News published on JOTA web portal: Only 8% of insider trading cases are tried by the Judiciary

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Convictions are limited to the administrative sphere, according to researchers from Fundação Getúlio Vargas
By Guilherme Pimenta
The convictions for the misuse of privileged information in the capital market (insider trading) continue limited to the administrative sphere and do not reach the Judiciary through criminal actions. In the book “Insider trading: normas, instituições e mecanismos de combate no Brasil” (“Insider trading: rules, institutions and fighting mechanisms”), professors from the Center of Studies on Markets and Investments from FGV Direito-SP showed that only 4 out of 50 cases – or 8% of all violations – adjudicated by CVM – the Brazilian Securities Commission – in the 2002-2015 period were tried in the criminal sphere.
Additionally, CVM and the federal courts make use of different criteria to decide on the convictions. This discrepancy in the analysis of the same illegal procedure was one of the points revealed by the research conducted by Viviane Muller Prado, coordinator of FGV’s Center of Studies on Markets and Investments, and Nora Matilde Rachman and Renato Vilela, attorneys and specialists in the area.
The book about insider trading is the result of a study started in 2009, when the first criminal conviction for the use of privileged information took place in Brazil, in the Sadia-Perdigão case.
In 2011, Marcelo Costenaro Cavali, at that time temporary judge at the 6th Federal Criminal Court of São Paulo, convicted Sadia’s former Chief Finance and Investor Relations Officer Luiz Gonzaga Murat Júnior and the former member of Sadia’s Board of Directors Romano Ancelmo Fontana Filho to prison (under the open regime): 1 year and 9 months and 5 months, respectively.
They were found guilty of insider trading during Perdigão’s tender offer, in 2006.
The use of privileged information became illegal in 2001, as set forth in the Article 27-D of the Law 6,385/1976:
Article 27-D: To make use of relevant information not yet disclosed to the market, to which someone has access and that must be kept confidential, capable of providing oneself or other parties with an undue advantage in the trading of securities. Penalty: 1 to 5 years of prison and fines of up to 3 times the amount of the illegal advantage obtained as a result of the crime.
In the 2002-2015 period, CVM adjudicated 50 sanctioning administrative insider actions. Yet in the criminal sphere, the first charge – the Sadia-Perdigão case – took place only in 2009, despite the fact that the practice started to be considered a crime in 2001.
FGV-SP’s survey found only other 3 cases. In one of them, the process was reprieved. The other two are underway – the businessman Eike Batista is the defendant in one of them – and the process is being tried by the Federal Justice Court of Rio de Janeiro.
“If it is a crime, why are there more cases in the CVM than in the Judiciary? Shouldn’t all cases be tried in the criminal sphere?”, questioned Viviane Muller Prado, in her interview to JOTA. “Despite the more restricted scope of the criminal rule, why are some cases involving people subject to the duty of confidentiality not tried in the criminal sphere by the Judiciary?”
In the conclusion of the book, the authors point out that “administrative and judicial precedents made use of and reached different results exactly because of the instruments, mechanisms, legal strategies and proactivism of the institutions when fighting the illegal act.”
Additionally, according to them, “there is lack of uniformity in the decision making process by both those that propose administrative and legal measures and those that analyze them.”
The scenario could be worst. On March 4, 2008, one year before the first charge of insider trading, the CVM Board signed a Technical Cooperation Agreement (TCA) with the Federal Prosecution Office. In 2013, the agreement was renewed for 5 years. The four charges were filed after the TCA.
In addition to the CVM, the authors also detail cases of misuse of privileged information that are reviewed in the court of appeals of the administrative sphere, in the Conselho de Recursos do Sistema Financeiro Nacional – CRSFN (“National Financial System’s Council of Appeals”), known as the Central Bank’s Conselhinho.
From 2003 to 2015, the CRSFN analyzed 26 cases, 11 of which mandatory reviews – resulting from cases acquitted by CVM.
Of that total, the Conselhinho maintained CVM’s decision in 19 cases. The decision was fully reviewed in 4 cases and partially reviewed in 3 cases.
“Surveying CRSFN’s decisions is crucial to understand, up to the last [administrative] degree, the course of the enforcement of penalties as to the use of privileged information in the Brazilian market. After all, the effective enforcement can play – and plays – a central role in suppressing illegal acts,” the authors state.
The book
The 102-page book analyzes the punitive scenario as to the insider trading in Brazil. It’s divided in three phases.
In the first one, the authors analyze the 1965-1976 period, characterized by “few regulations and many possibilities of manipulation.”
In the second phase, the book addresses the 1976-2001 period. That’s exactly when the first cases began, with the creation of CVM and the participation of the Judiciary Branch for damages purposes. Finally, the authors analyze the period as of 2001, when the practice started to be considered a crime.
“The book seeks to record a historical moment, encourage new analyses and show the connections that help establish the course of action and strategies to be followed by the institutions involved in the enforcement of the rules that ban the use of privileged information,” the authors highlight in the conclusion of the book.
In addition to bringing an overview about the administrative and judicial discipline, the authors also detail the use of Terms of Commitment (TC) by CVM for settlement purposes. When a TC is signed between the suspect and CVM, the process is reprieved.
“As the fines applied by CVM are paid in only 3% of the cases, we have identified that the terms of commitment are more effective because they are paid,” said Renato Vilela, one of the authors.
Guilherme Pimenta – São Paulo
Click here to access the article published on JOTA web portal.