A reduced number of mergers and acquisitions means that Britain's financial regulator will focus on other areas to root out market abuse, such as company refinancings and profit announcements.
``If we are entering into a recession, the likelihood is that we will see more examples of companies needing to give profit warnings, or even announcements concerning liquidity,'' said Jamie Symington, head of wholesale enforcement at the Financial Services Authority, in a speech in London today. ``This poses a high risk of market abuse.''
The FSA is under political pressure to win its first criminal conviction for insider trading and is prosecuting its first three criminal cases. The M&A boom that ended last year provided more deals in which market abuse could occur, with suspicious trading seen before 29 percent of takeovers in 2006 and 2007, up from 24 percent in 2005, according to FSA data.
The regulator has begun to look beyond corporate mergers. In September, it made its first fine and ban for market abuse in bond trading, penalizing a former Moore Capital Management LLC fund manager for using inside information to buy Rhodia SA notes.
About $2.5 trillion of acquisitions have been announced globally so far this year, 30 percent less than to date last year, according to data compiled by Bloomberg.
``The FSA needs to ensure that they capture abuse in wholesale markets such as the credit markets, something which they have done little of,'' said Chris Brennan, a former FSA lawyer now at London-based Barlow Lyde & Gilbert. ``A trader considering abuse in the credit markets is not likely to be deterred by criminal cases which are largely retail-focused.''
One of the FSA's most famous civil cases, against GLG Partners LP and its former managing director, Philippe Jabre, in 2006, was based on information passed during the recapitalization of Sumitomo Bank. He was fined 750,000 pounds and later founded Jabre Capital Partners and raised $1.9 billion last year.
The FSA believes that a move toward criminal prosecutions will be more of a deterrent to would-be white-collar criminals. It will be using a leniency program that will offer a civil penalty or reduced jail time in exchange for information when two or more people have been involved in insider trading, Symington said today.
``We see this as the carrot which complements the stick of the threat of more prosecutions,'' he said.
Insider trading carries a maximum jail sentence of seven years in the U.K.
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