FSA Suspects Insider Trading in Bradford & Bingley Stock

Britain’s Financial Services Authority, a private corporation with a monopoly, is looking into allegations of insider trading in the stock of trouble bank Bradford & Bingley. The stock dropped 14% in 3 working days right before the bank warned investors of poor earnings. The warning was so severe that two banks underwriting the issue were able to drop their obligations and re-do the deal. Yet, the FSA seems unable to do anything about the suspected insider trading.

According to Martin Waller of The Times, “The FSA admits that it is 'disappointed' by the level of insider trading in London, which it believes took place before a fifth of all takeover announcements last year. The record shows that since 2001, when the authority took over responsibility for policing market abuse, of which insider dealing is just one variety, there have been only 14 successful actions. Despite the odd high-profile case, most recently the £750,000 fine on Philippe Jabre, the hedge fund manager, net worth when last estimated £200 million, most fines ran to a few thousand pounds.”

Part of the problem is with the tribunal that decides market abuse cases. It a case of quis custodiet ipsos custodes. The tribunal is composed of City men who are sitting in judgment of other City men. It’s no wonder there are few successful actions. Striking out on civil penalties from the tribunal leaves the FSA with no alternative but criminal prosecution where the burden of proof is much harder to meet.

As Mr. Waller noted, the FSA needs whistleblowers and plea-bargaining. In the UK, the legal situation is much different when it comes to this sort of thing than it is in the US. Mr. Waller said that it would take an Act of Parliament to provide the kinds of tools to root out insider trading that the US has, and those familiar with the workings of the House of Commons know that could take years.

There were four banks involved in the issue of B&B shares. That means there were probably a thousand insiders. A 14% drop in the price of the stock in 3 days before a profit warning is a clear sign at least one of them talked. Even an unsuccessful prosecution at this stage would have a positive effect -- pour encourager les autres, at least

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