White collared: the Financial Service Authority raids in the City
Dawn raids in the stockbroker belt by the Financial Services Authority have led to a series of arrests and fuelled the City rumour mill. Iain Hollingshead reports.
By Iain Hollingshead
Published: 6:21PM BST 05 Apr 2010
'Hello," says a polite, nervous voice on the telephone. "My name's Caroline Wilby. I work for the FSA. I'm awfully sorry to trouble you, but I wondered if I might ask for your help." In Sebastian Faulks's credit-crunch novel A Week in December, John Veals, a venal hedge-fund manager involved in a complicated form of illegal insider trading, runs rings around a naive 26-year-old investigator from the Financial Services Authority. Miss Wilby makes an appointment to visit his office, eats his soft chocolate biscuits with glee and is sent on her way, none the wiser (and still working for the toothless regulator, despite a desperate parting plea to Veals to give her a job in his fund).
Life, however, has just become rather more brutal than art. In an eventful week in March, 143 FSA staff, supported by officers from the Serious Organised Crime Agency (Soca), carried out dawn raids on 16 addresses in London, Kent and Oxfordshire. White-collar crime had just been confronted with remarkably blue-collar tactics.
This was certainly not your average early-morning wake-up call on a drug-ridden council estate. Julian Rifat, a trader earning comfortably more than £1 million a year at Mayfair hedge fund Moore Capital, was arrested at 5.30am at his home in leafy north Oxford on March 23. Every item that could store information – including his children's iPods – was removed by investigators. It was his 41st birthday.
Five other financiers were arrested simultaneously. All co-operated, surprised and bleary-eyed. One of them, Iraj Parvizi, a Mayfair-based investor originally from Iran, was in hospital, receiving treatment for a throat infection. Another – we have not been told which – was known to have had a shotgun on the premises. Fearing this, FSA and Soca officers were accompanied by uniformed police. There were no chocolate biscuits or polite telephone calls.
An hour later, at 6.30am, a van pulled up at the London Wall headquarters of Deutsche Bank. Seven men and one woman, some wearing smart suits, others carrying rucksacks, got out and spent two-and-a-half hours ransacking a desk on the fifth floor. Its usual occupant, Martyn Dodgson, was already in custody a couple of miles away, at Holborn police station. Dodgson, whose surname has landed him with the inevitable nickname "Dodgy" among colleagues, is a managing director who advised the Treasury on the banking bail-out.
Again, simultaneous raids were carried out at business premises across the capital. Other detainees that day included Clive Roberts, nicknamed "Del Boy" and head of equities at Exane BNP Paribas, and Graeme Shelley, a senior equities trader with Novum Securities. The following day, Ben Anderson, a former stockbroker, was arrested by Soca agents at Gatwick airport on his return from a holiday in St Lucia. The identity of the seventh person has still not emerged.
A spokesman for the FSA says that these arrests were conducted "on suspicion of being involved in a sophisticated and long-running insider dealing ring". All vigorously deny any wrongdoing, some of them through expensive solicitors. Mr Rifat has hired Stephen Pollard, who represented the Barings rogue trader Nick Leeson. It is thought that all seven have now been released on bail.
In the absence of anything concrete to go on – the FSA is expected to take more than a year to bring charges – gossip is rife across the City about what exactly is happening. Theories abound, including speculation over the number of people involved, the exact nature of the alleged offending trades, and accusations that all this recent manic activity by the FSA (on Tuesday, in an unrelated incident, it charged seven men with making £2.5 million from insider trading) is merely the death throes of an agency that the Conservative Party has pledged to abolish.
The more lurid rumours suggest that these arrests are only the beginning. "I'm almost certain the FSA has someone bigger in its sights," an anonymous banker was quoted as saying this week. "They're hoping one of these guys will flip and agree to talk about other people. They have learnt a lot from the US." If so, there must be more than a handful of sleepless financiers dreading a dawn knock. An article posted this week on the website of Clyde & Co, an international law firm, gives guidance on what to do in the event of a raid: "Check that the warrant has been granted against your premises/abode and that it is signed, dated and sealed and that it is still in date."
Equally lurid are the theories as to the possible connections between the seven suspects. Some have suggested a shared interest in horseracing, high-stakes online poker or even Mayfair drinking dens. No one has yet managed to draw a convincing link between them.
What we do know is that the FSA's investigation started in 2007 and was almost certainly focused on trades carried out in advance of fund-raisings by Barclays Bank, Segro, the real estate group, and Taylor Wimpey, the house-builder. None of these companies are in any way implicated in the allegations, but all their share prices rose significantly after rights issues and discounted share placing. It is thought that speculating brokers might have acted in advance on this sensitive inside information, placing their own trades ahead of the client's and making a killing in an illegal process known as front-running. Other reports suggest that the alleged ring made more than £4 million by trading Scottish & Newcastle shares during its takeover by Heineken and Carlsberg in late 2007.
The length and depth of their investigations are the FSA's retort to accusations that these high-profile arrests have come at a convenient time – just before an election. Clearly, their investigators started gathering evidence long before the Tories' July 2009 policy document set out their intention to disband the authority. Under Margaret Cole, the FSA's uncompromising head of enforcement, the authority has been ramping up its activities for some time. A few years ago, it installed Sabre, a complex computer system that analyses suspicious trading patterns. It can also deploy phone taps and has been making greater use of whistleblowers, who can claim immunity in return for testifying.
"Sophisticated investors need flexible arrangements, not fussy inspectors," says John Veals in a rather heavy-handed bit of satire in Faulks's novel. It seems that, at last, it is the inspectors who are becoming more sophisticated.
So far, so noble. Yet the Financial Times last week reported a senior FSA official saying: "It's clear that if we can make waves now, if we can make a lot of noise, then post-election a Tory government would find it difficult to disband a successful organisation."
And just how successful has the FSA been? It didn't exactly cover itself in glory with Northern Rock or Lehman Brothers. It has certainly been busy of late, though. In the past year, it has handed down £27.5 million in fines, 32 per cent higher than the previous year, and including eight separate fines of more than £1 million. There have also been three insider dealing prosecutions. Hector Sants, its outgoing chief executive, has pledged to hire 460 employees and increase its annual funding by 10 per cent to £455 million.
The FSA is even beginning to show its teeth abroad. On Tuesday, Helmy Omar Sa'aid, from Singapore, became the first person to be successfully extradited to Britain in connection with an insider trading investigation. Meanwhile, even the much-maligned Serious Fraud Office scored a success last month with the arrest of three directors of Alstom, the engineering company, for alleged price-fixing.
However, as the FSA has found to its cost in the past, there is a world of difference between suspecting someone of insider dealing and proving it. Although it estimates that up to 32 per cent of takeover bids in Britain during the first half of this decade involved significant volumes of insider trading, there have been just 22 successful criminal cases, according to Professor Paul Barnes, director of the International Fraud Prevention Research Centre at Nottingham Business School. Only two collaborative rings have been successfully prosecuted in the City of London since 1980. For the most part, the FSA has chosen instead to go after minor, careless players.
The greater the zeal with which the FSA pursues the bigger fish, the greater the satisfaction its enemies will take if it fails. "This is a biggie," says Prof Barnes. A biggie for the authority, certainly, and for its enemies, but most of all, of course, for the suspects. At least four of them are on leave or have been suspended. The FSA has frozen their assets indefinitely, allowing them, it is thought, just £300 a week to cover all costs. "For a City slicker, it's quite a change of lifestyle," says Prof Barnes, with considerable understatement.
Additional reporting by Harry Wilson