We'll Know it When We Can't Hear it: A Call for a Non-Pornography Test Approach to Recognizing Non-Public Information
46 Pages Posted: 7 Dec 2009
Date Written: 2006
Supreme Court Justice Potter Stewart once authored a concurring opinion in which he explained that, while he would not attempt to delineate pornographic materials, he knew pornography when he saw it.
Likewise, in the field of insider trading, the courts and others have embraced such pragmatism, namely, effectively transforming the test for identifying insider trading (trading while aware of "material" and "nonpublic" information) to a weighing of such considerations as whether the defendant had access to insiders, betrayed a confidence, and/or captured a profit. Such a pornography test approach - while satisfying on some level of expedience - fails to provide businesses with certainty, the law with clarity, the market with confidence, and the layman with guidance. Meanwhile, the definitional term "non-public" is reduced to a shibboleth, the mere utterance of which triggers insider trading investigations, cases, penalties, and press. The Securities and Exchange Commission has survived attacks on such definitional uncertainty (while garnering a fair share of headlines) by bringing enforcement actions showcasing exorbitant profits, salient boardroom details, indefensible criminal acts and aristocratic defendants. Nonetheless, the dirty little secret of the "material, non-public information" definition of insider trading is that the "non-public" half lacks clarity and consistent application - indeed, it may not truly exist at all. Consequently, the Commission's winsome approach is destined to win some and lose some, as the courts increasingly rule for defendants in cases relying on definitional vagaries or unprecedented application of the prohibition.
This Article thus urges the Commission to abandon its totality of the circumstances approach (as well as its lip service to the term "nonpublic" as a separate definitional element) in favor of a well-defined, two-tier standard in insider trading cases.
Keywords: insider trading, non-public information, Securities and Exchange Commission
JEL Classification: K22, G38, G14
Suggested Citation: Suggested Citation