Insider Trading in a Globalizing Market: Who Should Regulate What?

As the market for securities becomes increasingly global, the question of whose rules should apply to any particular transaction will arise with increasing frequency. The issue is examined

“It’s Just Not Right”: The Ethics of Insider Trading

The Supreme Court doctrine defining insider trading and a competing theory called the misappropriation theory are criticized, focusing on the case of United States vs Chestman. A counter-argument is presented

No Pain, No Gain: The Criminal Absence of the Efficient Capital Markets Theory from Insider Trader Sentencing

(Excerpt) This Note argues that, for purposes of criminal insider trading sentencing, courts should look to the date that the information was disclosed to determine the amount of the defendant’s gains. This point in time simultaneously signifies the conclusion of the offense and the market’s valuation of the information initially traded on. Part I will discuss the statutory prohibition on insider trading and its corresponding sentencing formula. Part II will focus on the current approaches adopted for measuring gains of insider trading in criminal sentencing, as well as other forms of securities fraud violations. Part III will identify the presence of the Efficient Capital Markets Theory in the general framework of insider trading and disclosure regulations. Finally, Part III will advance a solution to calculating gains by presuming that in an efficient market, a stock’s price reflects the previously undisclosed information upon its disclosure and therefore, concludes the accumulation of gains for sentencing purposes

No Pain, No Gain: The Criminal Absence of the Efficient Capital Markets Theory from Insider Trader Sentencing

(Excerpt) This Note argues that, for purposes of criminal insider trading sentencing, courts should look to the date that the information was disclosed to determine the amount of the defendant’s gains. This point in time simultaneously signifies the conclusion of the offense and the market’s valuation of the information initially traded on. Part I will discuss the statutory prohibition on insider trading and its corresponding sentencing formula. Part II will focus on the current approaches adopted for measuring gains of insider trading in criminal sentencing, as well as other forms of securities fraud violations. Part III will identify the presence of the Efficient Capital Markets Theory in the general framework of insider trading and disclosure regulations. Finally, Part III will advance a solution to calculating gains by presuming that in an efficient market, a stock’s price reflects the previously undisclosed information upon its disclosure and therefore, concludes the accumulation of gains for sentencing purposes

The Learned Hand Unformula for Short-Swing Liability

Section 16(b) of the Securities Exchange Act of 1934 allows for the recovery of short-swing profits realized by certain insiders from trading in a corporation’s stock within a period of less than six months. Three generations of corporate law students have been taught the “lowest-in, highest-out” formula that is intended to maximize the disgorgement of short-swing profits under section 16(b). Arnold Jacobs’s 1987 treatise presented two hypothetical examples where the formula fell short of the intended maximum, but courts, commentators, and practitioners have largely ignored these theoretical challenges to the formula’s validity. This Article identifies Gratz v. Claughton as the first reported real-world example of the formula’s failure. Ironically, Gratz has been taught and cited for more than sixty years as a leading authority for the formula’s use, not least because of its distinguished author, Judge Learned Hand. This Article argues that Gratz has been misunderstood and that Hand wisely adjudicated this complex case without prescribing or endorsing the formula in any way. It also shows that the formula has no need of Gratz’s endorsement, as long as the formula is correctly interpreted as limited to simpler cases where it is mathematically valid. It formalizes and extends Jacobs’s results by showing that the formula may fall short of the maximum by up to fifty percent when misused in more complex cases, and has actually fallen short in another more recent case. Finally, it provides online tools to enable practitioners and judges to calculate short-swing liability correctly in all cases

Insider Abstention and Rule 10b5-1 Plans

Company insiders will typically be in possession of material non-public information (MNPI) about their companies. In order to allow insiders the opportunity to trade, the SEC adopted Rule 10b5-1, which provides an affirmative defense to insider trading liability if the trades are made pursuant to a written plan or trading instruction entered into when the trader was not aware of MNPI. Over the years, there has been considerable concern that insiders were abusing Rule 10b5-1 plans by adopting plans just prior to trading, adopting multiple plans, or even terminating plans when they turned out to be unprofitable. The SEC recently adopted new rules designed to curb some of the more abusive practices, but one significant problem remains: while Rule 10b5-1 plans are supposed to be irrevocable, insiders who back out of plans have so far escaped liability under the central anti-fraud provision of the federal securities laws, principally because a violation of that provision requires an actual trade. The issue of “insider abstention”—insiders who decide not to trade based on MNPI—has long bedeviled insider trading law and policy. Insider abstention is typically undetectable and unknowable, raising insurmountable issues of proof, while the general requirement that fraud be “in connection with the purchase or sale of a security” imposes a rigid legal barrier. But Rule 10b5-1 plans stand on a different evidentiary footing: they are written plans, communicated to third parties, creating a clear record of intent. The only real question is whether legal liability can attach in the absence of an actual purchase or sale of a security. Traditionally, the answer to this question has been no. The SEC staff has stated on a few occasions that cancellation of a Rule 10b5-1 plan would not in itself lead to liability under Rule 10b-5 because terminating a plan would not meet the “in connection with” requirement. However, Rule 10b5 is not the only statutory provision that has been used to prosecute insider trading. The SEC has frequently prosecuted insider trading under Section 17(a) of the Securities Act, a provision that applies not only to the “sale” of securities but extends more broadly to “offers” to sell securities. And criminal authorities have increasingly been prosecuting insider trading under mail and wire fraud statutes that do not have an “in connection with” requirement at all. These other statutory provisions could provide a basis for insider trading liability in the context of a cancelled or terminated Rule 10b5-1 plan