Dubai-Based Investor Fined Record $9.6 Million for Market Abuse
Sarah Jane Leake | Bloomberg Law
The Financial Services Authority (FSA) has recently fined Rameshkumar Goenka, a Dubai-based private investor, $9,621,240 (approximately £6 million), the largest fine imposed by the FSA on an individual, for manipulating the closing price of Reliance Industries securities on the London Stock Exchange (LSE).
The penalty comprises restitution of $3,103,640 (approximately £2 million), which will be used to reimburse the bank that suffered loss as a result of Goenka’s misconduct.
Owing to his willingness to settle at an early stage in the investigation, Goenka benefited from a 30 percent reduction on the penalty (not on the restitutionary damages). Without this, the FSA would have fined him a total of $12,414,560 (approximately £7.7 million), including restitution.
The Structured Products
In 2007, Goenka, a sophisticated investor with a substantial portfolio of investments, purchased two separate over-the-counter (OTC) structured products in 2007 – one with a maturity date of 30 April 2010 (Product 1), and another with a maturity date of 18 October 2010 (Product 2) – for $10 million each.
Each product related to a basket of global depositary receipts (GDRs) – the first represented shares in Russian companies Gazprom, Luckoil, and Surgutneftegaz, and the second in Indian companies Reliance, UCICI Bank Ltd, and the HDFC Bank Ltd.
The final payment to Goenka depended on the closing price of the worst performing of the three different GDRs on their maturity date. Upon maturity of Product 1 and Product 2, the worst performing securities in the baskets of GDRs were Gazprom and Reliance respectively. While Reliance has a primary listing in India, its GDRs are traded on the LSE.
— Market Manipulation
On 18 October 2010, Goenka placed and executed a high number of orders to inflate the closing price of Reliance securities, ultimately to increase his payout on Product 2.
Some ten minutes before the auction commenced, Reliance GDRs were trading at $48.28. Just 10 seconds before closing, Goenka made the following orders: (1) simultaneous buy and sell orders of 100 GDRs at $48.69; (2) simultaneous buy and sell orders of 100 GDRs at $48.71; (3) an order to buy 18,000 GDRs at “market” (i.e., with no price limit and having priority); and, (4) an order to buy 770,000 GDRs at $48.71.
Before entering the final order, Reliance GDRs were trading at $47.93, 72 cents below the “break-even” price of $48.65. After entering the final order (which was not filled in its entirety by closing), Goenka had acquired 193,550 Reliance GDRs, representing 46 percent of the day’s trading volume. In consequence of his trading, the price of the GDRs rose to $48.71 and he was paid $10 million by the issuing bank, the counterparty to the structured product. By increasing the closing price of the securities, Goenka avoided a loss of $3,103,640.
— Attempted Market Manipulation
Goenka had planned to similarly manipulate the price of Gazprom GDRs in April 2010. No trading, however, took place owing to the announcement of the merger between Gazprom and Ukrainian gas company Naftogaz, which caused Gazprom’s price to move too far to be manipulated. Goenka is reported to have advised his broker “we’re not doing anything, we’ve lost the game.”1
The UK’s civil market abuse provisions are set out at section 118 of the Financial Services and Markets Act 2000 (FSMA), as amended.2 Within this framework, market abuse is defined, amongst other things, as behaviour that occurs in relation to qualifying investments admitted to trading on a prescribed market, such as the LSE, and that: (1) gives, or is likely to give a regular user of the market a false or misleading impression as to the supply of, demand for, or price or value of, qualifying instruments; or, (2) secures the price of one or more such investments at an abnormal or artificial level.3
Further guidance on determining whether a particular behaviour constitutes market manipulation is set out in the FSA’s Code of Market Conduct (MAR) at MAR1.6. Amongst other things, it provides the following example of market manipulation:
. . . a trader buys a large volume of commodity futures, which are qualifying investments, (whose price will be relevant to the calculation of the settlement value of a derivatives position he holds) just before the close of trading. His purpose is to position the price of the commodity futures at a false, misleading, abnormal or artificial level so as to make a profit from his derivatives position.4
The FSA concluded that Goenka’s orders to trade “were not effected for legitimate reasons and in conformity with accepted market practices.”5 His trading strategy had been carefully planned in order to move the price of Reliance GDRs to avoid a loss of approximately $3.1 million, and he had directed significant resources (over $54 million) to facilitate the price movement.
Goenka continuously bought at a slightly increased price to where the market was trading, thereby pushing up the price of Reliance GDRs by $0.78. This was artificial, giving a misleading impression as to the proper interplay of supply and demand.
Goenka’s trading also represented 90 percent of trading activity in the closing auction. Moreover, he purposely placed these orders in the final seconds of trading, to ensure that other market participants had insufficient time to respond before the closing price was determined.
The FSA may, pursuant to section 123(1) FSMA, impose a penalty on any person proven to have engaged in market abuse. The FSA’s policy on imposing financial penalties is set out in its Decision Procedures and Penalties Manual (DEPP) at DEPP 6. Provisions of its Enforcement Guide (EG) are also relevant.
Given that the misconduct occurred after 6 March 2010, the FSA’s new penalty regime, set out at DEPP 6.5C, applied. To determine the appropriate level of fine, the FSA used a five-stage process:
- Disgorgement: the FSA seeks to deprive individuals of any financial benefit derived from the market abuse, including any loss avoided. Goenka avoided loss to the tune of $3,193,640 and so the FSA now requires him to pay restitution in this sum, pursuant to section 384 FSMA. As no other benefit was derived, the penalty figure remains nil.
- Seriousness: Goenka holds a prominent position in the market as an investor both in the UK and overseas, and deliberately set out to manipulate the market. While he made no profit per se, the loss he avoided was of a significant sum and for these purposes constitutes profit made. In line with the factors set out at DEPP 6.5C2G(15), the FSA considered a “profit multiple” of three most appropriate. The penalty at this stage is therefore $9,310,920.
- Mitigating and aggravating factors: these did not affect the penalty to be imposed.
- Adjustment for deterrence: the FSA may, where it considers that the figure arrived at after the third stage is insufficient to deter Goenka, and others, from committing market abuse, increase the penalty. In this case, the FSA does not consider it necessary to increase the penalty.
- Settlement discount: the FSA may apply a discount for early settlement. In view of Goenka’s willingness to settle at an early stage, he qualified for a stage one discount of 30 percent (though this does not apply to the disgorgement figure). The penalty was therefore reduced to $6,517,600 (rounded down to the nearest $100).
Commenting on the action, Tracey McDermott, acting director of enforcement and financial crime at the FSA stated that the impact of Goenka’s behaviour “goes far beyond one counterparty,” stressing that “market confidence will suffer if participants cannot be satisfied that the price of quoted securities reflects the proper interplay of supply and demand.”6
Until now, the highest fine the FSA had ever imposed on an individual for market abuse was £2.8 million (comprising £1.3 million in restitution), against Simon Eagle in May 2010.7 The high penalty in this case reflects the FSA’s increased commitment to credible deterrence and it is likely that more individuals will in due course be fined comparable sums for similar misconduct under the new penalty regime.
At present, the FSA cannot sanction Goenka for his attempted manipulation of Gazprom GDRs, as attempted market manipulation, unlike attempted insider dealing, falls outside the scope of the market abuse regime at UK and EU level. However, under plans to revise the Market Abuse Directive,8 the European Commission is proposing to introduce a new civil offence of attempted market manipulation.9 In years to come, the FSA will therefore most likely be able to sanction those who seek, but fail, to manipulate the market.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
©2011 Bloomberg Finance L.P. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of Bloomberg Finance L.P.