FCA secures High Court Judgment awarding injunction and over £7 million in penalties against five defendants for market abuse

The High Court today held that the Financial Conduct Authority (FCA) is entitled to permanent injunctions and penalties totalling £7,570,000 against Da Vinci Invest Ltd, Mineworld Ltd, Mr Szabolcs Banya, Mr Gyorgy Szabolcs Brad and Mr Tamas Pornye for committing market abuse.  The defendants were found to have committed market abuse in relation to 186 UK-listed shares using a manipulative trading strategy known as “layering”.

The FCA took action to stop the abuse in July 2011. This is the first time that the FCA has asked the High Court to impose a permanent injunction restraining market abuse and a penalty.  Four of the five defendants were incorporated or resident abroad in Switzerland, the Seychelles and Hungary.

Georgina Philippou, acting Director of Enforcement and Market Oversight, said:

"This case demonstrates that we are prepared to take robust action to ensure the integrity of UK markets. We acted quickly to stop the abusive behaviour in 2011 and today’s judgment means that those behind the abuse will now have to pay significant financial penalties. 

"This was a sophisticated form of abuse that took place across multiple trading platforms. Today's judgment shows the FCA’s ability and determination to stamp out abusive market practice wherever it may occur in UK markets. As the judge states, 'Protecting the integrity and proper functioning of those markets is a matter of substantial importance to individuals as well as to national and international economic interests'."  

In July and August 2011, the FCA successfully applied for an interim injunction restraining Da Vinci Invest Ltd, Da Vinci Invest PTE Ltd[1], Mineworld Ltd, Mr Szabolcs Banya, and Mr Gyorgy Szabolcs Brad from committing market abuse and freezing the assets of the three companies. This was on the grounds that the defendants had between them repeatedly committed market abuse between August 2010 and December 2010 and from February 2011 until July 2011 (when the interim injunction was issued).

The manipulative behaviour consisted of an abusive trading strategy known as “layering”, involving the entering and trading of orders in relation to shares traded on the electronic trading platform of the London Stock Exchange (“LSE”) and multi-lateral trading facilities (“MTFs”)[2] in such a way as to create a false or misleading impression as to the supply and demand for those shares and enabling them to trade those shares at an artificial price. 

The defendants typically used a mixture of large and small orders entered on one side of the LSE's order book to create a false impression of supply or demand in a particular stock. These orders were not intended to be traded. The large orders were carefully placed at prices close enough to the best bid or offer prevailing on the LSE at the time to give a false impression of supply and demand, but far enough away to minimise the risk that they would be traded.  The small share orders (typically around 100 shares) were used to improve the best bid or offer price. As the price improved, further large orders were strategically placed at prices close to the new best bid or offer in order to support the improved price.  In this way the defendants systematically sought to manipulate the share price up and down.

These orders had the effect of moving the share price as the market adjusted to the apparent shift in the balance of supply and demand. Once the price had been moved to an advantageous level, the defendants initiated a trade on the other side of the order book in order to profit from the price movement that they had created.  These trades took place either on the LSE or on a competing MTF in order to take advantage of available liquidity.

The large “layered” orders, which were never intended to trade and which were used to stimulate the price movement of the relevant shares, were then cancelled and the process would start over again, typically aimed at moving the share price in the opposite direction. In this way the defendants’ actions consistently resulted in them buying shares at lower prices and selling shares at higher prices than would have been the case had the strategy not been employed[3].

The defendants accessed the relevant trading platforms via a service offered by certain brokers known as Direct Market Access (DMA). DMA allows clients direct access to exchanges and other trading platforms.  The defendants did not trade directly in shares but used a derivative instrument called a Contract for Difference (CFD), the price of which precisely matches the price of the underlying share. The nature of the CFD/DMA accounts was such that the defendants knew that CFD orders placed with the DMA providers would immediately and automatically result in the placement of equivalent orders in the underlying shares on the relevant trading platform, so as to affect the underlying share price.

A hearing is to be fixed to determine various consequential issues including the terms of the final injunction. Please note that the Defendants have the right to apply for permission to appeal.

The FCA has secured a number of other enforcement actions against firms and individuals for layering including cases against Swift Trade[1] and Michael Coscia[2].

Notes to editors

1. The Judgment of Mr Justice Snowden[3].
2. Upon handing down the judgment today, Mr Justice Snowden made an Order that the Defendants pay the following sums to the FCA by way of penalties by such  date(s) as to be determined at a subsequent hearing (save in so far as monies frozen in respect of Mineworld Limited are to be transferred forthwith to the FCA on account of Mineworld Limited’s liabilities in respect of penalty): Da Vinci Invest Limited - £1.46 million; Mineworld Limited - £5 million; Mr Szabolcs Banya - £410,000; Mr Gyorgy Szabolcs Brad - £290,000; and Mr Tamas Pornye -  £410,000.  The hearing has been adjourned to a date to be fixed as soon as practicable after 7 September 2015 for the purpose of determining the date by which the penalties are to be paid, finalising the terms of the injunction to be granted against the defendants, determining any applications in respect of costs, and determining any applications for permission to appeal and/or for a stay of execution.
3. The judge says at paragraph 260 of the judgment: "Market abuse can cause serious harm, not only to other market participants and the many millions of private citizens whose personal wealth and provision for retirement is invested on the financial markets, but also to the reputation of those markets more generally.  Protecting the integrity and proper functioning of those markets is a matter of substantial importance to individuals as well as to national and international economic interests.  The policy imperative to prevent and deter market abuse is very clear."
4. The FSA’s publication Market Watch, Issue No.33[4] provides FSA commentary on Manipulation of the order book – “layering and spoofing” and this is also discussed in Market Watch, Issue No.44[5] in the article on "Abusive high frequency trading (HFT) strategies in commodities markets".
5. The conduct that led to the FSA’s action was first brought to the FSA’s attention by an MTF on which one of the companies had traded.
6. On 1 April 2013, the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA). On 1 April 2014, the FCA took over responsibility for consumer credit regulation.
7. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
8. Find out more information about the FCA[6].