FSA releases details of landmark market manipulation legal judgement

The UK's Financial Services Authority (FSA) has released details of a legal judgement that repudiates a novel human rights defence attempted by an ex-JP Morgan equity derivatives trader accused of market manipulation.

The UK Court of Appeal found that in the case of Bertrand Fleurose against the Securities and Futures Authority (SFA) - a predecessor regulator of the FSA – the regulator’s enforcement action had not been in breach of the European Convention on Human Rights. The UK is a signatory of the convention, under which defendants in criminal cases are entitled to a fair trial.

Fleurose had been found guilty by an independent SFA tribunal in mid-1999 - and then by an independent SFA disciplinary appeal tribunal in early 2000 - of being a willing participant in transactions intended to depress the FTSE 100 index.

In January 1997, JP Morgan Securities in London had entered into a five-year FTSE 100/S&P 500 binary option. Morgan agreed to pay the counterparty 1.15% of the option’s notional value for each month where both indexes closed higher than the closing levels on the last trading day of the previous month.

On November 28 1997, Fleurose – then a senior trader at JP Morgan – entered into a series of trades, culminating in the sale of large volumes of top-five FTSE 100 stocks well below market prices in the final six seconds of electronic trading. As a consequence, the FTSE 100 closed at 4831.769 - below the option’s strike of 4842.3 - and JP Morgan was able to avoid a payout of £475,549.

Fleurose had claimed that the SFA’s enforcement was effectively a criminal, rather than civil, prosecution and that the vagueness of the charge against him meant that the fairness of his trial was compromised. These claims were rejected by the UK High Court in April 2001, and then by the UK Court of Appeal in December 2001.

The disciplinary proceedings resulted in Fleurose’s suspension from the SFA’s register of general representatives between November 30 1997 and December 1 1999, and he was ordered to pay £175,000 towards the regulator’s costs. Additionally, Henri Laurent – who was head of the equity derivatives group in London at JP Morgan in November 1997 and had instructed Fleurose to execute the trades - was expelled from the register and ordered to pay £200,000 towards the SFA’s costs.