U.K. regulator, the Financial Conduct Authority, is set to charge hedge fund manager Julian Rifat after a drawn-out four-year probe focusing on his alleged connection to an insider trading ring.
In 2010, "Operation Tabernula" was the financial watchdog's largest and most high profile case; 143 police officers were involved in almost a dozen different dawn raids across the City.
Rifat, a hedge fund manager at Moore Capital was arrested along with Clive Roberts, a trader at Exane BNP Paribas, who is yet to be charged.
In the wake of the financial crisis, the U.K. regulator faced harsh criticism for being "asleep at the wheel" and responded by ramping up its enforcement action and bolstering its markets team. Many in the industry have suggested that the regulator has been looking for "scalps" in order to repair its reputation – something the regulator denies.
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Rifat was forced to leave Moore Capital in 2010 and many of his assets were frozen as he waited for the FCA to conclude its investigation. The regulator is now expected to charge Rifat within the next few weeks after a court hearing to unfreeze his assets set for earlier this week was scrapped. He has previously denied any wrongdoing.
"The issue is that people's lives are on hold, their reputations destroyed and their careers are just thrown away because the FCA takes years to bring its case forward. It is not innocent until proven guilty, but the other way round in the City," said one senior source with knowledge of the investigation.
But insiders at the FCA claim that their case teams, which draw on 3,000 people, need time in order to accumulate the right evidence to convict those who breach City and criminal laws. There are currently no time limits for the FCA to charge people after they have been arrested.
However, those at the regulator point to the success of their criminal cases, highlighting that 80 percent of cases prosecuted conclude in a criminal conviction.
Seven men have been charged in relation to Operation Tabernula, including Martyn Dodgson, a senior corporate broker at Deutsche Bank and Graeme Shelley, a broker at Novum Securities. Last year, Paul Milsom, a senior trader at Legal & General, pleaded guilty to passing on confidential details about 14 companies to Shelley. The 12-year veteran of Legal & General is said to have made £161,588 ($265,776) from his trades and £80,776 for trades via a second broker. He was jailed for two years and ordered to repay £245,657.
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According to evidence uncovered by Operation Tabernula, Milsom shared price-sensitive information using an unregistered mobile phone moments before Legal & General made large block trades, an illegal form of trading known as "front running".
However, the FCA has also foundered in cases that have been proven to be wrong. One of the regulators most recent investigations was dropped without charge but resulted in the closure of Lodestone hedge fund.
Carl Linderum and Tim Whyte, the founders of Lodestone were arrested in February 2013 along with Carl Esprey a fund manager at GLG, owned by the world's largest listed hedge fund Man Group. The nine-month investigation was dropped in November but much of the damage had already been done. Lodestone Investment Partners was forced to close and staff laid off as its investors reacted to press speculation about the arrests of its founders.
Those close to Esprey claim he is one of the most "respected and honest" members of the hedge fund community whose arrest shocked many who knew him.
Sources close to the regulator say a "suspicious transaction report" about specific trades between the three men made it necessary to launch an investigation that pre-dated the arrests by one year.
Those defending the FCA say that without arresting people the regulator is unable to compile the right type of evidence usually uncovered by seizing computers and mobile phones.
"Of course there are unintended consequences, but cases are not launched without a lot of thought going into it beforehand. Not every investigation will result in a charge. That is just not how it works," said one source with knowledge of the situation. Others point to the deterrent function of such high profile crackdowns, which work to dissuade others to breach rules.
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In a statement the regulator said making markets function meant cracking down on market abuse: "One of the ways in which the FCA tackles market abuse is by bringing criminal prosecutions for insider dealing. Insider dealing is a serious criminal offense punishable by up to seven years imprisonment. We have secured 23 convictions for insider dealing since 2009 and are currently prosecuting seven other individuals with trials fixed later this year.
The statement added that insider dealing investigations were "extremely complex" and therefore were "often time consuming".
In 2012, Ian Hannam, one of JPMorgan's most senior European bankers, was forced to resign after the Financial Services Authority – the precursor to the FCA – fined him £450,000 for market abuse related to allegedly passing on insider information in a deal four years earlier. His case attracted the sympathy of politicians and chief executives who rallied to defend Hannam's reputation.
Hannam denies the allegations and has fought to overturn the fine with a tribunal case that is due to report back on the case imminently.
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