Following publication by the Financial Services Authority (FSA) on 25 January 2012 of a decision notice setting out financial penalties against David Einhorn, owner of the US hedge fund Greenlight Capital Inc, and his fund for engaging in market abuse, the City of London Law Society (CLLS) Regulatory Law Committee wrote a letter to the FSA as it had concerns about paragraph 3.11 of that decision notice. Paragraph 3.11 concerns a third party who agrees to be wall crossed so that it can be provided with inside information but it is then restricted from trading. Paragraph 3.11 of the decision notice states that the party that has been wall crossed “is only able to trade in the company’s shares again once the information it has been given is made public. In the context of a transaction, the information will be made public either when the transaction is announced to the market, or in cases where a transaction does not proceed, when an announcement is made to the market stating that a transaction was contemplated, but did not proceed. This announcement may be referred to as a cleansing statement”.
The Regulatory Law Committee was concerned at the suggestion that there should in all cases be a cleansing announcement when information is provided about a possible transaction. While the Regulatory Law Committee agrees that a party who receives inside information will be unable to trade for so long as it remains inside information, they do not believe it will always necessarily be the case that the fact that a capital raising is not going ahead remains inside information and they set out a number of reasons why information imparted may cease to be inside information. The Regulatory Law Committee was concerned that, in light of the FSA’s statement in paragraph 3.11 of the decision notice, investors might refuse to take part in discussions about a capital raising on a wall-crossed basis unless they receive an assurance from the issuer or its adviser that a cleansing announcement will be issued if the deal does not proceed. Issuers would be likely to be wary of giving any such guarantee and could be advised that there is no requirement to issue a cleansing announcement where a deal does not proceed and no inside information continues to exist.
The FSA responded to the letter of the Regulatory Law Committee on 23 March 2012 and that response has now been published on the CLLS website. In their response, the FSA confirm the following:
- it agrees that, in some circumstances, the fact that a previously proposed capital raising is no longer going ahead will not necessarily constitute inside information. Each case will depend on its own facts and circumstances and firms and individuals may need to take legal advice as appropriate;
- the statement about cleansing in paragraph 3.11 of the decision notice must be read in the context of the decision notice as a whole and the individual facts of that case; and
- in circumstances where information is no longer inside information, a cleansing announcement will be unnecessary but the FSA will expect advisers to consider carefully whether that is the case.
(CLLS Regulatory Law Committee, Letter to FSA - Cleansing announcements, 02.03.12)
(FSA, Response to CLLS Regulatory Law Committee: Cleansing announcements, 23.03.12)