FSB victory in market abuse case
The decision concerns a challenge to the jurisdiction of the Enforcement Committee of the Financial Services Board (“FSB”) to deal with market abuse, specifically in this case publishing false statements that resulted in an overstatement of the performance of their company.
The two appellants were Maslamony Pather and Ah-Vest Ltd (formerly All Joy Foods Ltd).
They did not contend that the factual findings of the Enforcement Committee of the FSB were wrong.
Rather, they argued that a hearing by the Enforcement Committee on charges of market abuse (such as insider trading, market manipulation, and false statements) that results in the imposition of an administrative penalty is similar to a criminal prosecution, and hence the standard of proof should be beyond reasonable doubt, rather than the civil standard, which is proof on a balance of probabilities.
The Supreme Court of Appeal dismissed their argument.
It confirmed that the purpose of the Securities Services Act (which applied at the time and was subsequently replaced by the Financial Markets Act, 2012) is to protect the public and promote confidence in the market.
The FSB’s Department of Market Abuse investigates contraventions of the Act, and refers them to the Enforcement Committee for decision. The purpose of the legislative scheme is (i) to ensure that financial services are provided in a fair, efficient and transparent manner; and (ii) to maintain a stable financial market environment.
The fact that the Enforcement Committee may impose administrative penalties does not make proceedings before it criminal proceedings. In fact, an administrative penalty, if unpaid, may be converted into a civil judgment in favour of the FSB. An administrative penalty does not constitute a previous conviction either.
In other words, although the regulatory provisions are punitive and intended as a deterrent, they are not criminal or quasi-criminal in nature. The administrative penalties are, furthermore, only monetary and there is no provision for the imposition of imprisonment.
All this supports the analysis, the SCA found, that these are administrative and not criminal proceedings.
The same analysis is adopted in foreign jurisdictions where similar regimes exist.
This is consistent with the approach adopted in regard to administrative penalties that are imposed under the Competition Act, the Income Tax Act, and the Employment Equity Act.
The fact that very large monetary penalties may be imposed does not alter the position.
The result is that a person aggrieved by the outcome of proceedings before the Enforcement Committee can only review the decision on grounds of unlawfulness, procedural unfairness or unreasonableness. The protections in section 35(3) of the Constitution, which deals with the right to a fair trial of an accused in a criminal prosecution, do not apply.
The decision will no doubt please the FSB. Its ability to deal with market abuse via its Enforcement Committee is an efficient, informal and inexpensive process, relative to a ponderous criminal prosecution, and enables the FSB to be more agile and adroit in policing market abuse.
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