November 9, 2010
"Fairness" as a statute....
A recent "DealBook" posting by Andrew Ross Sorkin of The New York Times notes another wave of SEC insider trading cases (this one highlighted by recent charges targeting railway employees who either did or didn't use unlawful means in divining a takeover). The piece aptly points out that the crime remains undefined by statute and seemingly cabined only by the "fairness" notion that spawned the prohibition in 1961.
To me, while the question of where the line is drawn between legitimate and other means of obtaining a trading advantage is timeless, I dream of having three questions on insider trading answered by those in charge:
1. What distinguishes a civil 10b-5 case from a criminal one?
Popular wisdom suggests that the answer lies in the size of the profits (and hence the enormity of the damage). Avid fans of this sport suspect that criminal cases often have little to do with size.
2. How can "attempted" insider trading be covered by Rule 10b-5 when the Rule requires an actual purchase?
Case law to date has seemingly included only settlements, thus rendering the legal question ultimately unavoidable.
3. If resources are scarce, why target railway workers, in-laws, and roomates?
Part of the answer lies in strategies attending fact patterns (i.e., "insiders" who are charged are no doubt advised of the success rate of the "classic" theory of liability). But do contested cases centering on non-employees (what the Chiarella Court called "complete strangers" to the market) simply risk unsettling court blessing of a crime that is not to be found in the U.S. Code? Recall that the entire Misappropriation Theory rested delicately upon a finding of "feigned fidelity" by a corporate outsider to his law firm. To continually revisit this gray area arguably succeeds first in questioning whether the prohibition should apply solely to Board members, broker-dealers, and stock exchange personnel.
Overall, maybe a compass of "fairness" - like the beehive hairdo and hula hoops - should be left in 1961.
November 9, 2010 | Permalink