Insider Trading Revisited

Everyone knows that insider trading is illegal and can create liability for the person who gives the “tip” and the person who trades based on the “tip.”  So why did the US House of Representatives enact the Insider Trading Prohibition Act a week or so ago? And, wonder of wonders, with strong bipartisan support?

As of this moment, there actually is no law prohibiting insider trading per se.  Rather, the illegality arises from the Securities Exchange Act prohibition against fraud.  Without here tracing the complex case law that has arisen in trying to define the “fraud” involved in the myriad fact patterns we call insider trading, suffice it to say that the elements of proof have wavered over time, most recently focusing on whether the tipper received any benefit from the “tip.”  (A curious side-trip, as the harm to free trading markets does not turn on that fact.)

The new bill abandons the idea of fraud and focuses on “wrongful use” of insider information. It also bans wrongful gathering, which would cover theft and hacking.

As the bill moves to the Senate, note a last-minute amendment to the House bill which re-inserted the requirement that there be personal benefit provided by the tippee to the tipper.  Per the bill’s draftsperson, Columbia Law professor John Coffee, Jr., this “major concession to the Republicans” ignores that in tipping cases the parties are “like members in an old boys club” and the reciprocity of access to information is normative and ingrained.   Let’s see what happens in the Senate.


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