Our Dysfunctional Insider Trading Regime
60 Pages Posted: 3 Feb 2000 Last revised: 22 Oct 2016
Although some have praised United States v. O'Hagan for bringing coherence and stability to the federal insider trader regime, the case actually underscores the regime's astonishingly dysfunctional nature. This Article explores three features of the regime. First, the federal insider trading regime that supposedly bans insider trading actually permits such trading. The conventional wisdom, that insiders must either disclose material, non-public information in their possession or abstain from trading their company's shares, is wrong. Instead, if insiders engage in Candid Insider Trading by declaring an intent to trade on material, non-public information prior to trading, they can avoid Rule 10b-5 liability. Second, the Supreme Court's construction of Rule 10b-5 broadens liability to all cases where a securities trade itself triggers a deception. Thus, whenever an insider engages in Deceptive Trading, she faces liability under Rule 10b-5, whether or not there is a misappropriation of material, non-public information. Third, this Deceptive Trading Theory explains liability in both the classical insider trading and the misappropriation scenarios. The first two problematic features arise out of the SEC's ongoing efforts to mitigate unfair informational asymmetries through the manipulation of a statute that prohibits deceptions. By cramming its goals into a statute that does not speak to its regulatory concerns, the SEC has created a regime that is nothing short of dysfunctional.
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