Operation Tabernula: AML Lessons learned

In a case brought by the Financial Conduct Authority (FCA), Martyn Dodgson, a senior investment banker, and Andrew Hind, a Chartered Accountant, have today been sentenced at Southwark Crown Court to 4.5 years and 3.5 years imprisonment, respectively, having been convicted of conspiring to insider deal between November 2006 and March 2010. Dodgson’s sentence is the longest ever handed down for insider dealing in a case brought by the FCA.

Confiscation proceedings will also be pursued against both defendants.

This investigation was conducted in partnership with the National Crime Agency.

In sentencing Dodgson and Hind the trial judge, His Honour Judge Pegden, remarked that their offending was 'persistent, prolonged, deliberate, dishonest behaviour.'

Mark Steward, Director of Enforcement and Market Oversight, said

'This case involved serious offending over a number of years, conducted in a sophisticated way using deliberate techniques to avoid detection. Dodgson was an approved person who was entrusted by his employer with sensitive and valuable information. He betrayed that trust by exploiting the information for his own benefit, conspiring with Hind to deceive the market

'Insider dealing is ever more detectable and provable.  And this case shows lengthy terms of imprisonment, not profits are the real result.'

Oliver Higgins, National Crime Agency Branch Commander, said: 'Dodgson and Hind tried to prevent us from uncovering their insider dealing by using unregistered mobile phones, encoded and encrypted records, and transferring benefit using cash and payments in kind.

'The NCA were able to support the FCA by carrying out surveillance and providing niche capabilities, including the deployment and monitoring of a listening device that recorded key conversations.

'We will continue to work with our partners to pursue and prosecute anyone who seeks to undermine financial systems, abuse markets, and poses a serious economic crime threat to the UK.'

The guilty defendants

Martyn Dodgson (5 October 1971) – during the period covered by the indictment Dodgson was employed by Morgan Stanley, Lehman Brothers and Deutsche Bank. He worked at Morgan Stanley as a Vice President in Global Capital Markets until January 2007, and then at Lehman Brothers as an Executive Director in the European Investment Banking Division from July 2007 to September 2008. He moved to Deutsche Bank in October 2008 as a Director in the Corporate Broking Department and was later promoted to Managing Director. Dodgson was Financial Services Authority (FSA) approved throughout the period.

Andrew Hind (16 April 1960) – is a businessman, a property developer and a qualified Chartered Accountant.

Overview of the facts

Dodgson and Hind, who were close personal friends, agreed to deal secretly, sometimes on the basis of inside information.

Dodgson sourced inside information from within the investment banks at which he worked, either through working on transactions himself or through being able to glean what his colleagues were working on.  He passed on this inside information to Hind who then affected secret dealing for the benefit of Dodgson and himself.

The defendants put in place elaborate strategies designed to prevent the authorities from uncovering their activities. These included the use of unregistered mobile phones, encoded and encrypted records, safety deposit boxes and the transfer of benefit using cash and payments in kind.

The FCA relied on five acts of insider dealing to prove this conspiracy.   The five acts of dealing related to the following companies:

  • Scottish & Newcastle plc in October 2007
  • Paragon Group of Companies plc in July 2008
  • Just Retirement plc in October 2008
  • Legal & General plc in February 2009
  • BSkyB plc in March 2010

In many other instances of trading effected by Hind during the Indictment period, Dodgson or his employer was advising or connected with the company traded or with a company party to a relevant corporate transaction.

The Operation Tabernula investigation

This has been the FCA’s largest and most complex insider dealing investigation. The offending in this case was highly sophisticated and took place over a number of years. The investigation (conducted in partnership with the National Crime Agency) was demanding and time-consuming. Investigators, forensic accountants, lawyers, markets experts, intelligence analysts and digital forensic specialists pooled their skills to unravel the conspiracy.  This was achieved through painstaking analysis of trading, financial and communications data, documentary evidence from the investment banks, and the material seized during searches under warrant. Surveillance was also deployed.

These two convictions – alongside those of Paul Milsom, Graeme Shelley and Julian Rifat – brings to five the number of convictions secured in the Operation Tabernula insider dealing investigation. http://www.fca.org.uk/news/insider-dealers-sentenced-in-operation-tabernula-trial

Regulators are maintaining their focus on all aspects of anti-money laundering, counter-terrorist financing and, increasingly after the Mossack Fonseca disclosures, financial crime, including tax evasion. 

UK and U.S. regulators are far from alone in their statutory objectives on the reduction of financial crime and the maintenance of market confidence. The breadth of activity potentially included under the banner of financial crime has grown from insider dealing, market abuse and market manipulation to include specific questions on beneficial ownership, opaque corporate structures and the extent to which a firm knows with whom, ultimately, it is dealing.

Dawn raids are not new but regulators and other law enforcement agencies continue to use them to gain access to the information and data needed to investigate and prosecute both firms and individuals. 

One recent example was Operation Tabernula which resulted in two jail sentences for insider trading and was kicked off by "mass police raids" after the Financial Services Authority (FSA), the then-UK regulator, was alerted to suspicious trading activity. 

Operation Tabernula was a long-running, high-profile criminal investigation, and although not all dawn raids have such dramatic results a firm needs to be prepared. Dawn raids are by definition a surprise but many potentially damaging ramifications can be mitigated by training and awareness, and by having a suite of tested policies and procedures in place. 

The introduction of the UK senior managers regime and the Yates memo in the United States raises the temperature with the growing potential for individuals as well as firms to be held accountable for any compliance failing. 

Compliance tips and next steps

As a first step, a firm should ensure it has a policy to cover dawn raids and other surprise inspections carried out by a regulatory body or law enforcement agency. It should be documented and all members of staff should be both aware of the policy and familiar with its contents. 

The board and all senior managers should be briefed in detail about the policy and asked to confirm their knowledge and understanding of the agreed approach. In addition:
    • A firm may wish to have the dawn raids policy included as part of any annual reaffirmation of polices. This can be a useful means of ensuring that the policy both remains up to date and staff are re-familiarised with the contents.
    • The dawn raids policy should be included as part of any induction training or "starter pack" for new joiners.
    • The roll-out of any specific detail of a dawn raids policy should be included in new office or branch opening checklists. Equally, any changes to the corporate approach to dawn raids must be rolled out, where relevant, to all parts of the group structure, regardless of geography.
    • Any firm which shares offices, reception staff or security guards should ensure that policies and procedures governing dawn raids (and indeed the serving of legal or court notices) are communicated to all front-desk staff. Where the office is shared the firm may wish to consider stipulating adherence to dawn raid and other relevant policies as part of the rental agreement or equivalent.
    • A firm should be aware that dawn raid policies and procedures should be tailored to each legal jurisdiction in which it, or its assets or data, have a physical presence. When in any doubt the firm should seek specific legal opinion as to the detail of the local approach under the umbrella of an overarching group policy.
    • The dawn raid policy should cover any outsourced operations and should be one of the policies agreed to in the outsourcing terms and conditions.
    • Communication is essential for the successful management of a dawn raid. The policy should clearly state who should be contacted, and in what order. Although the local compliance officer should be one of the first people contacted, senior managers all the way to the top of a firm should be included in the communication ladder. The firm's press office should also be high on the contact list and as a minimum should compile an agreed holding statement; handling the PR of any dawn raid is a critical part of the process.
    • A firm also needs to consider communication with other regulators; this can take a couple of forms. In a single jurisdiction the firm should actively consider the need to inform its financial services regulator of any dawn raid carried out by another authority such as tax or competition bodies. Where a firm operates in multiple jurisdictions, a surprise inspection by any regulatory authority should be reported to the firm's lead financial services regulator.
    • During a dawn raid a firm should aim to keep as many records as possible in the form of copies of documents taken, notes of which sections of the firm were visited and which PCs or other equipment were removed. Where possible a firm should try to ascertain the information stored on any PCs taken to ensure it is aware of the detail of the information now in the possession of the authorities.
    • Where a firm claims legal privilege over certain documents, it is important that those documents are separated from non-privileged material and that staff are clear about what to do in the event of a dawn raid or regulatory challenge. In anticipation of a dawn raid the firm may, for instance, wish to consider procedures to seal particular documents and deliver them to a third party until an issue has been resolved. This approach can be particularly useful not only for surprise inspections but also in the context of regulatory supervision visits.
    • Last is the need for a review process as and when a firm has been the subject of a raid. As experienced compliance officers know, the only true test of a policy is once it has been used for real. Detailed jurisdiction-specific policies and procedures may look great on paper but until they have been tested in the often controlled chaos of a dawn raid then there is no way of knowing whether or not they were fit for purpose. A post-raid review should be used to refine and update any policy and to initiate a new round of training and awareness for the entire firm.
Dawn raids are difficult events for a firm and its senior managers to deal with, but a clearly documented and communicated policy should allow a difficult situation to be managed as smoothly as possible. The lack of an effective policy increases the risk of a poor scenario turning into a regulatory disaster.
 Susannah Hammond is senior regulatory intelligence expert in the Enterprise Risk Management division of Thomson Reuters Regulatory Intelligence; the views expressed are her own.

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