Securities Law Commons^™

Selective Disclosure By Federal Officials And The Case For An Fgd (Fairer Government Disclosure) Regime, Donna M. Nagy, Richard W. Painter

Articles by Maurer Faculty

This Article addresses a problem at the intersection of securities regulation and government ethics: the selective disclosure of market-moving information, by federal officials in the executive and legislative branches, to securities investors outside the government who use that information for trading. These privileged investors, often aided by political intelligence consultants, can profit substantially from their access to knowledgeable sources inside the government. In most instances, however, neither the disclosure nor the trading violates the antifraud provisions of the federal securities laws (under which the insider trading prohibitions arise). This legally protected favoritism undermines investor confidence in the fairness and integrity …

What Were They Thinking? Insider Trading And The Scienter Requirement, Donald C. Langevoort

Georgetown Law Faculty Publications and Other Works

On its face, the connection between insider trading regulation and the state of mind of the trader or tipper seems intuitive. Insider trading is a form of market abuse: taking advantage of a secret to which one is not entitled, generally in breach of some kind of fiduciary-like duty. This chapter examines both the legal doctrine and the psychology associated with this pursuit. There is much conceptual confusion in how we define unlawful insider trading—the quixotic effort to build a coherent theory of insider trading by reference to the law of fraud, rather than a more expansive market abuse standard—which …

Enforcement Without Foundation? Insider Trading And China's Administrative Law Crisis, Nicholas C. Howson

Articles

China's securities regulator enforces insider trading prohibitions pursuant to non-legal and non-regulatory internal "guidance." Reported agency decisions indicate that enforcement against insider trading is often possible only pursuant to this guidance, as the behavior identified is far outside of the scope of insider trading liability provided for in statute or regulation. I argue that the agency guidance is itself unlawful and unenforceable, because: (i) the guidance is not the regulatory norm required by the statutory delegation of power; and (ii) the guidance is ultra vires because (a) it addresses something substantively different from what is authorized under the statutory delegation, …

Reflections On The Securities Law Of Jordan , Bashar H. Malkawi, Haitham A. Haloush

American University International Law Review

No abstract provided.

Reflections On The Securities Law Of Jordan , Bashar H. Malkawi, Haitham A. Haloush

American University International Law Review

No abstract provided.

United States V. Nacchio: The Tenth Circuit’S Civil Approach To Sentencing For Insider Trading, Amy Dominick Padgett

Oklahoma Law Review

No abstract provided.

Insider Trading, Congressional Officials, And Duties Of Entrustment, Donna M. Nagy

Articles by Maurer Faculty

This article refutes what has become the conventional wisdom that insider trading by members of Congress and legislative staffers is “totally legal” because such congressional officials are immune from federal insider trading law. It argues that this well-worn claim is rooted in twin misconceptions based on: (1) a lack of regard for the broad and sweeping duties of entrustment which attach to public office and (2) an unduly restrictive view of Supreme Court precedents, which have interpreted Rule 10b-5 of the Securities Exchange Act to impose liability whenever a person trades securities on the basis of material nonpublic information in …

Trimming The "Judicial Oak": Rule 10b5-2(B)(1), Confidentiality Agreements, And The Proper Scope Of Insider Trading Liability, Ryan M. Davis

Vanderbilt Law Review

In recent years the Securities and Exchange Commission, commonly known as the SEC, has been involved in a number of high- profile suits that have attracted a good deal of media attention. Among those prosecuted by the Commission are hedge fund billionaire and Galleon Group founder Raj Rajaratnam, investment/Ponzi- scheme guru Bernie Madoff, television host and magazine publisher Martha Stewart, and colorful Dallas Mavericks owner Mark Cuban. Although such notable suits may simply be the SEC's attempt to justify its own existence and role in the market it polices in light of the financial disasters of the past decade, these …

Insider Trading And The Gradual Demise Of Fiduciary Principles, Donna M. Nagy

Articles by Maurer Faculty

Recent SEC enforcement actions, such as the case filed against Dallas Mavericks' owner Mark Cuban, raise the question whether deception by a fiduciary is essential to the Rule 10b-5 insider trading offense. Under the Supreme Court's classical and misappropriation theories, the answer is clearly yes - each theory has a fiduciary principle at its core. Yet lower courts and the SEC frequently disregard the Court's explicit dictates, and a consensus is emerging that insider trading rests simply on the wrongful use of material nonpublic information, regardless of whether a fiduciary-like duty is breached. Although this view of insider trading can …

The Screening Effect Of The Private Securities Litigation Reform Act, Adam C. Pritchard, Stephen J. Choi, Karen K. Nelson

Articles

Prior research shows that the Private Securities Litigation Reform Act (PSLRA) increased the significance of merit-related factors in determining the incidence and outcomes of securities fraud class actions (Johnson et al. 2007). We examine two possible explanations for this finding: the PSLRA may have reduced the incidence of nonmeritorious litigation, or it may have changed the definition of merit, effectively precluding claims that would have survived and produced a settlement pre-PSLRA. We find no evidence that pre-PSLRA claims that settled for nuisance value would be less likely to be filed under the PSLRA regime. There is evidence, however, that pre-PSLRA …

Hands-Off Options, Jesse M. Fried

Vanderbilt Law Review

Executive compensation long has attracted considerable interest from investors, academics, regulators, and the media. It received increased attention in the wake of the Enron and other corporate governance scandals that erupted at the beginning of the century. Hundreds of firms were found to have engaged in various forms of earnings manipulation that, ultimately, destroyed tens of billions of dollars of social value. Much of this earnings manipulation was linked to executives' pay arrangements, such as their ability to time the unwinding of their equity incentives. The scandals eventually led to some of the most important corporate governance reforms in decades, …

Do Investors In Controlled Firms Value Insider Trading Laws? International Evidence, Laura Nyantung Beny

Articles

This article characterizes insider trading as an agency problem in firms that have a controlling shareholder. Using a standard agency model of corporate value diversion through insider trading by the controlling shareholder, I derive testable hypotheses about the relationship between corporate value and insider trading laws among such firms. The article tests these hypotheses using firm-level cross-sectional data from twenty-seven developed countries. The results show that stringent insider trading laws and enforcement are associated with greater corporate valuation among the sample firms in common law countries, a result that is consistent with the claim that insider trading laws mitigate agency …

Getting The Word Out About Fraud: A Theoretical Analysis Of Whistleblowing And Insider Trading, Jonathan Macey

Michigan Law Review

The purpose of this Article is to show that corporate whistleblowing is not analytically or functionally distinguishable from insider trading when such trading is based on "whistleblower information," that is, the information a whistleblower might disclose to the authorities. In certain contexts, both insider trading and whistleblowing, if incentivized, would reduce the incidence of corporate pathologies such as fraud and corruption. In light of this analysis, it is peculiar that whistleblowing is encouraged and protected, while insider trading on whistleblower information is not only discouraged but criminalized. Often, insider trading will be far more effective than whistleblowing at bringing fraud …

The Missing Link Between Insider Trading And Securities Fraud, Richard A. Booth

Faculty Scholarship

In a recent article, I argued that diversified investors - the vast majority of investors - would prefer that securities fraud class actions under the 1934 Act and Rule 10b-5 be dismissed in the absence of insider trading or similar offenses during the fraud period. See Richard A. Booth, The End of the Securities Fraud Class Action as We Know It, 4 Berk. Bus. L. J. 1 (2007), http://ssrn.com/abstract=683197. In this article, I draw on the classic case, SEC v. Texas Gulf Sulfur Company, to show that the federal courts originally viewed securities fraud as inextricably connected to insider trading …

Insider Trading Laws And Stock Markets Around The World: An Empirical Contribution To The Theoretical Law And Economics Debate, Laura Nyantung Beny

Articles

The primary goal of this Article is to bring empirical evidence to bear on the heretofore largely theoretical law and economics debate about insider trading. The Article first summarizes various agency, market, and contractual (or "Coasian") theories of insider trading propounded over the course of this longstanding debate. The Article then proposes three testable hypotheses regarding the relationship between insider trading laws and several measures of stock market performance. Exploiting the natural variation of international data, the Article finds that more stringent insider trading laws are generally associated with more dispersed equity ownership, greater stock price accuracy and greater stock …

Insider Trading Rules Can Affect Attractiveness Of Country's Stock Markets, Laura Nyantung Beny

Articles

The academic debate about the desirability of prohibiting insider trading is longstanding and as yet unresolved. Until Henry Manne’s 1966 book, Insider Trading and the Stock Market, the debate centered on whether insider trading is unfair to public investors who are not privy to private corporate information. However, the fairness approach is malleable and indeterminate and thus does not lend itself to clear-cut policy prescriptions. Since Manne’s book, the focus of the debate has been on the effect of insider trading on economic efficiency. Manne argued that, contrary to the prevailing legal and moral opinion of the time, insider trading …

Overvalued Equity And The Case For An Asymmetric Insider Trading Regime, Thomas A. Lambert

ExpressO

The forty-year debate over whether insider trading should be regulated has generally proceeded in all-or-nothing terms: Either all insider trading should be permitted (subject only to private restrictions imposed by issuers themselves), or none should. This Article argues for an asymmetric insider trading policy under which insider trading that decreases the price of an overvalued stock is generally permitted, but insider trading that increases the price of an undervalued stock is generally prohibited. Concluding that the net investor benefits of price-decreasing insider trading exceed those of price-enhancing insider trading, the Article argues that an asymmetric insider trading regime likely represents …

The Marginal Incentive Of Insider Trading: An Economic Reinterpretation Of The Case Law, Kristoffel R. Grechenig

ExpressO

Commentators on insider trading are divided into two camps, one in favor of regulation, the other in favor of deregulation. The arguments for the two positions are manifold but not irreconcilable. I show that important gains to social welfare come with insider trading on negative information (sales), whereas losses often result from the use of positive information (purchases). Thus, I look at a regulation that allows insiders to use negative but not positive non-public information. Because positive information will be disclosed much sooner than negative information, the marginal incentive (and marginal gain to social welfare, respectively) of insider trading as …

The End Of The Securities Fraud Class Action As We Know It, Richard A. Booth

ExpressO

In this article, I argue that securities fraud class actions (SFCAs) should not be treated as class actions but rather should be treated as derivative actions. In addition, I argue that such actions should be dismissed unless it appears that insiders (including the company itself) have enjoyed gains from trading during the fraud period. Both of these conclusions are based on the fundamental argument that (1) securities law seeks to protect the interests of reasonable investors, (2) reasonable investors diversify, and (3) diversified investors are effectively protected against the supposed financial harms of securities fraud by virtue of being diversified, …

Legislation And Legitimation: Congress And Insider Trading In The 1980s, Thomas W. Joo

ExpressO

Legislation and Legitimation:

Congress and Insider Trading in the 1980s

Abstract

Orthodox corporate law-and-economics holds that American corporate and securities regulation has evolved inexorably toward economic efficiency. That position is difficult to square with the fact that regulation is the product of government actors and institutions. Indeed, the rational behavior assumptions of law-and-economics suggest that those actors and institutions would tend to place their own self-interest ahead of economic efficiency. This article provides anecdotal evidence of such self-interest at work. Based on an analysis of legislative history—primarily Congressional hearings—this article argues that Congress had little interest in the economic policy …

Overvalued Equity And The Case For An Asymmetric Insider Trading Regime, Thom Lambert

Faculty Publications

This article argues for an asymmetric insider trading policy under which insider trading that decreases the price of an overvalued stock is generally permitted, but insider trading that increases the price of an undervalued stock is generally prohibited. Concluding that the net investor benefits of price-decreasing insider trading exceed those of price-enhancing insider trading, the article argues that an asymmetric insider trading regime likely represents the bargain that shareholders and corporate managers would strike if they were legally and practically able to negotiate an insider trading policy. Current insider trading doctrine would permit regulators to impose such an asymmetric insider …

Introduction: Insider Trading (Pli 2d Ed. 2006), Marc I. Steinberg, William K.S. Wang

Faculty Journal Articles and Book Chapters

This paper is the Introductory chapter to Insider Trading (PLI 2d ed. 2006). Insider Trading is a two-volume treatise that analyzes the application of various laws to stock market insider trading and tipping. Among the federal laws are Exchange Act section 10(b), SEC rule 10b-5, mail/wire fraud, SEC rule 14e-3, Exchange Act section 16, and Securities Act section 17(a). The state laws discussed are the common law, the Uniform Securities Act, and the California and New York securities statutes.

Another chapter addresses government enforcement of the insider trading/tipping prohibitions. A chapter on compliance programs deals with how firms can try …

The Essential Role Of Securities Regulation, Zohar Goshen, Gideon Parchomovsky

Faculty Scholarship

This Article posits that the essential role of securities regulation is to create a competitive market for sophisticated professional investors and analysts (information traders). The Article advances two related theses – one descriptive and the other normative. Descriptively, the Article demonstrates that securities regulation is specifically designed to facilitate and protect the work of information traders. Securities regulation may be divided into three broad categories: (i) disclosure duties; (ii) restrictions on fraud and manipulation; and (iii) restrictions on insider trading – each of which contributes to the creation of a vibrant market for information traders. Disclosure duties reduce information traders’ …

Insider Trading: Hayek, Virtual Markets And The Dog That Did Not Bark, Henry G. Manne

ExpressO

This Essay briefly reexamines the great debates on the role of insider trading in the corporate system from the perspectives of efficiency of capital markets, harm to individual investors, and executive compensation. The focus is on the mystery of why trading by all kinds of insiders as well as knowledgeable outsiders was studiously ignored by the business and investment communities before the advent of insider trading regulation. It is hardly conceivable that officers, directors, and controlling shareholders would have remained totally silent in the face of widespread insider trading if they had seen the practice as being harmful to the …

Insider Trading: Hayek, Virtual Markets, And The Dog That Did Not Bark, Henry G. Manne

ExpressO

This Essay briefly reexamines the great debates on the role of insider trading in the corporate system from the perspectives of efficiency of capital markets, harm to individual investors, and executive compensation. The focus is on the mystery of why trading by all kinds of insiders as well as knowledgeable outsiders was studiously ignored by the business and investment communities before the advent of insider trading regulation. It is hardly conceivable that officers, directors, and controlling shareholders would have remained totally silent in the face of widespread insider trading if they had seen the practice as being harmful to the …

What Counts As Fraud? An Empirical Study Of Motions To Dismiss Under The Private Securities Litigation Reform Act, Adam C. Pritchard, Hillary A. Sale

Articles

This article presents the findings of a study of the resolution of motions to dismiss securities fraud lawsuits since the passage of the Private Securities Litigation Reform Act (PSLRA) in 1995. Our sample consists of decisions on motions to dismiss in securities class actions by district and appellate courts in the Second and Ninth Circuits for cases filed after the passage of the Reform Act to the end of 2002. These circuits are the leading circuits for the filing of securities class actions and are generally recognized as representing two ends of the securities class action spectrum. Post-PSLRA, the Second …

Measuring Share Price Accuracy, Merritt B. Fox

Faculty Scholarship

This Article concerns how to measure share price accuracy. It is prompted by the fact that many scholars believe that the prices established in the stock market affect the efficiency of the real economy. In their view, more accurate prices increase the amount of value added by capital-utilizing enterprises as these enterprises use society's scarce resources for the production of goods and services. More accurate share prices help improve both the quality of choice among new proposed investment projects in the economy and the operation of existing real assets currently in corporate hands.

The proposition that more accurate share prices …

Unfit To Serve: Permanently Barring People From Serving As Officers And Directors Of Publicly Traded Companies After The Sarbanes-Oxley Act, Philip F.S. Berg

Vanderbilt Law Review

On June 4, 2003, lifestyle guru Martha Stewart was indicted on multiple criminal and civil charges by the Securities and Exchange Commission (SEC or Commission). The charges, including obstruction of justice and civil insider trading, stemmed from Stewart's sale of ImClone stock shortly before the Food and Drug Administration rejected a drug produced by ImClone and sent the company's stock price tumbling. Although Stewart could face a number of serious penalties under her criminal indictment, the primary remedy sought by the SEC for her civil insider trading charges is rather uncommon-a bar from serving as a director of Martha Stewart …

Justice Lewis F. Powell, Jr. And The Counterrevolution In The Federal Securities Laws, Adam C. Pritchard

Articles

The confirmation of Lewis F. Powell, Jr., to the Supreme Court coincided with a dramatic shift in the Court's approach to securities law. This Article documents Powell's influence in changing the Court's direction in securities law. Powell's influence was the product of his extensive experience with the securities laws as a corporate lawyer, which gave him much greater familiarity with that body of law than his fellow Justices had. That experience also made him skeptical of civil liability, particularly class and derivative actions. Powell's skepticism led him to interpret the securities law in a consistently narrow fashion to reduce liability …

Self-Regulation And Securities Markets, Adam C. Pritchard

Articles

Enron, Arthur Andersen, Tyco, ImClone, WorldCom, Adelphia - as American investors reel from accounting scandals and self-dealing by corporate insiders, the question of trust in the securities markets has taken on a new urgency. Securities markets cannot operate without trust. Markets known for fraud, insider trading, and manipulation risk a downward spiral as investors depart in search of safer investments. Today, many investors are rethinking the wisdom of entrusting their financial futures to the stock market. Absent trust in the integrity of the securities markets, individuals will hoard their money under the proverbial mattress.