Friday, August 20, 2021
Testing Our Intuitions About Insider Trading - Part II
As Congress and the SEC continue to contemplate reforms to the U.S. insider-trading enforcement regime, I suggested in my last post that it is important for us all to explore our intuitions about what we think insider trading is, why it is wrong, who is harmed by it, and the nature and extent of the harm. If we are going to rethink how we impose criminal and civil penalties for insider trading, we should have some confidence that the proscribed conduct is wrongful and why. One way to do this is to place ourselves in the shoes of traders and ask, “What would I do?” or “What do I think about that?” To this end, I have developed some scenarios designed to test our attitudes regarding trading scenarios that distinguish the four historical insider trading regimes (laissez faire, fiduciary-fraud, equal access, and parity of information).
In the last post, I offered a scenario that would result in liability under a parity-of-information regime, but not under the other three. Those of you who were not convinced that the trading in that scenario was wrongful may favor one of the less restrictive models.
In this post, I offer the following scenario to test our attitudes regarding trading under an equal-access model. An equal-access regime precludes trading by those who have acquired information advantages by virtue of their privileged access to sources that are structurally closed to other market participants (regardless of whether such trading violates a duty of trust and confidence). An equal access model is narrower in scope than the parity-of-information model, but broader than the laissez-faire and fiduciary-fraud models. Consider these facts:
A senior VP at BIG Corp (a publicly traded company) took the lead in closing a big deal to merge BIG Corp with XYZ Corp (another publicly traded company). The shares of both BIG Corp and XYZ Corp will skyrocket when the deal is announced to the public in seven days. The senior VP asks the CEO and board of Big Corp if, instead of receiving the usual cash bonus that would be his due for leading such a deal, he can purchase shares of XYZ Corp for his personal account in advance of the announcement. The CEO and board approve the VP’s trading—deciding that the BIG Corp shareholders will save money from this arrangement. The VP buys XYZ Corp shares in advance of the announcement and he makes huge profits when the deal is announced.
Was the senior VP’s trading wrong or harmful? If you do not think the senior VP or Big Corp has done anything wrong or harmful in this scenario, then you will probably not favor the equal-access model for insider trading regulation—which would render this conduct illegal. You will likely favor some version of the less restrictive laissez-faire or fiduciary-fraud model instead. My next post will offer a scenario to test our intuitions about the fiduciary-fraud model (the third most restrictive regime).
Again, the hope is that walking through these scenarios will help bring some clarity to our shared understanding of when trading on material nonpublic information is wrong and harmful—and (given our answers to these questions) the nature and extent to which it should be regulated. Please share your thoughts in the comments below!