A site visit, a competitor and a friend
Ravi is a portfolio manager at a UK discretionary fund manager. He visits the Arden Chemicals plant as part of research. During a tour, Arden's operations director says a fire at Bexley Materials' only UK plant has closed it for at least six months and that Arden has taken 'several large orders' as a result. The director asks Ravi not to attribute the remark. Arden has not issued an RNS. Ravi returns to the office and sells the fund's £4m holding in Bexley, then buys £3m of Arden. That evening he tells a friend, who runs a hedge fund, that Bexley's plant is 'out for the count' and that Arden is winning contracts. The friend short-sells Bexley the next morning. Arden's shares rise 9% when it announces a contract win two weeks later; Bexley falls 12% after its own announcement. Compliance reviews Ravi's trades and phone records.
1. Was the information inside information in relation to Arden and/or Bexley? Apply the relevant tests.
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Inside information must be precise, not generally available, relate directly or indirectly to the issuer or financial instrument, and be likely to have a significant effect on price if made public. For Arden, the operations director's statement is precise enough: a competitor's plant is closed for at least six months and Arden has won several large orders. It is not public and is issuer-specific; a reasonable investor would likely see it as significant. For Bexley, the information relates directly to its own production capacity and is equally precise and non-public. The fact that Ravi learnt it from Arden's director, or that Bexley was not the subject of the visit, does not stop it being inside information about Bexley. The 'not attributable' request reinforces confidentiality. Ravi therefore had inside information in relation to both issuers. The later 9% rise in Arden and 12% fall in Bexley is consistent with significance, although the test is ex ante, not based on the actual move.
2. What breaches may have occurred, and what should compliance do?
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Ravi, as an insider, must not deal or attempt to deal on the information, nor disclose it unlawfully. Selling the Bexley holding and buying Arden are both potentially insider dealing. Telling his friend is a tipping or unlawful disclosure offence; the friend's short sale is also potentially insider dealing. These are criminal offences and market abuse under UK MAR. Compliance should immediately preserve trading and telephone records, restrict Ravi's activity, and make a suspicious transaction and order report to the FCA promptly. It must not tip off Ravi or the friend. It should consider whether the firm's market abuse controls, wall-crossing and personal account dealing procedures failed, and whether the fund's clients need to be compensated or the trades unwound. The firm should also assess whether Arden's selective briefing to Ravi should be reported. Legal advice should be taken before any external communication. A 'not attributable' request is not a defence and is itself a warning sign.
3. How should the firm handle the operations director's request not to attribute the remark?
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The request is a clear signal that the director did not intend the remark for public consumption. It does not make the information public or allow Ravi to use it. Ravi should have stopped the conversation, sought compliance advice, and not traded or tipped. The firm should treat the remark as confidential, consider whether Arden has breached its disclosure obligations by selectively briefing an investor, and decide whether to report the issuer's conduct. It should also remind staff that site visits can generate inside information and that 'off the record' comments are still covered by the market abuse regime. The firm should not rely on the fact that the remark was unattributed, because the source and the substance were known to Ravi. If the information later becomes public through an RNS, trading may resume only after the firm is satisfied that the market has had time to absorb it and that any restricted list is lifted.