European Court of Human Rights Shakes Insider Trading Rules

The following post comes to us from Guido Rossi, former Chairman of the Consob (Italian SEC), and Marco Ventoruzzo of Pennsylvania State University, Dickinson School of Law, and Bocconi University.

A recent and groundbreaking decision of the European Court of Human Rights (ECHR) in Strasburg might shatter the entire structure of the Italian and European regulation of market abuse (insider trading and market manipulations). The case is “Grand Stevens and others v. Italy”, and was decided on March 4, 2014.

The facts can be briefly summarized as follows. In 2005, the corporations that controlled the car manufacturer Fiat, renegotiated a financial contract (equity swap) with Merrill Lynch. One of the goals of the agreement was to maintain control over Fiat without being required to launch a mandatory tender offer. Consob, the Italian securities and exchange commission, initiated an administrative action against the corporation and some of its managers and consultants, accusing them of not having properly disclosed the renegotiation of the contract to the market. The procedure resulted in heavy financial fines (for some individuals, up to 5 million euro), and additional measures prohibiting some of the people involved from serving as corporate directors and practicing law. At the same time, a criminal investigation was launched for the same facts. It is not necessary here to discuss the merits of the controversy, it is sufficient to mention that the sanctioned parties challenged the sanctions in Italian courts, but did not prevail.

Hence the lawsuit in Strasburg. Simplifying a very long and complex decision, which is stirring a lively debate, the ECHR, following some of its precedents, affirmed some revolutionary principles in the area of financial markets regulation. The starting point of the reasoning of the European judges is that the sanctions, formally defined as “administrative” in nature under Italian law, are substantially “criminal” sanctions in the light of their harshness and of the possibility to apply measures that affect the ability of the accused to work and their honorability. If the sanctions are criminal in nature, the application of the European Convention of Human Rights follows, and specific protections for the accused must be granted. In this perspective, the ECHR criticizes the sanctioning procedure followed by Consob, arguing that it does not sufficiently guarantee the right of the accused to defend himself, and that there is not a sufficient separation between the divisions that conduct the investigation and propose the sanctions, and the deciding body, the Commission itself, notwithstanding the fact that the final determination can be—and was—challenged in court.

Secondly, and possibly more importantly for several European countries, the ECHR attacks the structure of the regulation, which provides that the same conducts can be punished both with an “administrative” sanction, and be the object of criminal prosecution. According to the Court this approach, which seems to be authorized by the European Directive on Market Abuse and is followed in different Member States, violates the principle of “ne bis in idem“, or “double jeopardy“, stating that none can be judged twice for the same facts.

The decision confirms concerns raised by scholars and similar precedents by the ECHR, and can affect deeply the enforcement of insider trading and market manipulation, also because both the legislature and the Stock Exchange Commission, both in Italy and in the other Member States, must act in accordance with European law. It’s probably still early for a full discussion of this decision, and to predict all its intended and unintended consequences. Surely there are parts of the opinion that can and will be the object of extensive discussion. Needless to say, effective enforcement of the rules against market manipulation is a pillar of investors’ protection, and one can only hope that both regulatory agencies and courts can actively prosecute violations; but the Court underlines the relevance of the European Convention on Human Rights also in the highly technical area of financial markets regulation.

The text of the decision, available in French, can be found here.

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