23/12/2009 - ECJ ruling on test for insider trading

The European Court of Justice on 23 December issued an important ruling on the test for insider dealing under the market abuse directive (Directive 2004/6/EC) in Case C-45/08 Spector Photo Group and Van Raemdonck. 

Spector Photo Group NV, a Belgian company, set up stock option scheme for its employees and advisers.  It needed to acquire shares for use in the scheme, told Euronext Brussels of its intention to buy its own shares, and made purchases in the market.  Mr van Raemdonck, Spector's former secretary-general, was involved in the purchasing process.

The regulator investigated some of the purchases, and detected a "link" between the pattern of purchasing and certain inside information regarding Spector's commercial activities.  It imposed fines on Spector and Mr van Raemdonck, who appealed.

The Belgian court referred a number of questions to the ECJ, in particular asking about the interpretation of Article 2(1) of the Directive:-

"Member States shall prohibit any [insider] who possesses inside information from using that information by acquiring or disposing of ... financial instruments to which that information relates". 

The court asked whether the mere fact that such a person possesses inside information and acquires or disposes of relevant financial instruments signifies in itself that he makes use of his inside information.

The ECJ ruled that, bearing in mind its antecedents, the Directive was intended to make clear no element of purpose or intention was required.  Thus dealing while in possession of the information "implies that that person has ‘used that information'" for Article 2(1) purposes. 

However, the Court accepted the arguments made by the Italy and the UK that for such dealing automatically to fall within the provision would risk extending the scope of the prohibition beyond what is necessary and appropriate to attain the goals pursued by the Directive.  Accordingly, the presumption of use of the information was rebuttable, and "certain situations may require a thorough examination of the factual circumstances enabling it to be ensured that the use of the inside information is actually unfair so as to be prohibited by the directive in the name of the integrity of financial markets and investor confidence".  Further, the Court considered that given the right of the defence to rebut the presumption, Article 2(1) was compatible with the presumption of innocence in Article 6(2) of the Human Rights Convention.