The Financial Services Authority (FSA) has won its market abuse case at the Financial Services and Markets Tribunal (the Tribunal) against Winterflood and two of its traders, Mr Sotiriou and Mr Robins.
Winterflood is an FSA authorised firm and the largest market maker in AIM securities.
In June 2008, the FSA found that Winterflood and its traders had played a pivotal role in an illegal share ramping scheme relating to Fundamental-E Investments Plc (FEI), an AIM listed company. In particular, the market maker had misused rollovers and delayed rollovers thereby creating a distortion in the market for FEI shares and misleading the market for about six months in 2004.
The FEI share trades executed by Winterflood had a series of unusual features which should have alerted the market maker to the clear and substantial risks of market manipulation. Rather than taking steps to ensure that the trades were genuine, Winterflood continued the highly profitable trading. Winterflood made about £900,000 from trading in FEI shares, its single most profitable stock at the time. As a result of their conduct, the FSA decided to impose fines of £4 million, £200,000 and £50,000 on Winterflood, Mr Sotiriou and Mr Robins respectively.
Commenting on the decision, Margaret Cole, director of enforcement at the FSA, said: "The FSA expects market professionals to always be alert to obvious indications of wrongdoing. There were clear warning signs that should have made Winterflood think something was amiss but it failed to recognise and react to them. Instead of challenging the trades, Winterflood allowed them to go ahead and made large profits as a result. Winterflood's failure to properly carry out its duties as an authorised market maker led to serious losses for investors and damaged confidence in the market. Taking this action against Winterflood shows that we are determined to tackle abusive behaviour and to deter market participants from threatening the integrity of our markets."
The share ramping scheme led to the FEI share price increasing from 4p in December 2003 to a high of 12.25p in June 2004. The London Stock Exchange susspended trading in shares in FEI on 15 July 2004. Following the resumption of trading on 23 July 2004, the price dropped back to 4p and has never recovered.
Winterflood did not challenge the findings of the FSA investigation at the Tribunal but referred the matter on a point of legal interpretation. Winterflood, Mr Sotiriou and Mr Robins are now seeking permission to appeal the decision at the Court of Appeal. Other parties involved in the scheme have referred their cases to the Tribunal.