Criminal law aspect of Danish securities trading regulation
January 2013 | EXPERT BRIEFING | BANKING & FINANCE
On 20 October 2011, the European Commission adopted a proposal for a Directive on criminal sanctions for insider dealing and market manipulation. The proposed Directive requires member states to take the necessary measures to ensure that the criminal offences of insider dealing and market manipulation are subject to criminal sanctions. Member states will also be required to impose criminal sanctions for inciting, aiding and abetting market abuse, as well as for attempts to commit such offences.
Denmark has for several years treated infringements of the securities trading rules set out in the Securities Trading Act (the Act) as criminal offences. However, in recent years, Denmark has experienced a growing number of criminal cases for such infringement. It is believed that this tendency has not been caused by altered investor trading patterns, rather by an increased focus from the regulators’ side on upholding and safeguarding market integrity. Cases include ‘hardcore’ infringements of the prohibitions against insider trading and price manipulation, but the regulators have also prosecuted several cases of other alleged infringements – for example, of listed companies’ obligations to disclose inside information to the market, and of the unauthorised disclosure of inside information to third parties.
The Danish Financial Supervisory Authority (FSA) supervises compliance with the Act whereas prosecution of violations is handled by the State Prosecutor for Serious Economic Crime (SEC).
Section 94 of the Act provides that persons violating section 35(1) (prohibition against unauthorised disclosure of inside information to third parties); section 36 (prohibition against insider trading); and section 39(1) (prohibition against market manipulation) of the Act, are liable to a fine or imprisonment for up to one year and six months. If a violation of section 35(1) and section 39(1) is intentional and of a particularly gross nature, or if a large number of intentional violations have been committed, the penalty may be increased to imprisonment for four years.
Thus, Danish law goes further than required pursuant to the proposed Directive, since under Danish law even negligent violations are subject to criminal sanctions, whereas the Directive only imposes an obligation on the member states to have criminal sanctions against intentional violations. The Danish government has recently announced that it will seek to raise the maximum penalty for violation of the prohibitions against insider trading and price manipulation from four to six years. Apart from underscoring the importance of these rules, the proposal is intended to make it possible for the regulators to use telephone interception as part of its investigations.
The Danish Supreme Court has stated that intentional violations of the prohibitions against insider trading and market manipulation shall, under normal circumstances, lead to unconditional imprisonment. The length of the imprisonment of course varies, but is typically between three and six months.
The Act criminalises other violations of the securities trading regulation than these hardcore prohibitions. Section 93 of the Act provides that any natural or legal person who violates inter alia the obligation to disclose inside information about a listed company to the market (section 27 of the Act), the obligation for a shareholder to disclose the establishment of a major shareholding in a listed company and any notable changes therein (section 29 of the Act) and the prohibition against offering securities to the public without an approved prospectus, is subject to a fine.
In some cases, such as violation of the disclosure rules, where the maximum sanction is a fine, it is possible for the FSA to close the case by giving a reprimand or by issuing an administrative fine. It is a prerequisite for closing the case at this administrative level that the accused person or company admits to having violated the Act. Otherwise, if following its investigations, the FSA believes that a criminal violation of the Act has been committed the FSA will hand over the case to the SEC for further investigations and eventual prosecution. Importantly, the FSA will as a main rule publish its decision to hand over the case to the SEC; exceptions apply if it would have adverse effects on the SEC’s further investigations or if public disclosure would lead to disproportionate damage to the undertaking or natural person. The latter exception is, unfortunately, rarely used and thus companies under investigation will normally be exposed to media and investor attention before the SEC decides whether or not to prosecute the case.
In recent years the FSA and SEC have worked towards increasing the level of fines. For violations of more formal rules, such as a lack of disclosure of major shareholdings, the preparatory works of the Act stipulate standard fines of between DKK 10,000 and DKK 20,000 for first time violations. For other violations (e.g., listed companies’ obligation to disclose inside information and unauthorised disclosure of inside information to third parties), fines will be considerably higher and are currently at the level of DKK 100,000. This level is expected to continue to increase in the coming years.
For alleged crimes committed by companies and other legal persons, the SEC will often prosecute the case against the company as well as against one or more individuals personally, if such persons are deemed to have acted intentionally or with gross negligence. However, the prosecution of low-ranking employees will only take place in exceptional circumstances.
Unfortunately, the investigation and prosecution of cases tends to take very long time in Denmark. It is normal for the SEC to take 12-18 months to investigate cases and court proceedings may last 12 months or more.
Christian Lundgren is partner and co-head of the capital market group at Kromann Reumert. He can be contacted on +45 38 77 45 30 or by email: firstname.lastname@example.org.
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