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First successful prosecution for a recommendation based on inside information

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Erwan Poisson



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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%.

The French Market Regulator (Autorité des Marchés Financiers) (AMF) quickly started an investigation into a suspicious transfer of Transgene’s shares. It appeared that on 1 and 8 February 2011, Mr A had short phone calls with two individuals who immediately afterwards ordered that all of their Transgene shares be sold. Both avoided significant financial loss by selling at that time.

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.

On appeal, Mr A argued that:

− there was no evidence that he held inside information, nor that he made any recommendation to the two individuals in question;

− 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 relied on Article 3(b) of the Directive which targets the act of “recommending or inducing another person, on the basis of inside information, to acquire or dispose of financial instruments to which that information relates”.2
Did Mr A have inside information?
The investigations did not find direct evidence that Mr A had been told that the contract with Roche was terminated at the time he made the alleged recommendation. However, the Conseil d’Etat approved the AMF Enforcement Committee’s decision that Mr A held inside information on the basis of corroborating indicia (“faisceau d’indices”). Mr A was regularly advising the management of the company on its financial communication strategy; he exchanged several emails, phone calls and text messages with the CEO of Transgene just before the announcement of the termination of the contract with Roche; and they had a meeting together on 25 January 2015, dedicated to the preparation of the company’s accounting and its communication with its shareholders. These elements were sufficient evidence that Mr A was aware of the termination on 25 January 2011 at the latest.
Use of the inside information by receiver irrelevant for the “recommending” offence
According to the Conseil d’Etat, the behaviour sanctioned by the Market Abuse Directive and the AMF General Regulation is the recommendation in itself. It is not necessary to take into account the behaviour of the beneficiaries. Theoretically the recommendation could be an infringement even if the beneficiaries had not used it in their own interests.
Not necessary to prove that the inside information was transmitted to beneficiaries

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 recommendation can be proved by corroborating events

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.
The decision is interesting as it revives a forgotten legal provision of the Market Abuse Directive and the AMF General Regulation. The decision confirms that the recommendation based on inside information is an autonomous infringement, which does not require the disclosure of the inside information to a third party.
It is clear that the AMF Enforcement Committee can issue sanctions even if there is no material evidence that the person making the recommendation held inside information or that this person actually made a recommendation to third parties. In both respects, corroborating indicia may be sufficient. This makes it more difficult for defendants to avoid a sanction since they would have to demonstrate that the operations made by the third parties were not the consequence of their alleged recommendation, but the result of other causes.
As we went to press, the French Government published a much awaited Order implementing the reform of contract law. This new regime is scheduled to become effective for contracts concluded after 1 October 2016 and mostly codifies precedents set by the French Supreme Court in this area of law. It also includes innovations regarding the negotiation (1), the performance (2) and the termination (3) of a contract. This article will briefly set out the key innovations of the Reform and show what issues should be carefully considered by parties in their future negotiations. We will consider this further in the next edition.

1 For additional details, see the Public Rapporteur’s report: Bulletin Joly Bourse, 1 December 2015, n°12, p.547.
2 A similar reasoning was adopted by the Conseil d’Etat in its Banque d’Orsay decision dated 18 February 2011.