Download Securities Regulation

Insider Trading
Nature of “evil”
Common law “yawn”
Federal “duty”
(last updated 5 Oct 06)
What’s insider trading
(and what’s the problem)?
Classic insider trading
vs. misappropriation
Insider vs. outsider trading
Classic insider trading
Investors /
shareholders
Outsider trading (misappropriation)
Shareholders
Investors /
shareholders
Buy or sell
Buy or sell
Insider
Corporation
Non-public,
material information
Insider
Corporation
Non-public,
material information
Target
Evaluate “insider trading”
Pros
Cons
• Sends “soft information”
to markets – thus
protecting proprietary info
• Encourages insiders to
own company stock
• Compensates insiders for
developing “good news”
• Unfair to those without
information
• Discourages investors
from entering market
• Adds to trading “spreads”
in markets
• Constitutes theft of
corporate intellectual
property
• Distorts company
disclosures as insiders
manipulate company info
Evaluate “insider trading”
Pros
Cons
• Sends “soft information”
to markets – thus
protecting proprietary info
• Encourages insiders to
own company stock
• Compensates insiders for
developing “good news”
• Unfair to those without
information
• Discourages investors
from entering market
• Adds to trading “spreads”
in markets
• Constitutes theft of
corporate intellectual
property
• Distorts company
disclosures as insiders
manipulate company info
Common law “yawn”
Common law
Strong v. Repide (US 1909)
Goodwin v. Agassiz (Mass 1933)
Shareholder
What is the common law?
Buy
Insider
Corporation
Non-public,
material information
What are “special facts”?
Common law
Common law
• Insiders generally
owe no duty to
shareholders
• But “special facts”
• Powerful insider
• Clear
knowledge
• Concealed
identity
Doesn’t reach
• Anonymous
transactions on
stock market
• Trading on tipped
info by non-insider
tippees
• Selling to nonshareholder
investors
• Outsider trading
No duty to
shareholders in
stock market
• Encourage
inside stock
ownership
• Difficult to
identify who are
plaintiffs
• What is
“material”?
Hypotheticals
Jack, an insider, knows his company InClone is
going to acquire BioGen – good for BioGen’s
shareholders, bad for InClone’s shareholders.
– Can Jack buy BioGen stock?
– Can he sell his InClone stock on a public
market?
– Can Jack sell “put options” in InClone stock on
the CBOE?
Federal “duty”
Federal “insider trading” law
Cady, Roberts (SEC 1961)
SEC v. TGS (2d Cir 1968)
Shareholders
Buy
Insider
Corporation
Non-public,
material information
Basis for duty
• Securities professionals
have special duty
• Insiders should not gain
personal benefit
• Investors should have
equal access
Federal “insider trading” law
Chiarella v. United States (US 1980)
Shareholders
What is basis
for “insider trading”
liability?
Buy
Eee
Shareholders
Printer
Insider
Corporation
Non-public,
material information
Target
Federal “insider trading” law
Chiarella v. United States (US 1980)
Justice Lewis
Powell
• Duty to “disclose or abstain”
• Relationship gives access to
inside information
• Unfair to take advantage of
information
• Premised on duty of “trust or
confidence” between parties
• Applies when sell to to-be SHs
and buy from existing SHs
Hypotheticals
Jack, an insider, knows his company InClone is
going to acquire BioGen – good for BioGen’s
shareholders, bad for InClone’s shareholders.
– Can Jack sell his InClone stock?
– Can Jack buy BioGen stock?
Katharina, a stranger, finds Jack’s InClone-BioGen
“takeover notebook.” What a lucky break.
– Can Katharina sell Inclone short?
– buy call options on BioGen?