(Not) Holding Firms Criminally Responsible for the Reckless Insider Trading of Their Employees

20 Pages Posted: 25 Apr 2017 Last revised: 21 Jun 2017

Date Written: July 1, 2017

Abstract

Criminal enforcement of the insider trading prohibitions under Section 10(b) and Rule 10b-5 is the root of corporate criminal liability for insider trading in the United States. In the wake of assertions that S.A.C. Capital Advisors, L.P. actively encouraged the unlawful use of material nonpublic information in the conduct of its business, the line between employer and employee criminal liability for insider trading becomes both tenuous and salient. An essential question emerges: when do we criminally prosecute the firm for the unlawful conduct of its employees?

The possibility that reckless employee conduct may result in the employer's willful violation of Section 10(b) and Rule 10b-5 (and, therefore, criminal liability for that employer firm) motivates this article. The article first reviews the basis for criminal enforcement of the insider trading prohibitions established in Section 10(b) and Rule 10b-5 and describes the basis and rationale for corporate criminal liability (a liability that derives from the activities of agents undertaken in the course of the firm’s business). Then, it reflects on that basis and rationale by identifying the potential for corporate criminal liability for the reckless insider trading violations of employees under Section 10(b) and Rule 10b-5, arguing against that liability, and suggesting ways to eliminate it.

Keywords: Insider Trading, Corporate Criminal Liability, Recklessness, Section 10(b), Rule 10b-5

JEL Classification: G30, G38, K22, K42, L14, L22, M10

Suggested Citation

Heminway, Joan MacLeod, (Not) Holding Firms Criminally Responsible for the Reckless Insider Trading of Their Employees (July 1, 2017). Stetson Law Review, Vol. 46, No. 1, 2016; University of Tennessee Legal Studies Research Paper No. 320. Available at SSRN: https://ssrn.com/abstract=2954796

Joan MacLeod Heminway (Contact Author)

University of Tennessee College of Law ( email )

1505 West Cumberland Avenue
Knoxville, TN 37996
United States
865-974-3813 (Phone)
865-974-0681 (Fax)

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