First successful prosecution for a recommendation based on inside information
23 March 2016
French Administrative Supreme Court, 10 July 2015, n°369454
A recommendation to acquire or dispose of a financial instrument on the basis of inside information is market abuse, even if no inside information is transmitted to, and no action is taken by, the beneficiary of the recommendation. This is the first ruling on this issue by the French Administrative Supreme Court (Conseil d’Etat), which decided that making such a recommendation is an autonomous infringement (distinct from the use or the disclosure of inside information).
The president of an investment bank (Mr A) was regularly advising Transgene, a French pharmaceutical company listed on Euronext Paris. Since 2007, Transgene had an exclusive licence agreement with the Swiss Roche Group, for the development of a cure for the HPV virus. At the end of 2010, Roche decided to terminate its agreement with Transgene. The termination was notified to Transgene on 17 February 2011 and the information became public through a press release issued by Transgene on 22 February 2011. The next day, Transgene’s share price dropped by 19%.
On 13 April 2013, the AMF Enforcement Committee ordered Mr A. to pay a EUR 200,000 fine for using inside information to recommend that the two individuals sell their Transgene shares under Article 622-1 of the AMF General Regulation and Article 3 of the Directive 2003/6/EC of 28 January 2003 on market abuse (Market Abuse Directive). This was the first time that the AMF had imposed a sanction for a recommendation based on inside information, rather than the use or disclosure of such information. Mr A appealed to the Conseil d’Etat.
− the AMF had not demonstrated that he transmitted inside information;
− the two beneficiaries of the inside information should also have been pursued by the AMF Enforcement Committee; and
− the decision violated the principle of the legality of criminal offences and penalties.
The Conseil d’Etat rejected the appeal. Importantly it stated, for the first time, that a recommendation made on the basis of inside information is an autonomous infringement under the AMF General Regulation and the Market Abuse Directive.1
The Conseil d’Etat ruled that transmission of the inside information was not a necessary ingredient of the recommendation offence. This is logical given that if evidence of such transmission had been required, the infringement would not have been a recommendation, but the disclosure of the information itself, which is covered by another legal provision.
The Conseil d’Etat observed that: (i) the two individuals ordered the sale of their Transgene shares minutes after their phone conversation with Mr A; (ii) they were close relatives of Mr A and they were usually advised by Mr A in their transactions; and (iii) they were not able to give a credible explanation for this operation, considering that in the short-term the rapid sale of their shares implied a loss on sale.
2 A similar reasoning was adopted by the Conseil d’Etat in its Banque d’Orsay decision dated 18 February 2011.