Markets in Financial Instruments Directive – MiFID

Professor Coffee conducted a study on the “comparative research on enforcement”, relying upon the preceding work of Professor Howell Jackson of Harvard Law School, constructing an empirical model to measure the “intensity” of enforcement among different jurisdictions (John C. Coffee, supra at 280). Without repeating the complex analysis undertaken by Professor Coffee, his comparative analysis between the United States and the United Kingdom are illustrative either of different styles or of inadequate enforcement supervision by the United Kingdom. Coffee first acknowledged that “insider trading” is common in the United States and the United Kingdom. However, the public enforcement response is radically different.  “Between 2001 and the fall of 2006, the SEC brought just over 300 insider trading enforcement actions against over 600 individuals and entitles. In addition, as the following table illustrates, the U.S. Department of Justice criminally prosecutes insider trading.

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Fiscal Year	Pending Cases	Indictments	Convictions
2006	56	24	15
2005	67	19	19
2004	53	21	13
2003	51	14	15
2002	52	16	12
2001	53	16	14

By contrast, “criminal prosecutions of insider trading are conspicuous by their absence in the United Kingdom. Even civil actions are rare”. Between 2001 and 2007, the FSA brought eight cases of insider trading to successful conclusion. Importantly, the FSA’s own staff economists reported an increase in insider trading during 2004-06 and attributed that increase to lack of law enforcement. In addition, compared to the United States, the fines are miniscule averaging 50,000 USD. By comparison, the chief executive officer of Qwest was sentenced to six years’ imprisonment, fined 19 million USD and required to forfeit 52 million USD.

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After finding that the SEC spends approximately 37.9% to 41.0% of its annual budget on enforcement activity, Professor Coffee turned his attention BaFin, the German Financial Regulator. The following table summarises the relevant data for BaFin.

Year	Total Budget (E MM)	Spent on Enforcement	Percentage
2005	109.71	3.40	3.1%
2006	126.82	6.51	5.1%
2007	120.15	7.81	6.5%

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Coffee concluded that the “FSA and BaFin seem to share a common aversion to enforcement” (Noteworthy is the fact that in 2008, 28% of mergers in the United Kingdom were preceded by suspicious stock trading, including possible insider trades, as acknowledged by the FSA. Wall Street Journal, In U.K., 28% of Mergers Raise Alarms, C1 (April 30, 2008)). This finding has two implications relevant to the object of this brief: (1) MiFID seeks to increase dispersed ownership of companies, and (2) the EU prides itself on the integrity of its company law and financial markets. However, if MiFID achieves its objectives by increasing ownership dispersion, then investors are either left without a remedy due to enforcement style or the lack of enforcement will chill retail investment in the market (Ironically, the European hysteria, following the decision in Centros, resulting in accusations that Europe will suffer from the Delaware effect, or race to the regulatory bottom, has not found a similar response to its dubious deference toward the interests of private majority shareholders). An inherent contradiction pervades EU policy makers and public enforcement officers. European companies eschew the US public markets due to compliance costs that would confer direct benefits upon their shareholders and provide the companies with direct benefit of cheaper capital, and a valuation premium or cross-listing their shares. Simultaneously, the EU seeks to emulate the US markets but appears to lack the stomach to intensify its enforcement against corporate fraud.