What Were They Thinking? Insider Trading and the Scienter Requirement

RESEARCH HANDBOOK ON INSIDER TRADING, Stephen Bainbridge, ed., Edward Elgar Publishing Ltd., Forthcoming

Georgetown Public Law Research Paper No. 12-111

31 Pages Posted: 30 Jul 2012  

Donald C. Langevoort

Georgetown University Law Center

Date Written: 2012

Abstract

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.

Keywords: insider trading, scienter, securities law, securities fraud, Supreme Court, misappropriation

JEL Classification: K20, K22, K29

Suggested Citation

Langevoort, Donald C., What Were They Thinking? Insider Trading and the Scienter Requirement (2012). RESEARCH HANDBOOK ON INSIDER TRADING, Stephen Bainbridge, ed., Edward Elgar Publishing Ltd., Forthcoming; Georgetown Public Law Research Paper No. 12-111. Available at SSRN: https://ssrn.com/abstract=2120141

Donald C. Langevoort (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States
202-662-9832 (Phone)
202-662-9412 (Fax)

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