SEE FINAL NOTICE ISSUED ON 13 NOVEMBER 2013

DECISION NOTICE

IRN:

RXS01352 (inactive)

ACTION

1.
For the reasons given in this notice, the FSA has decided to:

i.
publish a statement that Mr Rahul Shah has encouraged another person
to engage in behaviour which, if engaged in by Mr Shah, would
amount to market abuse. Were it not for Mr Shah’s financial position,
the FSA would have decided to impose on him a financial penalty of
£125,000; and

ii.
make an order prohibiting Mr Shah from performing any function in
relation to any regulated activities carried on by any authorised or
exempt persons, or exempt professional firm (“the Prohibition Order”).

SUMMARY OF REASONS

2.
Between November 2009 and March 2011 Mr Shah was retained as an
independent consultant by Investor A. Mr Shah’s role was to look for
investment opportunities for Investor A. Mr Shah was remunerated under the
terms of an unwritten profit-share agreement with Investor A, which stated
that Mr Shah would receive 40% of any profits, and incur 40% of any losses,
generated as a result of the opportunities he identified.

3.
On 16 June 2010, Mr Shah was asked by a financial adviser (“the adviser”)
acting on behalf of Vyke Communications plc (“Vyke”) whether he was
prepared to be made an insider in respect of Vyke and thereby prohibited from
trading in its shares. Mr Shah agreed.

4.
The adviser then informed Mr Shah that a joint venture contract had been
signed between Vyke and a US telecommunications company which would
turn Vyke into a profit-making company. He suggested that Vyke would issue
a formal announcement to the market in approximately two weeks.

5.
On 30 June 2010, Mr Shah was informed by the adviser that the
announcement of a joint venture involving Vyke was imminent and that the
fall in the share price that had occurred that day following Vyke’s AGM
announcement was a good buying opportunity for anyone not ‘inside’.

6.
Moments later Mr Shah passed Investor A information to the effect that the
adviser considered it a good time to buy Vyke shares, as a result of which
Investor A placed two orders to buy Vyke shares. Investor A did not possess
any inside information about Vyke and was not aware that Mr Shah did.

7.
Immediately after Investor A had placed the first order, at Investor A’s
instruction Mr Shah called the adviser and told him that Investor A had just
acquired 1 million Vyke shares. When the adviser reminded Mr Shah that he
was “on the inside” with respect to Vyke and therefore prohibited from
trading, Mr Shah replied, “Yes, no I know. Hey, we’re all friends here”.

8.
That day, Investor A bought a total of 2,178,572 Vyke shares at an average
price of 2.125p per share. On 12 July 2010, when the joint venture was
announced to the market the Vyke share-price increased by almost 12%.
However, once Investor A became aware that Mr Shah had inside information
at the time of the trading, Investor A unilaterally decided not to sell the shares.
Vyke subsequently went into administration, and the shares were rendered
valueless. As a result no profit was ever realised on the shares.

9.
As a result of his behaviour Mr Shah encouraged Investor A to engage in
behaviour which, if engaged in by Mr Shah, would have amounted to market
abuse as defined by section 118(2) of the Act.

10.
The FSA regards Mr Shah’s behaviour as particularly egregious because in
March 2010 he received a Policing letter from the Markets Division of the
FSA concerning conduct indicative of market abuse, in which he was
reminded about the penalties for market abuse and insider dealing.

11.
The FSA considers that Mr Shah’s behaviour was deliberate, and he has
therefore demonstrated a serious lack of honesty and integrity.

DEFINITIONS

12.
The definitions below are used in this Decision Notice.

“the Act” means the Financial Services and Markets Act 2000.

“the FSA” means the Financial Services Authority.

“Vyke” means Vyke Communications plc, listed and traded on the
Alternative Investment Market.

“the adviser” means the financial adviser acting on behalf of Vyke.

“the investment vehicle” means the company of which Investor A was
the sole shareholder and beneficial owner.

FACTS AND MATTERS

13.
Between November 2009 and March 2011, Mr Shah was retained as an
independent consultant by Investor A through the investment company of
which Investor A was the sole shareholder and beneficial owner (“the
investment vehicle”). Investor A used his own funds to invest through the
investment vehicle which was, in effect, a two man proprietary trading
company, comprising only of Investor A and Mr Shah. It was not authorised
by the FSA.

14.
Investor A relied upon Mr Shah’s familiarity with the Alternative Investment
Market and the market abuse regime. Mr Shah has over 15 years experience
working as a broker within financial services and has previously been
approved to perform the CF30 (Customer) controlled function on behalf of
authorised firms.

15.
Mr Shah’s role was to contact brokers, monitor the financial markets and look
for investment opportunities for Investor A. Mr Shah was remunerated under
the terms of an unwritten profit-share agreement, by which Mr Shah would
receive 40% of any profits, less any losses, generated as a result of the
opportunities he identified, whilst Investor A retained the remainder.

16.
By the end of April 2010, the investment vehicle already held shares in Vyke,
having participated in a placing earlier that month. Investor A, through the
investment vehicle, had participated in the placing as a result of information
provided by Mr Shah. Vyke shares were traded on the Alternative Investment
Market.

17.
On 16 June 2010, Mr Shah was contacted by the adviser, and asked if he was
willing to be made an insider. Before disclosing any inside information, the
adviser advised Mr Shah that Mr Shah’s status as an insider would mean that
he would be prohibited from trading. Mr Shah confirmed that he understood.

18.
The adviser then informed Mr Shah that a joint venture contract had been
signed between Vyke and a US telecommunications company which would
turn Vyke into a profit-making company. He suggested that Vyke would issue
a formal announcement to the market in approximately two weeks.

19.
Mr Shah did not disclose this information to Investor A.

20.
On 30 June 2010 at 11:30am, Vyke issued an announcement to the market in
relation to its Annual General Meeting but the announcement said nothing
about the joint venture. Following this announcement the price of Vyke shares
fell.

21.
At 3.45pm that day, at Investor A’s instruction Mr Shah called the adviser
expressing his concern at the fall in the Vyke share price. Mr Shah informed
the adviser that Investor A was either going to sell all of his Vyke shares or
buy more.

22.
The adviser reminded Mr Shah that he was still an insider with respect to the
Vyke joint venture and that he was restricted from trading. Mr Shah confirmed
that he understood. The adviser told Mr Shah that he expected the details of
the joint venture to be announced to the market within the next 24 hours, and

that the fall in the share price that day would be a good buying opportunity for
anyone not ‘inside’.

23.
Moments later Mr Shah informed Investor A that the adviser had said that the
fall in the share price was a good buying opportunity. At 3.51pm and at
3.56pm Investor A placed orders to buy Vyke shares.

24.
Immediately after the order placed at 3.51pm, Mr Shah called the adviser at
Investor A’s instruction and told him that the investment vehicle had just
acquired 1 million Vyke shares. When the adviser reminded Mr Shah that he
was “on the inside” with respect to Vyke and therefore prohibited from
trading, Mr Shah replied, “Yes, no I know. Hey, we’re all friends here”.

25.
In total Investor A, through the investment vehicle, bought a total of 2,178,572
Vyke shares on 30 June 2010 at an average price of 2.125p per share.

26.
The announcement of the joint venture was in fact not made to the market
until 12 July 2010, as a result of which the Vyke share price increased by
11.7%. The total unrealised profit from Investor A’s dealing was £5,446.43 of
which, under the terms of the agreement, Mr Shah would have been entitled to
£2,178.57. However, once Investor A became aware that Mr Shah had inside
information at the time of the trading, Investor A unilaterally decided not to
sell the shares. Vyke subsequently went into administration, and the shares
were rendered valueless. No profit was ever realised on the shares, and Mr
Shah never became entitled to any profit on them.

27.
On 1 July 2010, the adviser phoned Mr Shah and told him that there was a
problem regarding the fact that Mr Shah had inside information. The adviser
confirmed that he had escalated his concerns within his firm. The following
day Mr Shah was contacted by a manager from the adviser’s firm who
expressed concern that insider dealing may have taken place.

28.
In the days that followed Mr Shah and Investor A made telephone calls to the
FSA Market Abuse Hotline volunteering innocent explanations for their
trading in Vyke shares on 30 June 2010.

29.
An aggravating factor regarding Mr Shah’s conduct as set out above is Mr
Shah’s previous contact with the Markets Division of the FSA, arising from
the circumstances of his dismissal from his previous employers.

30.
Mr Shah was dismissed by his employers in November 2009 for gross
misconduct following an incident in which he allegedly traded in a company’s
shares on behalf of a client, ahead of a placing announcement about which he
had inside information.

31.
The incident was examined by the FSA. Mr Shah maintained that his actions
in trading ahead of a placing announcement were a result of a
miscommunication with his client. Although no formal enforcement action
was taken against Mr Shah, on 29 April 2010 he was sent an FSA Markets
Division policing letter which stated that whilst his conduct might be
indicative of market abuse it appeared to be negligent rather than deliberate.
Mr Shah was reminded about the penalties for market abuse and insider
dealing but no further action was taken.

32.
As a result of his behaviour Mr Shah encouraged Investor A to engage in
behaviour which, if engaged in by Mr Shah, would have amounted to market

abuse as defined by section 118(2) of the Act. As a consequence it appears to
the FSA that Mr Shah is not a fit and proper person, and should therefore be
prohibited, pursuant to section 56(1) of the Act.

FAILINGS

33.
The statutory and regulatory provisions relevant to this Decision Notice are set
out in the Annex.

34.
Under section 123 of the Act, the FSA may impose a penalty on Mr Shah, or
publish a statement, if the FSA is satisfied that he, by taking any action, has
encouraged another person to engage in behaviour which, if engaged in by Mr
Shah, would amount to market abuse. The FSA is satisfied that Mr Shah has
done so.

35.
Mr Shah, knowing that Investor A was planning either to buy more Vyke
shares or sell the shares he already possessed, told Investor A that the adviser
considered the fall in the share price to be a good buying opportunity. The
FSA is satisfied that, in the circumstances, by taking this action Mr Shah
encouraged Investor A to deal in Vyke shares. If Mr Shah had done so, this
would have amounted to market abuse.

36.
Mr Shah’s behaviour fell within section 118(1)(a) of the Act, in that it
occurred in relation to Vyke shares which are qualifying investments, and
which are traded on a prescribed market.

37.
Mr Shah’s behaviour, had he dealt in Vyke shares, would have amounted to
market abuse by way of insider dealing in breach of section 118(2) of the Act
for the following reasons:

a)
Mr Shah was an insider;

b)
Mr Shah had inside information; and

c)
the dealing was on the basis of that information.

An insider

38.
Mr Shah was an insider because he had inside information as a result of
having access to information through the exercise of his employment and/or
his duties as a consultant providing services to Investor A and the investment
vehicle.

Inside information

39.
The information received by Mr Shah both on 16 June and on 30 June 2010,
met the statutory requirements of inside information, namely:

i.
the information related to Vyke, and to Vyke shares;

ii.
the information was precise because:

a)
it indicated circumstances that existed or an event that had
occurred (that a joint venture contract had been signed between
Vyke and a US telecommunications company which it was
expected would turn Vyke into a profit-making company); and

b)
it was specific enough to enable a conclusion to be drawn as to
the possible effect of those circumstances or that event on the
price of Vyke shares;

iii.
the information was not generally available; and

iv.
the information was likely to have a significant effect on the price of
Vyke shares as it was information which a reasonable investor would
be likely to use as part of the basis of his investment decisions.

Circumstances that exist or an event that has occurred

40.
The information disclosed by the adviser to Mr Shah, was sufficiently precise
to indicate circumstances that existed, or an event that had occurred, namely
that a joint venture contract had been signed between Vyke and a US
telecommunications company which it was expected would turn Vyke into a
profit-making company.

Specific information

41.
The information disclosed by the adviser to Mr Shah, and by Mr Shah to
Investor A, about the nature of the joint venture and that it would turn Vyke
into a profit-making company, was specific enough to allow a conclusion to be
drawn as to its possible effect on the price of Vyke shares.

42.
The conclusion could be drawn that when the joint venture was announced it
would have an effect on the price, which would be to increase it.

The information was not generally available

43.
The information regarding the joint venture was not generally available.

Information which a reasonable investor would be likely to use

44.
It follows from the analysis at paragraphs 41-42 above that a reasonable
investor would be likely to use the information disclosed to Mr Shah as part of
the basis of his investment decisions.

Dealing on the basis of the inside information

45.
The FSA considers that Investor A’s decision to deal (through the investment
vehicle) was based on the comment made to him by Mr Shah that the adviser
had said that it was a good time to buy, which (unknown to Investor A) was
based on the inside information.

SANCTION

46.
The FSA’s policy on imposing a financial penalty is set out in Chapter 6 of the
Decision Procedures and Penalties Manual (“DEPP”), which is part of the
FSA Handbook.

47.
Section 123(2) of the Act states that the FSA may not impose a penalty on a
person if there are reasonable grounds to be satisfied that: (1) the person
concerned believed, on reasonable grounds, that his behaviour did not amount
to market abuse or requiring or encouraging; or (2) the person concerned took

all reasonable precautions and exercised all due diligence to avoid engaging in
market abuse or requiring or encouraging.

48.
DEPP 6.3.2G lists factors which the FSA may take into account when
deciding whether either of these two conditions is met. The FSA is satisfied
that neither of these conditions is met by Mr Shah.

49.
In respect of conduct occurring on or after 6 March 2010, the FSA applies a
five-step framework to determine the appropriate level of financial penalty.
DEPP 6.5C sets out the details of the five-step framework that applies in
respect of financial penalties imposed on individuals in market abuse cases.
Chapter 6.5C is annexed to this notice.

Step 1: disgorgement

50.
Pursuant to DEPP 6.5C.1G, at Step 1 the FSA seeks to deprive an individual
of the financial benefit derived directly from the market abuse where it is
practicable to quantify this.

51.
As a result of buying the Vyke shares on 30 June 2010, Investor A made an
unrealised profit of £5,446.43. Mr Shah would have been entitled to 40% of
this amount - £2,178.57. However, Investor A unilaterally chose not to sell the
shares, Vyke subsequently went into administration, and the shares were
rendered valueless. Mr Shah never became entitled to any profit. Mr Shah is
not therefore required to disgorge any sums.

52.
Step 1 is therefore £0.

Step 2: the seriousness of the breach

53.
Pursuant to DEPP 6.5C.2G, at Step 2 the FSA determines a figure that reflects
the seriousness of the market abuse. That figure is dependent on whether or
not the market abuse was referable to the individual’s employment. The
market abuse was referable to Mr Shah’s employment. In cases where the
market abuse was referable to the individual’s employment, the Step 2 figure
will be the greater of:

a)
a figure based upon a percentage of the individual’s relevant
income;

b)
a multiple of the profit made or loss avoided by the individual
for their own benefit, or for the benefit of other individuals
where the individual has been instrumental in achieving that
benefit, as a direct result of the market abuse (the “profit
multiple”); and

c)
for market abuse cases which the FSA assesses to be
seriousness level 4 or 5, £100,000.

54.
An individual’s relevant income is the gross amount of all benefits they
received from the employment in connection with which the market abuse
occurred for the period of the market abuse. Where the market abuse lasted
less than 12 months, or was a one-off event, the relevant income will be that
earned by the individual in the 12 months preceding the final market abuse.
Where the individual was in the relevant employment for less than 12 months,
his relevant income will be calculated on a pro rata basis to the equivalent of
12 months' relevant income.

55.
The “period of the market abuse” was the 12 months prior to 30 June 2010.
The FSA considers Mr Shah’s relevant income for this period to be £88,000.

56.
In cases where the market abuse was referable to the individual’s employment:

a)
the FSA determines the percentage of relevant income which
applies by considering the seriousness of the market abuse and
choosing a percentage between 0% and 40%; and

b)
the FSA determines the profit multiple which applies by
considering the seriousness of the market abuse and choosing a
multiple between 0 and 4.

57.
The percentage range and profit multiple range are divided into five fixed
levels which reflect, on a sliding scale, the seriousness of the market abuse;
the more serious the market abuse, the higher the level. For penalties imposed
on individuals for market abuse there are the following five levels:

Level 1 – 0%; profit multiple of 0

Level 2 – 10%; profit multiple of 1

Level 3 – 20%; profit multiple of 2

Level 4 – 30%; profit multiple of 3

Level 5 – 40%; profit multiple of 4

58.
In assessing the seriousness level, the FSA takes into account various factors
which reflect the impact and nature of the market abuse, and whether it was
deliberate or reckless. DEPP 6.5C.2 G(15) lists factors likely to be considered
‘level 4 or 5 factors’. Of these, the FSA considers the following factors to be
relevant:

a)
The wall-crossing procedure is a recognised industry practice
designed to impose restrictions on persons who receive inside
information. Mr Shah demonstrated a blatant disregard for
those restrictions. Such behaviour has a serious adverse effect
on confidence in markets, DEPP 6.5C.2 G(15)(b);

b)
Mr Shah breached a position of trust because he had agreed to
be “wall-crossed” as a pre-condition prior to the adviser
disclosing the inside information, DEPP 6.5C.2 G(15)(d); and

c)
Mr Shah acted deliberately, DEPP 6.5C.2 G(15)(f).

59.
DEPP 6.5C.2 G(16) lists factors likely to be considered ‘level 1, 2 or 3
factors’. Of these, the only factor that the FSA considers to be relevant is that
Mr Shah made no profit as a result of the market abuse, DEPP 6.5C.2
G(16)(a).

60.
The FSA also considers that the following factors are relevant:

a)
Mr Shah encouraged another, Investor A, to engage in
behaviour which, if engaged in by Mr Shah, would have
amounted to market abuse, DEPP 6.5C.2 G(12)(c); and

b)
Mr Shah is an experienced industry professional, DEPP 6.5C.2
G(12)(e).

61.
The FSA usually expects to assess deliberate market abuse as seriousness level
4 or 5, DEPP 6.5C.2 G(3)(c).

62.
Taking all of these factors into account, the FSA considers the seriousness of
the market abuse to be level 4. This means that the Step 2 figure is the higher
of:

a)
30% of Mr Shah’s relevant income of £88,000, a sum of
£26,400;

b)
A profit multiple of 3 applied to Mr Shah’s financial benefit of
£0, a sum of £0; and

c)
£100,000.

63.
Step 2 is therefore £100,000.

Step 3: mitigating and aggravating factors

64.
Pursuant to DEPP 6.5C.3G, at Step 3 the FSA may increase or decrease the
amount of the financial penalty arrived at after Step 2, but not including any
amount to be disgorged as set out in Step 1, to take into account factors which
aggravate or mitigate the market abuse.

65.
The FSA considers that the following factor aggravates the breach: Mr Shah
had recently been told about the FSA’s concerns in relation to market abuse as
a result of the Markets Division policing letter, in which he was reminded
about the penalties for market abuse and insider dealing, DEPP 6.5C.3
G(2)(e).

66.
The FSA considers that there are no factors listed within DEPP 6.5C.3G that
mitigate the breach.

67.
Having taken into account these aggravating and mitigating factors, the FSA
considers that the Step 2 figure should be increased by 25%. This reflects the
fact that Mr Shah’s market abuse occurred soon after receipt by him of the
Markets Division policing letter, and the similarity of his market abuse to the
conduct in relation to which that letter was sent.

68.
Step 3 is therefore £125,000.

Step 4: adjustment for deterrence

69.
Pursuant to DEPP 6.5C.4G, if the FSA considers the figure arrived at after
Step 3 is insufficient to deter the individual, or others, from further or similar
market abuse, then the FSA may increase the penalty.

70.
The FSA considers that the Step 3 figure of £125,000 represents a sufficient
deterrent to Mr Shah and others, and so has not increased the penalty at Step 4.

71.
Step 4 is therefore £125,000.

Step 5: settlement discount

72.
Mr Shah did not reach an agreement with the FSA and does not qualify for a
discount.

Serious financial hardship

73.
Pursuant to DEPP 6.5D.4G, the FSA will consider reducing the amount of a
penalty if an individual will suffer serious financial hardship as a result of
having to pay the entire penalty.

74.
Mr Shah has provided verifiable evidence to satisfy the FSA that payment of
any penalty would cause him serious financial hardship. Were this not the case
the FSA would have decided to impose on him a penalty of £125,000.

75.
Given that the payment of any penalty would cause Mr Shah serious financial
hardship, the FSA has decided to publish a statement that Mr Shah has
encouraged another person to engage in behaviour which, if engaged in by Mr
Shah, would amount to market abuse.

76.
The FSA’s power under section 56 of the Act to prohibit individuals who are
not fit and proper from carrying out functions in relation to regulated activities
helps the FSA to work towards its regulatory objectives of protecting
consumers, maintaining confidence in the financial system and reducing
financial crime.

77.
The FSA’s general policy in this area is set out in Chapter 9 of the
Enforcement Guide, which is part of the FSA Handbook.

78.
Mr Shah’s behaviour in deliberately encouraging behaviour which, if engaged
in by Mr Shah, would amount to market abuse, amounted to a serious act of
dishonesty. Mr Shah received inside information and, knowing this
information was confidential and price sensitive, encouraged Investor A to
trade.

79.
Mr Shah failed to follow the proper standards of market behaviour and he
pursued a deliberate course of conduct which put other market participants at a
disadvantage. His behaviour demonstrates that he lacks integrity.

80.
The FSA is satisfied that in all the circumstances of the case, Mr Shah should
be prohibited from performing any function in relation to any regulated
activity carried on by any authorised or exempt person or exempt professional
firm on the grounds that he is not a fit and proper person, pursuant to section
56 of the Act.

REPRESENTATIONS AND FINDINGS

81.
Below is a brief summary of the key representations made by Mr Shah in
response to the Warning Notice and how they have been dealt with. In making
the decision which gave rise to the obligation to give this notice, the FSA has
taken into account all such representations, whether or not set out below.

82.
Mr Shah made representations that:

(1) immediately after his conversation with the adviser on 16 June 2010 he
passed on to Investor A the information he had received. He told Investor
A that they were ‘inside’ with regard to Vyke until the joint venture deal
was announced to the market. He told Investor A that the announcement

would be in a couple of weeks. Investor A therefore knew that he was
‘inside’ and consequently he did not carry out any trades in Vyke in the
following days;

(2) just before the 3.45pm call on 30 June 2010, Investor A told Mr Shah that
an announcement about Vyke was out, which was an AGM announcement,
that the stock was dropping and that Mr Shah should call the adviser;

(3) Mr Shah knew that they were still ‘inside’ after his conversation at 3.45pm
and Investor A must have known this too. Investor A had the only
Bloomberg terminal in the office on his desk, which listed all
announcements. Mr Shah presumed that Investor A kept up with the news
flow;

(4) following the 3.45pm call, Mr Shah tried to attract Investor A’s attention.
However, he was preoccupied and Mr Shah did not want to aggravate him.
Mr Shah also had other things to do and was trying to contact another
broker. Therefore, between the end of the 3.45pm call and Mr Shah’s call
to the adviser at 3.56pm, Mr Shah had not spoken to Investor A and did
not know what Investor A was doing;

(5) at 3.56pm, before Mr Shah had had a chance to speak with him about the
3.45pm call, Investor A told Mr Shah to contact the adviser. Mr Shah
immediately did so and while the conversation took place Investor A
shouted over his desk what Mr Shah should say. This was common –
Investor A would tell Mr Shah what to say while on a call, and Mr Shah
would repeat what Investor A was saying to the person on the other end of
the line;

(6) investor A told Mr Shah to tell the adviser that Investor A had just bought
1 million shares of Vyke, which Mr Shah did. Until then Mr Shah did not
know that Investor A had traded in Vyke shares that day – if he had known
he would have tried to stop him. Mr Shah knew that they were still ‘inside’
– there would be no reason for him to tell the adviser, who would not
otherwise have known, that they had just bought 1 million Vyke shares,
knowing the consequences. His comment to the adviser that ‘we’re all
friends here’ was simply the first thing he said in a moment of confusion -
although Mr Shah believed that despite the AGM announcement they were
still inside, he thought that he might have missed something in the
announcement or another announcement. The timing of Investor A’s
trading just after the 3.45pm call ended was pure coincidence; and

(7) Mr Shah presumed at the time that Investor A knew that he was still
‘inside’ because he had been told. Mr Shah speculated in retrospect that
Investor A might have thought that he was no longer ‘inside’ because it
was 30 June, exactly two weeks since Mr Shah’s conversation with the
adviser on 16 June 2010. But the only announcement made had been an
AGM announcement.

83.
The FSA has found that:

(1) Mr Shah’s version of events is not credible;

(2) Investor A was an experienced trader who had instructed Mr Shah to call
the adviser so that Investor A could determine whether to buy more Vyke

shares or sell the ones he already owned. It is not plausible that he would
then have traded in Vyke shares without first checking with Mr Shah what
the adviser had said. Further, it is implausible that Investor A would have
coincidentally decided to buy Vyke shares just minutes after Mr Shah had
been told by the adviser that it was a good time to buy them;

(3) Mr Shah’s version of events is that Investor A told Mr Shah to call the
adviser, following which Investor A heard nothing back from Mr Shah.
Then, 10 minutes later, Investor A again asked Mr Shah to call the adviser,
and Mr Shah did so without mentioning to Investor A that Mr Shah had
spoken to the adviser in the intervening 10 minutes. The FSA does not
consider this to be plausible;

(4) there is no evidence to support Mr Shah’s claim that he passed on inside
information regarding Vyke to Investor A on 16 June 2010 or thereafter. If
Investor A had been ‘inside’ it is not credible that he would have
instructed Mr Shah to tell the adviser that Investor A intended to trade
Vyke shares on 30 June 2010 and to inform him after the trading had
occurred. Although Mr Shah states that he would not have told the adviser
about the trading if he had known it had occurred while they were ‘inside’,
it appears that he had little choice – he had been instructed by Investor A
to inform the adviser of this, and Investor A was nearby when the call was
made. Further, it is clear from the recording of the 3.56pm call that Mr
Shah was not being instructed what to say while the call was taking place;
and

(5) there was no reason for Investor A to trade between 16 June and 30 June,
and therefore the fact that he did not do so does not evidence Mr Shah’s
claim that the lack of trading was because Investor A knew that he was
‘inside’.

PROCEDURAL MATTERS

Decision makers

84.
The decision which gave rise to the obligation to give this Notice was made by
the Regulatory Decisions Committee.

85.
This Decision Notice is given under sections 57 and 127 of the Act and in
accordance with section 388 of the Act. The following statutory rights are
important.

The Tribunal

86.
Mr Shah has the right to refer the matter to which this Decision Notice relates
to the Upper Tribunal (the “Tribunal”). Under paragraph 2(2) of Schedule 3
of the Tribunal Procedure (Upper Tribunal) Rules 2008, Mr Shah has 28 days
from the date on which this Decision Notice is given to him to refer the matter
to the Tribunal. A reference to the Tribunal is made by way of a signed
reference notice (Form FTC3) filed with a copy of this Decision Notice. The
Tribunal’s address is: The Upper Tribunal, Tax and Chancery Chamber, 45
Bedford Square, London WC1B 3DN (tel: 020 7612 9700; email
financeandtaxappeals@tribunals.gsi.gov.uk). Further details are contained in
“Making a Reference to the UPPER TRIBUNAL (Tax and Chancery
Chamber)” which is available from the Upper Tribunal website:

87.
Mr Shah should note that a copy of the reference notice (Form FTC3) must
also be sent to the FSA at the same time as filing a reference with the
Tribunal. A copy of the reference notice should be sent to Nick Bayley at the
FSA, 25 The North Colonnade, Canary Wharf, London E14 5HS.

Access to evidence

88.
Section 394 of the Act applies to this Decision Notice. The person to whom
this Notice is given has the right to access:

(1) the material upon which the FSA has relied on in deciding to give this
Notice; and

(2) any secondary material which, in the opinion of the FSA, might undermine
that decision.

89.
There is no such secondary material.

Confidentiality and publicity

90.
This Decision Notice may contain confidential information and should not be
disclosed to a third party (except for the purpose of obtaining advice on its
contents). The effect of section 391 of the Act is that a person to whom this
notice is given may not publish the notice or any details concerning it unless
the FSA has published the notice or those details.

91.
The FSA may publish such information about the matter to which a Decision
Notice or Final Notice relates as it considers appropriate. The facts and
matters contained in this notice may therefore be made public.

FSA contacts

92.
For more information concerning this matter generally, contact Nick Bayley at
the FSA (direct line: 020 7066 5342) or Rebecca Green (direct line 020 7066
9496).

Andrew Long
Acting Chairman, Regulatory Decisions Committee

ANNEX

RELEVANT STATUTORY PROVISIONS AND REGULATORY GUIDANCE

Statutory provisions

1.
Section 123(1)(b) of the Act states that, if the FSA is satisfied that a person
(“A”) by taking or refraining from taking any action has required or
encouraged another person or persons to engage in behaviour which, if
engaged in by A, would amount to market abuse, it may impose on him a
penalty of such amount as it considers appropriate.

2.
Section 123(2) sets out certain circumstances in which the FSA may not
impose a penalty on a person.

3.
Under section 123(3) of the Act, if the FSA is entitled to impose a penalty on a
person under this section it may, instead of imposing a penalty on him, publish
a statement to the effect that he has engaged in market abuse.

4.
Market Abuse is defined at Section 118(1) of the Act as follows:

For the purposes of this Act, market abuse is behaviour (whether by one
person alone or by two or more persons jointly or in concert) which:-

(a)
occurs in relation to –

(i)
qualifying investments admitted to trading on a prescribed market
…and

(iii) in the case of subsection (2) or (3) behaviour, investments which
are related investments in relation to such qualifying investments,
and

(b)
falls within any one or more of the types of behaviour set out in
subsections (2) to (8).

5.
Section 118(2) sets out the behaviour that will amount to insider dealing:

… where an insider deals or attempts to deal, in a qualifying investment
or related investment on the basis of inside information relating to the
investment in question.

6.
Section 118B of the Act provides as follows:

… an insider is any person who has inside information:…

(c)
as a result of having access to the information through the exercise
of his employment, profession or duties.

7.
Section 130A of the Act defines dealing as follows:

in relation to an investment, means acquiring or disposing of the
investment whether as principal or agent or directly or indirectly, and
includes agreeing to acquire or dispose of the investment, and entering
into and bringing to an end a contract creating it.

8.
Section 118C(2) sets out the requirements for information to be inside
information:

Inside information is information of a precise nature which:

(a)
is not generally available;

(b)
relates, directly or indirectly, to one or more issuers of the
qualifying investments or to one of more of the qualifying
investments;

(c)
would, if generally available, be likely to have a significant effect
on the price of the qualifying investments.

The Code of Market Conduct

9.
The FSA has issued the Code of Market Conduct (“MAR”) pursuant to section
119 of the Act. In deciding to take the action set out in this notice, the FSA
has had regard to MAR and other guidance published in the FSA Handbook.

MAR 1.3.2E gives descriptions of behaviour that amount to market
abuse (insider dealing): This example relevant to this notice is:

(1) dealing on the basis of inside information which is not trading
information.

MAR 1.2.12 E sets out factors that are to be taken into account in
determining whether or not information is generally available, each of
which indicate that the information is generally available (and therefore
that it is not inside information), which include:

•
whether the information has been disclosed to a prescribed
market through a regulatory information service or otherwise in
accordance with the rules of the market; and

•
whether the information is otherwise generally available,
including through the Internet, or some other publication
(including if it is only available on payment of a fee), or is
derived from information which has been made public.

10.
MAR 1.3.3 E sets out factors that are to be taken into account in determining
whether or not a person’s behaviour is “on the basis of” inside information and
sets out a number of factors that are indications that it is not (none of which
are relevant to the facts of this case).

Decision Procedures and Penalties Manual (“DEPP”)

11.
Section 123(1) of the Act authorises the FSA to impose financial penalties in
cases of market abuse. Section 124 of the Act requires the FSA to issue a
statement of its policy with respect to the imposition of penalties for market
abuse and the amount of such penalties. The FSA’s policy in this regard is
contained in Chapter 6 of DEPP.

12.
In deciding whether to exercise its power under section 123 in the case of any
particular behaviour, the FSA must have regard to this statement of policy.
Therefore, in determining the level of penalty, the FSA has had regard to
DEPP 6 as it applied in June 2010. With regard to the application of section
123(2) of the Act, DEPP 6.3.2 G sets out factors that the FSA may take into

account in determining whether the conditions of 123(2) are met. Factors
relevant to this notice include:

(1)
whether, and if so to what extent, the behaviour in question was or
was not analogous to behaviour described in the Code of Market
Conduct (see MAR 1) as amounting or not amounting to market
abuse or requiring or encouraging;

(2)
whether the FSA has published any guidance or other materials on
the behaviour in question and if so, the extent to which the person
sought to follow that guidance or take account of those materials
(see the Reader's Guide to the Handbook regarding the status of
guidance.) The FSA will consider the nature and accessibility of
any guidance or other published materials when deciding whether
it is relevant in this context and, if so, what weight it should be
given; and

(3)
whether, and if so to what extent, the behaviour complied with the
rules of any relevant prescribed market or any other relevant
market or other regulatory requirements (including the Takeover
Code) or any relevant codes of conduct or best practice.

(4)
the level of knowledge, skill and experience to be expected of the
person concerned

13.
The five steps for penalties imposed on individuals in market abuse cases

Step 1 – disgorgement

DEPP 6.5C.1G
The FSA will seek to deprive an individual of the financial
benefit derived as a direct result of the market abuse (which
may include the profit made or loss avoided) where it is
practicable to quantify this. The FSA will ordinarily also
charge interest on the benefit.

Step 2 – the seriousness of the market abuse

DEPP 6.5C.2G
(1)
The FSA will determine a figure dependent on the

seriousness of the market abuse and whether or not it was
referable to the individual's employment. This reflects the
FSA's view that where an individual has been put into a
position where he can commit market abuse because of his
employment the fine imposed should reflect this by
reference to the gross amount of all benefits derived from
that employment.

(2)
In cases where the market abuse was referable to the

individual's employment, the figure for the purpose of Step
2 will be the greater of:

(a)
a figure based on a percentage of the individual's

"relevant income". The percentage of relevant income
which will apply is explained in paragraphs (6) and
(8) to (16) below;

(b)
a multiple of the profit made or loss avoided by

the individual for his own benefit, or for the benefit of

other individuals where the individual has been
instrumental in achieving that benefit, as a direct
result of the market abuse (the "profit multiple"). The
profit multiple which will apply is explained in
paragraphs (6) and (8) to (16) below; and

(c)
for market abuse cases which the FSA assesses

to be seriousness level 4 or 5, £100,000. How the FSA
will assess the seriousness level of the market abuse is
explained in paragraphs (9) to (16) below. The FSA
usually expects to assess market abuse committed
deliberately as seriousness level 4 or 5.

(3)
In cases where the market abuse was not referable to

the individual's employment, the figure for the purpose of
Step 2 will be the greater of:

(a)
a multiple of the profit made or loss avoided by

the individual for his own benefit, or for the benefit of
other individuals where the individual has been
instrumental in achieving that benefit, as a direct
result of the market abuse (the "profit multiple"). The
profit multiple which will apply is explained in
paragraphs (7) to (16) below; and

(b)
for market abuse cases which the FSA assesses

to be seriousness level 4 or 5, £100,000. How the FSA
will assess the seriousness level of the market abuse is
explained in paragraphs (9) to (16) below. The FSA
usually expects to assess market abuse committed
deliberately as seriousness level 4 or 5.

(4)
An individual's "relevant income" will be the gross

amount of all benefits received by the individual from the
employment in connection with which the market abuse
occurred (the "relevant employment") for the period of the
market abuse. In determining an individual's relevant
income, "benefits" includes, but is not limited to, salary,
bonus, pension contributions, share options and share
schemes; and "employment" includes, but is not limited to,
employment as an adviser, director, partner or contractor.

(5)
Where the market abuse lasted less than 12 months, or

was a one-off event, the relevant income will be that earned
by the individual in the 12 months preceding the final
market abuse. Where the individual was in the relevant
employment for less than 12 months, his relevant income
will be calculated on a pro rata basis to the equivalent of 12
months' relevant income.

(6)
In cases where the market abuse was referable to the

individual's employment:

(a)
the FSA will determine the percentage of

relevant income which will apply by considering the
seriousness of the market abuse and choosing a
percentage between 0% and 40%; and

(b)
the FSA will determine the profit multiple which

will apply by considering the seriousness of the
market abuse and choosing a multiple between 0 and
4.

(7)
In cases where the market abuse was not referable to

the individual's employment the FSA will determine the
profit multiple which will apply by considering the
seriousness of the market abuse and choosing a multiple
between 0 and 4.

(8)
The percentage range (where the market abuse was

referable to the individual's employment) and profit
multiple range (in all cases) are divided into five fixed
levels which reflect, on a sliding scale, the seriousness of
the market abuse. The more serious the market abuse, the
higher the level. For penalties imposed on individuals for
market abuse there are the following five levels (the
percentage figures only apply where the market abuse was
referable to the individual's employment):

(a)
level 1 - 0%, profit multiple of 0;

(b)
level 2 - 10%, profit multiple of 1;

(c)
level 3 - 20%, profit multiple of 2;

(d)
level 4 - 30%, profit multiple of 3; and

(e)
level 5 - 40%, profit multiple of 4.

(9)
The FSA will assess the seriousness of the market

abuse to determine which level is most appropriate to the
case.

(10) In deciding which level is most appropriate to a
market abuse case, the FSA will take into account various
factors which will usually fall into the following four
categories:

(a)
factors relating to the impact of the market

abuse;

(b)
factors relating to the nature of the market

abuse;

(c)
factors tending to show whether the market

abuse was deliberate; and

(d)
factors tending to show whether the market

abuse was reckless.

(11) Factors relating to the impact of the market abuse
include:

(a)
the level of benefit gained or loss avoided, or

intended to be gained or avoided, by the individual
from the market abuse, either directly or indirectly;

(b)
whether the market abuse had an adverse effect

on markets and, if so, how serious that effect was.
This may include having regard to whether the
orderliness of, or confidence in, the markets in
question has been damaged or put at risk; and

(c)
whether the market abuse had a significant

impact on the price of shares or other investments.

(12) Factors relating to the nature of the market abuse
include:

(a)
the frequency of the market abuse;

(b)
whether the individual abused a position of trust;

(c)
whether the individual caused or encouraged

other individuals to commit market abuse;

(d)
whether the individual has a prominent position

in the market;

(e)
whether the individual is an experienced

industry professional;

(f)
whether the individual held a senior position

with the firm; and

(g)
whether the individual acted under duress.

(13) Factors tending to show the market abuse was
deliberate include:

(a)
the market abuse was intentional, in that the
individual intended or foresaw that the likely or
actual consequences of his actions would result
in market abuse;

(b)
the individual intended to benefit financially
from the market abuse, either directly or
indirectly;

(c)
the individual knew that his actions were not in
accordance with exchange rules, share dealing
rules and/or the firm's internal procedures;

(d)
the individual sought to conceal his misconduct;

(e)
the individual committed the market abuse in
such a way as to avoid or reduce the risk that the
market abuse would be discovered;

(f)
the individual was influenced to commit the
market abuse by the belief that it would be
difficult to detect;

(g)
the individual's actions were repeated;

(h)
for market abuse falling within section 118(2) of
the Act, the individual knew or recognised that
the information on which the dealing was based
was inside information; and

(i)
for market abuse falling within section 118(4) of
the Act, the individual's behaviour was based on
information which he knew or recognised was
not generally available to those using the
market, and the individual regarded the
information as relevant when deciding the terms
on which transactions in qualifying investments
should be effected.

(14) Factors tending to show the market abuse was
reckless include:

(a)
the individual appreciated there was a risk that

his actions could result in market abuse and failed
adequately to mitigate that risk; and

(b)
the individual was aware there was a risk that

his actions could result in market abuse but failed to
check if he was acting in accordance with internal
procedures.

(15) In following this approach factors which are likely to
be considered 'level 4 factors' or 'level 5 factors' include:

(a)
the level of benefit gained or loss avoided, or

intended to be gained or avoided, directly by the
individual from the market abuse was significant;

(b)
the market abuse had a serious adverse effect on

the orderliness of, or confidence in, markets;

(c)
the market abuse was committed on multiple

occasions;

(d)
the individual breached a position of trust;

(e)
the individual has a prominent position in the

market; and

(f)
the market abuse was committed deliberately or

recklessly.

(16) In following this approach factors which are likely to
be considered 'level 1 factors', 'level 2 factors' or 'level 3
factors' include:

(a)
little, or no, profits were made or losses avoided

as a result of the market abuse, either directly or
indirectly;

(b)
there was no, or limited, actual or potential

effect on the orderliness of, or confidence in, markets
as a result of the market abuse; and

(c)
the market abuse was committed negligently or

inadvertently.

[Note: For the purposes of DEPP 6.5C, "firm" has the
special meaning given to it in DEPP 6.5.1 G.]

Step 3 - mitigating and aggravating factors

DEPP 6.5C.3G
(1)
The FSA may increase or decrease the amount of the

financial penalty arrived at after Step 2, but not including
any amount to be disgorged as set out in Step 1, to take into
account factors which aggravate or mitigate the market
abuse. Any such adjustments will be made by way of a
percentage adjustment to the figure determined at Step 2.

(2)
The following list of factors may have the effect of

aggravating or mitigating the market abuse:

(a)
the conduct of the individual in bringing (or

failing to bring) quickly, effectively and completely
the market abuse to the FSA's attention (or the
attention of other regulatory authorities, where
relevant);

(b)
the degree of cooperation the individual showed

during the investigation of the market abuse by the
FSA, or any other regulatory authority allowed to
share information with the FSA;

(c)
whether the individual assists the FSA in action

taken against other individuals for market abuse
and/or in criminal proceedings;

(d)
whether the individual has arranged his

resources in such a way as to allow or avoid
disgorgement and/or payment of a financial penalty;

(e)
whether the individual had previously been told

about the FSA's concerns in relation to the issue,
either by means of a private warning or in supervisory
correspondence;

(f)
the previous disciplinary record and general

compliance history of the individual;

(g)
action taken against the individual by other

domestic or international regulatory authorities that is
relevant to the market abuse in question;

(h)
whether FSA guidance or other published

materials had already raised relevant concerns, and
the nature and accessibility of such materials; and

(i)
whether the individual agreed to undertake

training subsequent to the market abuse.

Step 4 - adjustment for deterrence

DEPP 6.5C.4G
(1)
If the FSA considers the figure arrived at after Step 3

is insufficient to deter the individual who committed the
market abuse, or others, from committing further or similar
abuse
then
the
FSA
may
increase
the
penalty.

Circumstances where the FSA may do this include:

(a)
where the FSA considers the absolute value of

the penalty too small in relation to the market abuse to
meet its objective of credible deterrence;

(b)
where previous FSA action in respect of similar

market abuse has failed to improve industry
standards; and

(c)
where the penalty may not act as a deterrent in

light of the size of the individual's income or net
assets.

Step 5 - settlement discount

DEPP 6.5C.5G
The FSA and the individual on whom a penalty is to be
imposed may seek to agree the amount of any financial
penalty and other terms. In recognition of the benefits of
such agreements, DEPP 6.7 provides that the amount of the
financial penalty which might otherwise have been payable
will be reduced to reflect the stage at which the FSA and the
individual concerned reached an agreement. The settlement
discount does not apply to the disgorgement of any benefit
calculated at Step 1.

Enforcement Guide ("EG")

14.
Section 9 of EG deals with prohibition orders. Paragraph 9.1 provides an
introduction to the FSA using its powers under section 56 of the Act:

The FSA’s power under section 56 of the Act to prohibit individuals who
are not fit and proper from carrying out functions in relation to regulated
activities helps the FSA to work towards achieving its regulatory
objectives. The FSA may exercise this power to make a prohibition
order where it considers that, to achieve any of those objectives, it is
appropriate either to prevent an individual from performing any function
in relation to regulated activities, or to restrict the functions which he
may perform.

15.
Paragraphs 9.3 to 9.7 of EG then set out the FSA’s general policy in relation to
prohibition orders and withdrawal of approval.

16.
Paragraphs 9.17 to 9.18 of EG state that where the FSA is considering making
a prohibition order against an individual who is not an approved person, the
FSA will consider the severity of the risk posed by the individual, and may
prohibit the individual where it considers this is appropriate to achieve one or
more of its regulatory objectives. When considering whether to exercise its
power to make a prohibition order against such an individual, the FSA will
consider all the relevant circumstances of the case, which may include the
following (see paragraph 9.9 of EG). Of those listed, the circumstances of
relevance to this notice include:

(2)
Whether the individual is fit and proper to perform functions in
relation to regulated activities. The criteria for assessing the fitness
and propriety of approved persons are set out in FIT 2.1 (Honesty,
integrity and reputation); FIT 2.2 (Competence and capability) and
FIT 2.3 (Financial soundness);

(4)
Whether the approved person has engaged in market abuse; and

(9)
The previous disciplinary record and general compliance history of
the individual including whether the FSA, any previous regulator,
designated professional body or other domestic or international
regulator has previously imposed a disciplinary sanction on the
individual.

17.
EG 9.10 provides that the FSA can have regard to the cumulative effect of a
number of factors. EG 9.11 provides that the factors set out at paragraph 9.9
are not a definitive list.

18.
EG 9.12 provides examples of types of behaviour which have previously
resulted in the FSA deciding to issue a prohibition order or withdraw the
approval of an approved person. The example of particular relevance to this
notice is:

(3)
Severe acts of dishonesty, e.g. which may have resulted in financial
crime.

Fit and Proper Test for Approved Persons ("FIT")

19.
Paragraph 1.3.1 of FIT states:

The FSA will have regard to a number of factors when assessing the
fitness and propriety of a person to perform a particular controlled
function. The most important considerations will be the person's:

(1)
honesty, integrity and reputation;

(2)
competence and capability; and

(3)
financial soundness.

20.
FIT 1.3.3 states:

The criteria listed in FIT 2.1 to FIT 2.3 are guidance and will be applied
in general terms when the FSA is determining a person's fitness and
propriety. It would be impossible to produce a definitive list of all the
matters which would be relevant to a particular determination.

21.
FIT 1.3.4 states:

If a matter comes to the FSA's attention which suggests that the person
might not be fit and proper, the FSA will take into account how relevant
and how important it is.

22.
The relevant criteria in this case are honesty, integrity and reputation.

23.
In assessing the fitness and propriety of an approved person under the criterion
of honesty, integrity and reputation, the FSA will have regard to the matters
including, but not limited to, those set out in FIT 2.1.3 G.

24.
FIT 2.1.3G refers to various matters, including:

(5)
whether the person has contravened any of the requirements and
standards of the regulatory system or the equivalent standards or
requirements of other regulatory authorities (including a previous
regulator), clearing houses and exchanges, professional bodies, or
government bodies or agencies.

(13) whether, in the past, the person has been candid and truthful in all
his dealings with any regulatory body and whether the person
demonstrates a readiness and willingness to comply with the
requirements and standards of the regulatory system and with other
legal, regulatory and professional requirements and standards.