Carrimjee v. Financial Conduct Authority: Enhancing Standards of Due Diligence in Market Abuse Enforcement

Introduction

Carrimjee v. Financial Conduct Authority ([2015] UKUT 79 (TCC)) is a seminal case adjudicated by the Upper Tribunal (Tax and Chancery Chamber) in the United Kingdom. The appellant, Tariq Carrimjee, a fund manager and investment adviser, contested the actions of the Financial Conduct Authority (FCA) concerning allegations of market abuse related to share price manipulation. The core issues revolved around whether Mr. Carrimjee knew or suspected his client, Mr. Rameshkumar Goenka, intended to engage in such manipulative practices and whether he exercised due skill, care, and diligence in his professional capacity.

Summary of the Judgment

The FCA initiated disciplinary actions against Mr. Carrimjee under the Financial Services and Markets Act 2000 (FSMA). The Tribunal found that Mr. Carrimjee did not act with integrity as required by Statement of Principle 1 but did fail to exercise due skill, care, and diligence in relation to the issue, breaching Statement of Principle 2. Consequently, a financial penalty of £89,004 was imposed under Section 66 FSMA. Additionally, the Tribunal remitted non-disciplinary references related to the withdrawal of approvals and prohibition orders back to the FCA for reconsideration.

Analysis

Precedents Cited

The Tribunal referenced several key precedents that shaped its understanding of integrity and due diligence in financial conduct. Notably:

Hoodless and Blackwell v FSA (2003): Defined integrity as moral soundness and adherence to ethical codes.
Vukelic v FSA (2009) and Atlantic Law LLP and Greystoke v FSA (2010): Emphasized the elusive nature of defining integrity and the necessity of specialist knowledge.
First Financial Advisors Limited v FSA (2012): Reinforced that lack of an ethical compass or misguided ethical compass can constitute a lack of integrity.
Batra v FCA (2014): Summarized principles related to characterizing behavior without integrity.
Re B [2009] AC 11, Re S-B (Children) Care Proceedings [2010] 1 AC 678: Clarified the standard of proof in civil cases as "balance of probabilities."

Legal Reasoning

The Tribunal meticulously dissected the FCA's allegations against Mr. Carrimjee, focusing on two main statements of principle:

Statement of Principle 1: Requires approved persons to act with integrity.
Statement of Principle 2: Mandates acting with due skill, care, and diligence.

The burden of proof rested on the FCA, adhering to the civil standard of "balance of probabilities." The Tribunal evaluated whether Mr. Carrimjee suspected his client of market manipulation and whether he sufficiently investigated those suspicions. Despite Mr. Carrimjee's consistent denials, the Tribunal found that his failure to act on certain warning signs constituted a breach of due skill, care, and diligence.

Impact

This judgment underscores the heightened responsibilities of financial professionals in identifying and addressing potential market abuses. It clarifies that even in the absence of overt evidence, professionals must act proactively when suspicions arise. The case reinforces the necessity for robust internal compliance mechanisms and diligent client scrutiny to uphold market integrity.

Future cases will likely reference this judgment when assessing the extent of due diligence required from financial advisers and fund managers, particularly in complex trading environments prone to manipulation.

Complex Concepts Simplified

The case introduces and adjudicates several intricate legal and regulatory concepts:

Statement of Principle: These are ethical and professional standards that approved persons must adhere to under FSMA.
Market Abuse: This refers to manipulative practices aimed at distorting stock prices, thereby misleading investors or gaining unfair advantages.
Balance of Probabilities: The civil standard of proof where a fact is more likely than not to be true, as opposed to the higher "beyond reasonable doubt" standard in criminal cases.
Financial Penalty under Section 66 FSMA: Allows the FCA to impose monetary fines on individuals deemed to have engaged in misconduct.
Prohibition Order under Section 56 FSMA: Restricts individuals from performing any functions related to regulated activities.

Conclusion

The Carrimjee v. Financial Conduct Authority case serves as a pivotal reference in delineating the boundaries of professional conduct within the financial sector. It emphasizes that integrity and due diligence are not merely aspirational qualities but enforceable standards under FSMA. The Tribunal's decision illustrates the FCA's uncompromising stance on maintaining market integrity and deterring misconduct through substantial penalties.

For financial professionals, this judgment is a clarion call to enhance their vigilance and proactive engagement in monitoring client activities. It also highlights the importance of comprehensive internal compliance frameworks to detect and address potential abuses swiftly.