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Gordon Gekko to the Rescue?: Insider Trading as a Tool to Combat Accounting Fraud


Robert E. Wagner


Maurice A. Deane School of Law at Hofstra University


University of Cincinnati Law Review, Vol. 79, p. 973, 2011

Abstract:     
This Article puts forward that, counter-intuitively, one way to help avoid future accounting scandals such as WorldCom would be the legalization of “fraud-inhibiting insider trading.” Fraud-inhibiting insider trading is the subcategory of insider trading where: (1) information is present that would have a price-decreasing effect on stock if made public; (2) the traded stock belongs to an individual who will likely suffer financial injury from a subsequent stock price reduction if the trading does not take place; (3) the individual on whose behalf the trading occurs would have the ability to prevent the release of the information or to release distorted information to the public; and (4) the individual in question did not commit any fraudulent activities prior to availing himself of the safe harbor. Arguing that prohibiting all insider trading incentivizes corporate fraud, this Article begins by giving examples from recent cases in which insider trading could have been used to avoid significant harm. Next, the Article briefly discusses both the history of insider trading and the philosophical and policy arguments against it. This Article particularly focuses on the two most prominent arguments raised against insider trading: (1) that it erodes confidence in the market; and (2) that it is similar to theft and should be prosecuted accordingly. Previously unexamined empirical evidence suggests that the confidence argument may be incorrect and does not suffice to justify a prohibition on fraud-inhibiting insider trading. This Article also shows that while the property rights rationale is the strongest position against general insider trading, it is an insufficient basis to outlaw fraud-inhibiting insider trading. The Article concludes with a proposal that the courts, the Securities and Exchange Commission, or Congress enact a safe harbor to legalize fraud-inhibiting insider trading and thus enable the insider trading laws to more effectively achieve their purported goal of protecting the securities market and investors.

Number of Pages in PDF File: 44

Keywords: insider trading, securities, white collar crime

JEL Classification: K22, K14

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Date posted: August 15, 2011  

Suggested Citation

Wagner, Robert E., Gordon Gekko to the Rescue?: Insider Trading as a Tool to Combat Accounting Fraud. University of Cincinnati Law Review, Vol. 79, p. 973, 2011. Available at SSRN: http://ssrn.com/abstract=1909562

Contact Information

Robert E. Wagner (Contact Author)
Maurice A. Deane School of Law at Hofstra University ( email )
121 Hofstra University
Hempstead, NY 11549
United States
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