| FSA fines IT guy for insider trading |
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| Written by Adrie van der Luijt | |
| Tuesday, 01 July 2008 | |
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The FSA has fined an IT technician at the Body Shop's head office £85,000 for market abuse.
John Shevlin established a short position equivalent to 80,000 Body Shop shares through a Contract for Difference (CFD) on 10 January 2006, in effect betting that the share price would fall. The Financial Services Authority (FSA) said that this trade was made on the basis of inside information. Economic interest A CFD is a contract between two parties where the buyer will receive from (or pay to) the seller, the difference between the value of a company's share at expiry and its value at the time of the contract. The buyer could also have the option to buy the shares at the later date although the CFD does not confer a right to buy them. The holder of a CFD on a company's shares has an economic interest in the company, without direct ownership of shares in the company. The Body Shop is a global manufacturer and retailer of beauty and cosmetics products with over 2,100 stores in 55 countries, with a range of over 1,200 products which it distributes through its network of own stores. The Body Shop was purchased by the L'Oreal Group on 17 March 2006. Shevlin joined the Body Shop on 16 February 1998 and was initially employed as a junior PC engineer based in Littlehampton, West Sussex. By January 2006, he was working in the Body Shop's head office at London Bridge where he was part of the desktop support team. His responsibility was to provide IT support for the London office and field based staff, including senior executives based in the London office. Shevlin closed out his CFD position on 11 January 2006 after Body Shop International plc announced its Christmas trading results to the market and made a profit of £38,472. He borrowed £29,000 - more than his annual salary - to affect the trade, which could have resulted in serious financial hardship had it gone against him. These additional loans increased his debt by 25 per cent. In convincing his bank to approve £14,000 of the loan, he falsely stated the funds were for home improvements. Passwords Shevlin obtained the inside information by improperly accessing confidential emails of certain senior executives of The Body Shop. He had been given passwords which allowed access to the email accounts of certain senior executives. From 16 December 2005 to 10 January 2006 emails were in circulation within the company which contained clear details about how the Body Shop was performing and how it was not going to meet its forecasted profit target. On 16 December 2005 an internal email indicated that if results did not improve over Christmas, the scheduled announcement of 13 January 2006 might have to be brought forward. From 8 January 2006 certain emails contained clear indications that the announcement would in fact be brought forward to 11 January 2006. In addition, from 8 January 2006 emails were in circulation which included draft text of the Christmas trading announcement. Specifically the Body Shop had missed its own operating profit forecast of 17 to 22 per cent. The firm's share price fell 18 per cent on the negative news. Motive to engage in insider dealing Before Shevlin's Body Shop CFD trade on 10 January 2005, his cumulative net trading losses for 2005 were approximately £13,000, of which £4,000 had remained outstanding to his broker from 30 November 2005 until 10 January 2006. Therefore, Shevlin had a motive to engage in insider dealing. His 10 January 2006 CFD trade was of considerable size and Given the considerable size of the trade, the risk was that Shevlin could lose £800 with each penny move upwards in the share price. This trade, despite its risk, was executed by Shevlin without any stop price, either guaranteed or non-guaranteed. At the broker's recommendation a non-guaranteed stop price was added in order to reduce the margin owing immediately post execution of the CFD. Shevlin was aware of how CFDs are traded, the risks involved and how related margin requirements work based on prior CFD losses and margin requirements against those CFD positions. The FSA said that he would have been aware that he would normally have been required to satisfy a margin call within a 24 The January 2006 CFD trade was significantly larger than any CFD Shevlin had previously traded. In fact it was 11.5 times larger than his largest previous trade other than in relation to the Body Shop. The size of the CFD necessitated that he deposit £22,000 margin with his broker to be able to execute this one CFD trade. Misuse of technical skills Margaret Cole, FSA’s Director of Enforcement, said that Shevlin had deliberately set out to obtain highly sensitive and valuable information to which he was not entitled. “He abused the trust placed in him by his employers and misused his technical skills to gain a financial advantage over other market users. Firms must take steps to protect market sensitive information,” she added. Cole warned that where individuals circumvent these protections they should expect to face significant financial or other sanctions, whether or not they are approved by the FSA. In reaching its decision, the FSA has taken into account that there have been no previous findings of market misconduct against Shevlin. The FSA said that no fault had been attributed to The Body Shop and that Shevlin is no longer working for the group. Related articles
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