€18 Million in Fines For Insider Dealing and More

Three companies and two individuals were fined a total of more than €18 million by a European regulator over the use of inside information and other irregularities. In a tangled web of transactions, a variety of parties related to an issuer were investigated and found to have contravened financial rules relating to privileged information about better-than-expected earnings of a European consumer goods producer, known hereafter as Company A.

Embroiled in the affair was:

Company B, a primary sector business based in an African country, which was a majority shareholder of Company A
Person A, the CEO of Company B and a board member of Company A
Person B, who was a representative of Company B and a board member of Company A
Company C, a beverage producer in another European country
Company D, the parent company of Company A

The background

In the mid-2010s, Company A was felt by the market to be underperforming in its industry. However, it released a report showing that it had overachieved on its predicted earnings before interest, taxes, depreciation, and amortisation (EBITDA). This news led to an increase in the share price for Company A.

However, the regulator in the country in which Company A was based discovered that there had been some suspicious trades in Company A’s stock ahead of the publication of the results.

Company B, whose CEO and other representatives also served on the board of Company A had increased its shareholding in the organisation between the point where the news was known internally and when it became public. During this time, the regulator found that it could be classified as inside information.

CPL_Stock-images_Price-of-Miscondct-1_050124-1

The investigation

During the investigation, it was discovered that Person A, a board member at Company A, had exploited her access to confidential information. She had used it to influence Company B’s decision to buy shares in Company A before the news of the EBITDA became common knowledge.

Further, the regulator noted that Person B, with close connections to both Company A and B, had advised Company C to buy shares in Company A. However, there was no evidence to confirm that he revealed any specific insider details to Company C, or that Company C used such information in its decision to purchase Company A's shares.

However, the regulator discovered that Company B, Company C and Company D failed in their duties to inform the regulator of their purchases of shares in Company A. This was necessary, given the connections between these organisations and the directors of Company A.

It also found that Company D had acquired shares in Company A during a closed period, which is 30 calendar days before the announcement of an interim financial report or year-end report. Under the Market Abuse Regulation, no person discharging managerial responsibilities (PDMR) should trade in an issuer’s stock during this time.

The outcome

Following the investigation, the regulator chose to fine Company B €10 million and Person A €6 million. Person B received a €2 million fine, with Company C and Company D paying €100,000 each.

This shows the seriousness with which regulators take their role in upholding the integrity of the markets.

How to prevent such issues

There are tools that companies can use to avoid regulatory non-compliance, or at least to take all possible steps to prevent it and to be able to show evidence of this intention.

Creating insider lists with InsiderLog shows who knew about the inside information at any one time, automating the process of having insiders acknowledge their responsibilities and obligations.

In addition, TradeLog’s pre-clearance feature stops individuals from making share acquisitions that fall outside of the regulatory framework. Whether it is because there is a closed period on that financial instrument, the company has inside information on the product or any other reason, you can configure the software to alert you to trade requests that infringe your company’s policy.

Request a demo of TradeLog today.