The European Court of Justice, in its recent decision (Case C-45/08; Spector Photo Group NV and Chris Van Raemdonck versus Commissie voor het Bank-, Financie-en Assurantiewezen (CBFA), has clarified the element of insider dealing which is a key notion in the Market Abuse Directive.
The purpose of this directive is to protect the integrity of financial markets and to enhance investor confidence by protecting investors from the misuse of inside information. It is aimed at prohibiting insider dealing to ensure that the parties to a transaction have equal access to information about securities traded.
Under the directive, member states are required to prohibit a primary insider who possesses inside information from using that information by acquiring or disposing of, for his own account or for the account of a third party, the financial instruments to which that information relates, or from trying to enter into such a transaction on the market.
In the case under review, Spector Photo Group NV (SPG), a publicly quoted company governed by Belgian law, used to purchase when necessary additional SPG shares from the market. In 2002, SPG purchased over 45,000 SPG shares from the market.
Between May and August 2003, SPG (acting through Mr Van Raemdonck, a director of SPG) purchased 27,773 SPG shares. Four lots of 2000 SPG shares were initially purchased, before Mr Van Raemdonck purchased the remaining 19,773 for SPG.
This later tranche was purchased at an average price per share of almost €10. Subsequently, SPG announced that one of its subsidiaries had signed a letter of intent to acquire the business of a competitor. In September 2003, SPG announced its first half year results for that financial year. These announcements increased SPG's price per share to €12.50.
In November 2006, the Commission for Banking, Finance and Insurance held that the share purchases by SPG and Mr Van Raemdonck constituted insider dealing contrary to Belgian law since it detected a "link" between the pattern of purchasing and certain inside information regarding Spector's commercial activities. It imposed fines on both Spector and Mr van Raemdonck.
SPG and Mr van Raemdonck appealed the decision to the Appeal Court in Belgium. A referral was made by the Appeal Court to the ECJ for clarification on whether it is sufficient, for a transaction to be classed as prohibited insider dealing, that a primary insider in possession of inside information trades on the market in financial instruments to which that information relates or whether it is necessary, in addition, to establish that that person has "used" that information "with full knowledge".
The court concluded that the prohibition on insider dealing applies where a primary insider who is in possession of inside information takes unfair advantage of the benefit gained from that information by entering into a market transaction in accordance with that information. Hence, it is not necessary also to establish that the insider has used the information with full knowledge. It was made clear by the court that no element of purpose or intention was required to be proven. Dealing while in possession of the information implies that that person has "used" that information for the purposes of the Market Abuse Directive.
However, the court accepted the arguments made by the Italy and the UK governments' representatives that for such dealing to fall automatically within the ambit of the directive would risk extending the scope of the prohibition beyond what is necessary and appropriate to attain the goals pursued by the directive. Accordingly, the presumption of use of the information was rebuttable, with certain situations requiring thorough examination of the factual circumstances such as to ensure that the use of the inside information is actually unfair in order for it to be prohibited by the directive in the name of the integrity of financial markets and investor confidence.
A number of member states continue to consider market abuse as a serious offence, best dealt with within the traditional criminal law regimes. Yet, even those member sates that apply instead an administrative regime to such abuses, they rightly consider them to be serious offences with severe cosequences, sometimes even to the extent of ending the career of any practitioner convicted of it.
Dr Grech is an associate with Guido de Marco & Associates and heads its European law division.