LONDON VAUXHALL DEALERS

James Sanders, who owned and was a director of now-defunct brokerage Blue Index, his wife Miranda and James Swallow, a Blue Index co-director, had last month pleaded guilty to a combined 18 counts of insider dealing between October 2006 and February 2008.

James Sanders, dubbed by Judge Peregrine Simon as "the driving force behind the criminality", was jailed for a record four years. Miranda Sanders - who was tipped off about imminent U.S. takeovers by her sister in America - was jailed for 10 months, as was Swallow.

The striking, sharply-dressed couple, who are both in their mid thirties and have two young children, saw their sentences cut by 25 percent after pleading guilty, although James initially argued his trades were legitimate stock picks.

They held hands while judge Peregrine Simon read out the case against them and kissed after sentencing. Miranda turned to smile and nod encouragingly at a woman in the court room's public gallery, who burst into tears on sentencing.

The Financial Services Authority (FSA), which brought the UK prosecution, said the three scooped almost 2.0 million pounds in profits from illegal share dealings, while Blue Index clients made around 10.2 million - a precursor to the Sanders' couple selling the business for around 8.0 million.

The FSA, which only started prosecuting notoriously tricky insider dealing cases in 2007 after being criticised for its "light touch" approach to regulation, had pushed for three custodial sentences despite the couple's young family.

"This was a case of systematic abuse by approved people of their privileged position in the market - we are determined to stamp out such abuse," said Tracey McDermott, acting head of enforcement at the Financial Services Authority (FSA).

"No doubt as they prepare to spend their first night behind bars, they will be reflecting on the consequences of their greed. Others, who might be tempted to do the same, should be in no doubt about our continued commitment to use all of the tools at our disposal to tackle those who abuse the market."

NAILED

The FSA was first alerted to possible insider dealing after spotting unusually heavy trade in U.S.-listed staffing services company Kronos ahead of its takeover by private equity house Hellman & Friedman Capital Partners in 2007.

Calling on the Securities and Exchange Commission (SEC), its U.S. peer, the regulator eventually pieced together the links between the Sanders couple and Miranda's San Francisco-based sister and brother-in-law, an M&A partner at accountancy firm Deloitte, "Annie and Arnie" McClellan.

In a tortuous case that involved trawling through 26 million emails and 800,000 phone calls recorded on Blue Index's office lines, regulators focused on dealings in five takeover targets: Kronos, Per Se, aQuantive, ChoicePoint and Getty Images.

McDermott told a journalist briefing there were "whoops of joy" in the FSA's offices when in one recorded telephone call, James Sanders' father Tim asks: "Is this not insider dealing?" James answers: "No, not really. Well ...". When his father laughs and says: "Try proving it", James says: "Yes, exactly".

A consummate trader, James Sanders told a newspaper in 2008 his mantra was: "Buy at the point of maximum fear" after snapping up a 5 million pound property in London's exclusive Kensington district for a 22 percent discount at the height of the credit crunch.

The FSA found what they called his "life plan" in his kitchen, in which he documented his plans to pay off his mortgages and luxury cars and resign from Blue Index by placing one 200,000 pound tip a year.

In a scribbled account, he put aside 100,000 pounds for a "car fund" and 50,000 for a watch, clothes, holidays and wine.

Blue Index was a specialist brokerage of contracts for differences (CFD), a tax-efficient trade that allows dealers to speculate on short-term price fluctuations of assets such as stocks by buying a percentage of their value, or "margin".

The FSA said the insider in the case was Miranda's brother-in-law Arnold McClellan, a senior partner at the San Francisco branch of Deloitte. It said Miranda's sister Annabel or Arnold leaked privileged, price-sensitive information to the British couple about U.S. securities listed in New York.

James Sanders then disclosed information to James Swallow and encouraged Blue Index clients to trade in those stocks.

Annabel McClellan has already been jailed for 11 months without parole and fined $1.0 million after being pursued by the SEC, Department of Justice (DoJ) and Federal Bureau of Investigation (FBI). No charges were brought against Arnold, who has now retired.

James Sanders, meanwhile, has been forced to park the Ferrari and has been disqualified as a director for five years. The court will decide on confiscation orders at a later date.

The FSA, which said it spent "millions" on pursuing the Blue Index case, is prosecuting 11 others for insider dealing - an offence that carries a maximum jail term of 7 years in the UK.

"This case really does demonstrate the FSA's determination to deliver criminal prosecutions for insider dealing," said Tim Dolan, a lawyer at Pinsent Masons.

"While the FSA have still brought relatively few criminal actions, and have not always been successful, results like this should go some way to deterring insider dealing in the future."

(Editing by Douwe Miedema and Jon Loades-Carter)

Responding to attacks in Congress on London's regulatory record, European policymakers, analysts and industry officials called the American comments ill-advised and politically driven.

"As the old saying goes, it is like the pot calling the kettle black," analysts at Mediobanca said.

A hearing in Congress - on how supervisors failed to spot the buildup of $2 billion (1.27 billion pounds) in derivatives losses at a London unit of U.S. bank JPMorgan Chase & Co - heard a top regulator and MPs describe London as offering a loophole American banks eagerly exploit.

"It seems to be that every big trading disaster happens in London," Carolyn Maloney, a Democratic lawmaker told Tuesday's hearing.

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission (CFTC), which regulates derivatives, added that U.S. firms, such as the JPMorgan branch in London, were set up abroad to find "lower regulatory regimes".

AIG, the U.S. insurer rescued by U.S. taxpayers, and CitiGroup's special purpose investment vehicle, which kept huge holdings of debt off the bank's balance sheet, were both in London and could put American taxpayers on the hook, Gensler said.

"So often it comes right back here, crashing to our shores," Gensler said, putting London on a par with other offshore centres like the Cayman Islands, a home to some hedge funds.

Yet Britain's Financial Services Authority has repeatedly said JPMorgan operates as a branch in London that is mainly regulated by the U.S. authorities, with the Office of the Comptroller of the Currency having five of its examiners based in JPMorgan's London building.

The FSA has long admitted its "light touch" pre-crisis regime failed and says it has become one of the toughest regulators in the world. Its top banking supervisor has seen no UK regulatory breaches for now at JPMorgan.

The UK watchdog declined to comment on Tuesday's remarks in Congress.

Mark Boleat, policy committee chairman at the City of London, home to a big chunk of the UK financial services sector, said the comments bring heat but no light and that each country needed to put its regulatory house in order.

"What we need to do, however, is avoid political jousting and to work together to ensure that international regulation is congruent," Boleat said.

NO TOUCH

Anthony Belchambers, chief executive of the Futures and Options Association, said the outburst was extraordinary after the financial crisis was sparked by a "no touch" U.S. regulatory regime towards derivatives and mortgage selling.

Defaults on U.S. home loans in 2007 triggered a global market meltdown, fuelled by the collapse of U.S. bank Lehman Brothers the following year.

"It is simply not helpful to wag fingers at other jurisdictions at a time when we must be thinking of how to establish a coherent framework for regulations across borders," Belchambers said.

The accusations came on the day world leaders met in neighbouring Mexico to congratulate themselves on how well their globally coordinated financial reforms were falling into place.

JPMorgan's losses not only embarrassed the bank but also regulators like the CFTC, which was already under the gun for failing to spot the financial crisis and faces a Congress-inspired budget cut.

The bank's losses coincide with a shift to implementing new rules at a time when there are already suspicions that some countries may try to row back on the detail.

"You would hope that regulators would be working in a more cooperative spirit and that is difficult where there is any lack of trust," said Richard Reid, director of research at the International Centre for Financial Regulation.

This lack of trust has already prompted the financial industry to call on the G20 to redouble efforts to mesh their national rules to avoid extra costs.

Some regulatory over-reach beyond local borders looks unavoidable, as Gensler openly linked concerns about London with his commission's push to get approval for new derivatives rules.

Leaving out the London branches of U.S. banks from the rules would be another loophole and a retreat from reform, Gensler said.

"I hope that the commission will vote ... to get public comment this Thursday so that we don't in essence create another London loophole," Gensler said.

The European Union has been slammed for doing likewise with its new markets and derivatives rules, saying that U.S. firms who want to do business in the 27-country bloc should be complying with "equivalent" rules back home.

"This is just another manifestation of the iron curtain which financial services regulators are raising across the Atlantic," said Simon Gleeson, a partner at law firm Clifford Chance.

(Editing by David Holmes)