The new corona virus affects all aspects of our lives. As law reflects human activity, so does COVID-19 raise questions in virtually all legal domains. Securities law is no exception. Due to the threat that the virus poses for financial market stability, short selling is being temporarily banned left and right[1] and is monitored more strictly[2] and supervisory authorities have started warning against fraudulent schemes attempting to profit from ongoing market volatility[3]. As regards market abuse, the European Securities and Markets Authority (ESMA) is well aware of the risk that the new corona virus poses for insider dealing and has stated that “issuers should disclose as soon as possible any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation in accordance with their transparency obligations under the Market Abuse Regulation”[4]. However, due to the pervasive nature of the virus and the drastic extent of governmental measures taken to combat it, it seems that the market abuse risk lies not so much with individual issuers and their shares but is rather elevated to a wholly different level.
Recently newspapers have reported that certain US senators have dumped their personal stock in January and February 2020 before the severity of the virus’ consequences on the US health system, economy and stock market became clear to the public[5]. Some of the senators reportedly received private briefings about the virus from administration officials. All the while, President Trump confirmed his confidence in the stock market through his favourite social media outlet[6]. Calls for the senators’ resignation due to alleged insider dealing grow increasingly loud. It is unclear how the US Securities and Exchange Commission (SEC) will tackle this matter, if at all.
It is interesting to assess the case from an EU law perspective. The definition of ‘inside information’ under the EU Market Abuse Regulation (MAR)[7] comprises primarily “information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments” (art. 7(1)(a) MAR). When we think about inside information, most examples tend to be company-specific information such as a change in the company’s senior management[8] or an envisaged acquisition[9]. This link between the privileged information and a particular issuer or financial instrument is also expressed in the definition of ‘insider dealing’, which presupposes that the possessor of the information uses it to acquire or dispose of financial instruments “to which that information relates” (art. 8(1) MAR). When one possesses inside information that exclusively concerns company X, obviously this does not in itself prohibit them from trading in shares issued by company Y. The question then is: can information that relates to the economy and financial markets as a whole constitute inside information and give rise to insider dealing?
MAR’s definition of ‘inside information’ leaves no doubt that it isn’t necessarily required that the information relates to one particular issuer, nor that the relation between the information and the issuer is direct. Rather it suffices that the information concerns, directly or indirectly, at least one issuer or at least one financial instrument. In 2007, ESMA’s predecessor, CESR, explicitly confirmed in its level 3 guidance that ‘inside information’ also encompasses information that only indirectly relates to issuers or financial instruments[10]. By way of example, CESR referred amongst others to market information such as data and statistics published by public institutions disseminating statistics and to governmental decisions. Even though CESR’s guidance dates back to the 2003 Market Abuse Directive[11], there is no reason to believe these examples are obsolete. Quite on the contrary, the purpose of MAR was to tighten market abuse rules and expand their scope of application. The fact that the insider dealing prohibition also covers “indirect” inside information is further supported by the wording of article 17(1) MAR, where the obligation for issuers to publicly disclose inside information as soon as possible is explicitly limited to inside information that directly concerns them. It goes without saying that issuers may simply not be aware of inside information that only indirectly affects them (e.g. governmental decisions to impose tariffs in their sector) and consequently cannot disclose that information. This was already acknowledged by CESR it is aforementioned guidance.
The requirement that the information must be precise also doesn’t exclude market-wide events, provided that the information concerning the event is specific enough to enable a conclusion to be drawn as to its possible effect on trading prices. The preciseness condition serves to differentiate between information on the basis of its conclusiveness (facts or mere rumours), not the scope of its potential consequences (limited to a specific issuer or global)[12].
Finally, the purpose of MAR, which is to protect the integrity of the financial market and to enhance investor confidence, which is based on the assurance that investors will be placed on an equal footing and protected from the misuse of inside information[13], implies that also (and perhaps even more so) in cases where the information concerns the financial markets as a whole, investors should be protected.
As always, whether the insider dealing prohibition was violated should be analysed on a case-by-case basis, in the light of the actual information known to the suspect. In this regard, it should be recalled that if certain non-public information about COVID-19 can indeed be considered as inside information, then government officials who possess that information as a result of having access to it through the exercise of their duties are so-called primary insiders (art. 8(4) MAR), which entails that the insider dealing prohibition automatically applies, i.e. without having to prove that they knew or ought to have known that the concerned information indeed qualified as inside information.
[1] https://www.esma.europa.eu/press-news/esma-news/esma-issues-positive-opinions-bans-net-short-positions-belgian-fsma-and-greek ; https://www.esma.europa.eu/press-news/esma-news/esma-issues-positive-opinion-short-selling-ban-french-amf ; https://www.esma.europa.eu/press-news/esma-news/esma-issues-positive-opinion-short-selling-ban-italian-consob-1.
[2] https://www.esma.europa.eu/press-news/esma-news/esma-requires-net-short-position-holders-report-positions-01-and-above
[3] https://www.cftc.gov/PressRoom/PressReleases/8134-20.
[4] https://www.esma.europa.eu/press-news/esma-news/esma-recommends-action-financial-market-participants-covid-19-impact
[5] https://www.nytimes.com/2020/03/19/us/politics/richard-burr-stocks-sold-coronavirus.html ; https://www.washingtonpost.com/politics/2020/03/20/richard-burrs-kelly-loefflers-suspiciously-well-timed-stock-trades-during-coronavirus-examined ; https://www.theguardian.com/us-news/2020/mar/20/republican-senators-sold-stocks-before-markets-plunged-on-coronavirus-fears-reports ; https://www.bbc.com/news/world-us-canada-51976484
[6] https;//twitter.com/realDonaldTrump/status/1232058127740174339
[7] Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC, OJ L 173, 12 June 2014, p. 1-61.
[8] E.g. CJEU C‑19/11, Geltl v Daimler AG, 28 June 2012, ECLI:EU:C:2012:397.
[9] E.g. CJEU C‑628/13, Jean-Bernard Lafonta v Autorité des marchés financiers, 11 March 2015, ECLI:EU:C:2015:162.
[10] CESR, “Level 3 – second set of CESR guidance and information on the common operation of the Directive to the market”, no . 1.16, available at https://www.esma.europa.eu/sites/default/files/library/2015/11/06_562b.pdf.
[11] Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse), OJ L 96, 12 April 2003, p. 16–25.
[12] CJEU C‑628/13, Jean-Bernard Lafonta v Autorité des marchés financiers, 11 March 2015, ECLI:EU:C:2015:162, no. 31 : “Consequently, the only information excluded from the concept of ‘inside information’ by virtue of that provision is information that is vague or general, from which it is impossible to draw a conclusion as regards its possible effect on the prices of the financial instruments concerned.”
[13] MAR, Preamble 24.
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