In Financial Conduct Authority v Da Vinci Invest and Others [2015] EWHC 2401 (Ch), the High Court granted the Financial Conduct Authority (the “FCA“) permanent injunctions and financial penalties for market abuse against two firms and three individuals. All but one of the Defendants was incorporated or resident abroad.  This decision represents the first time the FCA has obtained both injunctions and penalties against a firm by application to the High Court, rather than using its own regulatory enforcement powers.

The Defendants were found to have engaged in market abuse, having committed the manipulative trading strategy of ‘layering’ or ‘spoofing’, in contravention of section 118(5) of the Financial Services and Markets Act (“FSMA“). As well as permanent injunctions against all the Defendants, the Court imposed total financial penalties of over £7.5 million.

In reaching this decision, the Court has given some helpful guidance on its approach to market abuse claims, dealing in particular with: (a) its jurisdiction under section 129 and 381 of FSMA to impose financial penalties and injunctions respectively; (b) the mental element required to constitute market abuse under section 118(1) and (5) FSMA, together with the attribution of such acts to corporate entities; (c) standard of proof; (d) what constitutes market manipulation under section 118(5) FSMA; and (e) available defences.

We consider this guidance in more detail below and comment on the likely impact of this decision for financial institutions.

Factual Background

The First Defendant was an English company, Da Vinci Invest Limited (“DVI“), which carried on business as an investment and fund manager from a branch office in Switzerland. In mid-2010, DVI entered into a joint venture with three traders from Hungary (the “Traders“, also Defendants), who previously had trading accounts suspended by Swift Trade for suspected manipulative trading. Under the arrangement, DVI would provide capital for trading, while the Traders traded in stocks using contracts for differences (“CFD“). Profits were split 50/50 between DVI and the Traders.

Trading began in August 2010, with the Traders using a bank’s direct market access (“DMA“) system, and DVI undertaking financial responsibility to that bank for the CFD trading, including providing collateral to cover any losses. By the end of December 2010, various suspicious activity referrals relating to DVI’s account were made to the Financial Services Authority (the “FSA“, the precursor to the FCA) by both the bank providing the DMA services and the platform on which the trades were taking place. The bank subsequently terminated the agreement to provide DMA services and the entire business relationship with DVI.

Following this termination, DVI established DMA trading and other facilities with an alternative supplier, and the Traders began trading again in February 2011. At this point, in addition to trading for DVI, the Traders also began trading for Mineworld Limited (“Mineworld“, another Defendant), a company incorporated in the Seychelles owned and controlled by the Traders.

The second period of trading also led to further alerts to the FSA from the trading platform referring to potential market abuse. The FSA began formal investigations in May 2011, and in mid-July the FSA issued Court proceedings against all the Defendants.


The Court found that there had been market abuse, determining the following issues:

(a) Jurisdiction and procedural objections

The claim was brought under section 129 and 381 of FSMA, two provisions which permit the FCA to apply to the Court to obtain financial penalties and injunctions respectively. DVI put forward various submissions as to why it was inappropriate for the FCA to use Court proceedings as opposed to regulatory proceedings in respect of the financial penalties. The Court concluded that there was no material difference between an application to the Court under section 129 FSMA and a decision by the FCA to impose a regulatory penalty under section 123 FSMA. The points considered included:

  • DVI claimed it was ultra vires for the FCA to bring a claim for financial penalties without giving a warning notice, as would have been required under the regulatory regime pursuant to section 123 FSMA. This was rejected by the Court, as the only provisions the FCA had to be mindful of were those in section 129 of FSMA, and there are no requirements for notice under this section.
  • DVI alleged that the interpretation of the Market Abuse Directive (the “Directive“) prevents more than one body from being authorised to impose penalties for market abuse. This was also rejected by the Court, as the Directive is a minimum harmonisation directive. There was nothing in the relevant articles of the Directive which would prevent the UK empowering the Court from imposing penalties.
  • Of greater weight was the fact that section 123 FSMA provides a specific defence to a person faced with the imposition of a penalty by the FCA, whereas section 129 FSMA contains no such express restriction on the power of the Court. The Court held that section 129 FSMA should be read so that the Court may not impose a penalty if it is satisfied that a section 123 FSMA defence applies.
  • The Court also rejected the submission that it was potentially unfair to bring Court proceedings due to the unlimited financial penalty capable of being imposed by the Court, as opposed to a penalty from the regulator, which would be determined by reference to a detailed framework. The Court noted that even in regulatory proceedings, the regulator is not bound by the penalty framework, but in any case the FCA had requested the Court to take an approach consistent with the regulatory framework.

The Court also rejected DVI’s claim that the power of the Court to impose a penalty under section 129 FSMA was only exercisable where the Court had actually granted an injunction under section 381 FSMA. This conclusion was reached on the plain wording of section 129 FSMA and for compelling practical reasons, to ensure that parties are engaged in only one set of proceedings in which all relevant factual/legal issues can be determined.

(b) Mental element and attribution in market abuse cases

The Court first considered the statutory reference to “behaviour” in the definition of market abuse at section 118(1) and (5) FSMA. DVI argued that this meant that acts could not be attributed to a corporate entity unless they were acts of the “directing mind and will” of the company, or carried out at that individual’s direction/specific knowledge/consent. In contrast, the FCA contended that whether market abuse had occurred was purely objective requiring no mental element. The Court agreed with the FCA, stating that the behaviour amounting to market abuse under section 118(5) FSMA does not require an investigation of the state of mind of the person committing the behaviour. This was the conclusion reached by the Court of Appeal in relation to the meaning of a previous version of section 118 in Winterflood Securities Limited v FSA [2010] EWCA Civ 423.

On this basis, the Court went on to consider how a corporate person could be found to engage in offending behaviour for the purpose of section 118. It concluded this question can be answered simply by reference to the general rules of attribution which are derived from the law of agency. The Court commented that this conclusion made sense in the context of modern trading on regulated markets. It would be contrary to the current market abuse regime if companies could escape liability for the actions of their employees if directors and senior management, as the “directing mind and will” of the company, did not have detailed knowledge of the day to day activities.

Applying those conclusions to the facts of the instant case, the Court held that the result was “very clear“. The behaviour of the Traders was, for the purpose of section 118, also the behaviour of DVI and Mineworld. The Court confirmed, however, that FSMA does permit a company to adduce evidence of the belief of other natural persons and/or of relevant steps taken by other persons on behalf of the company as part of a statutory defence.

(c) Standard of proof

It was agreed by the parties (after some initial dispute) and the Court that the civil standard of proof on the balance of probabilities applied to the various factual issues arising in the case (taking into account any inherent improbabilities).

(d) Market manipulation

In considering whether there had been market manipulation, the Court confirmed that it would take into account Article 4 of the Directive and the Code of Market Conduct section of the FSA/FCA Handbook. On the evidence before the Court, it was “entirely satisfied” that the Traders jointly engaged in market manipulation within section 118(5) FSMA on behalf of DVI and Mineworld. Examples of manipulative behaviour included:

  • placing orders predominantly on one side of the book and then moving orders to the other side in a “saw-tooth” pattern, consistent with conduct intended to influence supply and demand;
  • high proportion of wash-trades (trades not resulting in a change of beneficial ownership) by the Traders; and
  • a significant number of orders being placed within a short time span, representing a high proportion of the volume of transactions.

These examples all correspond with indicia of manipulative trading as set out in the FCA’s Code of Market Conduct, and all the expert evidence presented to the Court concurred with a finding of market abuse.

(e) Available defences

Finally, the Court examined whether any of the Defendants could establish a defence that they believed, on reasonable grounds, that their behaviour did not constitute market abuse or that they took all reasonable precautions and exercised all due diligence to avoid behaving in such a way.

The Court found that on the facts, the Traders and Mineworld (as the corporate entity used for trading in 2011) must have known what they were doing, and that they were well aware that their behaviour was improper. As such, no defence was available for them. With respect to DVI, the position was less straightforward, as none of the senior management actually directed the market abuse undertaken by the Traders. However, the Court found that DVI’s failure to carry out proper background checks of the Traders or to understand the Traders’ strategy went beyond negligence, it was irresponsible and reckless. DVI was therefore also not able to establish a defence.

Accordingly, the Court imposed penalties of over £7.5 million and granted permanent injunctions against all of the Defendants.

Accepted market practices

The Court also noted, and in doing so declined to follow the remarks of the Upper Tribunal in Hobbs v FSA (FS/2010/0024), that for a matter to constitute an “accepted market practice” for the purposes of the exception in section 118(5) FSMA, the FCA must have undergone a formal acceptance procedure as envisaged by Article 1.5 of the Market Abuse Directive and Article 3 of the 2004 Implementing Directive.


Whilst the fines imposed in this case were not as large as other recent cases, the penalties were significant because the FCA chose to enforce by commencing High Court proceedings to obtain both a fine and an injunction against all the Defendants. The reasons for the FCA choosing this approach were not discussed in the case, but presumably include the enforceability of Court orders outside of the jurisdiction (for example, under the Recast Brussels Regulation, Lugano Convention and Hague Convention) and the practical convenience of dealing with matters in one set of proceedings where both a fine and injunction were sought. It seems likely that injunctions will remain to be used in cases such as these, where there is clear recklessness on behalf of the parties, or a real risk that the market abuse will continue.

Looking towards the future, market abuse and in particular the type of market abuse that arose in this case, will continue to be under scrutiny. A new EU Market Abuse Regulation (“MAR“) will apply from 3 July 2016. It will apply to a wider range of securities and certain types of algorithmic and high-frequency trading will be expressly forbidden.  HM Treasury have not to date clarified whether they propose to retain the defences currently set out in section 123 of FSMA (which are not replicated in the text of MAR).

In addition, the new Markets in Financial Instruments Directive (“MiFID II“) is due to come into application in 2017 (although this may now be delayed to 2018). It will introduce new authorisation requirements for firms undertaking certain types of high frequency and algorithmic trading, and also deals with direct access. The FCA has not indicated whether action against the second DMA provider is in contemplation, but under MiFID II, DMA providers will be required to monitor (and report where appropriate) transactions effected by their DMA clients for infringements of the rules of the trading venue, disorderly trading conditions or conduct that may involve market abuse. Whilst it is unlikely that MAR or MiFID II would have affected the result in this case, the increased scope and the enhanced reporting, notification and procedural requirements may well lead to an increased volume of FCA enforcement and/or High Court proceedings.

Karen Anderson
Karen Anderson
+44 20 7466 2404
Ceri Morgan
Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948