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By Tracy Corrigan
Telegraph, 08 May 2010
She apologises for the poky meeting room we have squeezed into and is flustered when the photographer starts snapping, admitting that she
hates having her picture taken.
But I am aware of her formidable track record at the UK financial regulator and suspect she is steelier than she seems. The former commercial law
firm partner who now heads the FSA's enforcement division has
scored some notable victories against the City's insider dealers,
market abusers and other financial fraudsters. Recent scalps include
David Baker, the former deputy chief executive of Northern Rock,
who was fined last month for making misleading statements to the
market, and Malcolm Calvert, a former Cazenove stockbroker, who is
now serving 21 months in prison for insider dealing.
This is all part of her plan to create a "credible deterrent" against market abuse in the City. "I want it to be socially unacceptable," she says.
"That is why the first step on the journey was to show that it's a
criminal offence. When you go down to Southwark [Crown Court] to be
sentenced, you take your toothbrush with you." Just as I thought,
steely.
Until Ms Cole's tenure, the UK authority's record of bringing insider traders to book – both before and after the creation of the FSA in 1997 – was lamentable. "These people felt they
were almost immune," remembers Simon Morris, a financial services
partner at law firm CMS Cameron McKenna.
Ms Cole joined the FSA five years ago and realised, a year into the job, that a change of direction was needed. "It was widely held that [insider dealing]
cases were too complex to go before a jury and therefore only civil
cases before a tribunal should be contemplated, on the grounds that
there was then a lower burden of proof," she says.
It didn't quite work like that in practice. Even if fines were imposed, they were often paltry. "We were not finding the process to be less onerous
because the tribunal was applying, effectively, the criminal standard
[of proof] through a different process.
"We came to the conclusion, reasonably early on, that we needed to embark on criminal prosecutions of market abuse and that was going to be the
answer to creating a credible deterrent. Actually seeing people going
to prison and being locked up was going to be much more powerful,
in the appropriate cases, than a fine. So we set about changing the
way we did things."
Her plan flew in the face of the conventional wisdom and she was not expected to pull it off. The FSA had never successfully prosecuted a criminal insider-dealing case.
Ms Cole says she lost count of the number of people who told her: "We think you are making a big mistake."
She sounds unfazed but surely, at the time, this must have been rather discouraging? "I thought it was the right thing to do [to pursue criminal
prosecutions]," she says simply. Under the Financial Services and
Markets Act of 2000, the FSA has a statutory objective to maintain
confidence in the UK markets and reduce financial crime.
"The job of a regulator," Mr Morris points out, "is to regulate and where it is not taken seriously it has to make sure that it is taken
seriously".
Last year, the FSA won its first criminal case for insider trading against Christopher McQuoid, former general counsel at TTP Communications, and his father-in-law, James Melbourne.
McQuoid was sentenced to eight months
in prison, a sentence upheld on
appeal, when the judge backed the FSA's pursuit of criminal
convictions.
"Insider trading is not a victimless crime – this is a crime which does undermine confidence in the integrity of the market and this is a confidence which is of great importance to the
economic welfare of the community as a wh***," the judge noted.
More cases have followed. "We don't go out looking for particular types of scalps but we wanted to have cases growing in magnitude and complexity because we wanted to have impact. That's the wh***
point," Ms Cole explains.
For that reason, the enforcement team is "moving from cases that you might perhaps describe as opportunistic to cases where it is a much more organised scheme".
There is no sense that the battle has been won. After the conviction of Malcolm Calvert, Hector Sants, the FSA's outgoing chief executive, told The Sunday Telegraph: "There is an
unacceptably high level of market abuse in the UK."
Nor is the greater focus on enforcement a post-financial crisis clamp-down akin to the Securities and Exchange Commission's fraud charges against
Goldman Sachs in the US (though the FSA is now conducting its own
investigation into that case).
"The cases in the courts now can't be politically motivated," Ms Cole points out, with a forbearance that suggests this is not the first time she has
corrected such an assumption. It takes at least two years for cases
to work through the pipeline,
as there is a long process of gathering
evidence, trawling publicly available data and finding expert
witnesses.
The McQuoid case, for example, came to court just over a year ago but the charges were brought in January 2008 and preparation started a year before that. It is, Ms Cole notes mildly,
"a fairly complex thing to do". Nonetheless,
the timing of the
recent spike in cases is fortuitous, even though no prosecutions have
come out of the controversial short-selling of bank stocks during
the financial crisis. ("We never saw any evidence that there was
manipulative short-selling," according to Ms Cole.)
The increased flow of cases coincides, happily, with the public's desire for tougher policing of the City – and the Conservative party's plan
to give the FSA's bank-supervisory powers to the Bank of England and
set up a financial crime unit. "It could well be that the FSA,
under threat of death, is making a very good plea for clemency," Mr
Morris says.
More aggressive tactics such as dawn raids have led to comparisons with the SEC, the US regulator, which, despite its failure to spot the Bernie Madoff scam, is generally seen as
tough on market abuse.
"We did go to talk to them about their tools and powers but we decided to develop our own version," says Ms Cole.
Lawyers in the industry, however, say there are some obvious borrowings. "There is a wh*** series of new regulatory approaches that they've taken, in particular in relation to insider
dealing, that are pretty clearly out of the SEC book," says Nathan
Willmott, an FSA investigations specialist at Berwin Leighton
Paisner, who cites unannounced telephone interviews of suspects,
witness immunity, as well as dawn raids and arrests of suspects.
Sometimes, he feels, it goes too far. "It is right that criminal conduct be pursued through criminal prosecutions, but there has been
a blurring of the FSA's approach in relation to deliberate criminal
conduct and regulatory breaches by firms or individuals based on
negligence or oversight," argues Mr Willmott.
He claims the FSA is increasingly "fining huge amounts and issuing prohibition orders over lesser charges in the hope that this will be the best
way of raising standards in the industry".
Others regard such actions as a necessary shift for the FSA, which has to keep an eye on what people don't do, as well as what they do. Certainly, this is
the FSA's perspective, following its own report and external criticism
of its shoddy supervision of Northern Rock in the run-up to the
crisis.
"We are not interested in process matters for their own sake but because supporting supervisory work and making sure firms have the right systems and controls is the front line of defence in
protecting against more serious wrongdoing," Ms Cole says.
"Transaction reporting, for example, is crucial to the fight against market abuse and firms have to take it very seriously. That is why we
are determined that our penalties should have real impact across this
and the other work we do to support intensive supervision."
In March the FSA turned up the volume again with a series of dawn raids on City institutions, including Deutsche Bank, Exane BNP and Moore
Capital. It is set to be the biggest insider dealing case to date.
Is Ms Cole biting off more than she can chew? Defence barrister Ian Burton thinks so. "That is a case that has been publicised beyond what it actually is. It is a deliberate PR campaign to show that they
are strong, powerful and policing the City. It has generated huge
publicity but I'm really not sure that there is that much substance
to the case," he told The Sunday Telegraph recently.
It seems unlikely, however, based on her record to date, that Ms Cole is unaware of what she is taking on. For example, after her initial
decision to pursue criminal convictions, she spent a year rebuilding
her team. When she describes the process, she talks of the need to
"upskill" and "instill a more commercial ethos".
This, of course, is management-speak for getting rid of staff who weren't up to the job and hiring new ones. There was
a "change programme". (When
Ms Cole uses such euphemistic jargon, which she is rather fond of,
it sounds like a polite way of expressing harsh necessities, rather
than deliberate obfuscation.)
Still, the reality was brutal enough. A third of the staff in the enforcement division left, allowing her to hire the criminal specialists needed to pursue her
plan – after all, defendants on charges of insider trading can often
command "an army" of top-flight lawyers. In doing so, she confounded
yet another piece of received wisdom – that regulators can never
recruit staff
of sufficiently high calibre to take on the City.
It must all have been pretty miserable, I suggest. She concedes that "2007 was not a comfortable year" but she got through it because she
had "a vision of the future".
Margaret Cole still has a lot on her plate, and she knows it, but she is not baulking at the latest challenges she has created for her team. "We have set a strong
pace," she agrees calmly. "And we are going to keep it up."
Facts
8 - Chistopher McQuoid's prison term, in months, for passing on inside information, in FSA's first successful criminal prosecution
21 - Former broker Malcolm Calvert's jail sentence, in months, for insider trading
£700k - Tenon Financial Services' fine for failings in advice and sales of Lehman-backed structured products
£1.1m - Fine imposed on Mehmet Sepil, chief executive of a Turkish oil exploration company - largest ever on an individual for market abuse
£35m - Total FSA fines in 2009, up from £22.7m in 2008
430 - Number of FSA enforcement staff
Margaret Cole
Born: 1961
Education: MA in Law, Cambridge University
Career: 1990 Partner at Stephenson Harwood; responsible for recovery actions over Maxwell pension funds on behalf of pension funds trustee 1995 Head of
dispute resolutions at US law firm White & Case 2005 Head of
enforcement at FSA
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