market manipulation Regulator to Name and Shame Insider Traders

The scope and severity of fines for insider trading has been significantly increased in the E.U., including smaller offenses and penalties for companies based on profits.
Dimming the lights for a shady handshake won't help insider traders in the E.U. to avoid tougher fines. Photo: E+/Getty Images

Regulators in the European Union are getting tough on insider trading, implementing a regime of naming and shaming those found guilty of such infractions. Numerous high-profile cases in the U.S. have made headlines and Germany's financial service regulator, BaFin, wants to ensure that German traders are not tempted to emulate wrongdoers. The case of small-time Barclay's investment banker Steven McClatchey, who will soon be packing a toothbrush and heading to prison, can be seen as a negative example.

Last month, Mr. McClatchey was sentenced to a five-month stretch behind bars, as well as a $10,000 fine and two years of supervised release for passing on information about mergers and acquisitions to a friend who owned a plumbing business on Long Island. In exchange, he received thousands of dollars in cash kickbacks and free plumbing work. For around a year and a half, all went well. But then the U.S. Securities and Exchange Commission (SEC) got wise to the scheme, and the ex-banker saw trouble coming down the pipes. Mr. McClatchey pleaded guilty in July 2016, two months after his plumber associate.

This curious tale is no isolated incident. But in spite of stricter rules and tougher penalties, the temptation to reveal information on mergers and acquisitions before they're announced is still great. And these don't always have to revolve around an exclusive coterie. Occasionally the leaks are made to the media.

In extreme cases, fines could be as much as 15 percent of total turnover. But there are also jail terms of up to ten years. Therefore I would not recommend taking the Trading Securities Act lightly. Elisabeth Roegele, BaFin

“There can be all sorts of reasons for traders to make transactions public, contrary to the regulations,” says Lucina Berger, a partner in the law firm Hengeler Mueller. “The aim can be to drive up the value of your own shares, or to increase competition in auctions. Some leaks happen simply because of inattentiveness,” she explained.

According to a recent study, some 8.6 percent of global M&A transactions are revealed in advance. Research by the tech firm Intralinks and the University of London's Cass Business School show that to be a 45 percent increase since 2014. A particularly large number of deals in Hong Kong, India and North America were uncovered in 2015 and what had once been a trend towards fewer leaks has reversed course.

“Despite increasing controls and regulations, there are still gains to be made from leaked transactions,” said Philip Whitchelo, Vice President of Financial Services Strategy at Intralinks. In 2015, real estate firms, energy companies and operators in the healthcare sector were frequently the targets.

“The analysis shows leaks can generate more offers from the competition, as well as an increase in value for individual transactions,” he told Handelsblatt.

In 2014 and 2015, Germany doesn't appear in the statistics. But BaFin has gone after several suspected cases of insider trading, such as the fertilizer producer K + S and the drug company Stada.

The investigations were discontinued on both occasions. Since the beginning of the year, Germany's supervisory authority has been examining the planned merger between Linde and Praxair, which would form the world's largest industrial gas concern.

Here, BaFin, the German financial services regulator, is examining whether current and former top level managers from the Linde supervisory and management boards used their inside knowledge to their own financial advantage.

Currently, the state attorney is investigating Deutsche Börse Chief Executive Carsten Kengeter for suspected insider trading. The allegations stem from merger talks held between the group's management and the London Stock Exchange between July and December of 2015.

In December 2015, about two months before Boerse and LSE announced merger talks, Mr. Kengeter acquired Deutsche Boerse shares to the tune of €4.5 million, or $4.85 million.

Capital market professionals are surprised that leaks are so widespread. Since July last year, new E.U. market abuse regulations threaten tough penalties. At the same time the new regulations came into effect, sanctions have been tightened significantly in accordance with the European requirements.

As the head of BaFin's securities supervision division, Elisabeth Roegele, explains, the scope of fines for frivolous insider trading offenses and market manipulation has been significantly increased. This includes the possibility of fines for companies being determined by profits. Ms. Roegele also sees a variety of potential motives for leaking information used for insider trading.

“A leak could be an attempt to thwart a takeover bid, or to change the terms of the bid,” she told this newspaper. “Strong regulations act as a deterrent, but will never completely prevent breaches.”

“In extreme cases, fines could be as much as 15 percent of total turnover,” Ms. Roegele said. “But there are also jail terms of up to ten years. Therefore I would not recommend taking the Trading Securities Act lightly.”

BaFin will also publicly reveal the identity of transgressors. The hope is that this name-and-shame tactic will act as an extra deterrent.

“Even in cases of an 'accurate' rumor, regardless of where it originates, companies are obliged to go public with the information,” says lawyer Lucina Berger, a partner at the firm Hengeler Müller.

Time will tell whether the stricter rules can really plug the leaks, as auxiliary profits through illegal practices still run high. Intralinks has calculated that the takeover bonuses in the case of punctured acquisitions are on average 53 percent higher. If confidentiality is maintained, the mark-up of mergers and acquisitions is around 24 percent.

Also, stock market winnings stay almost exclusively in the hands of professional investors, leaving small shareholders without a bigger piece of the pie.

“Leaked insider information is always at the expense of small investors, who can't react as quickly to the information as the professionals. This damages trust in capital markets,” says Sebastian Klein, head of the Würzburg-based Fürstlich Castell'sche Bank Credit-Casse Stock Corporation. “But trust in these markets is a bitter necessity, especially as Germans have traditionally only put their trust in loans and savings bonds."


Peter Köhler covers banks, private equity and venture capital firms and corporate financing. Robert Landgraf is the deputy head of Handelsblatt's finance section and is based in Frankfurt. To contact the authors:  [email protected],

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