Law Commons^™

Cost Of Capitol: Analyzing Congressional Insider Trading Regulation, Hannah Levy

Finance Undergraduate Honors Theses

The United States Congress has involved itself with the financial regulation of big business for decades. The legislative body has passed a multitude of laws over time which foster greater transparency and trust between individual investors and big business. Until recently, legislators have avoided passing laws which regulate their own financial activity. Recent investigations revealing that dozens of federal lawmakers have violated financial disclosure laws and made stock trades on insider information has successfully angered the public and forced Congress to consider tighter restrictions. But can Americans trust their legislators to effectively regulate themselves? If no legislative action is taken, …

Taking Misappropriation Seriously: State Common Law Disgorgement Actions For Insider Trading, Jeanne L. Schroeder

Articles

In two recent cases, Kokesh v. SEC, and Liu v. SEC, the U.S. Supreme Court cut back substantially on one of the Securities and Exchange Commission’s most important enforcement powers. This is the ability to seek disgorgement from persons who violate the federal securities laws, depriving them of their ill-gotten gains.

Previously, the Supreme Court had developed a largely property-based theory of insider trading. Why is insider trading evil? Because material nonpublic information is property that the trader has fraudulently obtained and must not use for his own purposes

In this article I bring these thoughts together. I …

Insider Trading As A Precursor To Modern Business Ethics, Robyn Coleman

Finance Undergraduate Honors Theses

There has been a recent change in business that there is more focus on the “stakeholder approach” than shareholder primacy. This can be attributed to the early actions and illegality of insider trading that expected a step beyond a solely economic approach. This attitude was then replicated to become what we see as the modern business approach. Business now includes ethical investing, environmental focus, corporate citizenship, and emphasis on multiple stakeholders that was not always there. Companies have embraced this position while others have been criticized for not doing so. As this approach develops and changes, it will be enlightening …

Whitman And The Fiduciary Relationship Conundrum, Lisa Fairfax

All Faculty Scholarship

While the law on insider trading has been convoluted and, in Judge Jed S. Rakoff’s words, “topsy turvy,” the law on insider trading is supposedly clear on at least one point: insider trading liability is premised upon a fiduciary relationship. Thus, all three seminal U.S. Supreme Court cases articulating the necessary elements for demonstrating any form of insider trading liability under § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 made crystal clear that a fiduciary relationship represented the lynchpin for such liability.

Alas, insider trading law is not clear about the source from which the fiduciary …

Insider Trading Framework In United States And Egyptian Stock Markets, Elsayed Eldaydamony

The Journal of Business, Entrepreneurship & the Law

This article examines the law of insider trading in both the American and Egyptian legal systems. It seeks to pinpoint the policy rationale behind prohibiting insider trading, the theories of civil enforcement and criminalization, and the concept of tipping in the United States. It also analyzes the express statutory prohibition under Egyptian law. Furthermore, it explains the doctrinal link between securities fraud and insider trading in the U.S. as well as the enforcement mechanisms in place at the SEC, the NYSE, and the NASDAQ. It also surveys the surveillance authority of the Egyptian Financial Regularity Authority and of the Egyptian …

Newman/Martoma: The Insider Trading Law's Impasse And The Promise Of Congressional Action, Tai H. Park

Fordham Journal of Corporate & Financial Law

The prohibition against insider trading is a judge-made law that has evolved for over fifty years, and has reached a critical impasse in two recent decisions in the Second Circuit Court of Appeals: United States v. Newman and United States v. Martoma. Judges of the Second Circuit are sharply divided over what conduct constitutes improper trading on material nonpublic information (“MNPI”), leaving the law in profound disarray. At bottom, the disagreement stems from a decades-old split within the judiciary about how to (1) ensure a fair securities marketplace, while (2) enabling institutional analysts to probe for corporate information in furtherance …

Insider Trading And Cryptoassets: The Waters Just Got Muddier, John P. Anderson

Journal Articles

The absence of any clear guidance on when a digital asset is a security is a problem that has ramifications far beyond this article’s limited focus on our insider trading enforcement regime. Nevertheless, I have argued that the impending application of our insider trading laws to cryptoassets helps to illustrate why it is unfair and unjust to force market participants to wait much longer for a definitive answer to the question of when a digital asset is a security.

Real Insider Trading, Michael A. Perino

Faculty Publications

In popular rhetoric, insider trading cases are about leveling the playing field between elite market participants and ordinary investors. Academic critiques vary. Some depict an untethered insider trading doctrine that enforcers use to expand their power and enhance their discretion. Others see enforcers beset with agency cost problems who bring predominantly simple, easily resolved cases to create the veneer of vigorous enforcement. The debate has, to this point, been based mostly on anecdote and conjecture rather than empirical evidence. This Article addresses that gap by collecting extensive data on 465 individual defendants in civil, criminal, and administrative actions to assess …

Watching Insider Trading Law Wobble: Obus, Newman, Salman, Two Martomas, And A Blaszczak, Donald C. Langevoort

Georgetown Law Faculty Publications and Other Works

“The crime of insider trading,” Judge Jed Rakoff has said, “is a straightforward concept that some courts have managed to complicate.” In the last eight years or so, insider trading law has wobbled visibly (in the Second Circuit in particular) in applying the standard for tipper-tippee liability originally set in the Supreme Court’s Dirks decision in 1983: from Obus (2012) to Newman (2014), with a detour to the Supreme Court in Salman (2016), and then two Martoma opinions (2017 and 2018). Most recently, the court of appeals offered what to many was a major surprise in its Blaszczak …

The Ever-Changing Scope Of Insider Trading Liability For Tippees In The Second Circuit, Sari Rosenfeld

Michigan Business & Entrepreneurial Law Review

Liability under insider trading law continues to change as federal courts attempt to find new ways to hold insiders liable under the law. As recently as two years ago, the Second Circuit—in analyzing past decisions regarding tipper-tippee insider trading violations—blurred the distinction between legal and illegal insider trading when it fundamentally altered the idea of “personal benefit.” These various decisions provide the basis for antifraud provisions of securities law applying to insider trading, the consequences of which can be detrimental. This Note will discuss the standard that the Second Circuit uses to hold tippees liable for insider trading violations under …

The Regulation Of Insider Trading In The European Community, Manning Gilbert Warren Iii

Manning G. Warren III

No abstract provided.

Insider Trading Framework In United States And Egyptian Stock Markets, Elsayed Eldaydamony

Maurer Theses and Dissertations

This thesis examines the law of insider trading in both the American and Egyptian legal systems. It seeks to pinpoint the policy rationale behind prohibiting insider trading, the theories of civil enforcement and criminalization, and the concept of tipping in the United States. It also analyzes the express statutory prohibition under Egyptian law. Furthermore, it explains the doctrinal link between securities fraud and insider trading in the U.S. as well as the enforcement mechanisms in place at the SEC, the NYSE, and the NASDAQ. It also surveys the surveillance authority of the Egyptian Financial Regularity Authority and of the Egyptian …

The Future Of Insider Trading After Salman: Perpetuation Of A Flawed Analysis Or A Return To Basics, Charles W. Murdock

Faculty Publications & Other Works

In large part due to two poorly reasoned decisions by Justice Powell in the early 1980s, Chiarella v. U. S. and Dirks v. SEC, the development of insider trading law has been constrained, enforcement has been hampered, and insider-trading has grown to the point where hundreds of millions of dollars are at stake. Moreover, Chiarella and Dirks were inconsistent with the Congressional policy that the purpose of the securities laws is to ensure a level playing field where one participant does not have an undue advantage over another participant. A Second Circuit decision, U.S. v. Newman unnecessarily extended Dirks, notwithstanding …

The Lost History Of Insider Trading, Michael A. Perino

Faculty Publications

Common conceptions about the history of insider trading norms in the United States are inaccurate and incomplete. In his landmark 1966 book Insider Trading and the Stock Market, Dean Henry Manne depicted a world in which insider trading was both widespread and universally accepted. It was SEC enforcement efforts in the early 1960s, he contended, that swayed public opinion to condemn what had previously been considered a natural and unobjectionable market feature. For five decades, the legal academy has largely accepted Manne’s historical description, and the vigorous debates over whether the federal government should prosecute insider trading have assumed, …

Undoing A Deal With The Devil: Some Challenges For Congress's Proposed Reform Of Insider Trading Plans, John P. Anderson

Journal Articles

The adoption of Rule 10b5-1 was, in a manner of speaking, a deal with the devil that the SEC and some lawmakers now appear to regret having made. The problem is that, as is often the case with such a deal, it cannot be easily undone. I identify challenges presented by the restrictions on Trading Plan use that Congress has proposed in the Corporate Insiders Act. In light of these challenges, I argue that effective Trading Plan reform cannot be accomplished by simply restricting the use of Trading Plans while leaving Rule 10b5-1(b)'s awareness test in place. If there is …

Securities Law In The Sixties: The Supreme Court, The Second Circuit, And The Triumph Of Purpose Over Text, Adam C. Pritchard, Robert B. Thompson

Articles

This Article analyzes the Supreme Court’s leading securities cases from 1962 to 1972—SEC v. Capital Gains Research Bureau, Inc.; J.I. Case Co. v. Borak; Mills v. Electric Auto-Lite Co.; Superintendent of Insurance v. Bankers Life & Casualty Co.; and Affiliated Ute of Utah v. United States—relying not just on the published opinions, but also the Justices’ internal letters, memos, and conference notes. The Sixties Court did not simply apply the text as enacted by Congress, but instead invoked the securities laws’ purposes as a guide to interpretation. The Court became a partner of Congress in shaping the securities laws, rather …

Informed Trading And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Gabriel V. Rauterberg

Articles

Informed trading--trading on information not yet reflected in a stock's price-- drives the stock market. Such informational advantages can arise from astute analysis of varied pieces of public news, from just released public information, or from confidential information from inside a firm. We argue that these disparate types of trading are all better regulated as part of the broader phenomenon of informed trading. Informed trading makes share prices more accurate, enhancing the allocation of capital, but also makes markets less liquid, which is costly to the efficiency of trade. Informed trading thus poses a fundamental trade-off in how it affects …

Insider Trading Law And The Ambiguous Quest For Edge, A. C. Pritchard

Michigan Law Review

A review of Sheelah Kolhatkar, Black Edge.

Insider Tainting: Strategic Tipping Of Material Nonpublic Information, Andrew Verstein

Northwestern University Law Review

Insider trading law is meant to be a shield, protecting the market and investors from unscrupulous traders, but it can also be a sword. Insofar as we penalize trading on the basis of material, nonpublic information, it becomes possible to share information strategically in order to disable or constrain innocent investors. A hostile takeover can be averted, or a bidding war curtailed, because recipients of such information must then refrain from trading. This Article offers the first general account of “insider tainting,” an increasingly pervasive phenomenon of weaponizing insider trading law.

Why Salman Is A Game-Changer For The Political Intelligence Industry, Kendall R. Pauley

American University Law Review

No abstract provided.

From Texas Gulf Sulphur To Laudato Si': Mining Equitable Principles From Insider Trading Law, Michael Kaufman

Faculty Publications & Other Works

In SEC v. Texas Gulf Sulphur, the Second Circuit declared that all investors trading on impersonal exchanges should have equal access to material information, and therefore anyone who possesses material inside information must either turn it over to the investing public or not trade. The broad reach of that insider trading prohibition sent shock waves throughout the financial markets and encountered significant judicial resistance from the Supreme Court.

Although the Supreme Court initially rejected the insider trading prohibition announced in Texas Gulf Sulphur, the fundamental equitable trading principles underlying that decision have endured. This article shows that TGS …

Personal Benefit Has No Place In Misappropriation Tipping Cases, Merritt B. Fox, George N. Tepe

Faculty Scholarship

The Supreme Court’s decision in Salman v. United States left unanswered an important issue concerning the reach of Rule 10b-5’s prohibitions with respect to trades based on a tip of material inside information: in cases based on the misappropriation theory, is it necessary to show that the tipper enjoyed a personal benefit of which the trader was aware? The personal benefit test was originally developed in the context of tipping cases based on the classical theory of insider trading. The Supreme Court in Salman explicitly said that it was not reaching the matter of whether the test should be extended …

Insider Information And The Limits Of Insider Trading, Yesha Yadav

Vanderbilt Law School Faculty Publications

This essay offers brief observations on the internal coherence of the rationales underlying the prohibition against insider trading, taking the opportunity offered by Newman and Salman to reflect on its central policy aims. I do not discuss these cases specifically, or what a resolution by the Supreme Court might mean for the future of insider trading. Scholars and commentators have thoughtfully critiqued Newman alongside the doctrinal whiplash that has followed in its wake. Rather, I take this opportunity to look under the hood of securities trading to examine information flows within the mechanisms by which securities are bought and sold. …

Insider Trading And The Myth Of Market Confidence, John P. Anderson

Journal Articles

This Article challenges the validity of the market-confidence claim as a justification for the regulation of insider trading on two grounds. First, insofar as it relies on a sociopsychological claim-that most investors perceive insider trading as economically harmful or morally wrong-it is subject to the problem of false consciousness (i.e., the psychological claim could be true though the shared belief is demonstrably false). Second, even if the problem of false consciousness is set aside, the market-confidence argument's empirical claims of a chilling effect among potential investors must be proven, not simply assumed.

Constructive Ambiguity And Judicial Development Of Insider Trading, Jill E. Fisch

All Faculty Scholarship

The Texas Gulf Sulphur decision began what has become a fifty-year project of developing U.S. insider trading regulation through judicial lawmaking. During the course of that project, the courts developed a complex, fraud-based approach to determining the scope of liability. The approach has led, in many cases, to doctrinal uncertainty, a result that is reflected in the recent decisions in Newman, Salman, and Martoma.

n the face of this uncertainty, many commentators have called for a legislative solution. This article argues, however, that the true challenge of insider trading regulation is a lack of consensus about the …

From Equality To Duty: On Altering The Reach, Impact, And Meaning Of The Texas Gulf Legacy, Lisa Fairfax

All Faculty Scholarship

As the first federal court decision to hold that insider trading represented a violation of the federal securities laws, the historical importance of SEC v. Texas Gulf Sulphur Co. is clear. However, its current relevance may not be so clear. This is because while there are some aspects of Texas Gulf that have endured and remain a fixture of federal insider trading jurisprudence, the Supreme Court has firmly repudiated the normative rationale for insider trading articulated by Texas Gulf. This essay contends that this repudiation has important descriptive and normative implications. Perhaps most importantly, this essay contends that Texas Gulf …

Two Faces Of Corporate Lobbying: Evidence From The Pharmaceutical Industry, Dongnyoung Kim, Incheol Kim, Omer Unsal

Finance Faculty Publications

This paper addresses two side effects of corporate lobbying on firm value in the pharmaceutical industry. Employing corporate lobbying and the Food and Drug Administration (FDA) approval data for the period from 1998 to 2013, we find that lobbying firms have a 67.3 percent higher chance that their new prescription drugs are approved by the FDA than non-lobbying firms. On the 3-day window surrounding FDA approval announcements, lobbying firms yield, on average, a 1.1% higher market reaction than non-lobbying peers. However, we also find that insiders in lobbying firms abnormally purchase their own stocks prior to FDA approvals. These opportunistic …

The Sec, Administrative Usurpation, And Insider Trading, Adam C. Pritchard

Articles

The history of insider trading law is a tale of administrative usurpation and legislative acquiescence. Congress has never enacted a prohibition against insider trading, much less defined it. Instead, the SEC has led in defining insider trading, albeit without the formality of rulemaking, and subject to varying degrees of oversight by the courts. The reason why lies in the deference that the Supreme Court gave to the SEC in its formative years. The roots of insider trading law are commonly traced to the SEC’s decision in Cady, Roberts & Co. Cady, Roberts was only made possible, however, by the …

When Insider Trading And Market Manipulation Cross Jurisdictions: What Are The Challenges For Securities Regulators And How Can They Best Preserve The Integrity Of Markets?, Janet Elizabeth Austin

PhD Dissertations

Over the last few decades world securities markets have become significantly more sophisticated in terms of how securities are traded as well as the variety of securities traded. My hypothesis is that the ability of securities regulators to take enforcement action against market abuse has not kept pace with the level of sophistication of the markets and, in particular, the way in which trading can take place across borders and the manner in which market related information can spread rapidly across the world. I argue that that regulators need to do more to protect the integrity of the markets by …

No More Quid Pro Quo: Abandoning The Personal Benefit Requirement In Insider Trading Law, Shannon Seiferth

University of Michigan Journal of Law Reform

A circuit split between the Second Circuit’s 2014 decision, United States v. Newman, and the Ninth Circuit’s 2015 decision, United States v. Salman, illustrates problems in insider trading law dating back over thirty years to the Supreme Court’s decision in Dirks v. SEC. Dirks held that when a corporate insider provides information to an outside party who then trades on the information, it must be shown that the insider received some form of a personal benefit for providing the information in order to impute liability. The courts in Newman and Salman disagreed on the sort of evidence …