On July 1, 2013, the Federal Service for Financial Markets (“FSFM”) announced that it had opened its first investigation into a potential violation of the Insider Trading Law1, which had entered into force in June 2010. However, on July 25, 2013, President of the Russian Federation Vladimir Putin signed the Order "On Dismissing of FSFM", effectively transferring all of the authorities of the FSFM, including its personnel and files, to the Central Bank of Russia ("CBR") beginning on September 1, 2013. In this respect, the investigation will continue under the direction of the CBR.
This case should provide valuable insight and a potentially powerful precedent with respect to how the CBR will investigate insider trading, especially since there was no legal framework for doing so prior to the passage of the Insider Trading Law.
In the fall of 2011, shortly before the official publication of a press-release regarding the acquisition by OOO Unilever Rus (“Unilever”) of a controlling stake in the Russian entity Kalina, the value of Kalina’s shares more than doubled, which aroused suspicion in the Russian market.
Over the course of the next two years, the FSFM, which was tasked with investigating any suspicious market activity (until its merger with the CBR), reportedly requested and analyzed documents and information from approximately 30 legal entities and 300 individuals. From the information gathered, the FSFM drew the conclusion that there were a number of individuals involved in the deal with Unilever who purchased Kalina’s shares for several hundred million rubles and then subsequently resold them at a higher price.
The CBR plans to hand over the materials obtained during the FSFM’s investigation to Russia’s law enforcement authorities in the hope that they might bring any offenders to justice.
However, despite what appears to be reasonably conclusive evidence, the offenders may nevertheless be able to escape criminal liability because the alleged offence was committed prior to the enactment of Article 185.6 of the Criminal Code of the Russian Federation2, which has no retroactive effect. Moreover, the one year limitation period for imposing administrative liability on any offenders has expired.
In terms of civil law remedies, an aggrieved party may only recover damages if it can prove the existence of a causal relationship between the offenders’ actions and the damage the aggrieved party has suffered.
While brokers/dealers are not held liable if acting under instruction from third parties, the CBR may still be able to revoke the license of the brokers/dealers who handled the acquisition of Kalina shares – but only if it can prove that there was a conspiracy between the brokers/dealers and their clients (the alleged insiders). In practice, obtaining such evidence is often difficult and problematic.
The case in question demonstrates that the CBR’s ability to prosecute offences in capital markets transactions, the responsibility of which it inherited from the FSFM, is very limited. Dmitry Pankin, the former head of the now defunct FSFM (who did not switch over to the CBR), explained that this was because the FSFM had neither a sufficient number of specialists for investigations nor the necessary investigative equipment, as used by law enforcement authorities (such as wiretaps and other forms of clandestine surveillance) at its disposal to investigate thoroughly.
Today, the scope of the CBR’s authority is confined solely to interviewing market participants and the alleged insiders identified by those participants, as well as to obtaining documents and information from public sources in order to uncover evidence of illegal insider trading activities. In practice, this takes a considerable amount of time and is not particularly efficient. Moreover, if the offender is a resident of a foreign state, the process of acquiring information is hampered by the usual formalities governing international data requests.