Dentist Trial Begins as U.K. Regulator Tackles Insider Trading

By Caroline Binham

Sept. 4 (Bloomberg) -- Neel Uberoi, a dentist from south London, stands trial today for insider trading as the U.K. financial regulator pursues a tougher line on market abuse.

Uberoi and a relative, Matthew Uberoi, are charged with 17 counts of insider trading by London police, according to an indictment filed at the City of Westminster Magistrates Court. His trial is one of three criminal cases the Financial Services Authority has brought this year. Defendants include two retirees and a former general counsel at TTP Communications Plc.

The collapse last year of mortgage lender Northern Rock Plc and the failure to bring charges over false speculation that erased 17 percent from HBOS Plc's share price in March has prompted criticism from lawmakers that the London-based regulator is powerless to prevent insider trading. While the authority should also take on higher-profile cases, such individual prosecutions may help the FSA rebuild its reputation, said Chris Brennan, a lawyer at the London firm Barlow Lyde & Gilbert.

``It's inevitable that a few enforcement actions do change perceptions,'' said Brennan, a former FSA official. ``It's one thing to arrest a little old lady for insider trading. What they've got to crack down on is the HBOS-type stuff.''

Margaret Cole, the FSA's enforcement director, was unavailable for an interview and the regulator declined to comment, said spokeswoman Abi Jones.

`Right Message'

FSA Chief Executive Officer Hector Sants told the Treasury committee in May that criminal cases send the ``right message.'' ``We are determined to remove the misconception that somehow or other we are light-touch,'' he said.

Finding proof of gossip intended to depress shares in HBOS, the U.K.'s biggest mortgage bank, is difficult in an industry that lives off rumors, said Carlos Conceicao, a former official at the FSA and now a regulatory lawyer in London at Clifford Chance LLP.

In the case against the Uberois, the FSA alleges they received inside information that NeuTec Pharma Plc would be sold, and bought shares on 11 separate occasions in May and June 2006. Novartis AG bought NeuTec a month later for 305 million pounds ($541 million).

The Uberois also made six separate investments in Gulf Keystone Petroleum Ltd. in August 2006, acting on inside information that the company would form a joint venture with an energy company, the regulator says.

Gemma Tombs, the Uberois' lawyer, declined to comment. Voicemails at the Uberois' home and office weren't answered.

FSA Raids

Before 2008, there were no FSA arrests for insider trading. Since January, the regulator has brought the court cases and arrested eight men, including a ``junior'' employee at UBS AG and a sub-contractor at JPMorgan Cazenove Ltd., as part of an investigation into insider trading.

Spokeswomen at both firms said in July that the men were no longer providing services during the FSA investigation.

``Why bother with these individuals?'' said Justin Urquhart Stewart, London-based director of 7 Investment Managers. ``The answer is because they can. It's also important to create precedent for when they do have enough evidence to go after bigger individuals.''

The FSA was formed in 1997 to help stop financial scandals such as the 1995 collapse of Barings Plc.

``Historically, the British authorities have had little success in prosecuting any form of market abuse,'' said Andrew Clare, a finance professor at London's Cass Business School. ``That's just because it's a hard crime to prove and to try.''

SEC

The U.S. Securities and Exchange Commission's record is different. In 2007, the SEC, which can only file civil claims, brought 47 insider trading cases, said spokesman John Nester.

``The U.K. financial system is probably one of the lowest- staffed relative to the market it supervises,'' said David Green, the FSA's former international head of policy and author of a book on global financial regulation. The FSA has 98 enforcement agents compared with the SEC's 1,175.

Cole has more than doubled her criminal prosecutions team, to 30, since last year. FSA Chairman Callum McCarthy told a Treasury Select Committee in May that criminal cases became a priority three years ago, when Cole joined the regulator.

The court cases the FSA filed this year involved trades at least two years old. Former Cazenove & Co. partner Malcolm Calvert, charged on July 24, is accused of insider trading dating back to 2003 and was arrested two years ago. Calvert's lawyers have said he intends to plead not guilty.

Cole told the select committee in May that while the burden of proof was for practical purposes the same in civil and criminal cases, criminal prosecutions are more of a deterrent.

Philippe Jabre Case

The agency's most famous civil case was against Philippe Jabre, then managing director at hedge fund GLG Partners LP. In 2006, he was fined 750,000 pounds.

Jabre ``then went on to make millions the next year,'' Brennan said. ``I mean, what's the point?'' Criminal cases carry a sentence of as much as seven years in prison.

In the U.K. in 2006 and 2007, suspicious trades occurred before 29 percent of takeovers, up from 24 percent in 2005, according to FSA statistics. While the New York Stock Exchange doesn't release comparable data, an analysis by MeasuredMarkets Inc. and the New York Times found that suspicious trades occurred before 41 percent of takeovers over $1 billion in 2006.

``It's a very different relationship that firms have with the FSA than with the SEC,'' said Jonathan Herbst, a former FSA official who's now a lawyer at Norton Rose LLP. ``You wouldn't dream of calling up the SEC to bounce off ideas or offer information.''

Eighteen months ago, London's flexible regulatory approach was seen as something positive.

``The perception was that the U.S. was a rules-based system that was unwieldy and expensive, and that was a reason for firms moving to London,'' said Clare. ``London had principles-based regulation, which is now seen as light touch.''

To contact the reporter on this story: Caroline Binham in London at cbinham@bloomberg.net