20 May 2016 - Post by:Hayley Humphries
The sophisticated investigative and surveillance methods used in Operation Tabernula (summarised below) evidence how, as Mark Steward (Director of Enforcement at the Financial Conduct Authority (FCA)) put it, ‘the FCA will not tolerate sophisticated predatory criminals abusing our markets’.
In this blog post, we provide an overview of Operation Tabernula – the FCA’s longest-running and most complex insider trading case.
Operation Tabernula, (meaning ‘Little Tavern’) began in late 2007 after the Financial Services Authority (FSA, as it then was) received a Suspicious Transaction Report concerning the trades of Ben Anderson and Iraj Parvizi in one listed company. On the day concerned, Anderson and Parvizi’s trades seemingly accounted for 26 % of the trading volume in the company. This caused sufficient concern to spark a complex probe into a potential insider trading conspiracy.
The 8 year investigation was run by a series of UK authorities: the FSA and Serious Organised Crime Agency, and then the FCA and the National Crime Agency (NCA). It is reported to have cost £14 million and drew on the expertise of forensic accountants, lawyers, investigators, markets experts, intelligence analysts and digital forensic specialists, plus utilised surveillance tactics (including wiretaps) deployed by the NCA.
The five Operation Tabernula defendants (affectionately known as Fruit, Little, Nob, Uncle and Fatty) were accused by the FCA of a single count of insider trading occurring between November 2006 and March 2010:
- Martyn Dodgson (“Fruit”) – a former corporate broker.
- Andrew Grant Harrison (“Little”) – a former corporate broker with a specialty in mid-cap firms.
- Andrew Hind (“Nob”) – trained accountant and former finance director for a large company.
- Iraj Parvizi (“Mad Punter”, “Fatty”) – Anderson’s former business partner who was reportedly the subject of a now-dropped investigation relating to alleged infiltration of the Bank of England (which he denies).
- Ben Anderson (“Uncle”) – a day trader who operated out of Belgravia.
The FCA alleged that Mr Dodgson and Mr Harrison passed inside information obtained via their jobs to Mr Hind, who then placed trades on their behalf through Mr Parvizi and Mr Anderson.
The indictment listed a single count of conspiring to engage in insider dealing regarding securities in multiple companies. The information exchanges occurred over encrypted memory sticks (known as ‘iron keys’) and pay-as-you-go mobile phones. The defendants utilised nicknames and passwords (borrowing the names of luxury car brands) to protect their exchanges and utilised bank accounts in Panama and Switzerland to hide their profits.
The trial, which commenced on 31 January 2016, lasted 12 weeks and led the jury to deliberate for 8 days. On 9 May 2016, the jury found Mr Dodgson and Mr Hind guilty of conspiracy to engage in insider dealing. Mr Anderson and Mr Parvizi (whose actions seemingly sparked the investigation) plus Mr Harrison were acquitted.
On 12 May 2016, Mr Justice Pegden handed Mr Dodgson a custodial sentence of 4.5 years – the longest UK sentence to date for insider dealing (but still short of the maximum sentence of 7 years). Mr Hind did not get off lightly either, and was handed a custodial sentence of 3.5 years. The defendants’ behaviour was reportedly described by the judge as ‘persistent, prolonged, deliberate, dishonest’ and, on the part of Mr Dodgson, amounted to ‘a gross breach of trust’.
Mr Dodgson and Mr Hind are liable for the full amount of the estimated £7.4 million of profits and will be subject to a confiscation hearing next year.
Wiretaps, the ‘rumour mill’ and future action by the FCA
The convictions of Mr Dodgson and Mr Hind – alongside those of Paul Milsom, Graeme Shelley and Julian Rifat – brings the FCA’s tally to 5 convictions in respect of Operation Tabernula. One additional individual is due to stand trial at a later date.
Although something you would perhaps be more used to seeing at the cinema, the NCA facilitated the FCA’s use of hidden surveillance in the form of a wiretap. This wiretap was covertly used for the first time by the FCA to record conversations between Mr Parvizi and Mr Anderson. The use of surveillance tools by the NCA highlights how sophisticated apparatus will continue to assist the FCA in pursuing, and securing the convictions of, such individuals.
To date, the FCA (and its predecessor the FSA) has secured 28 criminal convictions in relation to insider dealing. It is clear that the FCA is determined to flex its muscles to investigate and prosecute those who engage in insider trading and that it will not be put-off by long or complex cases. However, the FCA’s success in relation to civil market abuse cases has been less notable, with a clear decline in the number of market abuse cases that have been concluded over the past few years. Nonetheless, the FCA remains committed to tackling both cases of criminal insider dealing and civil market abuse.
One interesting point given prominence during the Tabernula trial was the prevalence of ‘rumours’ in the stock market and the concept of the ‘rumour mill’. This point surfaced in the context of evidence alleging that one of the defendants, Mr Parvizi, had intentionally spread rumours regarding certain listed companies with a view to benefitting from the subsequent rise or fall in share price. When Mr Parvizi took the stand, his comments on this topic led to him being warned about the risk of self-incrimination, perhaps due to the risk that he could be admitting to having committed the offence of making misleading statements or creating a misleading impression, previously found in section 397 of the Financial Services and Markets Act 2000 and now in sections 89 and 90 of the Financial Services Act 2012.
During his closing arguments on 19 April 2016, Mr Parvizi’s barrister informed the court that the world of trading was dependent on the rumour mill. Apparently, ‘rumour makes the world go round and fuels speculation… in this ruthless environment etiquette very often goes by the board’. Query whether the FCA’s work in this area will lead them to turn so-called ‘etiquette’ into more hard-hitting enforcement action and prosecution in order to deter similar conduct.