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The French legal regime on market abuse: what next?

Market abuse has been the subject of much debate in France since the March 2014 decision of the European Court of Human Rights in the Grande Stevens case. The debate intensified in March 2015, when the French Constitutional Court ruled on the unconstitutionality of certain French provisions of the legal regime on market abuse in the EADS case, and ordered that legislative changes be made by September 2016. This article examines the French reform proposals, in the context of recent market abuse sanctions in the UK and the U.S. 

Background: Recent case law on market abuse

In its decision of 4 March 2014 (Grande Stevens & ors v Italy1), the European Court of Human Rights (ECtHR) ruled on the application of the principle of ne bis in idem or double jeopardy, embodied in Article 4 §1 of Protocol No 7 to the European Convention on Human Rights, to market abuse proceedings initiated by administrative and criminal authorities.

According to the Court, the administrative sanctions imposed by the Italian market regulator, the Consob, may be considered as criminal penalties. As a result, the ECtHR ruled that the principle of ne bis in idem may be violated where a criminal procedure is initiated for market abuse that has already been subject to regulatory (ie administrative) sanctions by the Consob, or vice versa. The reservation that the Italian Government had made to limit the application of the principle of ne bis in idem to offences classified as “criminal” by Italian law was considered to be invalid by the ECtHR in view of its general nature.

Given that:

  • the dual prosecution of market abuse by criminal and administrative authorities is permitted under both French and Italian law; and
  • the French and Italian Governments have made the same reservation in relation to the principle of ne bis in idem,
  • the ECtHR’s decision was intended to have a direct impact on the French legal regime concerning market abuse too.

On 18 March 2015, the French Constitutional Court (Conseil constitutionnel) gave a landmark decision in the EADS case regarding the constitutionality of several provisions of the French Monetary and Financial Code (MFC). Under the MFC, market abuse may be prosecuted by both the French markets regulator (Autorité des Marchés Financiers) (AMF) and the criminal courts.2 The French Constitutional Court held that the AMF rules and the criminal offence in relation to insider trading have the same objective, protected the same public interests and provided similar sanctions. The possibility of a dual prosecution of insider trading committed by persons other than professionals regulated by the AMF3 was therefore held to violate the constitutional principle of the necessity of penalties. Allen & Overy acted for the successful party.

The French Constitutional Court has given the legislature until 1 September 2016 to replace the unconstitutional provisions of the MFC. Allen & Overy acted for the successful party.

Since 18 March 2015, the French Supreme Court (Cour de cassation) has already had an opportunity to apply the French Constitutional Court’s decision. On 20 May 2015, the criminal chamber of the French Supreme Court4 declared null and void a Court of Appeal decision which had upheld a criminal conviction issued in 2010 against an individual for insider dealing in circumstances where the same individual had already been sanctioned by the AMF in 2008 in connection with the same illegal acquisition of shares.5

Reform proposals

Three reform proposals have been published since the French Constitutional Court’s decision:

  • the AMF published a report in May 2015 containing numerous recommendations on the application of the principle of ne bis in idem to the prosecution of market abuse;6
  • a report on the prosecution and sanctions for market abuse was published by the French legal think tank Le Club des juristes in June 2015;7
  • the Finance Commission of the French Senate (Commission des finances du Sénat) submitted a draft bill on the punishment of financial offences to the Bureau of the Senate at the beginning of October 2015.8 This draft bill primarily proposes to reform the French legal regime on market abuse in light of the French Constitutional Court’s decision. However, it also contains wider reforms that would affect the punishment of financial offences in general, such as strengthening the sanctioning powers of the French banking regulator (Autorité de contrôle prudentiel et de résolution).
  • Furthermore, the French legislature has until 3 July 2016 to transpose the EU Market Abuse Directive (MAD) of 16 April 2014.9 We note that even if this EU legislation allows Member States to pursue the dual prosecution of market abuse by both administrative and criminal authorities, it expressly states that they must do so in compliance with the principle of ne bis in idem enshrined in Article 50 of the EU Charter of Fundamental Rights.

The AMF’s recommendations

In view of the MAD and the French Constitutional Court’s decision, the AMF rejects the possibility of either totally decriminalising market abuse or abolishing administrative sanctions for market abuse committed by persons other than professionals regulated by the AMF. Similarly, the AMF rejects the possibility of creating a Financial Markets Tribunal (Tribunal des marchés financiers10) dedicated to market abuse on the grounds that such a specialised jurisdiction could be unnecessary, incompatible with the constitutional principle of the separation between judicial and administrative authorities, and create multiple procedural difficulties.

The principal recommendations put forward by the AMF are:

  • the introduction of a legislative ban on dual prosecutions by the criminal and administrative authorities. The legislation would also specify which prosecution measures must be exclusively assigned to the criminal authorities or, alternatively, to the administrative authorities. No distinction would be made between professionals regulated by the AMF and other persons;
  • the reservation of the most serious cases to the criminal authorities. Objective criteria would be set out in the legislation in order to reserve the most serious cases to the criminal authorities, such as the amount of illicit profit, the degree of intention, or the existence of an organised group. The texts defining the market abuse offences would thereby be rewritten, in line with the MAD;
  • a compulsory two-month consultation between the national financial prosecutor’s office (parquet national financier) (PNF) and the AMF before initiating a prosecution in order to avoid any risk of parallel prosecutions and to ensure that the threshold is met for initiating a criminal procedure;
  • the limitation of the possibility of registering as a victim (se constituer partie civile) (ie to compel the opening of a criminal investigation) prior to the consultation between the AMF and the PNF, until after the case has been referred to the criminal authorities. In its Report, the AMF points out that victims would still be able to bring an action for damages before the civil courts and that, in any case, individuals and corporate entities very rarely register as victims in criminal proceedings concerning market abuse (the AMF can count only 12 cases over the past ten years11); and
  • procedural adjustments to reduce the criminal procedural delays and to increase the efficiency of the sanction procedure, such as: encouraging the re-use of AMF’s investigations by the criminal authorities; bringing the amounts of criminal penalties and administrative sanctions closer together and creating the offence of insider trading in an organised group; making use of the AMF’s ability to become a civil party to criminal proceedings; trying out the direct committal procedure and the guilty plea mechanism in appropriate cases; setting up a co-ordination unit between the AMF and the PNF; and unifying the appeal procedures before one jurisdictional order.
Le Club des juristes Report

Le Club des juristes asserts that it is neither possible to decriminalise market abuse nor appropriate to abolish administrative sanctions. It proposes, first and foremost, the creation of a Financial Markets Tribunal (Tribunal des marchés financiers), based on the model of the AMF Enforcement Committee (Commission des sanctions), which would have exclusive jurisdiction over all market abuse cases. This Tribunal would have the power to issue a variety of sanctions, including imprisonment penalties. The AMF would retain the right to offer a settlement procedure (composition administrative) to financial intermediaries that fail to meet their professional obligations, as an alternative to sanction proceedings. This settlement procedure would have to be approved by the Financial Markets Tribunal (rather than the AMF Enforcement Committee12) and would not apply to market abuse cases. The PNF would fulfil the role of public prosecutor to the Tribunal.

However, Le Club des juristes notes that the French legislature seems to favour more isolated measures which do not substantially amend the judicial order. It therefore proposes as an alternative the creation of a legislative framework for referring cases to the administrative or criminal authorities in order to avoid a dual prosecution and to guarantee the efficiency of a potential action for damages. This referral could take place after an organised period of consultation between the AMF and the PNF.

In the event of a disagreement between these two authorities over the procedural route to follow, either of them could ask an ad hoc referral commission (Commission des infractions boursières) to choose which authority should pursue the case. This commission would be partly based on the model of the Tax Offences Commission (Commission des infractions fiscales) and would comprise three councillors from the Highest Administrative Court (Conseil d’État), three judges from the French Supreme Court (Cour de cassation), as well as two eminent individuals nominated by the President of the Senate (Sénat) or the President of the National Assembly (Assemblée nationale)

The context of the draft bill – international comparisons

When explaining the rationale behind the draft bill on the punishment of financial offences, Senators Albéric de Montgolfier and Claude Raynal considered both the French and international context.

For individuals, the EUR 14,000,000 sanction imposed on Mr Joseph Raad on 18 October 2013 in an insider trading case appears to be the highest sanction issued by the AMF to date. For corporate entities, the AMF issued a total of EUR 16,000,000 in sanctions against Elliott Advisors (UK) Ltd and Elliott Management Corporation on 25 April 2014, comprising a EUR 8,000,000 sanction for the transmission of inside information by the former and a EUR 8,000,000 sanction for the use of this information by the latter.

The sanctions issued by the AMF are generally much higher than the financial penalties issued by the criminal authorities. On 19 May 2014, the Paris Court of Appeal imposed financial penalties that were the “equivalent of the profit made from the insider trading” (ie the legal minimum) in the Vivendi Universal case. These penalties amounted to EUR 5,000,000 for Mr Bronfman Jr and to EUR 850,000 for Mr Hannezo, but the court decided to suspend the payment of half of them.13 Likewise, on the rare occasions when the French criminal courts issue imprisonment penalties against individuals convicted of market abuse, they systematically issue suspended custodial penalties.14

By contrast, in the UK, Tom Hayes, the first individual to be charged and stand trial in the UK as a result of the Serious Fraud Office’s on-going criminal investigation into the manipulation of LIBOR, was sentenced to a total of 14 years’ imprisonment at the beginning of August 2015.15 In Operation Tabernula, a long running and complex insider trading investigation conducted by the Financial Conduct Authority (FCA) and the National Crime Agency, several sentences of imprisonment have been imposed so far and more could be delivered at the end of the trial scheduled for January 2016. For corporate entities, the FCA imposed an unprecedented financial sanction of GBP 284,432,000 on Barclays Bank plc in May 2015 for failing to control business practices in its foreign exchange business in London.16

In the U.S., in 2015 six major banks have been subject to a record GBP 3.7 billion in financial penalties from the U.S. Department of Justice for exchange rate manipulation as well as a further GBP 0.95 billion in sanctions from the U.S. Commodity Futures Trading Commission.17 A similar degree of severity is shown by these authorities against individuals convicted of market abuse, some of whom have received unsuspended custodial sentences in addition to financial penalties.18

The content of the draft bill

Against this context, the Finance Commission of the Senate proposes:

  • A new legislative ban on the dual punishment of market abuse cases by both the criminal and administrative authorities. The criminal authorities would be in charge of prosecuting the most serious market abuse cases, taking account of the perpetrator’s intention, the amount of profit made and the status of the accused etc. The majority of market abuse cases would be dealt with by the AMF due to its technical capabilities, expertise, and timeframe.
  • The AMF and the PNF would continue to conduct their investigations separately but would co-operate more with each other. They would then consult one another to decide which one of them would keep the case, using objective criteria (seriousness, degree of intention, amount of profit etc). In the event of a disagreement, a Market Abuse Commission (Commission des infractions boursières) – comprising three councillors from the French Highest Administrative Court (Conseil d’État) and three judges from the French Supreme Court (Cour de cassation) with a rotating presidency – would decide which authority was to proceed with the case.
  • Maximum criminal penalties for individuals would be increased. In cases of insider trading,19 stock price manipulation or the disclosure of false information, the criminal courts would be able to issue a maximum penalty of EUR 15,000,000 or ten times the amount of “advantage potentially drawn” from the offence. The maximum sentences of imprisonment would be raised from two years to five years for these offences which, if committed in an organised group, would be punishable by 10 years’ imprisonment and a financial penalty of EUR 30,000,000.
  • As for corporate entities, maximum penalties punishing markets abuses would also be increased to a maximum financial penalty of EUR 75,000,000 or ten times the amount of “advantage potentially drawn” from the offence. More significantly, criminal and administrative authorities would be able to impose a financial penalty of up to 15% of the corporate entity’s net turnover. The draft bill proposes to replace the terms “profit potentially made” by “advantage potentially drawn, if this can be determined”.
  • In response to the AMF’s request, the settlement procedure (composition administrative) would be extended to market abuse and market operators, whereas it currently only applies to breaches of professional obligations by certain professionals regulated by the AMF. According to the AMF’s 2014 annual report, this procedure has been successfully used 20 times since its creation. The fact that it requires the professional to plead guilty and that the settlement is publicised prevents it from being used more often. Indeed, it is regrettable that the draft bill does not attempt to remedy these defaults, whereas Le Club des juristes Report envisages the possibility of a settlement procedure that does not require a prior guilty plea, based on the model of the recently amended American “neither admit nor deny” procedure implemented by the SEC.
  • The protection of whistle-blowers would be reinforced. A compensation fund would also be created for them and be partly funded by the proceeds of the sanctions issued by the criminal and administrative authorities.

Comment

With the fast approaching deadlines for transposing the new EU legislation and repealing the unconstitutional provisions of the Monetary and Financial Code, the French legal regime on market abuse is likely to remain a very hot topic in both legal and parliamentary spheres over the upcoming months.

At present, however, it is not possible to say which of the proposals will be ultimately taken up by the French legislature. That said, it is unlikely that market abuse will be decriminalised or excluded from administrative sanctions. It is also likely that the AMF and the PNF will play key roles in the punishment of market abuse. 

In view of the global crackdown on market abuse, both the administrative sanctions and criminal penalties are bound to get harsher in France.

Footnotes

1.Grande Stevens &ors v Italy – 18640/10, 18647/10, 18663/10 et al dated 4 March 2014.

2. Decision No 2014-453/454 QPC and 2015-462 QPC dated 18 March 2015.
3. As defined in paragraph II of Article L. 621-9 of the MFC.
4. French Supreme Court, 20 May 20145, No 13-83489, PB.
5. The criminal Judgment rendered in 2010 had been upheld by the Paris Court of Appeal on 22 April 2013 (ref. CA Paris No 12/03600).
6. The Report “L’Application du principe ne bis in idem dans la répression des abus de marché, Propostion de réforme, 19 mai 2015” is available online https://www.amf-france.org/ 
7. The Report “Poursuite et sanction des abus de marché” is available online at URL http://www.leclubdesjuristes.com/rapport-poursuite-et-sanction-des-abus-de-marche/
8. The draft bill is entitled “Proposition de loi No 20, relative à la répression des infractions financières”.
9. Directive 2014/57/EU of 16 April 2014 on criminal penalties for market abuse (Market Abuse Directive), accompanied by the Regulation (EU) No 596/2014 of 16 April 2014 on market abuse (Market Abuse Regulation). The directive divides market abuse into three categories, namely insider trading, market manipulation and the unlawful disclosure of inside information. However, pursuant to the AMF’s General Regulation (Règlement Général de l’AMF), market abuse is separated into two parts, with insider transactions (including the disclosure of inside information) on one side, and market manipulation (including stock price manipulation and the disclosure of false information) on the other.
10. The creation of a Financial Markets Tribunal (Tribunal des marchés financiers) has been advocated by several scholars, including Anne-Valérie le Fur and Dominique Schmidt, for many years. See, for example: A.-V. Le Fur, D. Schmidt, Pour un tribunal des marchés financiers, Bull. Joly Bourse 2015, § 112a1; A-V Le Fur, D. Schmidt, Il faut un tribunal des marchés financiers, Recueil Dalloz 2014 page 551; A-V Le Fur, Faut-il faire de la Commission des sanctions de l’Autorité des marchés financiers un tribunal des marchés financiers?, Mélanges AEDBF VI, RB, Paris, 2013, page 335.
11. See the AMF Report page 26.
12. As is currently the case under Article L. 621-14-1 of the MFC.
13. Frédéric Stasiak, Définition des abus de marché, RSC 2015. 345.
14. See, for example, French Supreme Court, 22 January 2014, No 12-83. 579.
15. https://www.sfo.gov.uk/
16. https://www.fca.org.uk/news/fca-fines-barclays-for-forex-failings
17. https://www.accaglobal.com/gb/en.404.html
18. See, for example,http://www.justice.gov/usao-nj/pr/former-bristol-myers-squibb-executive-sentenced-prison-trading-inside-information
19. This does not include the disclosure of inside information which, pursuant to Article L. 465-1 §2 of the MFC, is currently subject to a maximum financial penalty of EUR 150,000 or ten times the amount of “profit potentially made” from the offence and one year’s imprisonment. The draft bill proposes a maximum financial penalty of EUR 15,000,000 or the amount of “advantage potentially drawn” from the offence and three years’ imprisonment. 

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