Beppe Degiorgio
In March 2022, the European Court of Justice (ECJ) gave a preliminary ruling in yet another case about the unlawful disclosure of inside information – this time by a journalist (Mr A) who informed some sources about a story he was going to publish in a prominent British newspaper regarding two takeover bids which were rumoured to be launched over the next few weeks. The Financial Markets Authority in France deemed Mr A’s disclosure to be unlawful and imposed a financial penalty of €40,000. Mr A subsequently appealed the decision and the Parisian Court of Appeal asked the ECJ for a preliminary ruling on a number of points.
Before analysing the court’s preliminary ruling, it is worth mentioning that the court was not asked to look into whether the publication of the articles themselves constituted an unlawful disclosure of inside information. Rather, the case revolved around Mr A’s disclosure of the forthcoming publication of the articles (before they were actually published). Moreover, for the sake of brevity, this article does not discuss the ECJ’s analysis of the disclosure of inside information made for the purposes of journalism in terms of article 21 of the Market Abuse Regulation – although that analysis makes for interesting reading for many “observers” and “commentators” in Malta!
Background
It is important to note that the reference for a preliminary ruling was made under the old market abuse regime, that is the Market Abuse Directive (Directive 2003/6/EC) rather than the current Market Abuse Regulation (Regulation (EU) 596/2014). That said, the definition of “inside information” is the same in both the Directive and the Regulation, meaning that the ECJ’s ruling in the present case is still good case law today.
Under both the Market Abuse Directive and the Market Abuse Regulation, the definition of inside information comprises four essential elements: (i) the information must be of a precise nature; (ii) the information must not have been made public; (iii) it must relate, directly or indirectly, to one or more financial instruments or their issuers; and (iv) it must be information which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments.
When a person comes into possession of inside information, both the Market Abuse Directive and the Market Abuse Regulation, prohibit that person from (a) trading in the financial instruments to which that information relates (that is, insider dealing) and (b) disclosing the information to anyone, unless in the normal exercise of one’s employment profession or duties (that is, unlawful disclosure of inside information). In the case at hand, Mr A was accused of unlawfully disclosing inside information, and in the course of his appeal the argument was made that information relating to the forthcoming publication of a press article reporting a market rumour about an issuer of financial instruments cannot be sufficiently precise for it to be classified as inside information. The Parisian Court of Appeal deemed it fit to refer this argument to the ECJ for a preliminary ruling.
Ruling
In terms of the Market Abuse Directive (as well as the Market Abuse Regulation), information is to be deemed to be of a “precise nature” if it satisfies two cumulative conditions: (i) it must indicate a set of circumstances which exists or may reasonably be expected to come into existence or an event which has occurred or may reasonably be expected to do so; and (ii) it must be specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of financial instruments.
Given that the actual publication of Mr A’s articles was a highly probable event, both the Parisian Court of Appeal and the ECJ were comfortable to say that the first condition of the “precision” test was easily satisfied. The second condition of the test was a bit less clear and formed the basis of much of the ECJ’s considerations.
The ECJ broke its assessment of the second limb of the precision test into two parts. In the first part, the ECJ considered whether in order for information relating to the forthcoming publication of a press article to be regarded as “specific enough”, the content of that article (that is, the launch of the envisaged bids) also needed to be specific. The second was whether information about a “market rumour” automatically disqualifies it from being inside information given that “rumours” are, by definition, uncertain. Although the questions are linked, they are tackled separately below.
First question: did the content of the articles also need to be precise?
On this issue, the ECJ ruled that the information relating to the forthcoming publication of a press article is closely (and, in my view, inherently) linked to the information forming the subject matter of that article. Were the information to be published not to have any degree of precision, the information relating to the publication of the articles would not enable any conclusions to be drawn as to the possible effect of that information on the prices of the financial instruments concerned – thereby rendering it imprecise and not “inside information”.
On this basis, the ECJ held that in order for information about a forthcoming article to be categorised as “inside information”, the substance of the article itself must necessarily satisfy the element of precision and specificity required by law.
Second question: is information about a market rumour always imprecise?
On the second question, the ECJ noted that if it were to be considered that information should not be regarded as “inside information” merely because it concerns the publication of a rumour, much information likely to have an effect on the price of the financial instruments concerned would fall outside the scope of the EU market abuse regime and could therefore be used by insiders who possess it to their profit and to the detriment of those who are unaware of it.
On this basis, the ECJ noted that the second question must be assessed on a case-by-case basis. To this end, the court noted the importance of taking into account the degree of precision of the content of that rumour and the reliability of the source reporting it. The ECJ held that the reputation of the journalist who authored the press articles and that of the media organisation which published those articles (a prominent British newspaper in this case) are decisive factors in so far as they lend credibility to the rumours concerned since investors may give more weight to rumours coming from reliable sources and media organisations.
Conclusion
There are obviously a number of key takeaways that can be drawn from the ECJ’s preliminary ruling in this case, such as the importance which the court placed on Mr A’s reliability (and credibility), as the journalist publishing the rumour, or the ECJ’s position that a rumour may be “precise” enough to be classified as inside information.
In my view, however, the most significant aspect of this ruling is not so much in the substance of the ECJ’s statements – as relevant and as important as they may be – but rather in the fact that Mr A, a journalist wholly extraneous to the companies who he was reporting on, autonomously generated inside information on each of those companies without the companies’ involvement. While the information about the takeovers themselves probably constituted inside information, the ECJ was clear that “information relating to the forthcoming publication of a press article reporting a market rumour is capable of constituting precise information”, thus capable of becoming a standalone piece of “inside information”.
While it is a common misconception that inside information exists exclusively within an issuer’s sphere of control, the ECJ’s preliminary ruling makes it clear that inside information can be autonomously generated outside an issuer – sometimes even without its knowledge. In the short-term, the implication of this ruling underscores the care with which market participants (other than issuers) need to act in their interactions with issuers and their financial instruments, as well as the importance of keeping abreast with regulatory developments. In the long-term, however, this preliminary ruling, along with other judgements on the European continent about the so-called “self-insider” doctrine, ought to instigate further academic and legal debate as to whether the market abuse regime is snowballing out of control and becoming a legislative Frankenstein. Without diminishing the importance of proper market abuse laws, rulings such as this require us to ask whether we’re using a sledgehammer to crack a nut.
Beppe Degiorgio is a member of Ganado Advocates’ capital markets practice, where he assists clients in navigating the intricacies of finance on both domestic and international fronts.
The author would like to thank Luca Camilleri for his assistance in drafting this article