Towards a Harmonization of Insider Trading Criminal Law at EU Level?

Abstract

In June 2014 the European Council promulgated the directive on criminal sanctions for market abuse 2014/57/EU forcing the European member states to criminalize particular acts related to market manipulation and insider trading. In the same month the directive also entered into force. As a result of this directive the traditional freedom that member states had to decide the ways in which they would implement a directive on market manipulation and insider trading has finished. With this important step the European institutions make use of the new powers that were allocated to them to force member states to the use of the criminal law in particular areas. Previously the European institutions made use of this inter alia with respect to environmental criminal law. However, this is the first time that the European institutions not only force member states towards criminalisation, but moreover, even impose a minimum level of specific penalties, something which was equally made possible with the treaty of Lisbon.

The enclosed paper describes the way in which the European institutions have addressed the enforcement of the insider trading prohibition and the role of the criminal law in this respect. Moreover, in the paper we critically question whether criminalisation and more particularly the imposition of criminal law at EU-level are appropriate tools.

In order to address those questions we use an economic approach and a legal theory approach to the criminalisation of insider trading and market manipulation. Economic theory has indicated that criminalisation may only be needed in specific (exceptional) circumstances, more particularly where the gain to the perpetrator would be relatively high, the potential damage to society high and the probability of detection low. We argue that although there may be circumstances in which these conditions are fulfilled, there can also be many situations where the probability of detection is not that low and where gains to the perpetrator are not substantial. In those circumstances alternatives such as civil remedies or administrative sanctions could suffice. It is striking that the European Commission pays a lot of attention to private enforcement in other policy domains like e.g. competition policy. In the domain of enforcement of insider trading and market manipulation there is, contrary to the situation in the US, no attention to the possibilities of private enforcements. To the contrary, differently than the suggestions from economic theory, the European institutions strongly believe in the need for criminal sanctions.

Not only the choice for the criminal law can be critically assessed. One can equally wonder why this criminalisation necessarily had to be imposed at EU-level. In fact, from the twenty-eight European member states only Bulgaria lacked criminal sanctions. That hence also justifies the question whether there really was a need to impose a criminalisation of insider trading and market manipulation at EU-level, rather than respecting the subsidiarity principle and hence allowing member states the appropriate remedies (civil, administrative of criminal) to insider trading and market manipulation.

The goal of this paper is hence to critically discuss this very recent European directive, forcing member states to a criminalisation of insider trading and market manipulation from an economic perspective. The paper critically analyses the directive on criminal sanctions for market abuse 2014/57/EU and also discusses the arguments in favour of criminalisation and the question whether forcing criminalisation at EU-level, as the directive does, was indicated.

Keywords: Law and Economics, Criminal Law, Deterrence Theory, Economics of Enforcement, Economics of Harmonization, Insider Trading, Directive 2014/57/EU

JEL Classification: K14, K22, K33