Finnish Supreme Court ruling: CEO guilty of aggravated abuse of inside information – key takeaways for listed companies

Insights|June 12, 2024

A recent client note summarizes a ruling by the Finnish Supreme Court, where the CEO of a Finnish listed company was found guilty of aggravated abuse of inside information concerning a customer order.

The ruling is significant because the Supreme Court upheld a relatively low bar for the test of preciseness required for inside information. It was irrelevant that there may have been uncertainty as to whether the company would receive the order or as to the value of the order. Furthermore, the Supreme Court did not attach importance to the fact that the CEO had consulted the company’s in-house counsel and seems to have attached decisive significance to what knowledge the CEO could be deemed to possess by virtue of his position.

Based on the ruling, we also present practical takeaways for listed companies when considering trading guidelines and handling of confidential projects.

Please find the key takeaways at the end.

Executive summary

The Finnish Supreme Court recently issued a ruling whereby the CEO of a Finnish listed company was found guilty of aggravated abuse of inside information. In October and November 2014, the CEO had acquired shares in the company whilst being in possession of information relating to a potential new order from an existing customer worth approximately EUR 8 million, later made public by way of a stock exchange release on 5 December 2014. The Supreme Court held that information regarding such potential new order constituted inside information.

The ruling is significant because:

  • The Supreme Court upheld a relatively low bar for the test of preciseness required for inside information. The court stated that inside information does not exclude plans that are uncertain and that it is not required that an event is more likely to occur than not to constitute inside information. The mere realistic prospect of the event occurring suffices. Even information on planned events that do not materialize can constitute inside information.
  • The order did not deviate from the company’s ordinary course of business and was not treated as an insider project in the company. However, the company’s published disclosure practice specified that an order of at least EUR 1 million constituted a significant order that had to be made public by way of a stock exchange release. In addition, the order was held to be significant compared to the company’s annual revenue (approx. 10 %) and other order backlog.
  • The publication of the information on the customer order resulted in a price increase of 3 cents (approximately 5%) on the day of publication, which the Supreme Court held to be a relatively significant change in value.
  • In assessing the CEO’s intention, the majority of the Supreme Court did not attach importance to the fact that he had consulted the company’s in-house counsel regarding the appropriate timing of the share purchases, or the fact that similar pending offers to customers had not been treated as inside information. Instead, the court seems to have attached decisive significance to his position as the CEO and what knowledge he could be deemed to possess by virtue of his position.
  • Two out of the five justices were of the opinion that the CEO’s conduct did not amount to aggravated abuse of inside information, giving weight to the fact that the customer order was in the company’s ordinary course of business and that the CEO consulted with the company’s in-house counsel.
  • The decision highlights the fact that, while it is always advisable to seek legal advice in situations involving the purchase of shares, it is ultimately up to the individual to determine whether the information in their possession could be considered inside information. The ruling emphasized each individual’s personal obligation to ensure that no inside information prevents trading and that they comply with legal requirements before trading in listed shares or other relevant financial instruments.

Case brief

On 28 October and 11 November 2014, the CEO of a Finnish listed company purchased a total of 550,000 shares in the company for EUR 337,071. Just over a month later, the company published a stock exchange release stating that the company had received a large order concerning software licenses and service from an existing customer, with a four-year agreement to continue the long-term customer relationship worth EUR 8 million in total (of which EUR 1.5 million was recognized for the financial year 2014).

Reports appended to minutes of the company’s Board of Directors from June 2014 stated that negotiations concerning the customer order had commenced, and that delays were possible. Reports from July to August 2014 indicated that the order was expected to be received in September, and reports from October 2014 indicated that negotiations had entered the final stages, with the order expected to be received in October. The reports indicated an order value of EUR 1–1.5 million.

The District Court had convicted the CEO of abuse of inside information, while the Court of Appeal dismissed the charge. The Court of Appeal noted that the order was in the company’s ordinary course of business and had not changed the company’s financial forecast for 2014. As regards the precise nature of the information, the Court of Appeal stated that it was uncertain when the company would receive the order and what the value of the order would be. Based on this, the Court of Appeal held that the CEO did not have precise information to assess the impact of the order on the value of the share.

The Supreme Court overturned the decision of the Court of Appeal and adopted a strict interpretation of the test of preciseness and the significance of the information. The Supreme Court concluded that the CEO was aware of the negotiations concerning the order from the customer and the progress of the negotiations when he purchased the shares. According to the Supreme Court, the CEO purchased the shares in order to seek to make a significant profit utilizing a particularly responsible position. When assessed as a whole, his actions were also considered aggravated.

The Supreme Court did not consider the actual likelihood of the customer’s order being placed to be of much relevance, but rather stated as follows:

  • inside information does not exclude plans that are uncertain, and it is not required to enable specific conclusions to be drawn as to whether and when the event will occur;
  • it is not required that an event is more likely to occur than not to constitute inside information, but the mere realistic prospect of the event occurring suffices;
  • even information on projects or alternative plans that do not materialize can be specific enough to constitute inside information;
  • the overall assessment of inside information must take into account that the more material a project or other set of circumstances is, the earlier it can be considered inside information.

The CEO was convicted of aggravated insider trading and was ordered to forfeit a certain amount of money to the state as a financial gain from the crime. The Supreme Court’s assessment

The definition of inside information under the EU Market Abuse Regulation (“MAR”) requires that the information:

  • is of a precise nature;
  • is related to a financial instrument admitted to trading on a regulated market or on a multilateral trading facility;
  • has not been made public; and
  • is likely to have a material effect on the price of the said financial instrument or other related financial instruments.

While the case was considered in light of the provisions of the Securities Markets Act based on the EU Market Abuse Directive (“MAD“) that were in force in 2014, the Supreme Court held that the constituent elements of the abuse of inside information and the definition of inside information have remained essentially the same as under the currently applicable MAR. Accordingly, the ruling has relevance also under the current regulatory framework.

The Supreme Court assessed the following factors:

  • the information the company (and the CEO) received from the customer about the potential new order;
  • the precise nature of the information;
  • the materiality of the information;
  • the intention of the CEO; and
  • the aggravated nature of the CEO’s actions.

These factors are summarized below.

The information received and its precise nature

The Supreme Court stated that, in order to meet the definition of inside information, the information must be of a precise nature. To be considered precise, it is not required under EU/national law that it is possible to draw a definitive conclusion as to the occurrence or timing of the circumstance or event in question based on the inside information (i.e. a high degree of probability is not required). Nor is it required that the occurrence of an event be more likely than not to occur, but it is sufficient that there is a realistic prospect that it will occur. The concept of inside information only excludes vague or general information, not enabling any conclusions as to the possible effect on the share price. Even information on projects that do not materialize can constitute inside information.

In this case, the Supreme Court considered that the reports included in the written board materials demonstrated that the negotiations with the customer had progressed quite far in the summer of 2014, and that in October the negotiations were already in their final stage with an agreement expected to be concluded soon afterwards.

The Supreme Court held that the CEO’s knowledge of the order clearly satisfied the requirement that the information be of a precise nature, so there was a realistic prospect that the order would be completed. The Supreme Court found it to be irrelevant that there may have been uncertainty as to whether the company would receive the order or as to the value of the order.

The materiality of the information

According to the Supreme Court’s previous rulings on inside information, the assessment of materiality of information must consider the circumstances and any special features relating to the security (e.g. a share) in question or the company’s field of business and their price formation. The company’s past disclosure practice and its consistency should also be considered, as these factors would influence the expectations of a reasonable investor.

According to MAR (and the previous MAD and the related Commission Directive), the assessment has to take into consideration the anticipated impact of the information in light of the totality of the company’s activity, the reliability of the source of information and any other market variables likely to affect the financial instruments in the given circumstances.

The customer was a significant existing customer of the company, and the CEO claimed that, rather than individual orders, it was more significant for the share price that orders were in line with the company’s financial forecasts.

According to the company’s published disclosure practice, the company would consistently and without undue delay, disclose by means of a stock exchange release the following significant orders: 1. an order from a new customer; 2. an order with a value of at least EUR 1 million; and 3. an order for new strategic products.

As such, the Supreme Court found that the nature of the order did not deviate from the company’s ordinary course of business but placed importance on the total value of the order (EUR 8 million), which was significant compared to the company’s revenue of EUR 80 million in 2014 and other order backlog, despite the order being spread over four years. It was also disclosed by the company as a significant order by way of a stock exchange release. The CEO was therefore held to be aware that the agreement regarding the order being negotiated was significant according to the company’s disclosure practice.

In assessing the materiality of the effect of information, the perspective of the reasonable investor is decisive. The significance of the information is assessed at the time of the act from the perspective of an objective third party. The Supreme Court found that, given the total value of the order in question, its financial significance to the company was considerable. This information contributed to confirming investors’ perception of a positive development of the company’s financial situation. Since the company itself considered the order to be significant, the Supreme Court held that a reasonable investor who would have been informed of this order worth approximately EUR 8 million would have acted on the information rather than treating it as irrelevant in assessing the trading of financial instruments.

Based on legislative preparatory works, a price impact of even a few percentage points resulting from the publication of information can be considered material. Based on previous rulings, it is not required to present evidence about the actual price impact. The assessment must be based on information available at the time a person decides to engage in trading, but the actual price impact can act as supporting evidence.

The Supreme Court found that the increase in the share price following the publication of the stock exchange release concerning the order in question supported the conclusion that the order had a significant effect on the value of the company’s share. In addition, the change in the share price (6 cents in two trading days) was not considered insignificant in relation to the typical change in the share price of the company. The Supreme Court even considered the price increase of 3 cents (approximately 5%) on the day of publication to be a relatively significant change in value.

The intention of the CEO

The Supreme Court held that the CEO had acted willfully. As the CEO, he was responsible for the day-to-day management of the company and had reported on the development of the company’s financial position to the Board of Directors. By virtue of his position, he was considered to have received the necessary information for evaluating the scale and financial significance of the customer order.

The Supreme Court held that, as the company’s CEO, he should have understood the significance of the information to investors and the potential price impact. The Supreme Court held that the CEO had knowledge of the facts on which the inside information is based, from which the legal evaluation of the inside information is made.

The Supreme Court found it to be irrelevant that the CEO had discussed the matter with the company’s in-house counsel prior to purchasing the shares or that the company did not consider pending offers of this size to constitute insider projects. The Supreme Court’s view reinforces each individual’s personal obligation to ensure in advance that no inside information prevents trading in listed shares or other financial instruments.

The aggravated nature of the CEO’s actions

The Supreme Court justified the aggravated nature of the offense by the fact that the amount of money spent on the purchase of shares was large for an individual, given that the acquisitions were made within a short period of time. The Supreme Court also considered that a particularly large profit was sought with the share purchase. Furthermore, the particularly responsible position as a CEO of the company also justified the finding that the act, when assessed as a whole, was aggravated.

Key takeaways

We recommend the following:

1. Follow trading guidelines presented by the Finnish Financial Supervisory Authority and Nasdaq Helsinki, such as:

  • timing trading to take place when the market has as exact information as possible about matters affecting prices of the listed company’s financial instruments, for example after the disclosure of a financial report or other significant information (but allowing the general market sufficient time after the disclosure to digest and evaluate the information);
  • avoiding excessively active and spontaneous trading and focusing on making long-term investments;
  • if possible, purchasing shares before taking up a managerial position in a listed company (having first ensured that you are not in possession of any inside information); and
  • as needed, utilizing explicit, detailed written trading plans defining in advance (at a time when you are not in possession of any inside information) the volumes, prices and times of transactions that are provided to a broker for independent execution.

2. Ensure that the status and progress of confidential projects (such as potential customer orders) are documented in appropriate detail in board minutes and appendices as well as other company internal documentation.

  • Depending on their quality and nature, such materials may either exonerate or incriminate persons that may be suspected of engaging in insider trading.
  • The documentation should be explicitly clear about when the company considers an event or circumstances to be material and specific enough to constitute inside information (and ideally the grounds for determining whether or not it does at each stage of the project).
  • It should be carefully recorded in board minutes when and by whom the determination about the insider nature of a matter and the decision to disclose or delay disclosure has been made.

3. Ensure that relevant listed company guidelines and policies for public disclosure and the appropriate handling of inside information are carefully prepared in appropriate information/disclosure policies and insider guidelines, which should:

  • be tailored to consider the specific factors and special features relating to the company’s shares, its operations and the industry in which it operates, which affect price formation;
  • consider that published disclosure policies and the consistency of disclosure practice impact reasonable investors’ expectations about what matters are considered material for the price formation of a company’s shares;
  • consider the appropriateness of internal monetary or percentage-based thresholds to provide clear guidance to management, personnel and other parties acting on behalf or on the account of the company in which situations an event or a set of circumstances may constitute inside information (emphasizing the need to always make a case-by-case assessment, as overly categorical and rigid thresholds may be used as aggravating evidence, as was the situation in the Supreme Court case summarized here;
  • make it clear which corporate body or individual(s) are authorized to make the determination of whether a potential event or potential circumstances constitute inside information, and whether the information should be published or delayed (including the process for informing relevant individuals of the insider nature of the information);
  • be provided to management and employees of the company, along with relevant training to ensure awareness of and compliance with guidelines and policies concerning inside information and disclosure practices throughout the organization.

4. Monitor price impacts of information disclosed by the company and those of relevant peers to enable data-based conclusions about the typical, and therefore potential, price impact of disclosing a particular type of information.

5. Even though a project is not yet determined to constitute inside information, consider:

  • notifying individuals involved in a confidential project that related information is sensitive and should be treated with strict confidentiality;
  • maintaining confidential information lists of those in possession of knowledge about confidential projects even before establishing an insider list;
  • informing those involved in confidential projects that the projects may eventually progress to a stage where they could constitute inside information; and
  • recommending that those involved in confidential projects refrain from trading until the project has been disclosed or terminated.