Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

The human rights of insider traders

The European Court of Human Rights (ECHR) has an interesting judgement (h/t June Rhee) upholding the human rights of those guilty of insider trading (The judgement itself is available only in French but the Press Release is available in English).

Though the fines and penalties imposed by the Italian Companies and Stock Exchange Commission (Consob) were formally defined as administrative in nature under Italian law, the ECHR ruled that “the severity of the fines imposed on the applicants meant that they were criminal in nature.”. As such, the ECHR found fault with the procedures followed by Consob. For example, the accused had not had an opportunity to question any individuals who could have been interviewed by Consob. Moreover, the functions of investigation and judgement were within the same institution reporting to the same president. The only thing that helped Consob was that the accused could and did challenge the Consob ruling in the Italian courts.

The ECHR ruling that the Consob fines were a criminal penalty brought into play the important principle that a person cannot be tried for the same offence twice. Under Italian law (based on the EC Market Abuse Directive), a criminal prosecution had taken place in addition to the Consob fines. ECHR ruled that this violated the human rights of the accused.

It is important to recognize that the ECHR is not objecting to the substance of the insider trading statutes and the need to penalize the alleged offences. The Court clearly states that the regulations are “intended to guarantee the integrity of the financial markets and to maintain public confidence in the security of transactions, which undeniably amounted to an aim that was in the public interest. … Accordingly, the fines imposed on the applicants, while severe, did not appear disproportionate in view of the conduct with which they had been charged.” Rather, the Court’s concerns are about due process of law and the protection of the rights to fair trial.

I think the principles of human rights are broadly similar across the free world – US, Europe and India. The judgement therefore raises important issues that go far beyond Italy.

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