EUROPEAN COURT OF JUSTICE ON INSIDER DEALING

February 02, 2010 4:59 AM

Market Abuse Directive defines insider dealing objectively

The European Court of Justice, in its decision dated 23 December 2009 (Case C‑45/08; Spector Photo Group NV and Chris Van Raemdonck versus Commissie voor het Bank-, Financie- en Assurantiewezen (CBFA)), has clarified the elements of insider dealing following a request from the Court of Appeal of Brussels.

The European Court of Justice was to interpret the expression ‘use of inside information’ in Article 2(1) of EU Directive 2003/6 (the Market Abuse Directive or MAD). That provision provides that the Member States are to prohibit any person referred to in the second subparagraph thereof (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, either directly or indirectly, the financial instruments to which that information relates’ or from trying to enter into such a transaction on the market. More precisely, the question is 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 purpose of the Market Abuse Directive is to protect the integrity of the financial markets and to enhance investor confidence, which is based, in particular, on the assurance that investors will be placed on an equal footing and protected from the misuse of inside information. According to the Court, the MAD defines insider dealing objectively without the intention behind such dealing being referred to explicitly in its definition.

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. It is not necessary also to establish that the insider has “used” the information “with full knowledge”.

Karel Frielink
Attorney (Lawyer) / Partner

1 February 2010