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Israel: Imprisonment for Insider Trading

(May 2, 2013) Israel’s Supreme Court recently rejected appeals of the sentences of three employees of an Israeli public company that trades its shares at the Tel Aviv Stock exchange. The employees were convicted of insider trading, having acquired the company’s stock after being exposed to information regarding its negotiations with Spanish companies over the sale of a product specifically developed by the company for the Spanish market. (Crim.A 6020/12 State of Israel v. Eyal Aden (decision rendered by the Supreme Court on Apr. 29, 2013 [in Hebrew]),State of Israel: the Judicial Authority.) Following their conviction, all three employees were sentenced to probation and fines; in addition, one was sentenced to ten months of imprisonment and the other two to three and six months of community service respectively. (Id.)

Justice Dafna Barak Erez noted that the offense of “use of inside information” was first introduced by the legislature in 1981 in the Securities (Amendment No. 6) 5741-1981 Law. (For an authorized English translation see 35Laws of the State of Israel 319 (5741-1980/81).) She held that “the objective of the prohibition on activities that involve the use of inside information is based on the critical importance of the information for conducting transactions in securities and, in particular, on the inherent priority of those who are privy to the company’s activities over regular investors” (Crim. A 6020/12 State of Israel v. Eyal Aden, supra. ¶18, this and further translations provided by author.) Citing an Israeli scholar, she noted that it was no wonder that the prohibition on use of inside information was viewed as one of the “setting stones of securities laws.” (Id.)

Barak Erez stated that the sentence that can be imposed on insider trading offenders had been increased since the offense was first added to the Securities Law in 1981. While in 1981 the penalty was one year of imprisonment and a fine, it is now up to five years of imprisonment, in addition to higher fines. (Securities Law 5728-1968, §52C.(b), as amended; up-to-date text is available atNevo online subscription database[in Hebrew].) The increased penalties prescribed by current Law, according to Barak Erez, convey a clear message that cannot be ignored regarding the need to address the “spreading of … economic criminality, as well as the dangers, [which] require the shifting of the balance towards emphasizing the public interest in appropriate sentencing.” (A 6020/12 State of Israel v. Eyal Aden, supra ¶ 22.)

In spite of the legislative authorization for increasing penalties, noted Barak Erez, prior to the sentences imposed in this case, no actual imprisonment had yet been imposed by courts on “insider persons” convicted of the use of inside information. In her opinion, the increase in penalties must be imposed gradually. In sentencing the three employees in this case, she determined, the lower court had been aware of this policy; otherwise, it would have imposed even harsher penalties on the convicted employees. (Id. ¶23.)