FSA concludes HBOS rumours investigation

UK supervisor wraps up market abuse investigation

LONDON – The UK Financial Services Authority has completed its investigation into the allegation of the use of malicious rumours surrounding share falls in HBOS share price on March 19, 2008. Following a diligent and thorough investigation, the UK regulator found that although false rumours were circulated there is no proof they were part of a concerted effort for individual profits. In a press release the FSA stated:

“At the time the HBOS rumours circulated there were very uncertain market conditions in relation to the UK banking sector. This, coupled with the news regarding Bear Stearns the previous weekend, meant traders and other market participants were very actively monitoring their positions in UK banking stocks (and were prepared to give credence to, and act on, negative market information). There is no doubt that false and damaging rumours were circulating about HBOS on March 19, 2008 and these would have had some impact on HBOS’ share price. It is difficult, however, to say how much impact, as the share price was also affected by the interaction of a number of other complex factors on the day, including: a lack of liquidity in the order book with parties unwilling to enter buy or sell orders, particularly after the automated trading halt; and the effect of algorithmic trading strategies, which amplified the impact of the initial downward trend in the HBOS share price.”

Therefore despite the likelihood that the rumours contributed to the fall in the share price, the FSA has not uncovered evidence that they were spread as part of a concerted attempt by individuals to profit by manipulating the share price.

The FSA has reiterated its dedication to the swift enforcement of market abuse rules and warns market participants to “expect that our surveillance and investigation activity will continue at a high level of intensity”. The statement adds: “Where individuals or firms appear to have benefited following false or misleading rumours, we will require individuals and/or firms to provide immediate access to traders, information and trading strategies as well as to make available email, messaging and telephone records. Where there is evidence of market abuse then we will take enforcement – including criminal – action.”

The FSA also confirmed that it is following up the wider issues the HBOS rumour case has highlighted through its ongoing thematic and supervisory work. In particular, the markets division has launched a review of the systems and controls at firms for dealing with rumours, specifically examining what policies are in place and how firms ensure compliance with them; whether and how rumours are verified; whether traders are permitted to pass on or trade on rumours; and how firms ensure staff do not initiate or spread false rumours. This exercise is covering a range of investment banks, securities firms and hedge fund managers, and the results will be communicated to the market in the early autumn.

Full details of the investigation can be found by clicking here