Europe Firms Its Hand Against Insider Trading

When it comes to cracking down on insider trading and similar forms of market abuse, the European Union certainly talks tough. It has introduced high-level directives in recent years to create a pan-European approach to the law in this area.

Enforcement on the ground, however, is patchy at best. Europe has a reputation for not doing enough to tackle the problem, and there is still one EU jurisdiction where insider dealing isn’t even illegal.

Recent events suggest that European nations might be raising their game in this area. The British Financial Services Authority has pushed market abuse higher up its agenda, and prominent investigations are underway in several other countries, notably France.

Forgeard

In June, French financial police filed preliminary insider trading charges against Noël Forgeard, former joint chief executive of Europe’s largest aerospace company, EADS. The charges allege that Forgeard sold shares ahead of an announcement that the company’s Airbus division was having production problems with its A380 super-jumbo jet. Police are investigating other current and former executives from EADS and Airbus. In May, French financial regulator Autorite des Marches Financiers said it had evidence against 17 individuals, who have all denied any wrongdoing.

At the start of the year the FSA brought its first-ever criminal charges over insider dealing in Britain; normally, it relies on civil fines. The agency has since launched high-profile investigations into suspect trading in the shares of two banks, HBOS and Bradford & Bingley. The FSA has also fined retailer Woolworths nearly $700,000 for failing to release price sensitive news to the market quickly.

The FSA has published guidance for listed companies on how better to handle sensitive information about mergers and acquisitions. The FSA says that nearly one-third of all merger announcements are accompanied by what it calls “informed price movements”—a hint that people are trading on the back of leaked news.

Flavin

There has been action in Ireland, too. Jim Flavin, the executive chairman of DCC, one of the country’s larger public companies, was recently forced to resign over an insider dealing scandal. And the Financial Services Authority of Ireland, the lead financial regulator, is investigating suspect trading patterns that it detected in March. The regulator said its investigators were working the case with their counterparts at the British FSA.

MAD MEASURES

The following excerpt is from the executive summary of the Committee of European Securities Regulators.

Note: The report sets out the situation as of Oct. 17, 2007. The accuracy of the responses is the sole responsibility of each CESR member.

For the infringement of Article 2 of the Market Abuse Directive (MAD) providing for insider dealing cases:

24 out of 29 jurisdictions may impose administrative measures whereas 5 out of 29

jurisdictions do not impose such measures (CY-HU-NO-PL-SE)

21 out of 29 jurisdictions may impose administrative pecuniary sanctions (fines) whereas 8

do not impose administrative pecuniary fines (AT-DK-EE-DE-LV-LU-PL-SE)

28 out of 29 jurisdictions may impose criminal sanctions. Only one jurisdiction does not

impose criminal sanctions (BG).

Similarly for infringements of Article 5 of the MAD providing for market manipulation cases

24 out of 29 may impose administrative measures whereas 5 out of 29 jurisdictions do not

impose such measures (CY-HU-NO-SI-SE)

25 out of 29 may impose administrative pecuniary sanctions whereas 4 out of 29 do not. (DK-LV-LU-SE)

25 out of 29 may impose criminal sanctions whereas 4 out of 29 do not impose criminal

sanctions (BG-SK-SI-AT)

There is also quite a divergence in the amount of administrative pecuniary sanctions available to

authorities. For example, for a market manipulation case:

In the UK the authority may impose unlimited financial penalties

In IT the authority may impose maximum € 75.000 or 10 times the profit

In SI the authority may impose to individual persons maximum € 1,200 to legal entities maximum € 125,000 and to persons responsible within a legal entity maximum €

1,400

In LT the authority may impose to individuals maximum € 1,450 and to legal entities maximum €

30,000 or 3 times the profit

In FI the authority may impose to individuals maximum € 10,000 and to legal entities maximum €

200,000

In BG the authority may impose to individuals maximum € 25,000 and to legal entities maximum €

50,000

In AT the authority may impose max € 50,000

In PL the authority may impose max € 52,910 or 10 times the profit

For an insider dealing case:

In the UK the authority may impose unlimited financial penalties

In IT the authority may impose maximum € 45.000.000 or 10 times the profit

In IS the authority may impose minimum € 118 and maximum € 235.000

In SI the authority may impose to individual persons maximum € 1,200

to legal entities maximum € 125,000 and to persons responsible within a legal entity maximum €

1,400

In LT the authority may impose to individuals maximum € 1,450 and to legal entities maximum €

30,000 or 3 times the profit

In BG the authority may impose to individuals maximum € 25,000 and to legal entities maximum €

50,000

The same divergence exists in relation to criminal sanctions. Criminal sanctions may range from

imprisonment to financial penalties and disgorgement of profits. For an insider dealing case:

2 out of 29 jurisdictions may not impose imprisonment (BG-SI)

27 out of 29 jurisdictions may impose imprisonment varying from minimum 3 months to maximum 1

year (BE) or maximum 15 years (LV)

The criminal pecuniary sanctions also vary across Europe:

In one jurisdiction (DE) unlimited criminal fines may be imposed

In one jurisdiction (IE) criminal fines up to € 10.000 may be imposed

In another jurisdiction (BE) a minimum € 50 maximum € 10.000 fine may be imposed

For a market manipulation case:

25 out of 29 jurisdictions may impose imprisonment varying from minimum 1 month to maximum 2 years (BE)

or maximum 15 years (LV) whereas 4 out of 29 do not force imprisonment

Source

CESR Executive Summary (February 2008).

Further evidence of a tougher, pan-European approach comes from the independent Committee of European Securities Regulators, created to advise the European Union on financial market issues. “CESR members work together very closely in cross-border cases, and we have certainly witnessed an increasing trend in the intensity of this cooperation,” says Kurt Pribil, chair of the CESR operational group on market surveillance and coordinated enforcement.

Pribil

CESR members are also starting to work together much earlier in an investigation, says Pribil, also chairman of the Austrian Financial Markets Authority. “All of this suggests that [we] are very serious in combating insider dealing,” he adds.

But these coordination efforts face a major barrier: Regulators in the EU’s 27 member states do not all have the same powers. CESR says that getting all regulators on the same footing is a “precondition” to both credible cross-border enforcement and a convergence of the ways in which EU members treat cases of insider dealing.

In theory the EU does have a common approach to insider dealing and other forms of market abuse, but enforcement practice varies enormously between member states. The Market Abuse Directive, which took effect in 2005, created a regime to tackle market manipulation in the EU and updated existing insider dealing legislation. All members were then supposed to introduce the requirements of the directive into their national laws. Most have, but not all.

Furthermore, the directive did not tell EU nations how to enforce the new laws or what kinds of sanctions to impose. Behavior that merits a regulatory fine in one country could result in criminal charges in another. This has led to a confusing patchwork of different approaches in Europe.

Last November, CESR published an analysis detailing how laws and enforcement still vary. Regulators in eight EU jurisdictions cannot issue a fine for insider dealing, for example. In one—Bulgaria—it isn’t even a legal offense. For market manipulation, regulators in four jurisdictions cannot impose a fine, including Denmark and Sweden, and in four, including Austria and Bulgaria, there is no criminal sanction.

Conflicting Sanctions

The level of sanction varies enormously, too. In Britain, the fine for market abuse is unlimited; in Italy, it is 75 million euros or 10 times the profit; in Austria, it is only 50,000 euros. For insider dealing, the British fine is, again, unlimited. In Lithuania, the maximum for an individual is a slim 1,450 euros.

As for the likelihood of spending time behind bars, all but two EU jurisdictions can imprison someone convicted of insider dealing. In Belgium, the maximum spell in jail is one year; in Latvia it is fifteen years.

CESR is trying to iron out these differences, Pribil says. Last year it produced two guidance papers aimed at encouraging convergence, and a third is currently out for consultation. The EU is separately reviewing how well the legal framework on market abuse works, and will report by the end of the year. “We are determined to continue efforts to achieve better supervisory convergence in the EU,” Pribil says.

Warren-Smith

Such developments should be welcomed, says Chris Warren-Smith, a partner at law firm Fulbright & Jaworski. “It’s encouraging to see regulators taking more steps to use their criminal and civil powers. There has been too little action taken in most, if not all, member states to try and combat market abuse and insider trading. Most member states are beginning to address that,” he says.

But efforts to harmonize sanctions and enforcement powers across Europe will not be enough on their own, he cautions. Regulators and criminal authorities need the funding required to investigate and prosecute cases. The British FSA has recently more than doubled the number of staff working on insider dealing from 12 to 30. In Germany, the police decided not to prosecute about three-quarters of the cases that the regulator handed over to them, Warren-Smith says. Resources are limited in France, too, he adds.

While EU members try to develop a common approach to insider dealing and market abuse, organizations need to make sure they understand how the regulations differ in the countries where they operate, Warren-Smith says. His advice? “You can never stop insider dealing if people want to do it, so the task is to show that you have made a proper effort.

“All a compliance officer can do is identify the main jurisdictions where risks arise and show they have taken proper steps in those jurisdictions to stop this happening in their organization,” he says.