Mr. Kyprios, Head of Credit Sales at Credit Suisse Securites (Europe) Ltd in London, has been fined £210,000 by the UK’s Financial Services Authority (“the FSA”) for disclosing client confidential information.
Credit Suisse acted on behalf of Liberty Global, Inc (“Liberty”) during its takeover of Unitymedia GmbH (“Unitymedia”), which was partially funded by a bond issue.
Kyprios was wall-crossed regarding the takeover and related bond issue. Kyprios was instructed in writing by Credit Suisse that this was inside information, which he should not disclose to anyone outside Credit Suisse, apart from five pre-approved investors who he was also permitted to wall-cross.
In November 2009 Kyprios called a fund manager to invite him to the bond issue road show. The fund manager told Kyprios that he did not want to be wall-crossed. The fund manager asked Kyprios about the bond issue and in response Kyprios engaged in a guessing game, including advising him when he was “getting warmer“. Through this guessing game, Kyprios signalled certain information to the fund manager, including (i) that Unitymedia was possibly about to bring a big bond issue to the market; (ii) the issue was intended to be announced the next day; (iii) the potential rating of the issue; (iv) that Unitymedia would redeem outstanding bonds; and (v) that the issue was M&A related. Kyprios called another fund manager and disclosed the identity of the issuer by another guessing game.
Why did the FSA take action?
The FSA found that Kyprios had breached Principles 2 (skill, care and diligence) and 3 (market conduct) of the FSA’s Statements of Principles for Approved Persons. He had breached Principle 2 by failing to exercise the skill, care and diligence expected of approved persons, in that he had disclosed client confidential information without client permission. The FSA said that his lack of care was evidenced by his participation in a guessing game in which he effectively disclosed the name of the potential investor.
The FSA found that Kyprios had breached Principle 3 by disclosing information being treated internally as “inside information” without authority and in breach of wall-crossing procedures. The information was price sensitive to outstanding Unitymedia Floating Rate Notes and Unitymedia Credit Default Swaps (“CDS”), which were non-qualifying investments. There was a risk that the fund manager would trade on the information or tell others who would trade and therefore have an impact on the market. Kyprios’ misconduct had occurred on an open trading floor in earshot of his staff and traders responsible for trading Unitymedia bonds and CDSs. His conduct, the FSA found, fell below the standard of conduct required of an approved person.
Kyprios had tried to justify his actions by saying that he thought that the information was not “actionable“. The FSA rejected this argument, saying that even if that were the case (which it was not because the information was price sensitive), this could not be a justification for his actions because the critical characteristic of client confidential information is its non-public nature and not its “actionability“. Further, Kyprios was told that he had received inside information and that he was prohibited from discussing it with non wall-crossed parties.
The following aggravating factors committed by Kyprios are worth noting:
Although this was a UK FSA decision, a similar approach could be taken by Hong Kong’s SFC, in an appropriate case, under its Code of Conduct. General Principle 2 of the Code of Conduct requires a registered person to act with due skill, care and diligence, in the best interests of its clients and the integrity of the market. This is similar to Principle 2 of the FSA’s Statements of Principles for Approved Persons, which Kyprios was found to have breached.
Notwithstanding pressure in the market place to perform, high standards are expected by regulators. As stated by the FSA in their press release regarding the Kyprios case:
“While the FSA accepts that he did not set out to disclose the information, Kyprios’ conduct in trying to push to the limit what he could say resulted in him crossing the line. His behaviour was well below the standards we expect of senior market professionals who we should be able to rely on to uphold the system rather than seek to get round it. The high penalty reflects the seriousness of Kyprios’ breach. Approved persons who have been wall-crossed need to recognise the value of the information they have been given and be vigilant in ensuring they do not inadvertently or recklessly disclose such information in breach of wall crossing procedures.”
Market players should review their practices in the light of this decision to avoid any practice which might cross the line.