Insider Trading Rules Need Rationalization

CLS Blue Sky Blog

The current scope of the insider trading prohibition is arbitrary and unrationalized.  Both sides in the debate should be able to agree on this, as the current scope is at the same time both underinclusive and overinclusive.  On the one hand, if a thief breaks into your office, opens your files, learns material, nonpublic information, and trades on that information, he has neither breached a fiduciary duty nor “feigned fidelity” to the source and is presumably immune from insider trading liability under current law.  On the other hand, if an employee of an acquiring firm seeks to test out information about a potential target with a friend at a major investor in the target and that investor later acquires more stock in the target based on that conversation, it is possible under SEC v. Obus that the employee will be deemed to have violated Rule 10b-5 on theory that he…

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