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Europeans get serious about insider trading

Airbus executives who sold ahead of bad news about the A380 may become the test cast.

By Peter Gumbel, Europe editor
Last Updated: July 2, 2008: 8:52 AM EDT

Airbus' new A380 superjumbo airliner

(Fortune) -- On June 18, when French authorities put a second EADS executive under formal investigation for insider trading, it was the latest reminder that European regulators were getting serious about cleaning up their stock markets. Insider trading has long been on the statute books in France. To date, however, only one Frenchman has ever landed in jail for the offense, even though the law allows for sentences of up to two years.

Similarly, Britain's answer to the Securities and Exchange Commission is considering adopting measures that have proved effective in the United States but aren't yet widely used in Britain, including protection for whistleblowers and a plea-bargaining system for defendants. "The legislation in Europe is not all that different from the U.S.," says Tom Ross, a partner at London law firm LG who specializes in financial market litigation. "What's different is that the watchdogs have been much quieter."

Several forces are driving the change. There is growing public outrage throughout Europe about white-collar crime and supersized executive pay packages. In France, President Nicolas Sarkozy is calling on business to adopt a "new morality." At the same time, U.S. and other international investors, who now hold 40% of the French stock market's total capitalization, are pushing European markets to clean up their act. In the EADS case, several U.S. plaintiffs attorneys filed lawsuits against the company for misleading the public.

EADS is the parent company of Airbus. Its former chief executive, NoŽl Forgeard, was placed under criminal investigation on May 30, followed less than three weeks later by Jean-Paul Gut, EADS's former chief operating officer. Fifteen other EADS executives are also being probed by the French stock market regulator, the Autoritť des Marchťs Financiers (AMF). Allegedly they exercised options or sold stock in the company in late 2005 and early 2006, before news broke about problems with Airbus's new A380 superjumbo airliner. That disclosure sent EADS stock plummeting more than 25%. Forgeard and Gut deny any wrongdoing. Forgeard, 62, says that he sold in order to create a retirement nest egg and provide for his family, and that neither he nor any member of the executive committee of EADS had been officially alerted to the A380 problems before they sold.

The AMF could do with a credibility boost. Its predecessor agency watched its entire strategy to combat insider trading shredded by France's highest appeals court. In a 1999 case involving a real estate company, the court ruled that the regulator's procedures violated the rights of defendants and thus were fatally flawed. As a result, several other cases were thrown out and "for two years after that, they were completely paralyzed," says Thierry Gontard, a managing partner of law firm Simmons & Simmons. The agency has since been overhauled and has adopted new procedures.

On the heels of the EADS investigations, some lawmakers in Paris are calling for even tougher sanctions, including raising the maximum penalty to three years in prison, from two. But the real issue is not whether the law will be changed but whether the existing one - which allows for fines up to ten times the profits made from insider trading - will be enforced. If it is, insider trading may join drinking two bottles of wine at lunch as a Gallic custom that has fallen victim to globalization.  To top of page

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