The Discreet Trader

This paper examines insider trading, specifically trades by corporate insiders around quarterly earnings announcements. Announcements were broken up into three categories: earnings above analyst expectations, earnings below expectations, and earnings in line with expectations. Trade data was collected from the thirty companies of the Dow Jones Industrial Average from 2012-’13. The trades were sorted by purchases and sales by date and analyzed with the earnings report of which the trades were made. Only trades in the interval from twenty days before the announcement date to twenty days after the announcement date were considered. The prediction was that corporate insiders would leverage their inside knowledge to delay trading until after the earnings announcement. They would benefit financially by trading after the announcement and draw less attention from the SEC, as they delayed trading until the announcement became public information. However, knowing how the market would react would allow them to make a meditated decision. For an announcement that was below analyst expectations, corporate insiders should buy stock after the market reaction causes the price to drop. Our findings were that corporate insiders did in fact wait until the announcement day and overall were net buyers. The study will give better insights into how corporate insiders trade and how restrictions can be made to stop this insider trading activity

At the Water’s Hedge: International Insider-Trading Enforcement After Morrison

From copy rooms to boardrooms, many Americans have succumbed to the siren song of insider trading. As U.S. companies have gone international, so too have corporate secrets ripe for exploitation. With the growth of overseas derivatives based on U.S. stock, foreigners are able to engage in insider trading to a similar extent as Americans. But in Morrison v. National Australia Bank, the Supreme Court limited the reach of the statutory insider-trading prohibition to transactions taking place in U.S. territory or transactions in securities listed on U.S. exchanges. Neither condition applies to overseas insider trading using derivatives. However, courts have reasoned that when the trader’s broker hedges by buying stock on a U.S. exchange, that transaction can be attributed to the trader, thus bringing the scheme within Morrison. This hedging theory depends on the acts of third parties—the brokers—to create insider-trading liability, thus giving arbitrary windfalls to blameworthy traders and creating both evidentiary and legal hurdles for U.S. enforcement. Because Morrison has backed courts into this unworkable corner, it should not govern in insider-trading cases. There is a fix: the Dodd-Frank Wall Street Reform and Consumer Protection Act abrogated Morrison for enforcement actions, albeit imperfectly. By abandoning the theory in favor of Dodd-Frank’s pragmatic standard, courts can more nimbly and forcefully protect U.S. markets from foreign fraud

The Stages of Scandal and the Roles of General Counsel

This Essay examines the roles of a general counsel, as the corporation’s chief legal officer, in responding to scandals when they happen and in developing and enforcing internal preventive practices prior to the occurrence of any particular scandal. The Essay differentiates between scandals and crises more generally, emphasizing the integral connection between scandal and jeopardy to reputation and tracing the interrelationships between a corporation’s reputation and that of its general counsel. The Essay argues that risks associated with scandal may strengthen general counsel’s power within the senior management team, in particular in general counsel’s relationship with the corporation’s CEO. Although general counsel’s position as a member of the senior management team may imperil counsel’s ability to bring detached judgment to bear, counsel’s position within the corporation is a critical component of effectiveness in anticipating and addressing scandals

What Were They Thinking? Insider Trading and the Scienter Requirement

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 leads to interesting psychological questions as to the required state of mind. Is it always simple greed? What if there is an element of unconscious misperception—or rationalization—at work? My sense is that the causal explanations for what is charged as insider trading are sometimes quite murky and not easily explained as pure greed. The chapter thus tries to connect the law of insider trading to a more sophisticated approach to state of mind, motivation and causation

Bulls, Bears and Excess Volatility: can currency intervention help?

Asset mis-pricing may reflect investor psychology, with excess volatility arising from switches of sentiment. For a floating exchange rate where fundamentals follow a random walk, we show that excess volatility can be generated by the repeated entry and exit of currency 'bulls' and 'bears' with switches driven by 'draw-down' trading rules. We argue that non-sterilised intervention - in support of 'monitoring band' - can reduce excess volatility by coordinating beliefs in line with policy. Strategic complementarity in the foreign exchange market suggests that sterilised intervention may also play a coordinating role