Extract taken from 'The Securities Ligation Review – edition 5'

Public enforcement

i Forms of action

The CNMV is entitled to initiate an administrative procedure that may lead to the imposition of a sanction when an issuer or a market operator violates securities regulations. Sanctions imposed by the CNMV can be appealed before administrative courts.

Nevertheless, the CNMV is not entitled to file a criminal complaint or prosecute securities-related crimes. If, in the course of its supervisory activity, the CNMV finds indications of a criminal offence, it must refer the case to the Public Prosecutor. The CNMV will not be a party to the criminal proceedings, but will assist the prosecutor and the court by producing documentary evidence or issuing expert opinions.

Criminal enforcement of securities regulations has recently been enhanced by an amendment to the Criminal Code that entered into force in March 2019. Through this amendment, Spain has transposed Directive 2014/57/EU of the European Parliament and the Council, of 16 April 2014, on criminal sanctions for market abuse. It has also clarified what conduct qualifies as market abuse and manipulation and insider trading offences, while keeping corporate criminal liability for securities-related crimes.

ii Procedure

Enforcement actions may be divided into two main categories: administrative proceedings conducted by the CNMV and criminal proceedings pursued mainly by the Public Prosecutor before the criminal courts.

Administrative sanctioning proceedings are initiated by the CNMV ex officio. The resolution of initiation will be notified to the defendant, who may file written allegations. The CNMV's Legal Affairs Department acts as the investigative body and is entitled to perform all necessary fact-finding tasks. In view of the initial findings, the investigative body will issue a preliminary statement of charges against the defendant, who will have 20 days to reply. Once the investigation is concluded, the investigative body will issue a motion for a resolution, regarding which the defendant will have 20 days to submit objections or comments.

After this time, the investigative body will refer the motion to the board of the CNMV, which is the competent authority to resolve sanctioning procedures. The board of the CNMV may take additional investigative measures before issuing its decision. Decisions (sanctions) issued by the board of the CNMV may be appealed to the Minister of the Economy. In turn, decisions by the Minister of the Economy may be appealed before an administrative court (the National Court in Madrid).

The duration of an administrative proceeding is limited to one year from the date of the decision to initiate the proceeding. Simplified proceedings (limited to four months) are available for minor infringements or cases in which the facts have been fully disclosed.

It is noteworthy that securities issuers and market operators are legally bound to cooperate with the CNMV during its investigations by disclosing and providing all requested information and documentation deemed necessary for the administrative proceedings. Refusal to cooperate with the CNMV is classified as a very serious administrative infringement.

As regards criminal enforcement, there is no special criminal procedure for the prosecution of securities-related crimes. Therefore, standard criminal procedure is applied.

Criminal proceedings under Spanish law are divided into three stages: the investigation stage, the accusation stage and the oral trial or hearing. The investigation stage is aimed at investigating the alleged crimes and the alleged perpetrators (both legal and natural persons) to allow the investigating judge to decide whether the case should be dismissed (if there are insufficient grounds) or tried (if there are sufficient indications that a crime has been committed by the alleged perpetrators). The accusation stage is an intermediate step between investigation and trial during which the parties (the prosecutors and defendants) file their respective briefs of accusation and defence. In the oral trial, prosecutors attempt to establish the facts and guilt of the accused parties (whether natural or legal persons).

The standard of proof depends on the procedural stage. In the investigation and accusation stages, prosecutors must provide the criminal court with sufficient indications (not evidence) that a crime may have been committed by the suspect so that an oral trial can be held. If there are insufficient indications of criminal activity, criminal proceedings will be dismissed at this stage. In the oral trial, the accused legal or natural person can only be declared guilty if criminal liability is proved beyond a reasonable doubt.

As regards discovery in criminal cases, parties may propose any investigative measure they deem necessary; however, the investigating judge has sole authority to order the measures (e.g., depositions, searches and seizures, wiretapping and document discovery). Unlike in administrative procedures, suspects have no obligation to cooperate with the court or the Public Prosecutor or to produce evidence.

iii Settlements

Unlike in other administrative proceedings, administrative sanctioning procedures involving securities do not allow settlements (or findings of conformity) between the defendant and the authorities concerned (in this case, the CNMV). The only possibility available to the defendant is to fully recognise and admit the infringement and redress it at its own initiative to the extent possible. Both the admission of liability and redressing actions are factors taken into account by the competent body when deciding to impose a less severe penalty within sentencing guidelines.

As regards criminal procedures, under Spanish law, public prosecutions are governed by the principle of mandatory prosecution (linked to the principle of legality). As a consequence, a Public Prosecutor is not entitled to drop or defer prosecution in the context of a settlement as long as there are indications that a crime has been committed.

However, the Criminal Procedure Act allows parties in criminal proceedings to enter into plea bargain agreements at any time before the oral trial is finished, except if the requested penalty exceeds six years of imprisonment. All securities-related crimes are subject to plea bargains given that none is punishable by a sentence exceeding six years.

A plea bargain consists of an agreed acceptance by the defendants (either legal or natural persons) of the charges, counts and penalties brought by the prosecutor before the criminal court. As a consequence, the criminal court issues a judgment in accordance with the mutually agreed penalties and damages, which are imposed on the defendants. The criminal court may only refuse to issue a judgment on those terms if:

  1. there exists some doubt that the accused's decision to enter into the bargain was taken under duress;
  2. the defendant's attorney deems it necessary to hold the trial; or
  3. the court believes that the prosecution's charges and counts contravene the law or that the sentencing requested is inappropriate.

The plea-bargain judgment may only be appealed if it does not comply with the terms of the agreement.

The general rule regarding attorneys' fees in criminal proceedings is that the convicted party is responsible for all legal costs (including attorneys' fees) of the claimants (private prosecutors). As a particular feature, procedural costs may only be imposed on private prosecutors where it is established that they have acted recklessly or in bad faith.

iv Sentencing and liability

The LMV classifies administrative infringements as minor, serious or very serious, establishing different sanctions for each class of infringement.

Very serious infringements are punishable with a fine amounting to the highest of the following figures: five times the amount of the gross profit made or the loss avoided as a result of the infringement; 5 per cent of the shareholders' equity of the offending entity; 5 per cent of the offending entity's or of third parties' funds used to commit the infringement; 10 per cent of the offending entity's annual turnover; or €5 million. In addition to the fine, other sanctions may be imposed, such as:

  1. suspension or limitation of the type or volume of transactions and activities that may be undertaken by the offender in securities markets for up to five years;
  2. suspension from membership in an official secondary market or a multilateral trading facility for up to five years;
  3. removal of a financial instrument from trading on a secondary market or a multilateral trading facility; or
  4. withdrawal of authorisation to trade.

Serious infringements are punishable with a fine amounting to the highest of the following figures:

  1. three times the amount of the gross profit made as a result of the infringement;
  2. 2 per cent of the shareholders' equity of the offending entity;
  3. 2 per cent of the offending entity's or of third parties' funds used to commit the infringement; or
  4. €300,000.

In addition to the fine, other sanctions may be imposed, such as:

  1. suspension or limitation of the type or volume of transactions and activities that may be undertaken by the offender in securities markets for a period of up to one year;
  2. suspension from membership in an official secondary market or a multilateral trading facility for a period of up to one year; or
  3. withdrawal or suspension of the authorisation to trade for up to five years.

Minor infringements are punishable with a fine of up to €30,000.

Article 310 of the LMV sets forth the criteria for calculating fines, such as the nature and severity of the infringement, the degree of responsibility and the financial strength of the offender, the seriousness and duration of the hazard or damage caused, the losses caused to third parties, the profit obtained or the loss avoided or the fact that the offender redressed the infringement at his or her own initiative.

After its 2019 amendment, the Criminal Code foresees the following securities-related criminal offences:

  1. investment fraud;
  2. market abuse and manipulation;
  3. insider trading;
  4. unlawful disclosure of inside information; and
  5. incitement and conspiracy to commit market abuse and manipulation, insider trading and unlawful disclosure of inside information.
Investment fraud

Article 282 bis of the Criminal Code punishes the directors of a securities issuer that forge the prospectus of an initial public offering (IPO) of shares or any other mandatory statements or periodic reports to unlawfully obtain investments. No loss need be incurred by any investor for a crime to have been committed. This offence is punishable by imprisonment of between one and four years. If a loss is caused to an investor, the punishment imposed will fall within the upper half of that range (imprisonment of two-and-a-half to four years). In addition, if the damage caused is particularly serious, the penalty will range from between one and six years' imprisonment and a fine of between €360 and €144,000.

Market abuse and manipulation

Article 284 of the Criminal Code punishes three different conducts of market abuse and manipulation:

  1. alteration of prices by using violence, intimidation, deceit or any other form of contrivance;
  2. alteration of prices of a financial instrument or a related spot commodity contract and manipulation of a benchmark by spreading false news or rumours, if the offender obtains a profit, provided that, at least, one of the following conditions is met:
    • the profit obtained or damage caused exceed €250,000;
    • the funds used exceed €2 million; or
    • market integrity is seriously impaired;
  • entering into transactions or placing orders to trade that give false or misleading signals as to the supply of, demand for, or price of, a financial instrument or a related spot commodity contract or a benchmark, or securing the price of one or several financial instruments or a related spot commodity contract at an abnormal or artificial level, provided that, at least, one of the following conditions is met:
    • the offender has obtained a profit exceeding €250,000 or has caused damage exceeding that amount;
    • the funds used exceed €2 million; or
    • market integrity is seriously impaired.

This offence is punishable with:

  1. imprisonment of six months to six years;
  2. a fine between €1,440 and €720,000 or of up to three times the profit obtained or the loss avoided, where this is a higher figure; and
  3. a special disqualification (debarment) from trading on financial markets for two to five years.
Insider trading

Article 285 of the Criminal Code punishes the person who, possessing inside information, engages in insider trading or recommends or induces another person to engage in insider trading, either by acquiring or disposing of financial instruments to which that information relates or by cancelling or amending an order concerning such financial instruments, provided that, at least, one of the following conditions is met:

  1. the offender has obtained a profit exceeding €500,000 or has caused damage exceeding that amount;
  2. the value of the financial instruments involved exceeds €2 million; or
  3. market integrity is seriously impaired.

This provision applies to any person who possesses inside information as a result of:

  1. being a member of the administrative, management or supervisory bodies of the issuer or emission allowance market participant;
  2. having a holding in the capital of the issuer or emission allowance market participant;
  3. having access to the information through the exercise of an employment, profession or duties; or
  4. being involved in criminal activities.

It also applies to any person who has obtained inside information under other circumstances, where that person knows that it is inside information; however, in such a case, applicable penalties will be less serious.

This offence is punishable with:

  1. imprisonment of six months to six years;
  2. a fine between €1,440 and €720,000 or of up to three times the profit obtained or the loss avoided, where this is a higher figure; and
  3. special disqualification (debarment) from markets and securities-related offices or activities from two to five years.

The penalties imposed will be in the upper half of the range if the offender regularly trades with inside information, or the profit obtained, the loss avoided or the damage caused is especially significant.

Unlawful disclosure of inside information

Article 285 bis of the Criminal Code punishes unlawful disclosure of inside information, which arises when a person possesses inside information and discloses that information to any other person, endangering market integrity or investors' confidence, except where the disclosure is made in the normal exercise of an employment, profession or duties, including where the disclosure qualifies as a market sounding made in compliance with EU regulations.

This offence is punishable with:

  1. imprisonment of six months to four years;
  2. a fine between €720 and €288,000; and
  3. special disqualification (debarment) from markets and securities-related offices or activities from one to three years.
Incitement and conspiracy

Article 285 quater of the Criminal Code punishes the incitement and conspiracy to commit the above-mentioned criminal offences with less serious penalties than those set out in Articles 284, 285 and 285 bis for such offences.

Finally, according to Articles 31 bis and 288 of the Criminal Code, a legal person may be held criminally responsible for any of these offences, together with guilty natural persons, if the crime was committed by its directors, representatives, agents or employees to the benefit of the entity. In these cases, the legal person will face mandatory fines ranging from one to five times the profit obtained or between €5,400 and €9 million.

In addition, the judge may impose one or more of the following penalties on the legal person:

  1. winding up of the company;
  2. suspension of activities (for up to five years);
  3. closure of premises (for up to five years);
  4. business ban (for up to 15 years);
  5. disqualification (debarment) from entering into public contracts, applying for state subsidies and tax or social security benefits (for up to 15 years); and
  6. judicial management of the company.

A 2015 amendment to the Criminal Code provides for an affirmative defence of compliance (set out in Chapter 2 of Section 31 bis of the Criminal Code) that allows legal entities to be exonerated if they prove in court that an effective compliance programme (or model) to detect and prevent crimes, or to reduce the risk of them being committed, was implemented before the offence took place.