insiders trading.docx

7/24/2019 Insiders trading.docx

1/13

Insiders trading

Illegal insider trading[edit]

Rules against insider trading on material non-public information exist in most jurisdictions around the

world (Bhattacharya and Daouk !""!# but the details and the efforts to enforce them $ary

considerably% &n the 'nited tates ections )*(b# and )"(b# of the ecurities +xchange ,ct of )./

directly and indirectly address insider trading% 0ongress enacted this act after the stock market crash

of )!%[.]1he 'nited tates is generally $iewed as ha$ing the strictest laws against illegal insider

trading and makes the most serious efforts to enforce them% [/]&n the 'nited 2ingdom the 3inancial

er$ices and 4arkets ,ct !"""gi$es the '25s 3inancial 0onduct ,uthoritythe responsibility toin$estigate and prosecute insider dealing defined by1he 0riminal 6ustice ,ct ).%

Definition of "insider"[edit]

&n the 'nited tates 0anada ,ustralia and 7ermany for mandatory reporting purposes corporate

insiders are defined as a company5s officers directors and any beneficial owners of more than )"8

of a class of the company5s e9uity securities% 1rades made by these types of insiders in the

company5s own stock based on material non-public information are considered fraudulent since the

insiders are $iolating the fiduciary duty that they owe to the shareholders% 1he corporate insider

simply by accepting employment has undertaken a legal obligation to the shareholders to put the

shareholders5 interests before their own in matters related to the corporation% :hen the insider buys

or sells based upon company owned information he is $iolating his obligation to the shareholders%

3or example illegal insider trading would occur if thechief executi$e officerof 0ompany , learned

(prior to a public announcement# that 0ompany , will be taken o$er and then bought shares in

0ompany , while knowing that the share price would likely rise%

&n the 'nited tates and many other jurisdictions howe$er ;insiders; are not just limited to corporate

officials and major shareholders where illegal insider trading is concerned but can include any

indi$idual who trades shares based on material non-public information in $iolation of some duty of

trust% 1his duty may be imputed< for example in many jurisdictions in cases of where a corporateinsider ;tips; a friend about non-public information likely to ha$e an effect on the company5s share

price the duty the corporate insider owes the company is now imputed to the friend and the friend

$iolates a duty to the company if the corporate insider trades on the basis of this information%
https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=1https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=1https://en.wikipedia.org/wiki/Insider_trading#cite_note-Newkirk-3https://en.wikipedia.org/wiki/Insider_trading#cite_note-Newkirk-3https://en.wikipedia.org/wiki/Insider_trading#cite_note-4https://en.wikipedia.org/wiki/Financial_Services_and_Markets_Act_2000https://en.wikipedia.org/wiki/Financial_Services_and_Markets_Act_2000https://en.wikipedia.org/wiki/Financial_Conduct_Authorityhttps://en.wikipedia.org/wiki/Criminal_Justice_Act_1993https://en.wikipedia.org/wiki/Criminal_Justice_Act_1993https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=2https://en.wikipedia.org/wiki/Chief_executive_officerhttps://en.wikipedia.org/wiki/Chief_executive_officerhttps://en.wikipedia.org/wiki/Chief_executive_officerhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Newkirk-3https://en.wikipedia.org/wiki/Insider_trading#cite_note-4https://en.wikipedia.org/wiki/Financial_Services_and_Markets_Act_2000https://en.wikipedia.org/wiki/Financial_Services_and_Markets_Act_2000https://en.wikipedia.org/wiki/Financial_Conduct_Authorityhttps://en.wikipedia.org/wiki/Criminal_Justice_Act_1993https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=2https://en.wikipedia.org/wiki/Chief_executive_officerhttps://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=1


2/13

Liability for insider trading[edit]

=iability for inside trading $iolations cannot be a$oided by passing on the information in an ;& scratchyour back< you scratch mine; or 9uid pro 9uoarrangement as long as the person recei$ing the

information knew or should ha$e known that the information was material non-public information% &n

the 'nited tates at least one court has indicated that the insider who releases the non-public

information must ha$e done so for an improper purpose% &n the case of a person who recei$es the

insider information (called the ;tippee;# the tippee must also ha$e been aware that the insider

released the information for an improper purpose% [>]

?ne commentator has argued that if 0ompany ,5s 0+? did not trade on the

undisclosedtakeo$ernews but instead passed the information on to his brother-in-law who traded

on it illegal insider trading would still ha$e occurred (albeit by proxy by passing it on to a ;non-

insider; so 0ompany ,5s 0+? wouldn5t get his hands dirty#

Trading on information in general[edit]

@ot all trading on non-public information is illegal insider trading% 3or example a person in a

restaurant who hears the 0+? of 0ompany , at the next table tell the 03? that the company5s

profits will be higher than expected and then buys the stock is not guilty of insider tradingAunless he

or she had some closer connection to the company or company officers% owe$er information about

a tender offer(usually regarding a merger or ac9uisition# is held to a higher standard% &f this type of

information is obtained (directly or indirectly# and there is reason to belie$e it is nonpublic there is a

duty to disclose it or abstain from trading%[)"]1he punishment for insider trading depends on a few

different factors% 1here are three main factors which can be identified%

1he significance of the trading C ow much money was in$ol$ed ow many people were

affected by the wrongdoing

+$idence C ,nyone charged is innocent until pro$en guilty% 1he burden of proof falls on the

prosecution% &f no one EflipsF or if there isnGt a smoking gun the prosecution has a harder timepro$ing guilt% 1his may result in prosecution mo$ing away from criminal charges and instead

choosing to pursue ci$il charges%

+0 $iolations C &f +0 regulations ha$e been broken the '%% Department of 6ustice (D?6#

may be called to conduct an independent parallel in$estigation% &f the D?6 finds criminal

wrongdoing the Department may file criminal charges%
https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=3https://en.wikipedia.org/wiki/Quid_pro_quohttps://en.wikipedia.org/wiki/Insider_trading#cite_note-United_States_v_2014-5https://en.wikipedia.org/wiki/Takeoverhttps://en.wikipedia.org/wiki/Takeoverhttps://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=6https://en.wikipedia.org/wiki/Tender_offerhttps://en.wikipedia.org/wiki/Tender_offerhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-10https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=3https://en.wikipedia.org/wiki/Quid_pro_quohttps://en.wikipedia.org/wiki/Insider_trading#cite_note-United_States_v_2014-5https://en.wikipedia.org/wiki/Takeoverhttps://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=6https://en.wikipedia.org/wiki/Tender_offerhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-10


3/13

Legal insider trading[edit]

=egal trades by insiders are common[.]as employees of publicly tradedcorporationsoften ha$e

stock or stock options% 1hese trades are made public in the 'nited tates throughecurities and

+xchange 0ommission filings mainly 3orm /%

+0 Rule )"b>-)clarified that the prohibition against insider trading does not re9uire proof that an

insider actually used material nonpublic information when conducting a trade< possession of such

information alone is sufficient to $iolate the pro$ision and the +0 would infer that an insider in

possession of material nonpublic information used this information when conducting a trade%

owe$er +0 Rule )"b>-) also created for insiders anaffirmati$e defenseif the insider can

demonstrate that the trades conducted on behalf of the insider were conducted as part of a pre-

existingcontractor written binding plan for trading in the future%[)!]

3or example if an insider expects to retire after a specific period of time and as part of retirement

planning the insider has adopted a written binding plan to sell a specific amount of the company5s

stock e$ery month for two years and later comes into possession of material nonpublic information

about the company trades based on the original plan might not constitute prohibited insider trading%

American insider trading law[edit]

1he 'nited tates has been the leading country in prohibiting insider trading made on the basis of

material non-public information% 1homas @ewkirk and 4elissa Robertson of the'%% ecurities and

+xchange 0ommission(+0# summariHe the de$elopment of ' insider trading laws% [.]&nsider

trading has a base offense le$el of I which puts it in Jone , under the '%% entencing 7uidelines%

1his means that first-time offenders are eligible to recei$e probation rather than incarceration% [).]

tatutory law[edit]

'%% insider trading prohibitions are based on +nglish and ,merican common law prohibitions

against fraud% &n )" well before the ecurities +xchange ,ct was passed the 'nited tates

upreme 0ourt ruled that a corporate director who bought that company5s stock when he knew the

stock5s price was about to increase committed fraud by buying but not disclosing his inside

information%
https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=8https://en.wikipedia.org/wiki/Insider_trading#cite_note-Newkirk-3https://en.wikipedia.org/wiki/Public_companyhttps://en.wikipedia.org/wiki/Corporationhttps://en.wikipedia.org/wiki/Corporationhttps://en.wikipedia.org/wiki/Corporationhttps://en.wikipedia.org/wiki/SEC_filinghttps://en.wikipedia.org/wiki/SEC_filinghttps://en.wikipedia.org/wiki/SEC_filinghttps://en.wikipedia.org/wiki/Form_4https://en.wikipedia.org/wiki/SEC_Rule_10b5-1https://en.wikipedia.org/wiki/Affirmative_defensehttps://en.wikipedia.org/wiki/Affirmative_defensehttps://en.wikipedia.org/wiki/Contracthttps://en.wikipedia.org/wiki/Contracthttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Stein2001-12https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=9https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=9https://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttps://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttps://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Newkirk-3https://en.wikipedia.org/wiki/U.S._Sentencing_Guidelineshttps://en.wikipedia.org/wiki/Insider_trading#cite_note-13https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=10https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=8https://en.wikipedia.org/wiki/Insider_trading#cite_note-Newkirk-3https://en.wikipedia.org/wiki/Public_companyhttps://en.wikipedia.org/wiki/Corporationhttps://en.wikipedia.org/wiki/SEC_filinghttps://en.wikipedia.org/wiki/SEC_filinghttps://en.wikipedia.org/wiki/Form_4https://en.wikipedia.org/wiki/SEC_Rule_10b5-1https://en.wikipedia.org/wiki/Affirmative_defensehttps://en.wikipedia.org/wiki/Contracthttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Stein2001-12https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=9https://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttps://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Newkirk-3https://en.wikipedia.org/wiki/U.S._Sentencing_Guidelineshttps://en.wikipedia.org/wiki/Insider_trading#cite_note-13https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=10


4/13

ection )> of the ecurities ,ct of )..[)/]contained prohibitions of fraud in the sale of securities

which were greatly strengthened by the ecurities +xchange ,ct of )./%[)>]

ection )*(b# of theecurities +xchange ,ct of )./prohibits short-swing profits (from any

purchases and sales within any six-month period# made by corporate directors officers orstockholders owning more than )"8 of a firm5s shares% 'nder ection )"(b# of the )./ ,ct+0

Rule )"b->prohibits fraud related to securities trading%

1he &nsider 1rading anctions ,ct of )I/ and the &nsider 1rading and ecurities 3raud +nforcement

,ct of )II place penalties for illegal insider trading as high as three times the amount of profit

gained or loss a$oided from the illegal trading%[)*]

+0 regulations[edit]

+0regulation 3D (;3air Disclosure;#re9uires that if a company intentionally discloses material non-

public information to one person it must simultaneously disclose that information to the public at

large% &n the case of an unintentional disclosure of material non-public information to one person the

company must make a public disclosure ;promptly%;[*]K>I*

&nsider trading or similar practices are also regulated by the +0 under its rules

ontakeo$ersandtender offersunder the:illiams ,ct%

0ourt decisions[edit]

4uch of the de$elopment of insider trading law has resulted from court decisions%
https://en.wikipedia.org/wiki/Securities_Act_of_1933https://en.wikipedia.org/wiki/Securities_Act_of_1933https://en.wikipedia.org/wiki/Insider_trading#cite_note-14https://en.wikipedia.org/wiki/Insider_trading#cite_note-14https://en.wikipedia.org/wiki/Securities_Exchange_Act_of_1934https://en.wikipedia.org/wiki/Insider_trading#cite_note-15https://en.wikipedia.org/wiki/Securities_Exchange_Act_of_1934https://en.wikipedia.org/wiki/Securities_Exchange_Act_of_1934https://en.wikipedia.org/wiki/SEC_Rule_10b-5https://en.wikipedia.org/wiki/SEC_Rule_10b-5https://en.wikipedia.org/wiki/SEC_Rule_10b-5https://en.wikipedia.org/wiki/SEC_Rule_10b-5https://en.wikipedia.org/wiki/Insider_trading#cite_note-16https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=11https://en.wikipedia.org/wiki/Regulation_Fair_Disclosurehttps://en.wikipedia.org/wiki/Regulation_Fair_Disclosurehttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Harris-6https://en.wikipedia.org/wiki/Insider_trading#cite_note-Harris-6https://en.wikipedia.org/wiki/Takeoverhttps://en.wikipedia.org/wiki/Takeoverhttps://en.wikipedia.org/wiki/Tender_offerhttps://en.wikipedia.org/wiki/Tender_offerhttps://en.wikipedia.org/wiki/Tender_offerhttps://en.wikipedia.org/wiki/Williams_Acthttps://en.wikipedia.org/wiki/Williams_Acthttps://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=12https://en.wikipedia.org/wiki/Securities_Act_of_1933https://en.wikipedia.org/wiki/Insider_trading#cite_note-14https://en.wikipedia.org/wiki/Securities_Exchange_Act_of_1934https://en.wikipedia.org/wiki/Insider_trading#cite_note-15https://en.wikipedia.org/wiki/Securities_Exchange_Act_of_1934https://en.wikipedia.org/wiki/SEC_Rule_10b-5https://en.wikipedia.org/wiki/SEC_Rule_10b-5https://en.wikipedia.org/wiki/Insider_trading#cite_note-16https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=11https://en.wikipedia.org/wiki/Regulation_Fair_Disclosurehttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Harris-6https://en.wikipedia.org/wiki/Takeoverhttps://en.wikipedia.org/wiki/Tender_offerhttps://en.wikipedia.org/wiki/Williams_Acthttps://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=12


5/13

&n SEC v. Texas Gulf Sulphur Co.[)L]a federal circuit court stated that anyone in possession of inside

information must either disclose the information or refrain from trading% [!]?fficers of the 1exas 7ulf

ulphur 0orporation had used inside information about the disco$ery of the2idd 4ineto make

profits by buying shares and call options on company stock% [)I]

&n )" theupreme 0ourt of the 'nited tatesruled in Strong v. Repide[)]that a director who

expects to act in a way that affects the $alue of shares cannot use that knowledge to ac9uire shares

from those who do not know of the expected action% +$en though in general ordinary relations

between directors and shareholders in a business corporation are not of such a fiduciary nature as

to make it the duty of a director to disclose to a shareholder the general knowledge which he may

possess regarding the $alue of the shares of the company before he purchases any from a

shareholder yet there are cases where by reason of the special facts such duty exists%

&n )I/ theupreme 0ourt of the 'nited tatesruled in the case of Dirks v. Securities and

Exchange Commission[!"]that tippees (recei$ers of second-hand information# are liable if they had

reason to belie$e that the tipper had breached a fiduciary duty in disclosing confidential information

and the tipper recei$ed any personal benefit from the disclosure% &n Dirks the ;tippee; recei$ed

confidential information from an insider a former employee of a company% 1he reason the insiderdisclosed the information to the tippee and the reason the tippee disclosed the information to third

parties was to blow the whistle on massi$e fraud at the company% ,s a result of the tippee5s efforts

the fraud was unco$ered and the company went into bankruptcy% But while the tippee had gi$en the

;inside; information to clients who made profits from the information the '%% upreme 0ourt ruled

that the tippee could not be held liable under the federal securities lawsAfor the simple reason that

the insider from whom he recei$ed the information was not releasing the information for an improper

purpose (a personal benefit# but rather for the purpose of exposing the fraud% 1he upreme 0ourt

ruled that the tippee could not ha$e been aiding and abetting a securities law $iolation committed by

the insiderAfor the simple reason that no securities law $iolation had been committed by the insider%

&n Dirks the upreme 0ourt also defined the concept of ;constructi$e insiders; who are lawyers

in$estment bankers and others who recei$e confidential information from a corporation while

pro$iding ser$ices to the corporation% 0onstructi$e insiders are also liable for insider trading

$iolations if the corporation expects the information to remain confidential since they ac9uire the

fiduciary duties of the true insider%
https://en.wikipedia.org/wiki/Insider_trading#cite_note-17https://en.wikipedia.org/wiki/Insider_trading#cite_note-17https://en.wikipedia.org/wiki/Insider_trading#cite_note-Concise-2https://en.wikipedia.org/wiki/Kidd_Minehttps://en.wikipedia.org/wiki/Kidd_Minehttps://en.wikipedia.org/wiki/Kidd_Minehttps://en.wikipedia.org/wiki/Insider_trading#cite_note-brooks-18https://en.wikipedia.org/wiki/Supreme_Court_of_the_United_Stateshttps://en.wikipedia.org/wiki/Supreme_Court_of_the_United_Stateshttps://en.wikipedia.org/wiki/Insider_trading#cite_note-19https://en.wikipedia.org/wiki/Supreme_Court_of_the_United_Stateshttps://en.wikipedia.org/wiki/Supreme_Court_of_the_United_Stateshttps://en.wikipedia.org/wiki/Insider_trading#cite_note-20https://en.wikipedia.org/wiki/Insider_trading#cite_note-17https://en.wikipedia.org/wiki/Insider_trading#cite_note-Concise-2https://en.wikipedia.org/wiki/Kidd_Minehttps://en.wikipedia.org/wiki/Insider_trading#cite_note-brooks-18https://en.wikipedia.org/wiki/Supreme_Court_of_the_United_Stateshttps://en.wikipedia.org/wiki/Insider_trading#cite_note-19https://en.wikipedia.org/wiki/Supreme_Court_of_the_United_Stateshttps://en.wikipedia.org/wiki/Insider_trading#cite_note-20


6/13

1he next expansion of insider trading liability came in SEC vs. Materia[!)]L/> 3%!d )L (!d 0ir% )I/#

the case which first introduced the misappropriation theory of liability for insider trading% 4ateria a

financial printing firm proofreader and clearly not an insider by any definition was found to ha$e

determined the identity of takeo$er targets based on proofreading tender offer documents during his

employment% ,fter a two-week trial the district court found him liable for insider trading and theecond 0ircuit 0ourt of ,ppeals affirmed holding that the theft of information from an employer and

the use of that information to purchase or sell securities in another entity constituted a fraud in

connection with the purchase or sale of a securities% 1he misappropriation theory of insider trading

was born and liability further expanded to encompass a larger group of outsiders%

&n United States v. Carpenter[!!]()I*# the '%% upreme 0ourt cited an earlier ruling while

unanimously upholding mail and wire fraud con$ictions for a defendant who recei$ed his information

from a journalist rather than from the company itself%

1he journalist R% 3oster :inanswas also con$icted on the grounds that he had misappropriated

information belonging to his employer theall Street !ournal% &n that widely publiciHed case

:inans traded in ad$ance of ;eard on the treet; columns appearing in the 6ournal%

1he 0ourt stated in CarpenterK ;&t is well established as a general proposition that a person who

ac9uires special knowledge or information by $irtue of a confidential or fiduciary relationship with

another is not free to exploit that knowledge or information for his own personal benefit but must

account to his principal for any profits deri$ed therefrom% owe$er in upholding the securities fraud

(insider trading# con$ictions the justices were e$enly split%

&n )L the'%% upreme 0ourtadopted the misappropriation theory of insider trading in United

States v. "#$agan[!/]>!) '%% */! *>> ()L#% ?5agan was a partner in a law firm

representing 7rand 4etropolitanwhile it was considering a tender offer for Millsbury 0ompany%

?5agan used this inside information by buying call options on Millsbury stock resulting in profits of

o$er N/%. million% ?5agan claimed that neither he nor his firm owed a fiduciary duty to Millsbury so

he did not commit fraud by purchasing Millsbury options%[!>]

1he 0ourt rejected ?5agan5s arguments and upheld his con$iction%
https://en.wikipedia.org/wiki/Insider_trading#cite_note-21https://en.wikipedia.org/wiki/Insider_trading#cite_note-21https://en.wikipedia.org/wiki/Insider_trading#cite_note-22https://en.wikipedia.org/wiki/R._Foster_Winanshttps://en.wikipedia.org/wiki/Wall_Street_Journalhttps://en.wikipedia.org/wiki/Wall_Street_Journalhttps://en.wikipedia.org/wiki/U.S._Supreme_Courthttps://en.wikipedia.org/wiki/U.S._Supreme_Courthttps://en.wikipedia.org/wiki/Insider_trading#cite_note-24https://en.wikipedia.org/wiki/Diageohttps://en.wikipedia.org/wiki/Diageohttps://en.wikipedia.org/wiki/Pillsbury_Companyhttps://en.wikipedia.org/wiki/Pillsbury_Companyhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-25https://en.wikipedia.org/wiki/Insider_trading#cite_note-21https://en.wikipedia.org/wiki/Insider_trading#cite_note-22https://en.wikipedia.org/wiki/R._Foster_Winanshttps://en.wikipedia.org/wiki/Wall_Street_Journalhttps://en.wikipedia.org/wiki/U.S._Supreme_Courthttps://en.wikipedia.org/wiki/Insider_trading#cite_note-24https://en.wikipedia.org/wiki/Diageohttps://en.wikipedia.org/wiki/Pillsbury_Companyhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-25


7/13

1he ;misappropriation theory; holds that a person commits fraud ;in connection with; a securities

transaction and thereby $iolates )"(b# and Rule )"b-> when he misappropriates confidential

information for securities trading purposes in breach of a duty owed to the source of the information%

'nder this theory a fiduciary5s undisclosed self-ser$ing use of a principal5s information to purchase

or sell securities in breach of a duty of loyalty and confidentiality defrauds the principal of theexclusi$e use of the information% &n lieu of premising liability on a fiduciary relationship between

company insider and purchaser or seller of the company5s stock the misappropriation theory

premises liability on a fiduciary-turned-trader5s deception of those who entrusted him with access to

confidential information%

1he 0ourt specifically recogniHed that a corporation5s information is its propertyK ;, company5s

confidential information %%% 9ualifies as property to which the company has a right of exclusi$e use%

1he undisclosed misappropriation of such information in $iolation of a fiduciary duty %%% constitutes

fraud akin to embeHHlement C the fraudulent appropriation to one5s own use of the money or goods

entrusted to one5s care by another%;

&n !""" the +0 enacted +0 Rule )"b>-) which defined trading ;on the basis of; inside

information as any time a person trades while aware of material nonpublic information% &t is no longer

a defense for one to say that one would ha$e made the trade anyway% 1he rule also created

anaffirmati$e defensefor pre-planned trades%

&n !")/ in the case of United States v. %e&man the 'nited tates 0ourt of ,ppeals for the econd

0ircuit cited the upreme 0ourt5s decision in Dirks and ruled that in order for a ;tippee; (a person

who has recei$ed insider information from an insider and has used that information# to be guilty of

insider trading the tippee must ha$e been aware not only that the information was insider

information but must also ha$e been aware that the insider released the information for an improper

purpose (such as a personal benefit#% 1he 0ourt concluded that the insider5s breach of a fiduciary

duty not to release confidential informationAin the absence of an improper purpose on the part of

the insiderAis not enough for criminal liability to be imposed on the either the insider or the tippee
https://en.wikipedia.org/wiki/SEC_Rule_10b5-1https://en.wikipedia.org/wiki/Affirmative_defensehttps://en.wikipedia.org/wiki/Affirmative_defensehttps://en.wikipedia.org/wiki/SEC_Rule_10b5-1https://en.wikipedia.org/wiki/Affirmative_defense


8/13

Arguments for legalizing insider trading

ome economists and legal scholars (such asenry 4anne4ilton 3riedman1homas

owell Daniel 3ischel and 3rank % +asterbrook# ha$e argued that laws against insider trading

should be repealed% 1hey claim that insider trading based on material nonpublic information benefits

in$estors in general by more 9uickly introducing new information into the market% [./]

3riedman laureate of the @obel 4emorial MriHe in +conomics saidK ;Oou want more insider trading

not less% Oou want to gi$e the people most likely to ha$e knowledge about deficiencies of the

company an incenti$e to make the public aware of that%; 3riedman did not belie$e that the trader

should be re9uired to make his trade known to the public because the buying or selling pressure

itself is information for the market%[*]K>)CL
https://en.wikipedia.org/wiki/Henry_Mannehttps://en.wikipedia.org/wiki/Henry_Mannehttps://en.wikipedia.org/wiki/Milton_Friedmanhttps://en.wikipedia.org/wiki/Milton_Friedmanhttps://en.wikipedia.org/wiki/Thomas_Sowellhttps://en.wikipedia.org/wiki/Thomas_Sowellhttps://en.wikipedia.org/wiki/Thomas_Sowellhttps://en.wikipedia.org/wiki/Daniel_Fischelhttps://en.wikipedia.org/wiki/Frank_H._Easterbrookhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-34https://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economicshttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Harris-6https://en.wikipedia.org/wiki/Insider_trading#cite_note-Harris-6https://en.wikipedia.org/wiki/Insider_trading#cite_note-Harris-6https://en.wikipedia.org/wiki/Henry_Mannehttps://en.wikipedia.org/wiki/Milton_Friedmanhttps://en.wikipedia.org/wiki/Thomas_Sowellhttps://en.wikipedia.org/wiki/Thomas_Sowellhttps://en.wikipedia.org/wiki/Daniel_Fischelhttps://en.wikipedia.org/wiki/Frank_H._Easterbrookhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-34https://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economicshttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Harris-6


9/13

?ther critics argue that insider trading is a $ictimless actK a willing buyer and a willing seller agree to

trade property which the seller rightfully owns with no prior contract (according to this $iew# ha$ing

been made between the parties to refrain from trading if there is asymmetric information% 1he

,tlantichas described the process as ;arguably the closest thing that modern finance has to a

$ictimless crime;%[.>]

=egaliHation ad$ocates also 9uestion why ;trading; where one party has more information than the

other is legal in other markets such as real estate but not in the stock market% 3or example if

a geologistknows there is a high likelihood of the disco$ery of petroleumunder 3armer mith5s land

he may be entitled to make mith an offer for the land and buy it without first telling 3armer mith

of the geological data%[!]@e$ertheless circumstances can occur when the geologist would be

committing fraudif because he owes a duty to the farmer he did not disclose the information (for

example where the geologist had been hired by 3armer mith to assess the geology of the farm#%

,d$ocates of legaliHation make free speech arguments% Munishment for communicating about a

de$elopment pertinent to the next day5s stock price might seem an act of censorship% [.*]&f the

information being con$eyed is proprietary information and the corporate insider has contracted to not

expose it he has no more right to communicate it than he would to tell others about the company5s

confidential new product designs formulas or bank account passwords%

ome authors ha$e used these arguments to propose legaliHing insider trading on negati$e

information (but not on positi$e information#% ince negati$e information is often withheld from the

market trading on such information has a higher $alue for the market than trading on positi$e

information%[.L][.I]

1here are $ery limited laws against ;insider trading; in the commodities markets if for no other

reason than that the concept of an ;insider; is not immediately analogous to commodities

themsel$es (corn wheat steel etc%#% owe$er analogous acti$ities such asfront runningare illegal

under ' commodity and futures trading laws% 3or example acommodity brokercan be charged

with fraud by recei$ing a large purchase order from a client (one likely to affect the price of that

commodity# and then purchasing that commodity before executing the client5s order to benefit from

the anticipated price increase%
https://en.wikipedia.org/wiki/Asymmetric_informationhttps://en.wikipedia.org/wiki/The_Atlantichttps://en.wikipedia.org/wiki/The_Atlantichttps://en.wikipedia.org/wiki/Insider_trading#cite_note-35https://en.wikipedia.org/wiki/Real_estatehttps://en.wikipedia.org/wiki/Geologyhttps://en.wikipedia.org/wiki/Petroleumhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Concise-2https://en.wikipedia.org/wiki/Insider_trading#cite_note-Concise-2https://en.wikipedia.org/wiki/Fraudhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-36https://en.wikipedia.org/wiki/Insider_trading#cite_note-36https://en.wikipedia.org/wiki/Insider_trading#cite_note-37https://en.wikipedia.org/wiki/Insider_trading#cite_note-38https://en.wikipedia.org/wiki/Front_runninghttps://en.wikipedia.org/wiki/Front_runninghttps://en.wikipedia.org/wiki/Front_runninghttps://en.wikipedia.org/wiki/Commodity_brokerhttps://en.wikipedia.org/wiki/Asymmetric_informationhttps://en.wikipedia.org/wiki/The_Atlantichttps://en.wikipedia.org/wiki/The_Atlantichttps://en.wikipedia.org/wiki/Insider_trading#cite_note-35https://en.wikipedia.org/wiki/Real_estatehttps://en.wikipedia.org/wiki/Geologyhttps://en.wikipedia.org/wiki/Petroleumhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Concise-2https://en.wikipedia.org/wiki/Fraudhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-36https://en.wikipedia.org/wiki/Insider_trading#cite_note-37https://en.wikipedia.org/wiki/Insider_trading#cite_note-38https://en.wikipedia.org/wiki/Front_runninghttps://en.wikipedia.org/wiki/Commodity_broker


10/13

Legal differences among jurisdictions[edit]

1he ' and the '2 $ary in the way the law is interpreted and applied with regard to insider trading%

&n the '2 the rele$ant laws are the 0riminal 6ustice ,ct ). Mart P chedule ) and the 3inancial

er$ices and 4arkets ,ct !""" which defines an offence of 4arket ,buse%[.]&t is also illegal to fail to

trade based on inside information (whereas without the inside information the trade would ha$etaken place#% 1he principle is that it is illegal to trade on the basis of market-sensiti$e information that

is not generally known% @o relationship to the issuer of the security is re9uired< all that is re9uired is

that the guilty party traded (or caused trading# whilst ha$ing inside information%

6apan enacted its first law against insider trading in )II% Roderick eeman said ;+$en today many

6apanese do not understand why this is illegal% &ndeed pre$iously it was regarded as common

sense to make a profit from your knowledge%;[/"]
https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=17https://en.wikipedia.org/wiki/Criminal_Justice_Act_1993https://en.wikipedia.org/wiki/Financial_Services_and_Markets_Act_2000https://en.wikipedia.org/wiki/Financial_Services_and_Markets_Act_2000https://en.wikipedia.org/wiki/Insider_trading#cite_note-39https://en.wikipedia.org/wiki/Insider_trading#cite_note-40https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=17https://en.wikipedia.org/wiki/Criminal_Justice_Act_1993https://en.wikipedia.org/wiki/Financial_Services_and_Markets_Act_2000https://en.wikipedia.org/wiki/Financial_Services_and_Markets_Act_2000https://en.wikipedia.org/wiki/Insider_trading#cite_note-39https://en.wikipedia.org/wiki/Insider_trading#cite_note-40


11/13

&n accordance with+' Directi$es 4altaenacted the 3inancial 4arkets ,buse ,ctin !""! which

effecti$ely replaced the &nsider Dealing and 4arket ,buse ,ctof )/%

1he ;?bjecti$es and Mrinciples of ecurities Regulation; [/)]published by the &nternational

?rganiHation of ecurities 0ommissions(&?0?# in )I and updated in !"". states that the three

objecti$es of good securities market regulation areK

)% &n$estor protection

!% &nsuring that markets are fair efficient and transparent and

.% Reducing systemic risk%

1he discussion of these ;0ore Mrinciples; state that ;in$estor protection; in this context means

;&n$estors should be protected from misleading manipulati$e or fraudulent practices including

insider trading front runningor trading ahead of customers and the misuse of client assets%; 4orethan I> percent of the world5s securities and commodities market regulators are members of &?0?

and ha$e signed on to these 0ore Mrinciples%

1he :orld Bankand&nternational 4onetary 3undnow use the &?0? 0ore Mrinciples in re$iewing

the financial health of different country5s regulatory systems as part of these organiHation5s financial

sector assessment program so laws against insider trading based on non-public information are

now expected by the international community% +nforcement of insider trading laws $aries widely from

country to country but the $ast majority of jurisdictions now outlaw the practice at least in principle%

=arry arris claims that differences in the effecti$eness with which countries restrict insider trading

help to explain the differences in executi$e compensationamong those countries% 1he ' for

example has much higher 0+? salaries than do 6apan or 7ermany where insider trading is less

effecti$ely restrained%[*]K>.

By nation[edit]European Union[edit]

&n !")/ the +uropean 'nion (+'# adopted legislation (0riminal anctions for 4arket ,buse

Directi$e# that harmonises criminal sanctions for insider dealing% ,ll +' 4ember tates agreed to
https://en.wikipedia.org/wiki/EU_Directiveshttps://en.wikipedia.org/wiki/EU_Directiveshttps://en.wikipedia.org/wiki/Maltahttps://en.wikipedia.org/w/index.php?title=Financial_Markets_Abuse_Act&action=edit&redlink=1https://en.wikipedia.org/w/index.php?title=Financial_Markets_Abuse_Act&action=edit&redlink=1https://en.wikipedia.org/w/index.php?title=Insider_Dealing_and_Market_Abuse_Act&action=edit&redlink=1https://en.wikipedia.org/w/index.php?title=Insider_Dealing_and_Market_Abuse_Act&action=edit&redlink=1https://en.wikipedia.org/wiki/Insider_trading#cite_note-41https://en.wikipedia.org/wiki/Insider_trading#cite_note-41https://en.wikipedia.org/wiki/International_Organization_of_Securities_Commissionshttps://en.wikipedia.org/wiki/International_Organization_of_Securities_Commissionshttps://en.wikipedia.org/wiki/International_Organization_of_Securities_Commissionshttps://en.wikipedia.org/wiki/Systemic_riskhttps://en.wikipedia.org/wiki/Systemic_riskhttps://en.wikipedia.org/wiki/Front_runninghttps://en.wikipedia.org/wiki/World_Bankhttps://en.wikipedia.org/wiki/International_Monetary_Fundhttps://en.wikipedia.org/wiki/International_Monetary_Fundhttps://en.wikipedia.org/wiki/Executive_compensationhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Harris-6https://en.wikipedia.org/wiki/Insider_trading#cite_note-Harris-6https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=18https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=18https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=19https://en.wikipedia.org/wiki/EU_Directiveshttps://en.wikipedia.org/wiki/Maltahttps://en.wikipedia.org/w/index.php?title=Financial_Markets_Abuse_Act&action=edit&redlink=1https://en.wikipedia.org/w/index.php?title=Insider_Dealing_and_Market_Abuse_Act&action=edit&redlink=1https://en.wikipedia.org/wiki/Insider_trading#cite_note-41https://en.wikipedia.org/wiki/International_Organization_of_Securities_Commissionshttps://en.wikipedia.org/wiki/International_Organization_of_Securities_Commissionshttps://en.wikipedia.org/wiki/Systemic_riskhttps://en.wikipedia.org/wiki/Front_runninghttps://en.wikipedia.org/wiki/World_Bankhttps://en.wikipedia.org/wiki/International_Monetary_Fundhttps://en.wikipedia.org/wiki/Executive_compensationhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-Harris-6https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=18https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=19


12/13

introduce maximum prison sentences of at least four years for serious cases of market manipulation

and insider dealing and at least two years for improper disclosure of insider information%

Norway[edit]

&n !"" a journalist in @etta$isen(1homas 7ulbrandsen# was sentenced to / months in prison for

insider trading%[/!]

1he longest prison sentence in a @orwegian trial where the main charge was insider trading was for

I years (! of which suspended# when,lain ,ngelilwas con$icted in a district court on December

!"))%[/.][//]

United Kingdom[edit]

See also' U( compan) la&

Regulatory fines imposed for market abuse in the '2 )*C!""% ourceK from &4R?QM&,Q3, annual reports

in =exis@exis )*C!"")< 3, ,nnual Reports ,ppendix on +nforcements !"".-!")!% 3urther details in

1onks (!")"#[/>]

,lthough insider trading in the '2 has been illegal since )I" it pro$ed difficult to successfully

prosecute indi$iduals accused of insider trading% 1here were a number of notorious cases where

indi$iduals were able to escape prosecution% &nstead the '2 regulators relied on a series of fines to

punish market abuses%

1hese fines were widely percei$ed as an ineffecti$e deterrent (0ole !""L# [/*]and there was a

statement of intent by the '2 regulator (the 3inancial er$ices ,uthority# to use its powers to enforce

the legislation (specifically the 3inancial er$ices and 4arkets ,ct !"""#% Between !""C!")! the

3, secured )/ con$ictions in relation to insider dealing%

United States[edit]

Rajat 7upta who had been managing partner of 4c2insey 0o%and a director at 7oldman

achs7roup &nc% andMrocter 7amble0o% was con$icted by a federal jury in !")! of leaking

inside information to hedge fundmanager Raj Rajaratnam% 1he case was prosecuted by the office of'nited tates ,ttorney for the outhern District of @ew OorkMreet Bharara%[/L]

:ith the guilty plea by Merkins ixon in !")/ for insider trading from !")"-!"). while at+$ercore

Martners Bharara said in a press release that !>" defendants whom his office had charged since

,ugust !"" had now been con$icted%[/I]
https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=20https://en.wikipedia.org/wiki/Nettavisenhttps://en.wikipedia.org/wiki/Nettavisenhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-42https://en.wikipedia.org/w/index.php?title=Alain_Angelil&action=edit&redlink=1https://en.wikipedia.org/wiki/Insider_trading#cite_note-43https://en.wikipedia.org/wiki/Insider_trading#cite_note-43https://en.wikipedia.org/wiki/Insider_trading#cite_note-43https://en.wikipedia.org/wiki/Insider_trading#cite_note-44https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=21https://en.wikipedia.org/wiki/UK_company_lawhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-45https://en.wikipedia.org/wiki/Insider_trading#cite_note-46https://en.wikipedia.org/wiki/Financial_Services_and_Markets_Act_2000https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=22https://en.wikipedia.org/wiki/Rajat_Guptahttps://en.wikipedia.org/wiki/McKinsey_%26_Co.https://en.wikipedia.org/wiki/McKinsey_%26_Co.https://en.wikipedia.org/wiki/Goldman_Sachshttps://en.wikipedia.org/wiki/Goldman_Sachshttps://en.wikipedia.org/wiki/Goldman_Sachshttps://en.wikipedia.org/wiki/Procter_%26_Gamblehttps://en.wikipedia.org/wiki/Procter_%26_Gamblehttps://en.wikipedia.org/wiki/Hedge_fundhttps://en.wikipedia.org/wiki/Raj_Rajaratnamhttps://en.wikipedia.org/wiki/Preet_Bhararahttps://en.wikipedia.org/wiki/Preet_Bhararahttps://en.wikipedia.org/wiki/Insider_trading#cite_note-47https://en.wikipedia.org/wiki/Evercore_Partnershttps://en.wikipedia.org/wiki/Evercore_Partnershttps://en.wikipedia.org/wiki/Evercore_Partnershttps://en.wikipedia.org/wiki/Insider_trading#cite_note-48https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=20https://en.wikipedia.org/wiki/Nettavisenhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-42https://en.wikipedia.org/w/index.php?title=Alain_Angelil&action=edit&redlink=1https://en.wikipedia.org/wiki/Insider_trading#cite_note-43https://en.wikipedia.org/wiki/Insider_trading#cite_note-44https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=21https://en.wikipedia.org/wiki/UK_company_lawhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-45https://en.wikipedia.org/wiki/Insider_trading#cite_note-46https://en.wikipedia.org/wiki/Financial_Services_and_Markets_Act_2000https://en.wikipedia.org/w/index.php?title=Insider_trading&action=edit&section=22https://en.wikipedia.org/wiki/Rajat_Guptahttps://en.wikipedia.org/wiki/McKinsey_%26_Co.https://en.wikipedia.org/wiki/Goldman_Sachshttps://en.wikipedia.org/wiki/Goldman_Sachshttps://en.wikipedia.org/wiki/Procter_%26_Gamblehttps://en.wikipedia.org/wiki/Hedge_fundhttps://en.wikipedia.org/wiki/Raj_Rajaratnamhttps://en.wikipedia.org/wiki/Preet_Bhararahttps://en.wikipedia.org/wiki/Insider_trading#cite_note-47https://en.wikipedia.org/wiki/Evercore_Partnershttps://en.wikipedia.org/wiki/Evercore_Partnershttps://en.wikipedia.org/wiki/Insider_trading#cite_note-48


13/13

?n December )" !")/ a federal appeals court o$erturned the insider trading con$ictions of two

former hedge fund traders 1odd @ewman and,nthony 0hiasson based on the ;erroneous;

instructions gi$en to jurors by the trial judge%[/]
https://en.wikipedia.org/wiki/Hedge_fundhttps://en.wikipedia.org/wiki/Anthony_Chiassonhttps://en.wikipedia.org/wiki/Anthony_Chiassonhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-NYT-20141210-BR-49https://en.wikipedia.org/wiki/Hedge_fundhttps://en.wikipedia.org/wiki/Anthony_Chiassonhttps://en.wikipedia.org/wiki/Insider_trading#cite_note-NYT-20141210-BR-49

insiders trading.docx

Documents