to be a product of its dogged determination to pursue the insider dealing ring, no matter how complex the trail, and whatever the cost. 
The FCA was naturally less keen to focus on the acquittal of the other three defendants, so any claim that it was an unmitigated triumph should be viewed in context. At the time, however, Dodgson's sentence of four and a half years' imprisonment was the longest ever handed down for insider dealing in a case brought by the FCA.

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