Freshfields Bruckhaus Deringer llp European market abuse news – Spring 2012
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Prosecution of insider trading based on indirect evidence
Regulatory bodies have found it difficult to adduce direct evidence of market abuse. In response, the Sanction Commission of the
Autorité des Marchés (AMF) often relies on fragments of indirect evidence that together show market abuse; for example, a trade that can only be explained by the use of inside information. This approach has been heavily criticised, as it is claimed to reverse the burden of proof.
The Sanction Commission used this approach in two decisions in September
2011. In the first 1 , the individual the AMF accused of insider trading successfully opposed the use of indirect evidence, arguing the trades could not only be explained by inside information. In contrast, in the second 2 , the Sanction Commission successfully used facts such as the timing and size of order executions to deduce market abuse had occurred.
However, it is likely that individuals will continue to appeal market abuse decisions, relying on the French Supreme Court decision handed down in June 2010 3 , which allows individuals to oppose the AMF if they can show ambiguity in the indirect evidence used in their conviction.
The role of the AMF’s Sanctions
Commission
Following the implementation of new banking and financial regulation legislation in late 2010 and changes in the investigations and sanctions procedures, such as the attendance of a member of the AMF Board at
Sanctions Commission hearings and the right for the president of the AMF Board to appeal a decision of the Sanctions Commission, the Chairman of the AMF Sanctions
Commission declared that the procedures
1
Commission des sanctions, 15 September 2011,
M A et Mlle B.
2
Commission des sanctions, 16 September 2011,
MM H et J.
3
Cass com, 1 June 2010, pourvoi No. 09-14.684.
of the Sanctions Commission are compliant with the European Convention on Human
Rights and represent an effective mechanism for enforcement action. In his opening address at the AMF’s annual conference in October 2011, Sanction Commission
Chairman Claude Nocquet stated, ‘Contrary to what its name suggests, the role of the
Enforcement Committee cannot be reduced to merely distributing sanctions within a reasonable time frame. Our positioning and the procedural rules we apply have made the
Committee a genuine “tribunal” as defined in Article 6 of the European Convention on
Human Rights. We form a highly specialised and statutorily independent body whose procedural rules meet the most demanding
European standards: our prosecution, investigation and judgement functions are separated; we work to improve the rights of defence; we have extended the rules of adversarial proceedings; and we seek to adopt a balanced position on the right of appeal and offer increased transparency by publishing details of the Committee’s meetings and decisions.’
Stéphane Bénouville
T +33 1 44 56 44 83
E stephane.benouville@freshfields.com
Dimitri Lecat
T +33 6 63 13 53 12
E dimitri.lecat@freshfields.com
Legislative developments to stop insider dealing in auctions of emission allowances
In October 2011, the German parliament adopted an act that relates to financial investment advisers and closed-ended funds 4 .
The act, which was already partly in force, aims to stop insider dealing and disclosure of inside information during auctions of emission allowances held under the
Emission Allowance Auctioning Regulation 5 .
It penalises the submission, modification or withdrawal of auction bids on the basis
4
Gesetz zur Novellierung des Finanzanlagenvermittler-und
Vermögensanlagerechts, BGBl. 2011, Teil 1, S. 2481.
5
Commission Regulation (EU) 1031/2010 of
12 November 2010.
Freshfields Bruckhaus Deringer llp European market abuse news – Spring 2012

of precise, price-sensitive and non-public information as well as the recommendation to or inducement of another individual to act in any of these prohibited ways. The act also restricts unauthorised disclosure of inside information to third parties.
Recent case law in Germany
In July 2011, the Federal Court of Justice upheld the Regional Court of Düsseldorf’s
2010 decision on market manipulation for publishing an inaccurate and misleading press release 6 . This is a landmark decision that provides important clarification of the meaning of the terms ‘information’ and
‘misleading information’ for the purposes of market manipulation and comments that even correct information may be misleading.
In a related case, the court rejected the use of the legislation to found a claim for damages against a person convicted of wilful market manipulation, which has been a point of debate in the past.
The Regional Court of Düsseldorf (the court) held that in section 20a (1) No. 1 of the
German Securities Trading Act 7 ‘information’ consists of statements on the existence or non-existence of circumstances that have been disseminated in writing, orally or by other media. Press releases are, the court held, one of the ways of disseminating such information.
In addition, information is ‘misleading’ if it is objectively capable of deceiving a class of investors targeted or any part of the class, if a reasonable, averagely informed investor is the relevant reference point. The court pointed out that information might be misleading despite being factually correct.
By way of background to the case, in 2007 the defendant was the spokesman for the board of a listed German bank, which primarily provided long-term financing to small and medium-sized companies. However, the bank also held sub-prime securities and granted significant liquidity lines to special purpose vehicles buying and selling asset-backed securities and collateralised debt obligations.
6
Decision of 20 July 2011, 3 StR 506/10.
7
Wertpapierhandelsgesetz.
Consequently, the bank was vulnerable to the sub-prime crisis in 2007, and despite being aware of this, the defendant issued a press release that confirmed the bank expected a positive operating income and indicated that the sub-prime sector would not be a concern for the bank. As a result, the bank’s share price initially rose by approximately 2 per cent, but plummeted after the extent of the bank’s exposure to sub-prime risks emerged. The defendant resigned as spokesman of the bank’s board.
The Regional Court of Düsseldorf convicted the defendant of wilful market manipulation on 14 July 2010 and this decision was upheld on appeal.
In December 2011, in a related action for civil liability, the Federal Court of
Justice held that the prohibition of market manipulation in the German Securities
Trading Act is primarily aimed at ensuring the proper functioning of the markets for securities and is not a protective law for the purposes of the German Civil Code 8 .
Consequently, the court denied a claim for damages 9 against a person convicted of wilful market manipulation in this case.
Christian Duve
T +49 69 27 30 81 52
E christian.duve@freshfields.com
Enforcement of market abuse in 2011
During 2011, the Italian Securities and
Exchange Commission (CONSOB) imposed seven sanctions for market abuse (two for insider trading, five for market manipulation), fines of around €2.15m and confiscated assets valued at €1.2m. This marks a significant reduction from 2010 on the number of sanctions imposed, amount of fines levied and value of assets confiscated.
CONSOB has not announced a change in approach to market abuse, however, and we do not anticipate a trend of reduced enforcement action.
8
See judgment of 13 December 2011, XI ZR 51/10.
9
The claim was made under section 823 (2) German
Civil Code in conjunction with section 20a (1)
German Securities Trading Act.
Freshfields Bruckhaus Deringer llp European market abuse news – Spring 2012
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Recent enforcement actions
In January 2012, CONSOB fined Mr Ruggero
Antonio Respigo, former senior partner of an auditing company, €525,000 and confiscated
€1,190,000 of assets for using inside information acquired from the professional mandates received by the auditing company for share purchases of target companies in prospective deals and other transactions.
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Although a typical action for insider dealing, it is worth noting that, as in a few other recent actions, CONSOB’s attention was drawn to this case because the individual concerned could not provide a commercial rationale to CONSOB for the unusually large volume of shares bought in advance of a transaction announcement.
Recent appeals of CONSOB decisions have confirmed that the fact that an analyst report is due for imminent publication
(distinct from the informational content of the report) can be price-sensitive information, so that trading before publication with knowledge of the imminent publication may be insider dealing. There has been some debate on this issue in the past. Between August 2009 and January
2010, CONSOB fined several banks, brokers and asset managers for the abuse of allegedly inside and price-sensitive information of the future publication of an analyst report. Although many of the individuals and entities fined appealed during 2010 and 2011, these appeals were unsuccessful.
Enrico Castellani
T +39 02 625 30304
E enrico.castellani@freshfields.com
Giuseppe Curtò
T +39 02 625 30358
E giuseppe.curto@freshfields.com
The Dutch Authority for the Financial
Markets, the Autoriteit Financiële Markten
(AFM), stated that its priorities for 2012 include enforcement of insider dealing and market abuse.
The AFM’s 2012 budget includes the following priorities:
• improving the quality, completeness and availability of information on capital markets (eg, prospectuses, public offering documents, financial reports and press releases containing price-sensitive information);
• preventing insider dealing and market manipulation and encouraging the settlement of market abuse cases; and
• encouraging active monitoring to identify suspicious transactions.
Robert Ten Have
T +31 20 485 7602
E robert.tenhave@freshfields.com
FSA continues to bring criminal prosecutions
Since the Financial Services Authority’s (FSA’s) first prosecution for insider dealing in 2009, it has obtained 11 convictions for insider dealing. The FSA is prosecuting a further 16 individuals for insider dealing and four for misleading statements to the market. The trial of seven of these, allegedly involved in an organised insider dealing ring trading on information from confidential print rooms at investment banks, started on 27 February.
At present, the information available for the other prosecutions is limited but Tracey
McDermott, Head of Enforcement at the FSA, has stated that these prosecutions involve market professionals in complex, organised insider dealing cases 11 .
UK opts out of criminal sanctions directive
The Financial Secretary to the UK Treasury,
Mark Hoban, announced that the UK will not opt in to the proposed directive on
10
See Consob v Respigo, Decision No. 18070 published on CONSOB’s Bulletin No. 2.2 available at www.consob.it
11
Speech by Tracey McDermott, Acting Director of Enforcement and Financial Crime Division of the FSA, on 23 February 2012. Text available at http://www.fsa.gov.uk/library/communication/ speeches/2012/0223-tm.shtml.
Freshfields Bruckhaus Deringer llp European market abuse news – Spring 2012

criminal sanctions for market abuse 12 although the UK may opt in at a later stage after the scope of the revised market abuse regime is clarified. He stated that the current criminal offences in the UK cover all of the offences currently proposed in the draft directive.
The current criminal offences in the UK are, however, defined very differently than the civil market abuse regime, which is based on European legislation, and the significant distinctions between definitions of civil and criminal misconduct and between the UK and other EU member states will persist.
Recent FSA enforcement action for disclosure and use of inside information
Early this year, the FSA took action against a firm and individuals when market abuse followed a refusal to be wall-crossed – the process by which inside information can be legitimately disclosed to a third party, although that third party is then prevented from trading or disclosing the information further.
The actions summarised below show that, in the UK, investors are unlikely to be successful in avoiding liability by claiming they did not want to receive inside information. Traders should also be alert to suspicious circumstances even if this entails scrutinising earlier transactions. Also, in the first action, the FSA has taken a slightly different approach to other market abuse actions by imposing sanctions on a wide range of individuals involved rather than limiting the action to the central characters responsible for insider dealing.
First, the FSA imposed financial penalties on a firm and three individuals in connection with trading on inside information, and one individual for disclosing that information, before an equity fundraising by Punch
Taverns. As a major shareholder, Greenlight was invited by Andrew Osborne to be wall-crossed, but David Einhorn (the owner, president and sole portfolio manager of
12
House of Commons Hansard for 20 February
2012 available online at http://www.publications.
parliament.uk/pa/cm201212/cmhansrd/cm120220/ wmstext/120220m0001.htm.
Greenlight) refused this offer. Despite this, a conference call was arranged between Mr
Einhorn, Punch Taverns’s management and its corporate brokers during which inside information was exchanged. Following the call, Mr Einhorn instructed Alexander
Ten-Holter, a Greenlight trader, to sell
Greenlight’s shareholding in Punch Taverns.
These sales were executed through Caspar
Agnew at JP Morgan. The FSA has imposed the following sanctions:
• Mr Osborne, the managing director in the corporate broking team at Merrill
Lynch International at the time, was fined £350,000 for engaging in market abuse by improperly disclosing inside information during the conference call with Greenlight despite the refusal from
Greenlight to be wall-crossed. Also, he failed to notify anyone when he became aware that Greenlight was selling its shareholding 13 ;
• Greenlight Capital and Mr Einhorn were fined £3.6m each for engaging in market abuse by trading on inside information.
The FSA accepted that Mr Einhorn did not believe the information received was inside information; however, as an experienced investment professional, there was an expectation that he ought to have appreciated the nature of the information and have handled it carefully, regardless of whether he had been wall-crossed 14 ;
• Mr Ten-Holter, an FSA Approved Person, trader and former compliance officer at
Greenlight, who was instructed to sell the shareholding after the conference call, was fined £130,000 and prohibited from performing compliance oversight and money laundering reporting functions for executing the sale of shares without making reasonable enquiries into potential market abuse. He did not submit a suspicious transaction report to the FSA 15 ; and
13
FSA final notice dated 15 February 2012.
14
FSA final notices for David Einhorn and Greenlight
Capital both dated 15 February 2012.
15
FSA final notice dated 26 January 2012.
Freshfields Bruckhaus Deringer llp European market abuse news – Spring 2012
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• Mr Agnew, a trading desk director at JP
Morgan, who executed the share sales, was fined £65,000 for failing to identify and report Greenlight’s transaction request as suspicious after the event when the announcement was made 16 .
Second, the FSA fined Nicholas Kyprios 17 , the head of European credit sales at Credit
Suisse, £210,000 for improper market conduct in disclosing client confidential information before an announcement of a takeover and bond issue in November
2009. At that time, Mr Kyprios knew of the intended takeover of Unitymedia by
Liberty Global and the associated bond issue. Although a fund manager declined
Mr Kyprios’s offer to wall-cross him, he continued to disclose information about the bond issue.
The information was not considered inside information (as it was not price-sensitive to qualifying investments) but was disclosed in breach of his employer’s procedures and express instructions, was confidential to the client and was price-sensitive to non-qualifying investments. The FSA considered his behaviour well below the standard expected of a senior market professional and in breach of principles that govern the conduct of approved persons (specifically a breach of Principle 2
(reasonable care and skill) and Principle 3 (to observe proper standards of market conduct) of the FSA’s principles for approved persons).
Simon Orton
T +44 20 7832 7671
E simon.orton@freshfields.com
Andrew Hart
T +44 20 7832 7302
E andrew.hart@freshfields.com
16
FSA final notice dated 3 October 2011.
17
FSA final notice dated 13 March 2012.
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, April 2012, 32802
Freshfields Bruckhaus Deringer llp European market abuse news – Spring 2012