November 25, 2010
Do They Serve "Equal Access" Kool-Aid at the SEC?
If you ask me to give you a quick summary of illegal insider trading, you are going to hear me talk first and foremost about two things: duty and deception. Did the trade in question involve deception in the form of a violation of a duty to disclose the non-public material information--either to the source of the information or the counterparty to the trade? Or, was the non-public material information being traded upon acquired deceptively via some form of affirmative misrepresentation? If the information came via a tip, did the source of the tip violate a duty not to disclose in exchange for some personal benefit, and should the recipient of the tip have known this?
Now, contrast the above summary with the summary given by Harvey L. Pitt, a former chairman of the Securities and Exchange Commission, in the interview provided here. You will not hear one mention of duty or deception. Rather, you'll hear that our law says "you're not supposed to cheat by having information that the rest of the market doesn't have." In fact, Mr. Pitt claims that it would be improper to trade on information you overhear standing in line next to someone who is blabbing away on their cell phone. This is simply not correct since, at the very least, the necessary personal benefit to the "tipper" is missing. While I want to give people every benefit of the doubt when critiquing their live interviews, the view being advanced here by Mr. Pitt seems to me to clearly be the "equal access" theory of insider trading that has been repeatedly and sternly rejected by the Supreme Court.
Now, time will tell whether the current insider trading dragnet is targeting individuals who are violating the law of insider trading as it is currently understood, or whether at least some part of this offensive will be aimed at once again trying to re-establish some form of the equal access norm--either via the courts or legislative action following judicial rejections. But either way, it's sometimes hard not to get the sense that when it comes to the equal access theory of insider trading--the SEC, for better or worse, is like a dog on a bone.