What is your model of what the FSA is thinking in its insider-trading crackdown? Here is this Decision Notice against JPMorgan global ECM chairman and general mining-industry macher Ian Hannam, shown here being unspeakably awesome in Afghanistan*, and he got in quite a bit of trouble for some pretty minor badness. Basically he was advising Heritage Oil and its CEO, Tony Buckingham, on a bunch of things including (1) being acquired by another company which is unnamed but let’s just call it Acme and (2) selling a stake in itself to “Mr A, a representative of an organisation with interests in Kurdistan (Organisation C),” which, there is a part of me that thinks that the organization was actually named "Organisation C" and that the guy would call Hannam and be like “Ian? Mr. A here.” No? I refer you again to that picture.
Anyway as things got serious with Acme in September '08, Hannam sent an email to Mr. A saying:
“I thought I would update you on discussions that have been going on with a potential acquirer of Tony Buckingham’s business. Tony, advised by myself, has deferred engaging with the client until Thursday of next week although we know they are very excited about the recent drilling results of Heritage Oil … I believe that the offer will come in in the current difficult market conditions at £3.50-£4.00 per share. I am not trying to force your hand, just wanted to make you aware of what is happening.”
Later, he sent another email to Mr. A ending “PS – Tony has just found oil and it is looking good,” and bcc’ed Mr. B, “a businessman with interests in Kurdistan,” about whom we get no further information though I’m guessing pretty much everyone named or pseudonymed here could have someone killed on 24 hours’ notice if it came to that.
It's not entirely clear what the motivations were here, but there are tantalizing hints. First of all Hannam was clearly dealing with Mr. A on Heritage's behalf - he went to meetings with Buckingham and Mr. A where they talked about strategic investments and where Buckingham told A that he'd fielded some potential M&A offers. Hannam apparently went a bit further with details, which is how he got in trouble, but the FSA itself says he "had implicit authority to make the disclosure of the information contained in the September email to Mr A, and was acting in his client’s interests."
On the other hand, a month later:
On 8 October 2008 at 3.30pm, Mr Hannam attended an internal Commitments Committee meeting at J.P. Morgan where he sought the committee’s approval to take on Mr A and Organisation C as clients, and in due course proceed with the fund expected to be set up by Organisation C. That approval was obtained.
So how shady is this? On the one hand, shady! He gave these people nonpublic information. Was it material? I don't know, but the surrounding facts are sort of bad - the FSA forced Heritage to discuss the M&A bid a week later because of trading activity in the stock, and Heritage employees were blacked out around the time it found oil because of the presumptive materiality of the discovery. So presumably it was material.
On the other hand - trafficking in information about potential acquirers, targets, JV partners, and competitors is sort of what investment bankers do, especially ones as connected as Hannam. What happened here is definitely poor form - it sounds like Mr. A and Organisation C had not signed any sort of NDA or standstill, and Heritage was/is a public company, so they could have gone and traded on that information in the public markets rather than transacting with Heritage directly - though, in the event, they apparently did neither.** But this sort of exchange of information about who might be buying whom, especially in the context of Hannam trying to talk Mr. A into investing in Heritage, is not far from the norm. Here is a revealing comment:
“I don’t think this sort of stuff goes on [widely]. You don’t disclose inside information. You would not write that,” says one M&A banker.
Who knows what the FT replaced with "widely," but I'm pretty sure "you would not write that" means "but you'd say it!"
I try to understand the FSA's insider trading crackdown through the lens of US securities law, with mixed results, and I suspect that in the US this case almost certainly wouldn't have been pursued. Not because it wouldn't violate US securities laws - it would I guess violate Reg FD - but because nobody traded on, or contemplated trading on, the material nonpublic information. No harm, no foul. To the extent there's a theory of US insider trading prosecutions, it's that regular investors and Raj Rajaratnam should have the same access to information so that they have a level playing field in trading stocks, which is maybe silly but at least it's a theory. If the people with access to the privileged information aren't trading stocks - because their interest in the information is strategic rather than market-driven - then they're of less interest to the SEC.
What some people in the US are interested in, though, besides insider trading, is conflicts of interest involving bankers. And boy did Hannam have them! Not that clients are complaining - they're all over the media today saying he was a stand-up guy and gave them good advice - but there is something suggestive about him passing along nonpublic information about one one client (Heritage) to another contact (Organisation C) who was a potential investor in Heritage - but also a potential client in its own right. And then going to Comm Comm a month later to formalize that client relationship.***
As a smart man once pointed out, big-ticket bankers like Hannam are basically paid for their contacts and relationships, and the way they cultivate those relationships is in part by trafficking in information. That traffic in information is actually not particularly harmful to "market integrity," whatever the FSA means by that, since it rarely leads to insider trading. But maybe it leads to - I don't know, clients or courts or shareholders being a bit sad that their financial adviser had incentives on both sides of the transaction. In the US we deal with that concern with massive doses of shareholder lawsuits. Maybe the UK is going to deal with it with occasional, randomly applied, enormous fines?
* Is this the most amazing mini-bio of a banker ever? Yes, yes it is:
“Ian Hannam was one of the most outstanding investment bankers I have met in the last 50 years,” says Lord Leach, a director at conglomerate Jardine Matheson and an old friend and business associate of Mr Hannam’s. …
That’s echoed by a long-time friend of his. “He’s no smoothy-chops in a pin-striped suit,” the friend says. …
Friends insist it is his unconventionality that was his downfall. “I suspect that people like Ian make the deskbound civil servant wallah feel a bit uneasy,” says one City grandee who knows him well. “He’s out of their comfort zone.”
And someone unironically says “He thought the word team had the letter ‘I’ in it.”
** Also it sounds like Hannam had a subordinate write that email and then failed to check it carefully. How bad does that subordinate feel right now?
*** Also, when Hannam says in that email "Tony, advised by myself, has deferred engaging with the client" - is that a typo, or is Acme also a Hannam client?