What Were They Thinking? Insider Trading and the Scienter Requirement
Donald C. Langevoort
Georgetown University Law Center
RESEARCH HANDBOOK ON INSIDER TRADING, Stephen Bainbridge, ed., Edward Elgar Publishing Ltd., Forthcoming
Georgetown Public Law Research Paper No. 12-111
On its face, the connection between insider trading regulation and the state of mind of the trader or tipper seems intuitive. Insider trading is a form of market abuse: taking advantage of a secret to which one is not entitled, generally in breach of some kind of fiduciary-like duty. This chapter examines both the legal doctrine and the psychology associated with this pursuit. There is much conceptual confusion in how we define unlawful insider trading — the quixotic effort to build a coherent theory of insider trading by reference to the law of fraud, rather than a more expansive market abuse standard — which leads to interesting psychological questions as to the required state of mind. Is it always simple greed? What if there is an element of unconscious misperception — or rationalization — at work? My sense is that the causal explanations for what is charged as insider trading are sometimes quite murky and not easily explained as pure greed. The chapter thus tries to connect the law of insider trading to a more sophisticated approach to state of mind, motivation and causation.
Number of Pages in PDF File: 31
Keywords: insider trading, scienter, securities law, securities fraud, Supreme Court, misappropriation
JEL Classification: K20, K22, K29
Date posted: July 30, 2012
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