Financial Services Authority v Da Vinci Invest Ltd & Ors

I have before me an application by the Financial Services Authority (“the FSA”), first, for freezing orders originally granted by Briggs J on 12 July 2011 against the first, second and third defendants to be continued until trial and, secondly, for orders to be made against the first, second, third, fourth and fifth defendants restraining them from engaging in "market abuse".

The application is made pursuant to section 381 of the Financial Services and Markets Act 2000. Section 381(1) of that Act empowers the court to make an order restraining "market abuse" if it is satisfied, among other things, "that there is a reasonable likelihood that any person will engage in market abuse" (see section 381(1)(a)). Under section 381(3) and (4), if the court is satisfied that a person may be or have been engaged in market abuse, it can make an order "restraining … the person concerned from disposing of, or otherwise dealing with, any assets of his which it is satisfied that he is reasonably likely to dispose of or otherwise deal with".

"Market abuse" is defined in section 118 of the 2000 Act. It includes behaviour which "occurs in relation to … qualifying investments admitted to a prescribed market" if the behaviour "falls within any one of the types of behaviour set out in subsections (2) to (8)" (see section 118(1)). One such type of behaviour is described in these terms in subsection (5):

The FSA alleges in the present case that the defendants have each engaged in market abuse by reason of behaviour falling within section 118(5) of the 2000 Act. The conduct of which the FSA complains is described in detail in an affidavit sworn by Mr Robert Beauchamp of the FSA. The relevant trading can be divided into two parts. There was first trading by the first defendant, Da Vinci Invest Limited, in contracts for differences between August and December 2010. This trading came to an end when Goldman Sachs International, through which the trading had been effected, terminated its agreement with the first defendant. The second period of trading began in February of this year and was carried out through Sungard Global Execution Services Limited (“Sungard”). This trading was undertaken by the second defendant, Da Vinci Invest PTE Limited, which is a wholly-owned subsidiary of the first defendant, and the third defendant, Mineworld Limited. The fourth and fifth defendants, Mr Banya and Mr Brad, who are Hungarian nationals, are each said to have traded on behalf of the first and second defendants. The fifth defendant is said to have traded on behalf of the third defendant too.

The FSA alleges that manipulative trading activity took place in both periods of trading. A skeleton argument filed on behalf of the FSA summarised the strategy which it is said was pursued in the earlier period in these terms:

The proceedings which are now before me were issued on 13 July of this year. On the previous day, the FSA made a without-notice application to Briggs J. He granted freezing orders against the corporate defendants (i.e. the first, second and third defendants) pursuant to section 381(3) and (4) of the 2000 Act, but he did not consider it appropriate to make any order under section 381(1) on a without-notice basis.

The matter next came before the court on 20 July. On that occasion, it was ordered, by consent, that the FSA's application should be adjourned and that Briggs J’s order should be continued in the interim. The first to fifth defendants gave undertakings over the same period along the lines of the relief sought by the FSA under section 381(1) of the 2000 Act.

As I have already mentioned, the FSA now seeks to have the freezing orders made by Briggs J continued until trial. It also asks that the first to fifth defendants be restrained until trial from engaging in "market abuse".

No evidence in opposition to the FSA's application has been served by any of the defendants, and the third, fourth and fifth defendants are neither present nor represented before me. The first and second defendants, in contrast, are represented by a director, Mr Hendrik Klein. Mr Klein disputed both that any relief should be granted against the first and second defendants under section 381(1) of the 2000 Act and that the freezing orders made by Briggs J should be continued. As a fallback position, Mr Klein suggested that the first and second defendants should be permitted to transfer a particular sum to New York.

Three points in particular emerge from Mr Klein's submissions. First, he said that the first and second defendants had been "unaware that the Hungarian traders were trading in the way the FSA has highlighted". Secondly, he queried whether the trading identified by the FSA amounted to "market abuse". Thirdly, he said that, now that he knew that the trading which had been carried out could be considered to represent "market abuse", there was no likelihood of the first and second defendants engaging in such activity in the future.

On balance, however, I have concluded that there is a reasonable likelihood that each of the defendants, including the first and second defendants, will engage in market abuse and, hence, that it is appropriate that I should make an order against them under section 381(1) of the 2000 Act.

In the first place, it seems to me that there is a strong case for saying that there has been "market abuse" in the past. In particular, the FSA's evidence tends to indicate that there has been behaviour falling within section 118(5) of the 2000 Act. Mr Klein put forward a number of reasons for thinking that the "Hungarian traders" had not been intending to manipulate the market, but (a) none of defendants has put in evidence; (b) the FSA's evidence, which is all that is available, provides good reason for thinking that there was an intention to manipulate the market; and (c) the FSA does not have to establish "market abuse" definitively to obtain interim relief. That will be a question to be considered at trial.

It is significant, moreover, that the trading of which complaint is made was resumed in February of this year, despite Goldman Sachs' termination of its agreement with the first defendant last December. Mr Klein told me that he had not known at the time of any FSA investigation, but he also said that Goldman Sachs had referred to potential difficulties under the LSE rules when explaining its decision to terminate. It thus appears that Mr Klein chose to resume trading, even though he knew that the trading would or might involve breach of LSE requirements and that Goldman Sachs had considered there to be an issue of sufficient significance to warrant termination. That fact must weigh heavily against Mr Klein and his companies.

I bear in mind Mr Klein's claim that the first and second defendants would not be likely to engage in conduct such as that of which complaint is made in the future. That claim is not without plausibility. At the end of the day, however, I have been persuaded by Mr Andrew George, who appears for the FSA, that there is a reasonable likelihood that the first and second defendants, like the third, fourth and fifth defendants, will engage in market abuse if no injunction is granted. Trading was resumed after Goldman Sachs' termination of its agreement with the first defendant. There is in my judgment a reasonable likelihood that it would also be resumed in some way were I to decline to grant an injunction.

I also consider that it is appropriate to continue the freezing orders which Briggs J granted. As already indicated, I am satisfied that the first, second and third defendants may have been engaged in market abuse (as required by section 381(3) of the 2000 Act). I am also satisfied, having regard to Mr Beauchamp’s evidence that those defendants are reasonably likely to dispose of, or otherwise deal with, assets of theirs (as required by section 381(4) of the Act). I bear in mind in this context that the third defendant has made no attempt to provide the information required under Briggs J's order and that there is rather limited information as to the first and second defendants’ financial circumstances and relationships.

As regards the money which the first and second defendants wish to transfer to New York, this is a matter, as it seems to me, which should be pursued in correspondence in the first instance. It may be that the parties will be able to reach agreement as to the way forward. If not, it will be open to the first and second defendants to refer the point to the court. I do not consider that I should make any direction in relation to it today.

In all the circumstances, I shall continue the freezing orders until trial and also grant the relief sought under section 381(1) of the 2000 Act.