2019 marks the ten-year anniversary for the Spector-decision, where the European Court of Justice determined that when an investor is in possession of inside information while trading, it can be presumed that he has “used” that information when forming his investment decision. This is generally referred to as “the Spector presumption”. The decade has in the meantime, however, witnessed a massive development of EU market abuse rules, which makes it appropriate to revisit the 2009-decision and see if it fits with the present legal rules.
Broadly speaking, the development of the market abuse framework can be characterized as – among other things – providing a more flexible and finely tuned sanctioning system.
This is demonstrated in the development of the legal instruments; from the administrative Market Abuse Directive of 2003 (MAD I) to the Market Abuse Regulation (MAR) and the Market Abuse on Criminal Sanction of 2014 (MAD II). But does the Spector presumption still fit?
The presumption is reasonable. It is hard for market abuse rules to be effective when the investor can simply claim that, although he had the information, it did not influence his decision. On the other hand, a purely objective delict would seem to run into problems with basic human rights. At least, that is how the ECJ argues, when emphasizing that as long as the investor can rebut the presumption, the arrangement is not contrary to the European Convention on Human Rights.
That is all well and fine, but the ECJ makes a couple of remarks, and frames the question in such a way, that it leaves the scope of the presumption open, especially when considering it in light of the subsequent development of the regime.
To be more specific, in my article in the Capital Markets Law Journal I ask the question whether the presumption applies in three different settings: (i) to primary and secondary insiders alike, (ii) in administrative and criminal proceedings alike, or (iii) MAD II-type behaviour only.
Regarding (i), I ask whether the specific reasoning behind the presumption is to be applied to primary insiders only. This seems to be the case when looking at both how the referring court phrased its questions, and how the ECJ is careful to prefix all of its premises and conclusions with “primary” insiders. More importantly, one of the bearing arguments for the presumption is that primary insiders come into contact with inside information on a daily basis, which should imply that secondary insiders – who do not enjoy such a special status – are not exposed to a presumption that they have used the information. Granted, the MAR preamble makes no such distinction, which seems to indicate that the EU legislator opted for an expansive interpretation of the Spector-presumption. But grounding an expansion of the ECJ’s position on a formulation in the recitals is, however, bad legislation.
Regarding (ii), I ask what it means when the ECJ refers to preparatory works, noting that the EU Parliament wanted to lower the subjective requirement, but omitting that the same preparatory works say that “[t]he mere use of inside information should be sanctioned in the administrative context, therefore any final or intentional element should be deleted”. Now, is the permissibility of switching the burden of proof premised on imposing administrative sanctions only? I argue that it seems that that was the original intention, but that subsequent practice from the ECHR and the ECJ makes the distinction irrelevant.
If MAD I seemed to prefer an administrative implementation, settling for the usual “effective, proportionate and dissuasive sanctions” formula, MAR is a decidedly administrative set of rules, only allowing member states to continue their criminal system of market abuse if they already had one at the date of implementation. The reason for this is that the EU also adopted a criminal sanctions directive (MAD II), thus aiming for a uniform, two-track system throughout the EU. MAD II applies to “serious forms of market abuse committed with intent”. Tellingly, although the wording is the same as in MAD I, there is no mention of a presumption in the recitals. The question is therefore whether the Spector-presumption applies to MAD II-type cases, a question I answer in the negative as regards (iii), claiming that intent should be proven and not presumed in MAD II-type cases.
I end with some reflections about the nature of the presumption in the modern, well-documented trading world, where most decisions are accompanied by some exterior signs of the mental elements and deliberations in the form of emails, extensive paper trails and so on. An absence of such exterior signs speaks volumes.
I also argue that the presumption applies differently to different types of investors: the day-trader on the one hand and the long-term or institutional investor on the other rely on completely different sources of information; what can be decisive information for the day-trader, can be noise for the institutional or the long-term investor. This fact makes it difficult to argue for wholesale defences against the presumption, and to claim that certain information will always or never be inside information, should it be applied to these investor categories.
Morten Kinander is Professor of Law at BI Norwegian Business School.