Challenges in enforcing the insider trading regulation:
The Brazilian perspective
Viviane Muller Prado
April 6th, 2015
Insider trading regulation
Law 6.404, 1976
Article 155. (…)
Paragraph 1. An officer or director of a publicly traded corporation shall also treat
in confidence any information not yet disclosed to the public, which he/she
obtained by virtue of his/her position and which may significantly affect the pricing
of securities, and shall not use of such information to obtain any advantages to
himself/herself or to third parties by purchasing or selling securities.
Insider trading regulation
Law 6.404, 1976 (2001 reform)
Article 155. (…)
Paragraph 4. It is forbidden to use relevant information not yet disclosed to
the market, by any person with the goal of retaining an advantage in the
securities market for the person in question or for others.
Insider trading regulation
Law 6.404, 1976
Article 155. An officer shall serve the corporation with loyalty, shall treat its affairs with confidence and shall not:
Paragraph 1. An officer of a publicly held corporation shall also treat in confidence any information not yet revealed to the public, which he obtained by
virtue of his position and which may significantly affect the quotation of securities, and shall not make use of such information to obtain any advantages
for himself or for third parties by purchasing or selling securities.
Law 6.385, 1976 (2001 reform)
Article 27-D. To use relevant information not yet disclosed to the market, which one
may know and which must remain confidential, so as to create undue advantages,
for oneself or others, through the negotiation of securities, in one’s behalf or on
behalf of others:
Penalty – imprisonment of one (1) to five (5) years and fine of up to three (3) times
the amount of the undue advantage obtained as a result of the crime.
Insider trading. Theory
Fiduciary-duty
Misappropriation
theory
Equal access to
information theory
Administrative/civil
sphere: equal acess to
information
Criminal sphere:
fiduciary-duty
Regulated parties subjected to insider trading prohibition
-
Corporate insiders
(“traditional” insiders)
"Constructive” insiders
(e.g. Underwritters /
attorneys)
-
Primary insider trading
Secondary insider
trading
- Administrative/civil
spheres: primary and
secondary insiders
-
Criminal sphere: just
primary (“traditional and
constructive” insiders)
Enforcement at CVM
Market defendants;
119
External
defendants; 12
Internal defendants;
56
Enforcement at CVM
Punishment
9
Issuer’s Shareholders
9
14
19
5
Issuer Company’s Employees
3
Banks
Legal Advisors
2
4
2
5
Banks and people connected to them
5
Brokerage firms and their employees
Former Directors
Relatives of internals defendants
Relatives of market defendants
34
4
1
7
Market
Investors
Externals
1
Consulting
Investment funds and their managers
Internals
Issuer’s Directors
Acquittal
12
6
38
2
1
2
2
Penalties: criteria to define the pecuniary sanction
Administrative sphere:
“up to treble the profits
garined through insider
trading activities”
“... any profit gained or loss
avoides, up to twice these
amounts"
"500,000 BRL, 50% of the
amount of securities or irregular
transaction or 3 times the
economic benefit derived or loss
avoided as a result of the
offense"
Criminal sphere:
imprisionament; fine of up to 3
times the amount of the ilegal
advantage
Fines applied by CVM
...195
...93.4
14.5
11.7
3,0 3,0 3.0 3,0
3,0 2,9 3,0
0,7
1,3 1,5
Time
(2002-2014)
2,1
2,0 2,0 2,0 2,0
3,0
2,0 2,0 2,0 2,0 2,0
1,0
Ratio between estimated gain or avoided loss and the fine
Gain obtained or loss avoided in insider trading cases
...11.6MM
BRL 4.000.000,00
...7.5MM
...7.5MM
BRL 3.500.000,00
BRL 3.000.000,00
BRL 2.500.000,00
BRL 2.000.000,00
BRL 1.500.000,00
BRL 1.000.000,00
BRL 500.000,00
BRL 0,00
Earnings per aquitted
Earnings per punished
Time
(2002-2014)
Administrative and criminal sancion: bis in idem?
Possibility of
administrative and criminal
sanctions
No bis in indem (European
Court of Human Rights,
“Grand Steven v. Italty
Case”)
Possibility of
administrative and criminal
sanctions
Enforcement in number
“between 2001 and 2006 the SEC brought over 300 insider trading enforcement actions
against over 600 individuals and entities” (Coffe, apud Ventoruzzo, p. 27)
“in the same period of time, (...)it has been involved in an average of roughtly 55 insider
trading cases a year prosecuted by the Department of Justice, resulting in 88 convictions in
the six years considered.” (idem)
Enforcement
“from 2001 to 2007 the U.K. Regulator, the Financial Securities Agency (FSA) has
successfully brought only 8 cases”
“From 2005 and 2012 Consob, the Italian Securities and Exchange Commission, has
investigated 25 insider trading cases, an average of approximately 3 cases a year. In 2007
(...) it joined as a private party 12 criminal cases alleging insider trading; of these 12, only 4
resulted in a conviction.”
“The German financial supervisory authority, the BanFin, seems more active in prosecuting
insider trading: in 2005 it started 54 new investigation, referring 23 cases to prosecutors.”
Enforcement
6
5
4
3
4
3
2
4
3
2
3
2
0
2002
2003
2004
2005
2006
2007
2008
2009
Number of insider trading cases
2010
2011
2012
2013
2014
Enforcement (Settlements – Termos de Compromisso)
17
8
11
6
2
3
2004
1
2
2005
2006
8
5
4
4
2007
2008
2009
Accepted proposals
2010
2
8
2011
Denied proposals
5
4
4
2012
2013
2014
Contact
Viviane Muller Prado - Law Professor at FGV Direito SP
Email: [email protected]
www.nemercadoseinvestimentos.com