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Transcript
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?