The identities of the fund managers whose communications ahead of two high-profile initial public offerings (IPOs) sparked a Financial Conduct Authority (FCA) probe can be revealed for the first time.
Paul Stephany, the former Newton fund manager at the heart of the FCA’s probe, was yesterday fined £32,200. Citywire can reveal the fund managers who exchanged emails and held telephone conversations with Stephany ahead of the flotations and share placings the FCA is examining.
Stephany called Philip Rodrigs, who was sacked by River and Mercantile last year for alleged misconduct, using his personal mobile on the day Market Tech, a real estate company, announced a share placing.
After On The Beach’s (OTB) IPO, Stephany emailed Giles Hargreave, veteran UK small cap manager and head of fund management at Hargreave Hale, and Hargreave’s colleagues Guy Feld and Eustace Santa Barbara, thanking them ‘if you did indeed come in with a lowball bid for OTB’.
The FCA launched an investigation into potential breaches of competition law by Newton, Artemis, River and Mercantile and Hargreave Hale in 2017. The investigation is still ongoing, so Citywire is not suggesting that any individuals or firms named here have done anything wrong.
‘Wonder if Rodders will listen to you’
Patrick Newens, global small caps portfolio manager at BMO, which is not subject to the subsequent FCA investigation, wished Stephany ‘good luck’ after the former Newton manager emailed peers at rival firms encouraging them to join him in submitting bids for On the Beach at a lower price.
‘[I] wonder if Rodders [Rodrigs, pictured] will listen to you this time,’ he added. ‘Some collective bargaining from the buyside not a bad thing.’
Other fund managers raised the alarm over Stephany’s conduct. Two fund managers at Old Mutual Global Investors forwarded his On The Beach emails to their head of compliance, Katie Carter, setting in train the series of events that led to Stephany’s firing by Newton, his investigation by the FCA, and a wider probe by the City regulator into a potential breach of competition law.
Lucy Marmion, then manager of the BlackRock UK Smaller Companies fund, responded to those same emails by saying she did not want to be canvassed that way in future.
‘It could potentially give rise to a situation where a group of shareholders were viewed to be acting in concert with all the attendant implications,’ she said.
The identities of the managers emerged in an employment tribunal ruling published last month after Stephany, who ran £1.8 billion of funds for Newton including the Newton UK Equity and UK Opportunities fund, lost his case over his dismissal by the fund group.
That 37-page ruling tells a similar story to that delivered by the FCA’s final notice against Stephany, but, crucially, employment tribunal judge Elliott’s ruling names the fund managers involved.
The ruling also reveals that Newton reported Stephany’s conduct to the FCA and Competition and Markets Authority after its internal investigation into the manager.
By doing so, it could avoid a hefty fine under a provision given by the CMA to those who report an alleged cartel of which it is not aware. Companies found to have breached the Competition Act are liable to fines of up to 10% of their turnover.
The ruling, meanwhile, details that Jon Bell, who had led Newton’s global equities and multi-asset teams and was Stephany’s line manager, was demoted after failing to inform the fund group’s compliance department of complaints about Stephany’s On The Beach emails. Bell now works in UK charity business development for Newton.
On The Beach emails trigger investigation
According to the tribunal ruling, the first evidence of Stephany’s conduct was presented to Newton compliance risk officer James Helby on 23 September 2015, when Old Mutual’s Carter forwarded on the emails the fund manager had sent ahead of On The Beach’s flotation.
Helby immediately launched an investigation and referred the matter to Helena Morrissey, then Newton’s chief executive, the following week.
The emails that triggered the investigation were sent by Stephany on the morning of Monday 21 September 2015, the day that On The Beach’s book-build for its IPO was due to close.
On the previous Wednesday, Stephany had submitted an order with book runners Numis for £13.6 million of shares at a £270 million ‘pre-money’ valuation, counting only the privately held shares in the company being sold and not the £10 million of additional investment it was seeking.
But over the weekend, Stephany had a change of heart and decided to lower the price he was willing to pay for the shares. Although the manager, who was also co-ordinating orders from other fund managers at Newton, decided to order more shares, he would do so at a lower valuation, of £260 million pre-money.
The following Monday at 8:10am, Stephany sent an email to himself, blind copying in 14 fund managers at 11 rival firms, urging them to join him in a lower bid.
‘Sorry for the out of the blue email but I wanted to urge those considering or in the OTB IPO to think about moving to a 260m pre money valuation limit,’ the email stated.
‘I have done that first thing this morning with my GBP17m order. I don’t usually do last minute brinkmanship on IPOs but think there are particularly good reasons on this one.’
He then sent a further email less than an hour later, claiming Numis had received two £20 million orders at a valuation of £260 million already.
Piecing together the tribunal ruling and FCA final notice suggests Rodrigs responded, saying he valued On The Beach at £270 million ‘post-money’, or £260 million pre-money, if there was a full exit by On the Beach’s majority owners, private equity firm Inflexion, but less if not.
Stephany responded that ‘I think full exit v unlikely given that book coverage sounds thin at best but I may be wrong. We have the power on this one’.
Three days after On The Beach floated, Stephany emailed Hargreave (pictured), Santa Barbara and Feld, thanking them ‘if you did indeed come in with a lowball bid for OTB’.
‘I think we should do more of this – not be bullied by the brokers who say “this is coming at X price” like it or lump it,’ he added.
In the event, Stephany’s attempts to influence rival fund managers were unsuccessful. The FCA final notice says that none of the managers who received his email changed their order to the suggested price. One who had previously submitted an order at that valuation maintained it.
But Stephany did get his wish. After failing to generate sufficient demand at its target price, book runner Numis was forced to explore a lower price and fundraising target.
Stephany reduced Newton’s order, first to £14 million, then £10.5 million, saying to a rival fund manager on Bloomberg chat that he was ‘in the midst of potentially getting an IPO canned single handedly… by pushing the price down’.
On The Beach’s flotation eventually got away at a £230 million pre-money valuation or 184p per share, well below the £260 million Stephany was targeting. The shares jumped on their admission to trading, closing at between 208p and 215p in their first two weeks.
The resulting Newton investigation into Stephany revealed similar instances of the manager communicating with rivals ahead of a placing of shares by Market Tech, a real estate company that has since delisted after a takeover, two months earlier in July 2015.
Stephany admitted to the tribunal he only raised the Market Tech issue with Newton when he knew his employers were ‘crawling all over’ his emails in relation to On the Beach.
On the day the placing was announced, Stephany called Rodrigs on his personal mobile, sharing his view on the performance of the company, including that he valued it at 220p per share.
He later complained to Newens that he wasn’t able to convince the River and Mercantile manager to ‘push the price down’, according to the tribunal ruling.
Rodrigs was sacked in February last year after being caught out by a tougher compliance regime implemented by River and Mercantile following the FCA’s launch, three months earlier, of its investigation of the fund group and three others over a potential breach of competition. Rodrigs disputed this.
The tribunal ruling is meanwhile unclear on whether Stephany also spoke to Hargreave or Santa Barbara, or both, on the same day.
In his Bloomberg chat with Newens, Stephany is quoted as saying that he ‘rang Giles H and Rodders’ but an account of his chat later in the ruling has him describing Rodrigs and Santa Barbara as having ‘no cohones [sic]’ for not helping him push the price down.
'You going for Card?'
Newton’s Helby unearthed similar correspondence from Stephany from a year earlier, in 2014, ahead of Card Factory’s IPO, used in the dismissal proceedings against him but which were not a factor in Stephany’s FCA fine.
Parkinson (pictured), then assistant manager to William Littlewood on the Artemis Strategic Assets fund and a former colleague of Stephany’s at Newton, emailed him, asking ‘You going for Card?’.
In that email exchange, and a Bloomberg chat four days later, Parkinson mentioned the sort of valuation he was looking for.
‘I’m strongly talking the range down to £700-800m,’ he said in the email, adding in the Bloomberg chat that ‘I’m trying to talk it down to 12-14x [price-earnings ratio]’.
In a further email, Parkinson added: ‘I’m taking William to see them this afternoon. Much will depend on his view. If he isn’t that keen I’ll really try to screw the price down towards £650-700m.’
Stephany also discussed his view of valuation, telling Parkinson ‘Cardies at 12x14 would be good yes’, Newens in a Bloomberg chat that ‘I want 700m v 760m bottom’, and forwarding on emails he had sent Parkinson about valuation to Newens.
Parkinson has since left Artemis and now works at Aviva Investors, where he runs the Global Equity Endurance fund
In fining Stephany, the FCA said by attempting to persuade rival fund managers to ‘use their collective power’ he was undermining ‘the proper price formation process of both the On The Beach IPO and the Market Tech placing for the benefit of the funds that he managed’.
The regulator added that the manager ‘demonstrated a lack of due skill, care and diligence by failing to give adequate consideration to the risks associated with engaging in communications with external fund managers at competitor firms in this way and for these purposes’.
The breaches of conduct principles are less serious than market abuse, which attracts higher fines from the regulator. According to the tribunal ruling, an earlier FCA market abuse charge into Stephany was dropped.
The FCA’s fine is based on 10% of Stephany’s £322,616 relevant income over the 12 months preceding the end of his breaches of the regulator’s rules.
That level of fine is at level two of the FCA’s five levels of individual fines for non-market abuse cases, the lowest level of seriousness to which a fine is attached.
In response to the fine, Stephany said: ‘I welcome the fact that the FCA is assured that the breaches were unintentional and that my conduct was open and transparent.
‘I fully respect the regulator’s decision, which acknowledges that my honesty and integrity as a fund manager are not in doubt and that no market user lost out financially due to my actions.
‘This is why the penalty has been set at the lowest level available and I am able to continue working in the financial sector.’
Stephany is working as a business consultant according to his LinkedIn page, ‘providing consultancy services to independent sell-side firms’.
A spokesperson for Newton said: ‘It is not our policy to comment on matters relating to former or current employees; however, Newton Investment Management has been cooperating fully with the FCA and will continue to do so until it reaches its conclusion.’
After Helby’s internal investigation, Morrissey suspended Stephany in October 2015. Jeff Munroe, manager of the Newton Global Equity fund and the fund group’s global equities head, decided to dismiss Stephany after a disciplinary hearing in July 2017.
Stephany lost his appeal against that decision in the autumn of 2017. Just over a month later, the FCA issued a ‘statement of objection’ against the four fund groups, the first of its kind using the regulator’s competition enforcement powers.
The regulator said its proceedings against Stephany were separate, though the details revealed in both its final notice, and the employment tribunal ruling, mean we now have much clearer picture of exactly what it is investigating.
Citywire approached Philip Rodrigs, Hargreave Hale, Artemis, River and Mercantile, Aviva Investors and BMO for comment.
Artemis and River and Mercantile said they weren’t able to comment due to the ongoing FCA investigation and BMO did not comment.
Rodrigs did not respond to a message sent on LinkedIn, while no comment had been received from Hargreave Hale or Aviva Investors ahead of publication.