Promoting public confidence in securities markets is a policy goal that is frequently cited by commentators, Congress, the courts, regulators, and prosecutors for the adoption and vigorous enforcement of insider trading laws.
For example, in the seminal insider trading case United States v. O’Hagan, the U.S. Supreme Court explained that “investors likely would hesitate to venture their capital in a market where [insider trading] is unchecked by law.” More recently, Preet Bharara, who earned the title of “Wall Street Sheriff” by successfully prosecuting scores of insider trading cases in the wake of the 2008 financial crisis, emphasized that … Read more
The courts have consistently held since the Supreme Court decided Dirks v. SEC in 1983 that tipper-tippee insider trading liability requires proof that the tipper personally benefited from the tip.
This personal benefit test can pose significant challenges to prosecutors in bringing tipper-tippee cases where the original tip may have been offered gratuitously.
In particular, the government’s recent efforts to bring insider trading actions against ever more remote tippees has been frustrated by the Second Circuit’s 2014 holding that tippee liability requires proof that the charged tippee had knowledge of the original tipper’s personal benefit. This knowledge element … Read more
Corporations are subject to broad criminal liability for the insider trading of their employees. Critics have noted that this results in a harsh irony. “After all,” as Professor Jonathan Macey notes, “it is generally the employer who is harmed by the insider trading.”
Of course, not all employers of insider traders are innocent. But I am convinced that critics like Professor Macey are on to something. Namely, the current enforcement regime is absurdly overbroad in that it affords no principled guarantee to corporate victims of insider trading that they will not be indicted or punished for the crimes perpetrated … Read more
Regulators demand the impossible when they require issuers to design and implement an effective compliance program to guard against insider trading, a crime that neither Congress nor the SEC has defined with any specificity. This problem is then compounded by the threat of heavy civil and criminal sanctions for noncompliance. Placed between this rock and hard place, issuers adopt over-broad insider trading compliance programs that come at a heavy price in terms of corporate culture, cost of compensation, share liquidity, and cost of capital. The irony is that, since all of these costs are passed along to the shareholders, insider … Read more
I have argued that insider trading is morally harmless where the issuer approves the trade in advance and makes certain ex ante and ex post public disclosures. I have also suggested that reforming the law to permit such issuer-licensed insider trading would result in a more rational, efficient, and just insider-trading enforcement regime.
A common objection is that Professor William K.S. Wang’s “Law of Conservation of Securities” proves that even issuer-licensed insider trading inflicts harm on some definite victim or victims. In my article, What’s the Harm in Issuer-licensed Insider Trading?, I argue that the … Read more