insider trading
DESCRIPTION
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. Classic insider trading. Insider vs. outsider trading. Outsider trading (misappropriation). - PowerPoint PPT PresentationTRANSCRIPT
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 tradingvs. misappropriation
Insider vs. outsider trading
Classic insider trading
Corporation
Investors / shareholders
Insider
Non-public,material information
Buy or sell
Outsider trading (misappropriation)
Corporation
Non-public,material information
Insider
Shareholders
Target
Investors /shareholders
Buy or sell
Evaluate “insider trading”
Pros• Sends “soft information”
to markets – thus protecting proprietary info
• Encourages insiders to own company stock
• Compensates insiders for developing “good news”
Cons• 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• Sends “soft information”
to markets – thus protecting proprietary info
• Encourages insiders to own company stock
• Compensates insiders for developing “good news”
Cons• 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)
Corporation
Shareholder
Insider
Non-public,material information
Buy
What is the common law?
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 non-shareholder 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)
Corporation
Shareholders
Insider
Non-public,material information
Buy
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)
Corporation
Non-public,material information
Insider
Shareholders
Target
Shareholders
BuyWhat is basis
for “insider trading”
liability? Printer
Eee
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?