Outsider Trading on Confidential Information - A Breach in Search of a Duty

Abstract:     
Despite the importance of the ban on trading on inside information under the federal securities laws, there is little agreement among courts, academics and the Securities and Exchange Commission ("SEC") as to an appropriate theory for outlawing insider trading. One of the most popular theories used for prosecuting insider trading cases, the misappropriation theory, has been accepted by several circuits and used by the Government in numerous criminal prosecutions, but it recently has been rejected by two circuits. The Supreme Court has determined to review this split in the circuits in a case involving trading by a lawyer in advance of a client's tender offer bid.This article discusses the development of the law on insider trading and the various theories in defense of a ban on such trading. The author then takes a different approach to the subject and argues that the ban on insider trading needs to be linked to the disclosure obligations of issuers, bidders and other market participants under the federal securities laws, as a means to enforce those obligations and also to accelerate the release of material information. This linkage would support the core cases in this area, but would not prohibit certain outsiders from trading on market facts where neither the outsider nor his tippors have a disclosure duty to investors. The article further suggests that the SEC should give greater attention to policies that result in prompt disclosure of material facts rather than relying upon insider trading prosecutions to compensate for gaps in the continuous disclosure system.

JEL Classification: G14, G18, K22

working papers series