Mobile Phone Communications at Center of Conspiracy

A judge has issued confiscation orders totaling £1.69m against two recently-convicted insider dealers. These confiscation orders follow an FCA prosecution in which a former investment banker and a chartered accountant were convicted in the largest ever FCA insider dealing investigation. Investment banker Martyn Dodgson and chartered accountant Andrew Hind received sentences of 4.5 years and 3.5 years, respectively.

To prove the conspiracy, the FCA worked alongside the National Crime Agency and relied on evidence of insider dealing in relation to five specific stocks. The conspiracy operated between 1 November 2006 and 23 March 2010. During that time, Mr. Dodgson held senior positions at Morgan Stanley, Lehman Brothers and Deutsche Bank. He used those positions to source insider information, which he passed on to his close friend, Mr. Hind, who in turn placed trades for the benefit of both defendants.

The FCA investigation uncovered elaborate strategies used by the defendants to cover up their activities, including the use of unregistered mobile phones, safety deposit boxes, and encoded and encrypted records.

FCA Enforcement

The FCA levied £229.4 million ($307 million) in penalties last year, a dramatic increase over the £22.2 million levied by the Authority in 2016. This year, the FCA has already fined a brokerage firm over one million pounds for weak surveillance procedures. This stands as one of the largest fines ever levied against a retail broker for poor surveillance.

This should serve as a reminder to review your policies and procedures to ensure you are compliant with current recordkeeping and supervision rules. MiFID II requires that firms have systems and processes in place to capture, retain and reproduce complete records of all services, activities and transactions. This includes all telephone calls on fixed and mobile, and all forms of electronic communications — text messaging, email, social media, instant messaging, and so on. MiFID II rules apply to relevant communications from any personal or business device.

Firms must make records available to clients for five years and for up to seven years for regulators. Records must be maintained in a durable medium, such as Write-Once-Read Many (WORM), that cannot be altered or deleted but must be searchable and readily available upon request.

Organizations must be able to provide evidence of their ability to detect behaviors that may be relevant to market abuse in all recordings — and this evidence must be readily available for regulatory investigation. The Archiving Platform from Smarsh features recordkeeping and surveillance aspects that allows firms to meet the MiFID II requirements. These supervisory capabilities allow users to flag activities that may be criminal or prohibited. For example, if a client sends a text to one of your firm’s employees that reads, “this is nonpublic,” or “material, nonpublic information,” the message will be automatically flagged for review, with the indication of a potential insider information policy violation. Lexicon policies can help test and verify that your firm’s supervisory procedures are reasonably designed to achieve compliance with applicable regulations. Monitoring electronic communications can be incredibly effective to find early indicators of any wrongdoing or sharing of non-public information. Firms must demonstrate effective oversight and control over policies and procedures relating to their communications.

Training and ongoing education are critical for effective oversight. Provide focus training on specific topics to inform reviewers of prohibited practices. Your reviewers should know how to detect and report potential violations. With the new MiFID II rules in effect, there are real and significant consequences for firms and individuals found out of compliance with global regulations.