Hedge Fund Market Abuse Case Results In Fines

LONDON – The UK's Financial Services Authority (FSA) hit London-based hedge fund, GLG, and its former senior trader, Philippe Jabre, with a fine of £750,000 each in early March for market abuse.

The decision comes more than two years after the original incident, when Goldman Sachs approached Jabre during its pre-marketing phase of a convertible bond issue for Sumitomo Mitsui Financial Group.

A Goldman Sachs employee, John Rustum, passed 'inside information' to Jabre, who claims he didn't realise the information was such, said a party close to the situation. Jabre then used the information to make a profit. "[It was] a complicated call, which led to a misunderstanding. Goldman Sachs has admitted this [to the FSA] in writing," said the source.

Rustum no longer works for Goldman Sachs and couldn't be contacted for comment.

A Goldman Sachs spokesman says the dealer does not comment on "regulatory matters", but an official at the US bank said its staff made it "very clear" to Jabre that he was "an insider". GLG and the FSA both refused to comment publicly on the matter.

According to the person close to the decision, although fined, Jabre was not suspended nor barred from involvement in the financial sector. This was ultimately because he was found not to have intended to break FSA rules. His offence was "a misunderstanding in hindsight". However it is "unlikely" that Jabre will stay with GLG.

The ruling represents the first successful case that the FSA has brought against a hedge fund for market abuse.

Convertible bonds represent a lucrative arbitrage opportunity for hedge funds, which can profit from going long on the bond and short on the issuer's equity.

The FSA realises this and is stepping up its monitoring of potential insider trades.