25 May 2007

Telegraph: FSA warns markets over potential abuses

The FSA has issued a stern reminder to hedge funds, arbitragers, and other market activists in the wake of a series of highly speculative reports of imminent buyouts of FTSE 100 companies.

The City regulator has warned all market participants to be careful to ensure that they are not making up stories of takeovers, or sharing information in certain companies, to the disadvantage of the majority of other shareholders. The watchdog, which is responsible for ensuring markets are not distorted, has reminded bankers and other investors that such activities are in clear contravention of its market abuse rules, which could result in unlimited fines or a ban from working in the City.

Perfectly legal shareholder activism is a growing phenomenon in London's markets, spearheaded by hedge fund managers such as TCI, led by Chris Hohn, and Polygon, who adhere to the FSA rule book. But there are concerns less scrupulous investors may take advantage of the UK's very open stock market.

The guidance, in an FSA paper entitled Shareholder Activism, comes in the light of a wave of largely unfounded press reports, based on market rumours, that a clutch of Britain's largest companies were about to be on the receiving end of a takeover bid. In one of the worst instances, shares in Scottish & Newcastle rose 13% over two days at the end of March on suggestions that it was about to be on the receiving end of a takeover bid from a rival. It has to yet receive any such bid.

Other companies who have fallen victim to such apparent rumours include fashion retailer Next and telecoms group Cable & Wireless, neither of whom have yet to receive any such approach.

Yesterday's publication from the FSA warned: 'There is also obvious potential for abuse were a participant deliberately to set out to generate a false rumour or expectation of some future corporate action knowing that it may be able to take advantage of a shortterm movement in the price of the target's securities.' In addition, in its wider comments on shareholder activism, the FSA seemingly takes aim at apparently disparate investor groups who may work together to the disadvantage of others.

An FSA spokesman last night said that the comments were not intended as a warning per se, but were issued as much as a reminder as to what people are allowed to do as to what they are not allowed to do.

© Graham Bishop