Market Manipulation and Insider Trading:
Regulatory Challenges in the United States of
America, the European Union and the United
Kingdom
Ester Herlin-Karnell and Nicholas Ryder
(Hart Publishing, 2019)
148 pp.
£60
Janet Austin*
Over the last two decades, there has been a transformation of the laws in the
European Union (EU) in respect to insider trading and market manipulation
(collectively referred to as market abuse). In the first Market Abuse Directive in
2003 (‘‘MAD I”), the EU developed a framework requiring each country in the
EU to prohibit market abuse.1 In 2014, this directive was repealed and a new
Market Abuse Directive (‘‘MAD II”) and a Market Abuse Regulation (MAR)
were adopted, both designed to enhance the effectiveness of the market abuse
regime.2 This included mandating that all countries in the EU have criminal
sanctions for market abuse. Against this background, this relatively concise book
compares and contrasts EU market abuse regulation with the regimes covering
market abuse in the United States (US) and the United Kingdom (UK). It also
considers the response of the respective regulators in those countries since the
2007/08 financial crisis.
The authors are Ester Herlin-Karnell, a Senior Lecturer at the University of
Gothenburg, and Nicholas Ryder, a Professor at the University of the West of
England, Bristol. Together they pool their collective expertise to conduct the
analysis. The co-authored introduction sets the framework for the book, defines
insider trading and market manipulation and briefly outlines the reasons for the
2007/08 financial crisis. The book then has five substantive chapters and a brief
conclusion. Herlin-Karnell authors Chapter 2, which sets out the legislative
*
Janet Austin is Professor, Faculty of Law, University of New Brunswick, Canada.
1
Directive 2003/6/EC of the European Parliament and of the Council on insider dealing
and market manipulation (market abuse) [2003] OJ I96/16.
2
Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014
criminal sanctions for market abuse (market abuse directive) [2014] OJ L 173/179 and
Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April
2014 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 [2001] OJ L 173/1.
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framework in relation to market abuse in the EU, and Chapter 4 that examines
EU market abuse regulation in the context of the broader fight by the EU against
other financial crimes. Ryder wrote Chapters 5 and 6, which describe the
regulatory structure in relation to insider dealing and market manipulation in the
UK and US respectively. Chapter 3 was co-authored and looks at the issue of
what are appropriate sanctions for market abuse.
The three chapters (2, 5 and 6) that describe the regulatory regimes in
relation to market abuse in the EU, the US and the UK, summarise the laws and
the roles of the respective regulators in these jurisdictions. While worthwhile,
these chapters ultimately do not add much to the existing literature on these
topics. This is because the information contained in these chapters is available
from a number of alternative sources.
The real strength of the book is the analysis contained in Chapters 3 and 4.
The focus of Chapter 3 is an examination of sanctions applicable for market
abuse and the effectiveness of those sanctions. With the adoption of MAD II and
the MAR, the EU Parliament and Council has stipulated that each jurisdiction in
the EU must have two kinds of sanctions for market abuse, namely criminal
penalties as well as administrative sanctions. It appears that the deliberation in
the EU in relation to these sanctions has centred on whether or not the
administrative sanctions are, in substance, criminal, despite their label. This is
because such administrative sanctions raise issues in relation to rights to a fair
trial and risk infringing rules surrounding double jeopardy. As discussed in this
chapter, the positive aspects of criminal sanctions for market abuse seems to have
been accepted without much debate. The authors question this assumption and
point to the fact that the need for criminal sanctions are traditionally examined
under the lens of JS Mill’s harm principle. In brief, the harm principle asserts that
the State should only intervene with criminal penalties if there is harm to others.
There has been little questioning of whether criminal sanctions appropriately
address the harm done by market abuse and whether or not they are
proportionate to this harm. The chapter then considers the framework and use
of sanctions in the UK and the US. It concludes that the majority of penalties
imposed upon corporations in the US now tend to be administrative, the US
Department of Justice (DOJ) being concerned about the collateral impact of
seeking criminal penalties. By way of contrast, most of the penalties in the UK
on corporations are civil law penalties.
Chapter 4 endeavours to dissect and describe the somewhat complicated
structure in the EU in relation to how the EU deals with other financial crimes.
This is relevant in that those who engage in market abuse may frequently also
commit other offences. For example, the authors examine the EU framework in
relation to anti-money laundering. The EU has progressed through five
Directives in relation to money laundering and is now proposing a sixth
Directive. This Directive makes money laundering an EU crime. Furthermore,
and similar to the market abuse regime, there is an EU anti-money laundering
regulation. However, although there are sanctions prescribed for money
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laundering, the focus of EU anti-money laundering legislation is on risk
management with the view to preventing money laundering before it occurs. This
is achieved by strengthening the “know your client” rules, that is ensuring that
private actors, such as banks, undertake appropriate due diligence in relation to
their clients, such as knowing who is the ultimate beneficial owner of funds.
A significant part of Chapter 4 is devoted to examining the European Public
Prosecutors Office (EPPO), established in 2017. At present, the EPPO only can
prosecute crimes against the EU budget. Given the fact that the part of the
rationale behind MAD II and the MAR was to ensure consistency of rules across
the EU, it would seem to make sense the EPPO should prosecute market abuse to
ensure consistency of enforcement. However, at this stage, the EPPO has not
been given such a mandate, possibly because there is a reluctance on the part of
EU member states to transfer such powers to an EU body. Yet the authors
suggest that it seems possible that this may occur in the future given the extended
powers given to other EU agencies such as Europol, as well as the fact that it is
proposed that EPPO will soon have the power to prosecute terrorist offences.
This chapter also touches upon the issue of the gathering of evidence for criminal
investigations in the context of the General Data Protection Regulation
(GDPR).
Despite the strength of its analysis in Chapters 3 and 4, the book is not
without its weaknesses. In particular, its analysis on sanctions in Chapter 3 does
not sufficiently delineate between sanctions against individuals and corporations.
The authors are critical of the stance taken by US and UK regulators in targeting
individuals for criminal prosecution, rather than corporations. However, it is
individuals, rather than corporations, who most frequently engage in insider
trading, in particular. Furthermore, many of the examples used of action taken
against corporations by the DOJ do not concern market manipulation and
insider trading. It would have been preferable, given the title and stated aims of
the book, to focus these examples on exclusively market abuse.
Another weakness of the book is that a stated aim is to consider the changes
made to the regulation and enforcement of market abuse since the 2007/08
financial crisis. Accordingly, the book appears to be premised upon linking the
2007/08 financial crisis with the regulatory changes made to fight market abuse.
Arguably however, the book might have been more coherent if it had not tried to
emphases such a link. This is because, even based on the author’s own analysis of
the causes of the financial crisis, the main financial crime committed during the
crisis was mortgage fraud, not market abuse. The crash of the stock markets that
resulted from the financial crisis may have focused politicians and regulators on
considering how to restore investor confidence in the markets but this is only
tangentially linked to the changes that have since been made to market abuse
regulation. Indeed, the adoption of MAD II and MAR seem to have been largely
prompted by the LIBOR manipulation scandal and ensuring a framework for
strong enforcement in its wake. Although manipulation of LIBOR was occurring
before and during the events of the financial crisis, it was not a cause of the crisis,
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although it did serve to demonstrate lax ethical standards within financial
institutions.
Despite these issues, overall Market Manipulation and Insider Trading is
useful book. This is because it delivers, in a clear and succinct form, an overview
of the law in relation to market abuse in the EU, UK and USA. It also raises,
and briefly considers, some of the important questions and unresolved concerns
in relation to regulation in this area. As such, it is recommended for academics,
lawyers, students and policy makers who have an interest in this interesting and
evolving field.
