Moral Principle in the Law of Insider Trading

Abstract:     
This article develops a theory of insider trading law based on deontological moral principle. Despite the fact that many courts and commentators observe that moral issues are involved in the law of insider trading, a sustained philosophical analysis of relevant moral duties that are violated by insider trading has not previously been done. The field has been dominated instead by law-and-economics approaches, but this scholarship has produced inconclusive results. In addition, the courts have struggled to make sense of insider trading law, but they have also had difficulty. For example, in United States v. O'Hagan, the Supreme Court adopted the "misappropriation theory" of insider trading liability, but commentators have raised a storm of protest about the inconsistency of the Court's reasoning and its failure to answer some important jurisprudential questions. This article develops a moral theory to explain the philosophical basis for the common sense intuitions expressed by the leading cases in the field. The article examines O'Hagan and other decisions with a view toward solving some of the most persistent puzzles in insider trading law. It reviews a number of competing theories that seek to justify laws against insider trading and finds them wanting from a philosophical perspective. The authors develop a general "fraud-on-the-investor theory" of insider trading law supported by an "equitable disclosure rationale." The authors argue that this approach makes sense of the leading precedents and provides a conceptual framework for the coherent development of insider trading law in the future.

JEL Classifications: K22

Accepted Paper Series