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Lord Kingsland moved Amendment No. 208A:

Page 51, line 1, leave out from ("which") to ("the") in line 3 and insert ("falls below").

The noble Lord said: We now come to deal with Clause 109 and the offence of market abuse. In moving Amendment No. 208A, I shall speak also to Amendments Nos. 208B, 209A, 211A, 212A, 212B, 213A. It has always been the view of the Opposition that the problem which the offence of market abuse seeks to confront would be better confronted by changes in the criminal law. However, that approach has been steadfastly resisted by the Government. At the same time, the Government have refused to tackle the really fundamental problems connected with the offence as contained in the Bill: its territorial scope is uncertain, and its definitions are too wide and ill considered.

However, its biggest defect is, perhaps, what I would describe as its "effect-based philosophy". The offence catches individuals who unwittingly or mistakenly mislead the market. Those individuals are subject to precisely the same penalties as individuals who intend to mislead the market. The approach that the Opposition are taking, which is reflected in these amendments, is to inject into the Bill the requirement of intent and to insist that, in order to proceed for market abuse, the authority has to go to the courts.

In taking that approach, we have been greatly influenced by what happens in the United States of America. In this regard I am happy to acknowledge the help that we have received from one of the partners--a former general counsel to the Securities and Exchange Commission--at the well-known Washington law firm of Debevoise and Plimpton.

As I understand it, the position in the United States is as follows. Section 10(b) of the Securities Exchange Act 1934, and under it the Exchange Rule (10)(b)(5), are broad anti-fraud provisions that prohibit manipulative, deceptive or fraudulent conduct in connection with the purchase or sale of any security through inter-state commerce.

The United States Supreme Court has held that the Securities and Exchange Commission must establish that a defendant acted with scienter, which the court has defined as,

"a mental state embracing an attempt to deceive, manipulate or defraud".

The same standard also applies in private actions brought under the Federal securities laws alleging securities fraud. While the Supreme Court frequently notes that negligence simply will not suffice, it has left open the question of whether or not "recklessness" could constitute a mental state sufficient to establish liability under these provisions. One of the leading Federal appellate courts has defined "recklessness", in this context, as a form of intentional conduct, rather than of gross negligence.

Over the years, Section 10(b) and Rule 10(b)(5) have been used to combat various forms of securities fraud, including insider trading, accounting irregularities and market manipulation. In each case, liability under

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these provisions must arise from knowing or reckless conduct involving manipulation or deception. Negligence, let alone strict liability, is simply not enough.

Congress and the SEC (through its delegated rule-making authority) have addressed problems caused by the misuse of market information through detailed and sophisticated regulation. But when the use of market information may harm the operation of securities markets, they provide that a person in possession of material non-public information must do one of two things: either disclose it completely or not trade.

The SEC may initiate an enforcement action in a Federal court alleging violations of Section 10(b) and Rule 10(b)(5) thereunder. The SEC is also authorised to institute administrative proceedings alleging violations of Section 10(b) and Rule 10(b)(5). These administrative proceedings are conducted before an SEC hearing officer, an administrative law judge designated by the agency. Initial administrative decisions may be appealed to the commission itself and then, if necessary, to a Federal appellate court.

When proceeding administratively, the SEC is limited to seeking an administrative order sanctioning the alleged violator. Monetary penalties and other sanctions are available in both forms, but in administrative proceedings monetary proceedings may only be assessed against a regulated entity and its associated persons--unlike the provisions for market abuse in the Bill.

Congress has established in certain circumstances, including insider trading and SEC administrative proceedings against regulated entities, tiers of monetary penalties that vary as to the degree of harm. In order to obtain certain civil monetary remedies for insider trading, the SEC must proceed in court. Therefore, it is quite clear from American practice that the mental state required under Rule 10(b)(5) is the intention to commit a fraudulent act, albeit that "recklessness" is treated in some court decisions as intentional. Accordingly, the US equivalent of market abuse is not strict liability or negligence.

Moreover, the SEC has to go to court whether for criminal or civil fraud, although it can impose monetary penalties itself. That is the pattern which has infected the amendments that we have tabled this evening.

Amendment No. 208A deals with subsection (1)(c) of Clause 109, which refers to market abuse as behaviour,

"which is likely to be regarded by a regular user of that market who is aware of the behaviour as a failure on the part of the person or persons concerned to observe the standard of behaviour reasonably expected of a person in his or their position in relation to the market".

Our amendment redrafts that paragraph to read:

"which falls below the standard of behaviour reasonably expected of the person or persons concerned in his or their position in relation to the market";

in other words, the standard becomes an objective one.

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Amendment No. 209A deals with Clause 109 (2)(b). It seeks to remove the word "likely", which appears after the reference to "behaviour", and replace it with the words,

"intended or might reasonably be presumed to be intended".

So we accept that intention can be proved by proving a series of events which, if not inevitably or completely conclusive, point beyond an appropriate degree of doubt to an offence.

Amendment No. 211A seeks to amend Clause 109(2)(c). At present the clause states,

"a regular user of the market would, or would be likely to, regard the behaviour as behaviour which would, or would be likely to, distort the market in investments of the kind in question".

The amendment seeks to add,

"and the behaviour is intended or might reasonably be presumed to be intended to cause that distortion".

In Clause 109(3) the expression,

"In determining whether behaviour amounted to market abuse by a particular person or by particular persons, regard must be had (among other matters) to the extent to which that person, or those persons",

is excised and replaced by,

"A person's behaviour shall not be regarded as amounting to market abuse if he--

(a) took care to avoid engaging in market abuse; or

(b) believed that the behaviour in question would not amount to market abuse".

At the end of that final part of paragraph (b), new paragraph (c), we seek in Amendment No. 213A to add the expression,

"believed on reasonable grounds that the behaviour in question would not amount to market abuse".

6.30 p.m.

Lord Fraser of Carmyllie: Before my noble friend develops his argument--I very much wish to avoid interrupting his line of thought--it would help me to understand all of his argument, much of which I support, if I could understand the following point a little more clearly. My noble friend's Amendment No. 208A to Clause 109(1)(c) states,

"Page 51, line 1, leave out from ("which") to ("the") in line 3 and insert ("falls below").

The concept of a regular user of the market is eliminated with that deletion. However, Clause 109(2) refers to,

"a regular user of the market".

My noble friend does not seem to be concerned to remove the concept of the regular market user in that provision. I wonder whether that is intentional. If it is, I should be grateful if he could expand on that.

Lord Kingsland: It is clear that regular users of the market will sometimes need to give evidence in disputes about how the market would behave, or ought to have behaved, in a particular set of circumstances. We have no objection to that. The reason that expression was sought to be removed by

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Amendment No. 208A was that, used as it is by the Government in Clause 109(1)(c), it gave the offence a subjective element which we wish to exclude.

I wish to comment on one government amendment in this group before I sit down, and that is Amendment No. 214. My understanding, from what had happened in another place, was that the status of the code, which had originally been intended to be evidential, has become, in effect, a safe harbour. Therefore, if an operator in the market performed in a way which conformed precisely with the code, he or she would be safe from pursuit by the authority. It now appears, as a result of the noble Lord's amendment, that things are not so simple. As I understand his amendment, it is not enough for a particular form of behaviour to be included in the code. It appears that that form of behaviour will only provide a safe harbour to a market operator if in addition it has an expression which says that it should do so.

It is my impression--I hope that the Minister will correct me if I am wrong--that the Government are resiling from the position they took at the end of the Bill's stages in another place. It is also my view that, if the situation has changed, it appears that an operator--the Minister will correct me if I am wrong--will, on the one hand, be obliged to follow the code which, on the other hand, gives him no guarantee of a secure haven.

Throughout the financial sector great concern has already been expressed about the uncertain conditions in which operators will function as a consequence of the Bill. I hope that the interpretation that I have put on Amendment No. 214 is incorrect; because if it is not, we shall have to reconsider the code to see what additional amendments we would have to make to that part of the Bill.

I had hoped that we had reached the stage where the code was now accepted as a safe harbour and we could move on to consider improving the provisions in relation to guidance which at the moment does not provide a safe harbour. The biggest uncertainty in the City at the moment is not the price of any particular commodity or the price of any particular share but what the regulator is going to do this time next year. Certainty now is at a huge premium. My concern is that the Minister's amendment is a step back rather than a step forward in this respect. I beg to move.

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