The Missing Link between Insider Trading and Securities Fraud

Abstract

Securities fraud and insider trading have become well established as independent causes of action. But the connection between securities fraud and insider trading matters. A securities fraud class action should be dismissed for failure to state a claim unless it appears that insiders have used the occasion to misappropriate stockholder wealth. There are two related reasons: First, rational investors diversify, making securities fraud without misappropriation a zero-sum game. Second, securities fraud class actions generate deadweight losses for diversified investors.

Keywords: SEC, SEC v. Texas, stocks, litigation, insider trading, securities fraud, SLUSA, misappropriation, policy, corporate crime, white collar crime

JEL Classification: E42, G18, L41