Unlawful Use Of Insider Information & Market Manipulation

On 27 July 2010 the Insider Trading Law (the Law)[1] was adopted in Russia.  Adoption of the Law triggered, inter alia, changes to Russian criminal law through introduction of liability for unlawful use of insider information (Art. 185.6 of the Russian Criminal Code) and a change of the actus reus of market manipulation (Art. 185.3 of the Russian Criminal Code).  These provisions came into effect on 27 July 2013.
 
The objective of these changes was to ensure fair pricing of financial instruments, foreign currency and goods, equality of investors and to build the trust of investors by combating abuses at organised biddings.  For years there was little, if any, regulation in this sphere which led to multiple violations and made insider trading and market manipulation common practice in Russia.  The situation was particularly bad with second and third echelon shares where almost any operations with shares can have an impact.
 
The following acts may entail criminal liability for unlawful use of insider information: (i) deliberate use of insider information for operations with financial instruments, foreign currency or goods; (ii) making recommendations to third parties, obliging or inducing them to sell or purchase financial instruments, foreign currency or goods on the basis of insider information; (iii) unlawful transfer of insider information to third parties.  Such acts are punishable if they result in significant losses for individuals, legal entities or the state, or significant gains (avoidance of losses) for the offender.[2]
 
As a rule, a significant increase of price quotations of large companies’ shares before announcements of important corporate events may attest to unlawful use of insider information.  For example, OJSC Kalina’s share price rose approximately 75 per cent two weeks before an acquisition thereof by Unilever was made public.  Pursuant to publically available information, this was the result of multiple transactions with Kalina’s shares by one of its top managers who performed the transactions himself and via broker accounts opened in the name of third parties.  The value of these transactions amounted to several hundreds of millions roubles.
 
Market manipulation may take the form of: (i) distribution of false information; or (ii) operations with financial instruments, foreign currency or goods which are prohibited by the Law, as a result of which the price, demand, offer or amount of the biddings deviated to a level or were sustained at a level essentially different from that of the expected level.  Such acts are punishable if they have the consequences described above.  It is important that market manipulation does not necessarily imply use of insider information.
 
A common method of market manipulation is to list a shell company which is being promoted among potential investors by distribution of false information.  Then several entities start making multiple simultaneous operations with its shares as a result of which the price and volume of biddings increases significantly.  The rush to purchase and growth of quotations attracts other investors who buy shares which are effectively worth nothing.  Another method is distribution of false information about a well-known public company that may entail rush buying of its shares (e.g., about a forthcoming buy-back of shares at a good price).  Before such information can be officially rebutted, “innocent” investors may buy its shares at unjustifiably high price. 
 
Although the amendments to the Russian Criminal Code came into force almost a year ago, there seem to be no pending criminal cases for these offences in their current actus reus.[3]
The main reason for this is that Russian Central Bank (the CB), which monitors compliance with the Law, has limited powers to obtain necessary information.  Unlike some of its peers in foreign jurisdictions, it is only entitled to conduct audit of compliance with the Law,[4] but cannot open (and hence investigate) criminal cases or conduct operational-search activities. This implies that the CB has limited access to various types of protected information (e.g., correspondence and other communications) which is crucial evidence in such cases.  This information can only be obtained through courts in the course of criminal investigations or operational-search activities by the relevant law-enforcement bodies.
 
The CB can request the Investigative Committee of the Russian Federation to open a criminal case, but it must provide sufficient information attesting to a possible crime.  It can also apply to the police for assistance with operational-search activities.  The Law envisages adoption of a joint decree of the CB and the police on matters of such cooperation, but, to the best of our knowledge, such act has not yet been adopted.
 
Thus, further collection of crucial evidence rests largely with these bodies.  However, they lack necessary expertise to efficiently perform their functions at the moment.
The situation could change if the CB is given an authority to conduct operational-search activities or if rules of cooperation between the CB and law-enforcement agencies in the course of audits are adopted. In the meantime, efficient suppression of abuses is impeded by practical implications of monitoring of compliance with the Law.
 
Maxim Pyrkov is an associate in Freshfields dispute resolution team in Russia. His experience includes representing Russian and international clients in commercial and treaty arbitration as well as domestic and cross-border litigation.
 
Maxim graduated from Institute of Law, Far East State University with honours, and attained a Master’s degree at Russian School of Private Law.
 
Mr. Pyrkov can be contacted by phone on +7 495 785 3075 or alternatively via email at maxim.pyrkov@freshfields.com
 
Maxim Kulkovheads our dispute resolution team in Russia. He has 17 years' experience in domestic and international litigation and arbitration. He joined the Moscow Region Bar in 2002.
 
The Legal 500 (Europe), Who’s Who Legal, Chambers & Partners, Best Lawyers and PLC Which Lawyer? describe Maxim as one of the best-known Russian dispute resolution lawyers. He is co-author of Institutional Arbitration and member of ICC Russia Arbitration Committee.
 
Maxim graduated from Moscow University and attained an LL.M at Nottingham University.
 
Mr. Kulkov can be contacted by phone on +7 495 785 3083 or alternatively via email at maxim.kulkov@freshfields.com