17 April 2010

In its decision published on 11 January 2010, the Financial Services and Markets Tribunal (“the Tribunal”) found that on 3 occasions in 2004 that Mr Chhabra, whilst an analyst at Evolution Securities, passed confidential information to Mr Patel, a close friend, private equity executive and regular spread bettor who placed bets in reliance of this information. Mr Patel and Mr Chhabra maintain that they did not engage in market abuse.

Taking each of the 3 bets in turn:

a.    Ebookers, 7 May 2004:

                             i.          Mr Patel placed a buy bet on Ebookers on 7 May.

                           ii.          The FSA allege that Mr Patel traded in reliance of price sensitive information provided by Mr Chhabra relating to a scheduled results announcement, which was released on 10 May 2004.

                         iii.          The bet was entirely consistent with Mr Patel’s trading history and trading strategy. He regularly bet ahead of Ebookers’ scheduled results announcements and the bet in question represented the 4^th time he had done so.

                          iv.          The results were in line with expectations. Further, the current trading statement in the draft supposedly to have been revealed to Mr Patel stated that current trading was in line with expectations. Therefore the results could not have been expected to generate a material price reaction.

                            v.          Mr Chhabra’s recommendation had been ‘ADD’ from the 22 March 2004 and I upgraded to BUY on 10 May.

                          vi.          Mr Patel lost money on this trade.

b.    Eidos, 20 May 2004:

                             i.          Mr Patel opened a long position in Eidos on 26 April following bid speculation in several newspapers. He then traded Eidos on a number of occasions between 26 April and 20 May responding to price momentum.

                           ii.          Eidos’ share price fell on the 19^th May and the morning of the 20^th May. In line with his strategy of following price momentum, Mr Patel took out a short position, this being the trade that is claimed to be abusive.

                         iii.          There is contemporaneously prepared documentation at Evolution clearly stating that Mr Chhabra was informed about Eidos’ profit warning after his apparently abusive calls to Mr Patel.

                          iv.          Even by the FSA’s own case, it is suggested that Mr Chhabra did not know whether Eidos would put out a positive or negative announcement at the time Mr Chhabra spoke to Mr Patel but that Mr Chhabra ‘guessed’ that it would be negative. There is no basis for this assertion (notwithstanding the fact that it is legally questionable that a ‘guess’ constitutes price sensitive information). In fact, Mr Chhabra published a ‘BUY’ note on Eidos on 19 May, the day before Mr Patel’s apparently abusive trades therefore any guess would have been that the announcement was positive.  In fact it was negative.

c.    Ebookers, 28 July 2004:

                             i.          Mr Patel traded Ebookers more frequently than any other stock. In 2004 he had an open position in the stock for 111 out of 253 available trading days. He therefore monitored Ebookers’ stock price regularly.

                           ii.          Ebookers share price had fallen persistently during July and had lost 25% between 1^st and 27^th.

                         iii.          Following concerns from investors about the persistent fall in the share price, Evolution released an email to the market on 20 July stating that the weakness was due to poor trading results by competitors and the appointment of a new CFO.

                          iv.          Mr Patel went short on the stock on 28 July to capitalise on the strongly bearish trend that had developed. Further, it had just fallen through a previous level of support.

                            v.          The FSA claims that Mr Chhabra was made aware of Ebookers’ intention to issue a profit warning by Mr Michael Brennan (Director, Corporate Finance) a few minutes prior to an apparently abusive call to Mr Patel at 11:28.     

                          vi.          However, Mr Brennan was at his desk on the phone in another office at 11:25 and 11:27. For Mr Chhabra’s call to Mr Patel to be abusive, the following would have all had to happen within a minute:

a.             Mr Brennan finishes his 11:27 telephone conversation

b.             Mr Brennan leaves his desk

c.                     Mr Brennan walks out of Corporate Finance (separate office requiring exit from a security door)

d.             Mr Brennan walks across the trading floor to Mr Chhabra

e.             Mr Brennan and Mr Chhabra go to a meeting room

f.        Mr Brennan tells Mr Chhabra about profits warning

g.             Mr Chhabra reacts

h.             Mr Chhabra leaves the room and walk out of a trading floor to a quiet area to make an abusive call to Mr Patel

This is logistically impossible given the timings assumed by the FSA.