Insider Trading as Private Corruption

Abstract

Deep confusion reigns over federal insider trading law, even over the essential elements of an insider trading violation. On the one hand, this uncertainty seems to have encouraged the Securities and Exchange Commission (SEC) and some lower courts to push the boundaries well beyond the limits previously established by the U.S. Supreme Court. On the other hand, influential academics continue to express normative skepticism as to why there is even a ban on insider trading at all. Without a satisfying theory of what constitutes insider trading and why it is wrong, doctrinal development in the lower courts has reached a crisis, with the economic stakes only getting higher. This Article offers a new theory of insider trading law. It maintains that insider trading is a form of private corruption, defined as “the use of an entrusted position for self-regarding gain.” The corruption theory not only provides answers to the normative skeptics but, as compared to the two leading alternatives, the property theory and the unjust enrichment theory, more closely aligns with the core features of the received insider trading doctrine. And, on careful analysis, the corruption theory reveals an implicit and previously unappreciated coherence to the doctrine. Finally, the corruption theory provides relatively concrete guidance in hard cases, which is the sort of pragmatic theory that the SEC and the courts desperately need.

Keywords: Insider trading, private corruption, public corruption, property theory, unjust enrichment theory, normative justification, doctrinal fit, temptation costs, distraction costs, legitimacy costs