Thursday 8 December 2016

'Show trials' in UK distract from the failure of the regulators

Matthew Lynn

Published 09/06/2011 | 05:00

OTHER jurisdiction also have their work cut out tackling corporate wrondoing.

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In Britain, insider-trading cases are like London buses: You can wait for ages without seeing any at all -- and then a whole bunch will come along at the same time.

The UK Financial Services Authority (FSA) are pursuing two high-profile investigations into alleged insider-dealing rings. In March, prosecutors secured a rare prison sentence against a former stockbroker.

Why now? For years, traders in the financial markets stood more risk of getting struck by lightning on the golf course than they did of being arrested for swapping a few share tips on the same fairways.

In reality, the regulators are responding to a public mood that has turned hostile to bankers. And they are covering up their own inadequacies. Show trials are just a distraction from far worse problems elsewhere in the system.

The real wrong-doers in the City of London are surely the politicians and regulators who allowed the country to be virtually bankrupted by a risk-hungry banking industry.

A few brokers and hedge-fund managers getting an inside track on which stocks or bonds might be up or down won't make much difference.

The crackdown on insider trading by UK regulators is harsh enough to make everyone in the markets feel nervous. The financial district has been rocked by some dramatic arrests. In one set of raids, executives of the hedge fund Moore Capital Management as well as Deutsche Bank and Exane BNP Paribas were arrested on suspicion of insider trading.

In a separate investigation, as many as 11 people may face charges arising out of a probe that started at the London printers working for UBS and JPMorgan Chase.

Insider trading

Christian Littlewood, a former banker at Shore Capital Group and Commerzbank's Dresdner Kleinwort, was charged with insider trading along with his wife. The agency has won an insider-trading case against Malcolm Calvert, a former partner at JPMorgan's Cazenove unit.

So why is London witnessing this sudden increase in law enforcement for insider traders? For years, insider trading wasn't just a largely victimless crime, as many opponents of the laws have argued. It was also mostly unenforced.

Most of us following the City reckoned we had more chance of seeing England lift the soccer World Cup before we saw anyone serve time in prison for illicit financial manipulation. Of course, there may be some simple reasons. The law is the law, whatever you may think of it, and the regulator's job is to identify anyone who breaks it.

If they have finally decided to devote more time and resources to making sure the rules are obeyed, then they are to be commended for that.

But surely, there is something more troubling at work. After the credit crunch, the public mood turned decisivelyagainst the financial markets and the people who work in them.

Stocks might have recovered, and the bonuses might be flowing again. That doesn't mean the near-collapse of the banking system has been forgotten.

The regulators may well be getting tougher on financial crime because they sense the public wants to see bankers, brokers and hedge-fund managers sent to prison.

Witch-hunt

In any case, the current witch-hunt is overdone. Making a few pounds by trading a stock ahead of a company announcement is much less damaging than inflating a balance sheet, loading it up with subprime debts, and then getting taxpayers to pay billions to the bankers who created the mess.

And who is more guilty of misconduct -- a few hedge-fund managers who get ahead of the game -- or the regulators who failed to notice that a whole series of financial institutions were built on foundations so flimsy that they collapsed as soon as the market turned down?

Under Josef Stalin, the Soviet Union created show trials to distract the masses from the incompetence of the leaders.

The insider-trading prosecutions look like they are doing something similar -- giving the appearance of a crackdown, while leaving the system intact.

If people are going to be punished for the financial crisis of the last few years -- which would be appropriate -- then we should focus on the real culprits, not just a few scapegoats.

(Bloomberg)

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