The recent successful prosecution of Mohammed Zina, a former analyst at Goldman Sachs International, is a useful reminder of the Financial Conduct Authority's willingness to bare its teeth in the exercise of its prosecutorial remit.
Zina was found guilty on Feb. 15 of six offenses of insider dealing and three offenses of fraud, following a trial,[1] and was sentenced to 22 months' imprisonment.
A custodial outcome underscores the seriousness of the issue and serves to provide a general deterrence against this type of offending.
This case provides an illustrative example of a breach of trust in the financial services sphere — exactly the type of conduct the FCA has sought to stamp out with its repetitive refrain of individual accountability and the paramount importance of integrity in the regulated industry.
Zina was found to have misused information relating to potential mergers and acquisitions that his former employer was advising its clients on, trading to his advantage with the benefit of that knowledge.
According to the FCA, he stood to gain approximately £140,000 ($178,500) from his illegal activity. This level of advantage is significant, but not monumental in the overall scheme of market trading. There have been examples of much larger market abuse previously, with much higher resulting gains, and there likely will be in the future.
What is critical here, however, is the very personal nature of the prosecution and penalty. The FCA wants to send a strong message to regulated individuals that such conduct will never be tolerated, and rightly so.
Zina shows an instance where an individual acted with purpose, in contravention of the rules and requirements he knew or ought to have known were incumbent on him and that were contrary to the ethical behaviors demanded of him in his role.
Importantly, there was no criticism of the former employer, in particular the systems and controls in place at that firm. This is important, because alongside the individual accountability message it promotes, the FCA consistently reminds firms through its Market Watch and other commentaries of its expectations that firms ensure they have adequate and effective systems and controls and procedures in place to address the possibility of financial crime, including abusive market behaviors.
Zina illustrates that despite having proper measures in place to reduce the likelihood of offending, firms will always be under attack from individuals seeking to circumvent those measures.
There will only ever be a limited amount that firms can be reasonably expected to do in order for them to demonstrate a commitment to trying to address the risks and realities of insider dealing occurring on their watch.
The FCA published an update on its progress toward its imperative to combat financial crime on Feb. 8, titled "Reducing and preventing financial crime."
This was principally focused on fraud and similar irregularities in interactions between regulated firms and their predominantly retail clients. It details several topics, but focuses on technology and the influence of data and the need for financial services firms to be aware of the specific risks their businesses pose to the financial system.[2]
The update did not detail matters relating to market abuse specifically, but there are takeaways for firms about the quality and sufficiency of their systems, and controls in identifying, monitoring and preventing financial crime in all its forms, wherever possible, including the risks of abusive market behaviors.
Vigilance and consistent review will matter, and firms should be asking themselves whether they understand the risks posed as a result of technological changes, both internally and externally.
Consideration should be given to reporting lines and the availability and use of internal whistleblowing procedures, particularly in cases where there are regulated employees seeking to commit financial crimes, including market abuse.
A challenge to firms on this front occurs in instances of home working by regulated traders. Most firms after the COVID-19 pandemic have mandated that traders conduct their regulated activities from approved office-based physical locations.
This assists firms in reducing the risks of poor trading behaviors. It is much more difficult, for example, for firms to monitor mobile phone usage, chat functions and banter among their regulated staff when those staff are in disparate locations or working remotely.
Firms should continue to ensure that key risk-takers and other trading staff are monitored, and that their trading activity is reviewed, manually or through the use of technology, to look for abnormalities and patterns that do not make sense.
In this regard, there is a clear role for artificial intelligence or algorithmic analysis to be undertaken in-house or provided by third-party providers to firms.
Ultimately, however, the entire system relies on individuals doing the so-called right thing. This reminds everyone of the need to ensure proper vetting takes place, and that there is no complacency in the review and monitoring of staff.
As Steve Smart, joint executive director of enforcement and market oversight at the FCA, observed, "Mohammed Zina's conviction sends a clear message that economic crime is on our radar, and we will take action to uphold the integrity of UK markets."[3]
The notion of personal gain will be relevant to anyone trying to cheat the system and be willing to risk market abuse in their trading. Whether the possibility of detection and prosecution is enough to seriously affect the thinking of those willing to behave in such a manner is a separate issue.
Borrowing the terminology of philosophers Jeremy Bentham and John Stuart Mill, not all criminals are "rational utility maximizers" who consider all aspects of their proposed conduct, including the downside if their offending is detected, before undertaking their nefarious actions.
They may remain focused on the short-term gain, oblivious to the possibility of a prosecution and even an outcome including incarceration.
While somewhat dramatic, it is in fact this short-term thinking that the FCA seeks to address in its policing of market cleanliness. It knows that it will be unlikely to deter organized criminal actors from committing market abuse, but hopes that it can reach people on an individual level to educate, remind and counsel — through the public outcomes associated with a successful prosecution — that it has no tolerance for market abuse.
More power to the regulator in trying to achieve its goals. A clean market and people acting with integrity are inherently desirable and laudable goals.
This article first appeared in Law360, the original article can be found here.
