JPM insider non-trading case puts banks on notice

April 4, 2012

By Peter Thal Larsen

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

No-one can accuse the Financial Services Authority of avoiding big targets. Indeed, the UK watchdog has trained its sights on one of the City of London’s most prominent dealmakers by fining Ian Hannam the best part of half a million pounds for passing on price-sensitive information about his client, Heritage Oil.

The penalty looks harsh given that the JPMorgan banker’s slip was accidental, and nobody traded on the tip. But even if Hannam – who has resigned in order to take the case to a tribunal – can get the ruling overturned, corporate advisers will have to re-think how they work.

Hannam is no stranger to controversy. As chairman of capital markets at JPMorgan he has been responsible for persuading a string of emerging markets mining and oil companies to list their shares in London. This has led to an inevitable clash between the business practices of oligarchs and the corporate governance standards expected by UK institutional investors.

This is not the first time that shares in Heritage Oil have attracted the FSA’s interest: two years ago, the regulator fined the chief executive of Genel Enerji, the Turkish oil company, almost 1 million pounds for trading on the basis of inside information about an oil discovery in Kurdistan. Nevertheless, the FSA’s case against Hannam looks sparse. It rests on two emails he sent in the autumn of 2008. The first alerted a potential bidder for Heritage – Hannam’s client – about a possible rival offer. The second signalled Heritage’s progress in finding oil. Hannam did not trade on this information, and there is no evidence that the emails’ recipients did either.

Without the trail supplied by the emails, there would be no case. The FSA maintains that simply passing on inside information constitutes a breach: it has successfully brought two similar “insider non-trading” cases in recent months. It also makes the point that somebody of Hannam’s seniority and experience should have known better.

Hannam’s defence, which he is expected to bring to a tribunal at some point next year, rests on two arguments. First, he was authorised to pass on the information – stirring up auctions is what companies hire advisers to do. And second, the information was not sufficiently specific to count as price-sensitive. Yet even if Hannam is cleared, the name of one of London’s most high-profile investment bankers has been tarnished. That message will not be lost on other corporate financiers.

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