FCA fines hedge fund ARCM £873,000 over secret shorting of Premier Oil shares

However, it failed to inform the FCA or the financial markets as it increased its short position between February 2017 and July 2019.

Mark Steward, director of enforcement and market oversight for the FCA said: "Failure to report disclosable short positions undermines the integrity and efficiency of financial markets

"ARCM repeatedly breached reporting rules and failed to provide important information to us and to the market.

"This fine reflects the seriousness of these breaches."

The fund should have made 155 notifications to the regulator as it was building its shorts up to 16.85% of the entire business.

It took a further 106 trading days after getting up to that percentage before it disclosed.

The short selling rules were brought in to prevent underhand dealings by investors motivated to damage a company's share price.

The FCA said ARCM's failings were "particularly serious" because there were so many of them, the short was so large, and they were committed over such a long period of time.

At its peak, ARCM's Premier short was the biggest against any company on the main Stock Exchange.

ARCM first invested in Premier in October 2016 when it bought into its debt.

Four months later it began buying financial instruments that would increase in value if the shares fell. This was to hedge its exposure to the risk of its credit position.

From that day on, the hedge fund was in breach of its obligations to notify the FCA of any short position above 0.2%.

The FCA found ARCM's compliance procedures failed because it had little experience in shorting European stocks.

Traditionally, shorting is done by hedge funds borrowing stock from an existing shareholder, pledging to return it on a given date. The idea is, the hedge fund sells the shares straight away, hoping that when they buy them back to return them to the shareholder, the price will have fallen.

However, ARCM used derivatives to make the bet, which it thought exempted it from the disclosure rules.

The FCA said it relied on "third party material" to check what the regulations were, and those guidelines failed to inform it that short positions through derivatives are just as disclosable as ones taken through conventional means.

The regulator said ARCM only discovered its mistake on 8 November and hired advisers to gather the correct data to make its disclosures.

It acknowledged that Hong Kong was in the throes of anti-China riots which meant key staff were unable to reach the office and complete the filing for over a fortnight, but said the hedge fund still failed to notify it that anything was wrong while it waited to gather the details.

Premier last week agreed a deal to be sold to US private equity backed North Sea oil explorer Chrysaor in a deal creating the biggest London-listed oil explorer and paying off its $1.23 billion of its debts to the likes of ARCM.

The deal came after a lengthy battle with ARCM over a plan to raise $530 million in equity to buy up some of BP's North Sea assets. The deal was nullified by the Chrysaor transaction, which was involved in, and approved of, the new deal.