A new line in criminality: ‘non-market abuse’ | FT Alphaville

A new line in criminality: ‘non-market abuse’

Summary: Credit Suisse bond salesman Nicholas Kyprios goofs around with clients ahead of a bond issue. No suspect trading is undertaken, there are no suspicious price movements, and in any case most of the bonds that might have been affected do not fall under the FSA market abuse regime.

No matter:

Head of European Credit Sales at Credit Suisse fined £210,000 for improper market conduct, disclosing client confidential information and exhibiting a lack of skill, care and diligence.

The goofing around stuff runs from point 13 in this Final Notice. Extract:

On 11 November 2009 Mr Kyprios called Fund Manager A, to follow-up on his invitation to the London road show.

Mr Kyprios began the call by disclosing the potential rating of the Unitymedia Bond Issue. He said ”I have been wall-crossed so I want to be careful to a certain extent” but immediately disclosed the issuer was European and outstanding bonds would be redeemed. He then signalled to Fund Manager A that the issuer was German and the issue was M&A related.

Mr Kyprios said, “We could play this game. You’re going to be my charades partner” and invited Fund Manager A to rule out issuers. Fund Manager A began guessing and Mr Kyprios ruled out incorrect names. He led Fund Manager A to the correct issuer in a game of “getting warmer” telling him where in the alphabet to focus his guesses and letting him know the issuer had alternative names (Unitymedia was also known as “lesy” and “ish”).

When Fund Manager A guessed “Unitymedia” Mr Kyprios signalled he was correct by repeatedly saying, “the line is breaking up”. It was not. Fund Manager A appears to confirm Page 3 of 9 he understood the issuer was Unitymedia by saying, “I can’t get the unity in my hearing”. Mr Kyprios laughed.

Now consider two more paragraphs:

Unitymedia had €1.97 billion in bonds admitted to trading at the time Mr Kyprios engaged in these calls. Unitymedia-related CDSs were also trading in the market. The majority of Unitymedia’s outstanding bonds were admitted on the GEM segment of the Irish Stock exchange so were not “qualifying investments” for the purposes of the market abuse regime. Neither were Unitymedia-related CDSs. The remainder of Unitymedia’s issued instruments comprised bonds that were qualifying investments for the purposes of the Act.

On 12 November 2009 those outstanding Unitymedia bonds that were qualifying investments for the purposes of section 118 were all trading at or close to their call levels. Accordingly, because the announcement of the Unitymedia Bond Issue could not and did not significantly impact the price of those instruments, Enforcement decided not to pursue market abuse.

Basically, there was no case of market abuse here for the FSA to pursue, but they hung the guy anyway.

We could say something glib about the FSA’s enforcement team suffering from a certain neural development disorder, but we know what they are up to.

The regulator wants Chinese Walls topped with razor wire. And, if you work in the financial sector, they don’t want you to have any fun whatsoever.