The Financial Conduct Authority has fined former Newton fund manager Paul Stephany for what he described as “last minute brinkmanship” to bring down prices on capital raising by UK small-cap companies by collaborating with rival firms on pricing.
The fine is connected to a separate competitions investigation into Artemis Investment Management, Hargreave Hale, Newton Investment Management and River and Mercantile Asset Management.
Stephany (pictured) was fined £32,200 based on his full-year income for 2015, the year in which the actions took place, when he made £322,616. At the time, he managed £1.8bn in the Newton UK Equity and UK Opportunities funds, plus the Johnson & Johnson (UK) Group Retirement Plan and the Merseyside Pension Fund. He was dropped as a manager of the funds in February 2016.
The penalty was for Stephany’s attempts to influence rival firms to squeeze down pricing on summer holiday retailer On The Beach Group IPO and the placing for Guernsey-domiciled real estate business Market Tech. The wrongdoing, which the FCA said undermined the proper price formation process of capital raises, took place in September 2015 and July 2015 respectively.
In November 2018, the regulator stated Artemis, Hargreave Hale, Newton and River and Mercantile were being investigated for breaking competition law due to sharing, or accepting from others, the price they intended to pay in two IPOs and one placing. This is a separate investigation under the Competition Act 1998, to which Stephany is not subject, but is related to his fine, which fell under the Financial Services & Markets Act 2000, the FCA said.
The FCA would not disclose whether other fund managers are being investigated for attempts to collaborate on the IPOs and placing.
Phone calls and emails to rival fund managers
On the Beach Group announced on 23 September 2015 it had achieved a market capitalisation of approximately £240m through its IPO with a price of 184p per share. Stephany had initially indicated to Numis that he would be making a pre-money bid of 216p a share, resulting in a pre-money valuation of £270m, which refered to the value of existing privately-held shares, with the company seeking to raise a further £10m in what would be added to the post-money valuation.
However, several days later, on 21 September 2015, he told Numis he was reducing his bid to a pre-money valuation of £260m due to market weakness and uncertainty regarding the US Federal Reserve’s decision not to move interest rates.
That same day he emailed himself and blind copied in 14 fund managers at 11 rival firms urging them to follow suit, although none of them ultimately did so. “Sorry for the out the blue email but I wanted to urge those considering or in for the OTB IPO to think about moving to a 260m pre money valuation limit. I have done that first thing this morning with my GBP17m order,” the email said. He went on to say he did not normally do “last minute brinkmanship on IPOs” but highlighted market weakness concerns and the fact book coverage was thin.
Mixed response from rival fund managers
Two managers contacted by Stephany escalated concerns about the email within their respective firms, while six others emailed or attempted to call Stephany with responses ranging from caution to support.
One stated: “Some collective bargaining from the buyside not a bad thing. Have you heard back from anyone?”
However, another manager said they were not participating in the IPO due to compliance concerns. They told Numis they were uncomfortable being associated with the IPO. “It feels like there’s quite an organised attempt to get the price down.” Several days after the IPO, another fund manager told Stephany they would not like to be canvassed on pricing in future.
In an email to a trio of fund managers who had responded to his initial email, Stephany said: “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. The fact is, there are relatively few funds with reasonable firepower in the small cap IPOs and they days of high teen PE [price earnings] multiple deals should be well over…”
On 9 July 2015, several months before the On the Beach Group IPO, Stephany had called two fund managers about Market Tech’s placing. He stated: “…I think push them for it to kind of 220 price rather than 230 plus they’re talking about.” He continued: “[I] will be submitting a chunky order at that 220 level.” Market Tech ultimately negotiated with Stephany to raise his price to 223p.
He later told another fund manager he had contacted others to push the price down but “they didn’t help me out”.
Failure to consult Newton
Stephany’s failure to take into account the risk of his activities highlighted his lack of due skill, care and diligence, the regulator said, and he failed to observe proper standards of market conduct.
While he conducted online research into concern party rules, he did not consult Newton’s compliance department or his line manager before contacting rival firms. He revealed his email to his line manager a day after sending it.
The BNY Mellon Investment Management boutique instructed fund managers not to “disclose Newton’s investment intentions or expectations” warning it could be “deemed to be acting in concert” if any fund managers did so.
“This matter underscores the importance of fund managers taking care to avoid undermining the proper price formation process in both IPOs and placings,” FCA executive director of enforcement and market oversight Mark Steward said. “These markets play a vital role in helping companies raise capital in the UK’s financial markets and when they are put at risk the FCA will take action.”
