Extract taken from 'The Securities Ligation Review – edition 5'
Public enforcementi Forms of action
The CBR has quite broad authority to supervise the securities market and to investigate any activities of its participants. It is necessary to mention that the CBR's authority to supervise the securities market is provided by the administrative legislation (the Administrative Code), as well as by the general legislation on the securities market and its regulation (the Law, the Protection Law, other legislative acts), so the CBR has wide variety of tools to regulate the market and prevent market abuses.
An investigation may be initiated by the CBR either on its own initiative on the basis of market supervision or received reports, or in response to any complaint from a market participant or any other person.
If, following an initiated investigation, the CBR finds any wrongdoing, it has the authority to initiate administrative proceedings and issue corresponding orders (or, depending on the amount of the loss or damage, pass the case for consideration to the investigating authorities in charge for initiation of a criminal case). Orders of the CBR may be appealed to relevant courts pursuant to the terms of the Administrative Code.
The CBR has the right to issues fines or petition the applicable court for disqualification of individuals responsible for the wrongdoing, or impose both these sanctions. The CBR is also entitled to use other coercive measures as provided by securities legislation:
- request documents for investigations in process;
- issue mandatory orders to participants in the securities market;
- issue orders prohibiting (or limiting) certain operations on the securities market for a period of up to six months; and
- prohibit issuance of certain securities, etc.
As noted, the CBR on its own initiative or upon a complaint initiates first a preliminary investigation and if there are grounds to believe that a wrongdoing was committed, the CBR starts a formal investigation. Once the formal investigation is initiated, the CBR has the power to proceed with certain coercive measures as indicated above to conduct and finalise the investigation, as well as to prevent ongoing wrongdoing, by issuing mandatory orders to the participants in the securities market.
Once it has reached its final conclusion in respect of the wrongdoing, the CBR may either close the case, undertake certain measures to prevent further wrongdoing, issue administrative fines or apply to the court for disqualification of certain individuals responsible for the wrongdoing (or both), or transfer the case for the consideration of the investigating authorities in charge if the amount of damage or loss caused by the alleged wrongdoing is substantial and exceeds certain statutory established thresholds (for each wrongdoing).
The alleged wrongdoer may participate in the CBR investigation, submit its explanations and objections, provide relevant documents in support of its position and further appeal the decision of the CBR to the relevant court.
The proceedings in the court are conducted pursuant to the Administrative Code. Usually the proceedings are fast and efficient.
The decision of the court of the first instance may be appealed to the corresponding appellate division within one month of the decision being issued in full. The decision of the appellate instance may be further appealed to the court of cassation.
If the CBR transfers the case to the investigating authorities in charge because the wrongdoing may be considered a criminal offence, the corresponding authorities conduct its own investigation and, depending on the results of a preliminary case assessment, it may initiate a criminal case.iii Settlements
Settlements in administrative cases are possible as well. The settlement in administrative proceedings may relate only to rights and obligations of the parties to the dispute (settlement may not affect rights and obligations of third parties and other participants in the securities market).
The settlement is fixed by a court-approved agreement, defining the rights and obligations of the parties. Upon approval of the settlement by the court, the administrative case proceedings shall be terminated in full (or in part, if settlement relates to a particular aspect of the dispute).
The court-approved settlement in administrative proceedings has the power of a valid and binding court decision and may be enforced accordingly.
Settlements with the CBR are not very common (nor are settlements with other administrative authorities), as Russian officials are concerned about potential accusations of corruption and thus tend to leave cases for final and ultimate consideration by the courts.
Settlements in criminal cases are also possible pursuant to Article 25 of the Criminal Procedure Code of the Russian Federation. The settlement is possible under the following conditions:
- the settlement is possible only for 'small- and mid-gravity' crimes (deliberate malicious wrongdoing with punishment of no more than five years of imprisonment or reckless acts as contemplated by the Criminal Code of the Russian Federation (the Criminal Code));
- the accused individual has never been criminally accused before;
- the accused individual reconciled with the injured party and fully compensated the damage;
- the injured party filed a special motion asking for termination of criminal proceedings; and
- the accused individual does not object to terminating the criminal proceedings.
Further, Russian legislation specifically provides the possibility of termination of criminal proceedings for certain economic crimes, which includes most criminally punishable wrongdoings in the securities market. Pursuant to Article 76.1 of the Criminal Code, criminal proceedings shall be terminated in respect of the crimes committed in the securities market under the following terms:
- the accused individual has never been criminally accused before;
- the accused individual fully compensated the damage done to the injured party; and
- the accused paid to the state budget double the amount of the damage or loss caused (or paid to the state budget the amount of income received as a result of the wrongdoing plus double the amount of that income).
Again, as in administrative proceedings, criminal investigators are reluctant to 'settle' cases, out of concern about corruption allegations; however, the settlement may be reached in court.iv Sentencing and liability
Under the Administrative Code, Articles 15.17–15.24.1 and 19.7.3 are devoted to administrative wrongdoing in the sphere of securities. The following liability is provided:
- illegal securities operations (transactions preformed prior to the proper registration of the securities): fines for responsible managers of up to 10,000 roubles (or criminal liability) and fines for legal entities of up to 500,000 roubles;
- violations in the sphere of disclosure of information in the securities market (non-disclosure, insufficient disclosure, false information, failure to comply with time frames or follow prescribed procedures): fines for responsible managers of up to 30,000 roubles (or criminal liability) or disqualification (prohibition on holding certain management positions) for up to a year, and fines for legal entities of up to 700,000 roubles;
- failure to make due and timely reports to the CBR: fines for responsible managers of up to 30,000 roubles or disqualification (prohibition on holding certain management positions) for up to a year, and fines for legal entities of up to 700,000 roubles;
- limitations on the use of securities and affecting the rights pertinent to the securities: fines for responsible managers of up to 30,000 roubles (or criminal liability), and fines for legal entities of up to 700,000 roubles;
- illegal use of insider information: fines for individuals of up to 5,000 roubles, fines for responsible managers of up to 50,000 roubles (or criminal liability) or disqualification (prohibition on holding certain management positions) for up to two years, and fines for legal entities equal to the amount of the profit received as a result of the illegal use of the insider information (or losses avoided) but not less than 700,000 roubles; and
- violations in the sphere of maintaining securities registers: fines for responsible managers of up to 50,000 roubles (or criminal liability) or disqualification (prohibition on holding certain management positions) for up to two years, and fines for legal entities of up to 1 million roubles.
Other fines for administrative wrongdoing in the securities market do not differ materially from the fines indicated above.
The Criminal Code shall be applicable (Article 185 of the Criminal Code) if the cost of damage or losses (or illegal income) arising from wrongdoing in the securities market exceeds 1.5 million roubles (large damage) or in certain cases 3.75 million roubles (extra-large damage).
The Criminal Code provides various sanctions for aggravated crimes (conspiracy, crimes committed by organised groups, with large or extra-large damage, etc.). The most serious sanctions are as follows:
- abuses in the issuance of securities (large damage) (failure to disclose information upon issuance and registration of securities, placement of securities prior to registration, etc.): fines of up to 500,000 roubles or three times the annual income of the accused, or imprisonment of up to three years;
- abuses in disclosing information (large damage): fines of up to 300,000 roubles or two times the annual income of the accused, or imprisonment of up to two years;
- market manipulation if the cost of damage or losses exceed 15 million roubles: fines of up to 1 million roubles or five times the annual income of the accused, or imprisonment of up to seven years with a fine or without one and disqualification for three years; and
- illegal use of insider information (or illegal transfer of such information for subsequent illegal use) (extra-large damage): fine up to 1 million roubles or four times the annual income of the accused, or imprisonment of up to six years with a fine or without one and disqualification for four years.