1. See, e.g., Henry
G.
Manne, In Defense of Insider Trading, Harv. Bus. Rev., Nov.-Dec.
1966, at 113. For this reason, defenses of insider trading
are nothing new.
2. Freeman
v.
Decio, 584 F.2d 186, 190, 196 (7th Cir. 1978) (noting that
there is no derivative action to disgorge profits under Indiana
law and that insider trading helps assure efficient capital
markets).
3. See Henry
G.
Manne, Insider Trading and the Law Professors, 23 Vand. L. Rev.
547, 565 (1970).
4. Jeanne
L.
Schroeder, Envy and Outsider Trading: The Case of Martha
Stewart, 26 Cardozo L. Rev. 2023 (2005). Schroeder argues
that Martha Stewart was not an insider. I would add that Stewart
was obviously a patsy; a proxy for the corporate misfeasance
exemplified, but not limited to, the Enron Corporation. Such is
the cautionary tale. Insider trading targets the wrong people for
the wrong acts and distracts regulators and the public from more
serious corporate misfeasance.
5. David
A.
Wilson, Outsider Trading--Morality and the Law of Securities
Fraud, 77 Geo. L.J. 181, 198 (1988) ("In pure teleological
terms, insider trading is good because its consequences benefit
both the trader and the company.").
6. "Statutes prohibiting
insider trading do not define the term 'insider.'" David
M.
Bovi, Rule 10b-5 Liability for Front-Running: Adding a New
Dimension to the "Money Game," 7 St. Thomas L. Rev. 103, 125
(1994).
7. Carol
B.
Swanson, Insider Trading Madness: Rule 10b5-1 and the Death of
Scienter, 52 U. Kan. L. Rev. 147, 207-08 (2003):
Given the uncertain policy
values in favor of insider trading, it makes no sense to impose
a regulatory standard that creates, at best, tremendous
uncertainty regarding when liability will apply for trading on
the basis of material nonpublic information and, at worst,
strict liability even for those who can conclusively establish
nonuse of the inside information.
8. Micah
A.
Acoba, Insider Trading Jurisprudence After United States v.
O'Hagan: A Restatement (Second) of Torts § 551(2) Perspective,
84 Cornell L. Rev. 1356, 1362 (1999) ("In fact, section
10(b) and Rule 10b-5 (or any of the federal statutes, rules, or
regulations) do not define "insider trading' or "˜inside
information" (or "misappropriation," for that matter)."); Oliver
Perry
Colvin, A Dynamic Definition of and Prohibition Against Insider
Trading, 31 Santa Clara L. Rev. 603, 617 (1991) ("[T]he SEC
has asserted, and the House Committee has blindly agreed, that a
legislative definition is unnecessary because the courts have
purportedly developed an adequate definition of insider trading.
As detailed above, however, the court-created parameters of
insider trading are woefully inadequate and uncertain.").
9. Joan
MacLeod
Heminway, Materiality Guidance in the Context of Insider
Trading: A Call for Action, 52 Am. U. L. Rev. 1131, 1167
(2003) (quoting J. William Hicks, Securities Regulation,
Challenges in the Decades Ahead, 68 Ind. L.J. 791, 801-02 (1993))
("The uncertain parameters of insider trading under U.S. law are
more than an inconvenience. In addition to creating the risk of
civil liability, a violation of statutory provisions or SEC rules
that prohibit insider trading can result in a criminal
conviction.").
10. Peter
Talosig
III, Regulation FD--Fairly Disruptive? An Increase in Capital
Market Inefficiency, 9 Fordham J. Corp. & Fin. L. 637,
692 (2004).
11. See, e.g., Carol
R.
Goforth, The Efficient Capital Market Hypothesis--An Inadequate
Justification for the Fraud-on-the-Market Presumption, 27 Wake
Forest L. Rev. 895, 896 (1992). The ECMH exists in weak,
strong, and semi-strong variants. The courts claim not to have
chosen any variant, though Goforth has deduced that the courts
apply the semi-strong variant. Id. at 898.
12. Investor
Home,
The Efficient Market Hypothesis and the Random Walk Theory,
http://www.investorhome.com/emh.htm:
There are three forms of the
efficient market hypothesis
1. The "Weak" form asserts that
all past market prices and data are fully reflected in
securities prices. In other words, technical analysis is of no
use.
2. The "Semistrong" form asserts
that all publicly available information is fully reflected in
securities prices. In other words, fundamental analysis is of no
use.
3. The "Strong" form asserts
that all information is fully reflected in securities prices. In
other words, even insider information is of no use.
13. Troy
A.
Paredes, Blinded by the Light: Information Overload and Its
Consequences for Securities Regulation, 81 Wash. U. L.Q. 417,
424 (2003); Lynn A. Stout, How Efficient Markets Undervalue
Stocks: CAPM and ECMH Under Conditions of Uncertainty and
Disagreement, 19 Cardozo L. Rev. 475, 475 (1997) [hereinafter How
Efficient Markets Undervalue Regulation].
14. Talosig III, supra
note 10, at 694 ("The Securities Exchange Commission itself has
relied expressly on the ECMH for justifying its rules establishing
the integrated-disclosure system and rules authorizing shelf
registration of securities."); Lawrence
A.
Cunningham, Capital Market Theory, Mandatory Disclosure, and
Price Discovery, 51 Wash. & Lee L. Rev. 843, 846, 856
(1994).
15. Steven
L.
Jones & Jeffry M. Netter, Efficient Capital Markets, The
Library of Economics and Liberty (2005), http://www.econlib.org/library/Enc/EfficientCapitalMarkets.html:
Financial economists often
classify efficiency into three categories based on what is meant
as "available information"--the weak, semistrong, and strong
forms. Weak-form efficiency exists if security prices fully
reflect all the information contained in the history of past
prices and returns. (The return is the profit on the security
calculated as a percentage of an initial price.) If capital
markets are weak-form efficient, then investors cannot earn
excess profits from trading rules based on past prices or
returns. Therefore, stock returns are not predictable, and
so-called technical analysis (analyzing patterns in past price
movements) is useless.
Under semistrong-form
efficiency, security prices fully reflect all public
information. Thus, only traders with access to nonpublic
information, such as some corporate insiders, can earn excess
profits. Under weak-form efficiency, some public information
about fundamentals may not yet be reflected in prices. Thus, a
superior analyst can profit from trading on the discovery of, or
a better interpretation of, public information. Under
semistrong-form efficiency, the market reacts so quickly to the
release of new information that there are no profitable trading
opportunities based on public information.
Finally, under strong-form
efficiency, all information--even apparent company secrets--is
incorporated in security prices; thus, no investor can earn
excess profit trading on public or nonpublic information.
16. See Lynn
A.
Stout, Stock Prices and Social Wealth, Harvard Discussion Paper
No. 301, http://www.law.harvard.edu/programs/olin_center/papers/pdf/301.pdf.
17. Lynn
A.
Stout, The Mechanisms of Market Inefficiency: An Introduction to
the New Finance, 28 J. Corp. L. 635, 635 (2003) [hereinafter
Mechanisms of Market Inefficiency] ("During the 1970s and early
1980s, the Efficient Capital Market Hypothesis (ECMH) became one
of the most widely-accepted and influential ideas in finance
economics."). Stout also states that
[t]his essay argues that the
weaknesses of the efficient market theory are, and were,
apparent from a careful inspection of its initial premises,
including the presumptions of homogeneous investor expectations,
effective arbitrage, and investor rationality. By the same
token, a wide range of market phenomena inconsistent with the
ECHM can be explained using market models that modify these
three assumptions.
Id.
18. Douglas
C.
Ashton, Revisiting Dual-Class Stock, 68 St. John's L. Rev. 863,
934 n.322 (1994) ("ECMH has been widely accepted by scholars,
regulators, and judges.").
19. Dennis
S.
Corgill, Insider Trading, Price Signals, and Noisy Information,
71 Ind. L.J. 355, 392 n.177 (1996) ("[I]nsider trading
scandals of the 1980's are among the many proofs that the strong
form of the ECMH is invalid.") (quoting Lawrence
A.
Cunningham, From Random Walks to Chaotic Crashes: The Linear
Genealogy of the Efficient Capital Markets Hypothesis, 62 Geo.
Wash. L. Rev. 546, 562, 562 n.74); Lawrence
A.
Cunningham, Capital Market Theory, Mandatory Disclosure, and
Price Discovery, 51 Wash. & Lee L. Rev. 843, 859 (1994)
("[T]he price discovery process in the market microstructure
demonstrates that the ECMH is false, even in its weak form ....");
Lawrence
A.
Cunningham, From Random Walks to Chaotic Crashes: The Linear
Genealogy of the Efficient Capital Market Hypothesis, 62 Geo.
Wash. L. Rev. 546, 548 (1994) ("Obsolescence renders the
ECMH false in all its forms.").
20. Investopedia,
Financial
Concepts: Random Walk Theory, http://www.investopedia.com/university/concepts/concepts5.asp
("[A] random walk says that stocks take a random and unpredictable
path.").
21. John
R.
Dorfman, Investment Dartboard: Random Stock Picks Give Pros the
Woes, Wall St. J., Nov. 4, 1988, at C1 (reporting that in
the first month of the contest, the dartboard portfolio had risen
0.7% while the pros' choices declined an average of 2.5%).
22. Richard
A.
Brealey & Stewart C. Myers, Principles of Corporate Finance,
336-37 (5th ed. 1996).
23. How Efficient Markets
Undervalue Regulation, supra note 13, at 476:
The Journal has now run the
Investment Dartboard contest for over eight years, and over that
time a clear pattern has emerged: although the darts frequently
give the pros a drubbing, on average the pros are beating both
the darts and the market. Indeed, as of October 1996, the pros'
portfolios had produced average annual gains of 20.6%, compared
to 11.2% for the darts, and 11.6% for the Dow Jones Industrial
Average.
24. See Georgette
Jasen,
Investment Dartboard: Luck Out: Stock Experts Top the Darts,
Wall St. J., Oct. 9, 1996, at C1 (reporting that during
eight years of contest, pros' portfolios produced average
six-month gains of 8.7%, compared to 7.8% for dart portfolio and
5.8% for the Dow Jones Industrial Average).
25. Stephen
M.
Muniz, Note, The Private Securities Litigation Reform Act of
1995: Protecting Corporations from Investors, Protecting
Investors from Corporations, and Promoting Market Efficiency, 31
New Eng. L. Rev. 655, 663 (1997) (noting that "United States
courts have essentially adopted the ECMH through application of
the "˜fraud on the market theory'").
26. Talosig III, supra
note 10, at 694 ("The Securities Exchange Commission itself has
relied expressly on the ECMH for justifying its rules establishing
the integrated-disclosure system and rules authorizing shelf
registration of securities. The SEC has also recognized ECMH when
formulating Reg. FD."); Berberet
v.
Myers, 144
S.W.
824, 829 (Mo. 1912) ("Law axioms are nothing more than the
conclusions of common sense, which have been formed and approved
by the wisdom of ages. This rule prevails equally in a court of
equity and a court of law ....").
27. Jon
Hanson
& David Yosifon, The Situational Character: A Critical
Realist Perspective on the Human Animal, 93 Geo. L.J. 1, 11
(2004) ("[A]xioms are presumed self-evident, and their truth is
taken for granted."); Giuseppe Dari Mattiacci, Goedel, Kaplow,
Shavell: Consistency and Completeness in Social Decision-Making,
79 Chi.-Kent L. Rev. 497, 509 (2004) ("[Certain] axioms are
accepted without proof.").
28. Jeanne
L.
Schroeder, The End of The Market: A Psychoanalysis of Law and
Economics, 112 Harv. L. Rev. 483, 528 (1998) ("A theorem is
defined as "˜[a] universal or general proposition or statement,
not self-evident ... but demonstrable by argument (in the strict
sense, by necessary reasoning); "˜a demonstrable theoretical
judgment.'") (emphasis omitted).
29. Thomas
J.
Siepmann, The Global Exportation of the U.S. Bayh-Dole Act, 30
U. Dayton L. Rev. 209, 210 n.7 (2004) ("[A] "˜hypothesis'
is a premise the researcher hopes to be true.").
30.Sarah
H. Ramsey & Robert F. Kelly, Social Science Knowledge in
Family Law Cases: Judicial Gate-Keeping in the Daubert Era, 59
U. Miami L. Rev. 1, 41 (2004) ("Rigorous empirical testing
is at the core of the logic of falsification. If an empirical test
of a hypothesis is not rigorous, its results might be used either
to incorrectly falsify or to incorrectly support a hypothesis.").
31. Amer
S.
Ahmed, The Last Twist of the Knife: Encouraging the Regulation
of Innovative Surgical Procedures, 105 Colum. L. Rev. 1529,
1546 n.87 (2005) (citing Daubert v. Merrell Dow Pharm., Inc., 509
U.S.
579, 593 (1993)) (asserting that a "key question to be
answered" about a hypothesis is whether it can be tested to
determine if it "can be falsified," an inquiry that "distinguishes
science from other fields of human inquiry").
32. How Efficient Markets
Undervalue Regulation, supra note 13, at 492 ("During the past two
decades, an extensive body of empirical evidence has accumulated
indicating that, in many situations, investors and securities
markets simply refuse to behave the way the ECMH/CAPM predicts
they should.").
33. Patrick
J.
Collins et. al., Financial Consequences of Distribution
Elections from Total Return Trusts, 35 Real Prop. Prob. &
Tr. J. 243, 298 (2000):
[S]tock price movements are not
strictly lognormal random variables. Although stochastic
modeling of the range of probable asset price movements in a
multivariate context provides a significantly better
understanding of risk and return, such modeling makes too many
simplifying assumptions. Although the lognormal distribution
explains most of the movement in asset price over time, this
distribution seriously underestimates the probability of sudden,
large, unexpected jumps in value.
34. Lawrence
A.
Cunningham, Behavioral Finance and Investor Governance, 59 Wash.
& Lee L. Rev. 767, 786 (2002) ("The net results of these
behavioral phenomena in financial economic thought are
theoretical, empirical, and psychological accounts showing that
stock prices systematically deviate from values. The story of the
EMCH turns out to be like a fairy tale ....").
35. See, e.g., Forbes.com,
Forbes
World's Richest People 2005, http://www.forbes.com/static/bill2005/LIRC0R3.html?passListId=10&passYear=2005&passListType=Person&uniqueId=C0R3&datatype=Person;
Wikipedia,
Value Investing, http://en.wikipedia.org/wiki/Value_investing
(last visited **
Dec. 26, 2007).
36. Eugene
F.
Fama, Random Walks in Stock Market Prices, Fin. Analysts J.,
Sept.-Oct. 1965, at 55.
37. Bart
G.
de Grooth, A Simple Model for Brownian Motion Leading To The
Langevin Equation, 1999, at V., http://scitation.aip.org/journals/doc/AJPIAS-ft/vol_67/iss_12/1248_1.html.
38. Wikipedia, Random
Walk, http://en.wikipedia.org/wiki/Random_walk
(last visited **
Dec. 26, 2007).
39. Henry
G.
Manne, Insider Trading and the Stock Market 97 (1966).
40. Jonathan
R.
Macey, Securities Trading: A Contractual Perspective, 50 Case W.
Res. L. Rev. 269, 272 (1999).
41. Marcel
Kahan,
Securities Laws and The Social Costs Of "Inaccurate" Stock
Prices, 41 Duke L.J. 977, 996 n.87 (1992) ("Stock price
movements themselves will, of course, not be random. Rather, stock
prices will tend to revert to fundamental values.").
42. Brian
Daly,
Of Shares, Securities, and Stakes: The Chinese Insider Trading
Law and The Stakeholder Theory of Legal Analysis, 11 Am. U. J.
Int'l L. & Pol'y 971, 1008 n.301 (1996).
43. Id.
44. Adam
Smith,
An Inquiry into the Nature and Causes of the Wealth of Nations,
Book IV Ch. II, 1776 available at http://www.gutenberg.org/dirs/etext02/wltnt11.txt:
By preferring the support of
domestic to that of foreign industry, he intends only his own
security; and by directing that industry in such a manner as its
produce may be of the greatest value, he intends only his own
gain; and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his
intention. Nor is it always the worse for the society that it
was no part of it. By pursuing his own interest, he frequently
promotes that of the society more effectually than when he
really intends to promote it.
45. Id. ("It is not from
the benevolence of the butcher the brewer, or the baker that we
expect our dinner, but from their regard to their own interest. We
address ourselves, not to their humanity, but to their self-love,
and never talk to them of our own necessities, but of their
advantages.").
46. How Efficient Markets
Undervalue Regulation, supra note 13, at 492 ("During the past two
decades, an extensive body of empirical evidence has accumulated
indicating that, in many situations, investors and securities
markets simply refuse to behave the way the ECMH/CAPM predicts
they should.").
47. See Roger Lowenstein,
Modern-day Midas, Bus. Times, Mar. 9, 1996, at 2 (reporting that
over the past four decades Warren Buffett has earned annual gains
of 28.6%, while major stock averages have enjoyed annual gains of
about 10%).
48. Wikipedia, George
Soros, http://en.wikipedia.org/wiki/George_Soros#Business
(last visited **
Dec. 26, 2007) ("Soros is the founder of Soros Fund Management. In
1970 he co-founded the Quantum Fund with Jim Rogers. It returned
3,365% during the next ten years ... and created the bulk of the
Soros fortune.").
49. See, e.g., Tim
Beyers,
Invest Like Gordon Gekko, Motley Fool, 12 Aug. 2005, https://www.fool.com/investing/small-cap/2005/08/12/invest-like-gordon-gekko.aspx:
[I]nvesting alongside those
already in the know--insiders such as directors and company
management--is generally more profitable than not. The reason
for this is simple: Insiders wouldn't hold shares unless they
had a good reason to believe they'd see market-beating returns.
And they have access to more information than you or I do.
That's why Motley Fool co-founder Tom Gardner demands a high
degree of insider ownership in each of his recommendations.
50. See, e.g., Matthias
Magnus, Insidergeschäfte und Reglungsbedarf aus oekonomischer
Sicht (Insider Transactions and Need for Regulation from an
Economic Viewpoint), 11 Zeitschrift fuer das Gesamte Kreditwesen
543, 545 (1994).
51.Fink
v. Ricoh Corp., 839 A.2d 942, 936 (N.J. Super. Ct. Law Div.
2003) (citations omitted):
ECMH fails to adjust for the
noise and chaos inevitable in any system created by the acts of
so many participants, one observer has gone so far as to contend
that "obsolescence renders the ECMH false in all its forms."
Other writers have commented on causation uncertainty in
understanding market reactions, noting, among other things: how
inefficiently prices reflect earnings; how other publicly
available financial information is underreflected; how other
information, such as historical underperformance, affects price;
and how the activities of underrational "noise traders" and
those otherwise affected by investor sentiment distort the
picture.
52. Michael
W.
Prozan & Michael T. Fatale, Revisiting "Truth In
Securities": The Use of the Efficient Capital Market Hypothesis,
20 Hofstra L. Rev. 687, 690 (1992). Moreover, as Prozan and
Fatale note, the SEC applies the ECMH inconsistently:
The discussion shows that the
Securities and Exchange Commission ("SEC" or "Commission")
applies the ECMH restrictively to the "˜33 Act registration
provisions; however, the courts espouse expansive
interpretations in finding reliance in Rule 10b-5 cases ....
This dichotomy occurs despite the fact that both results are
premised on the existence of an efficient capital market.
Id. at 690-91.
53. See, e.g., Basic,
Inc. v. Levinson, 485
U.S.
224 (1988); In
re
PolyMedica Corp. Sec. Litig., 224 F.R.D. 27, 41 (D. Mass.
2004) (attempting to honestly apply the unworkable ECMH standard);
but see Kaufman
v.
i-Stat Corp. 754 A.2d 1188 (N.J. 2000) (ECMH and fraud on
the market theory rejected as basis for proving reliance in common
law fraud action for alleged share price manipulation.).
54. United States v.
Chiarella, 588
F.2d
1358, 1367 (2d Cir. 1978), rev'd United States v. Chiarella,
445
U.S.
222 (1980); In
re
Worlds of Wonder Sec. Litig., No. C87 5491 SC, 1990 WL
260675 (N.D. Cal. Oct. 19, 1990); SEC v. Marcus Schloss & Co.,
Inc., 714
F.Supp.
100, 101 (S.D.N.Y. 1989).
55. See, e.g., Goforth,
supra note 11.
56. Levinson,
485
U.S. at 224 (Both Justice White and Justice O'Connor
concurred with Justice Blackmun.).
57. Id. at 253 (Blackmun,
J., dissenting) ("[W]ith no staff economists, no experts schooled
in the "efficient-capital-market hypothesis," no ability to test
the validity of empirical market studies, we are not well equipped
to embrace novel constructions of a statute based on contemporary
microeconomic theory.").
58. Gregory
J.
Werden, Economic Evidence on the Existence of Collusion:
Reconciling Antitrust Law with Oligopoly Theory, 71 Antitrust
L.J. 719, 779 n.278 (2004) ("[M]odels are
abstractions--simplifications of reality that never perfectly
describe the real world."); Malcolm B. Coate, Efficiencies in
Merger Analysis: An Institutionalist View, 13 Sup. Ct. Econ. Rev.
189, 207 (2005) ("By their very nature, economic models make a
number of simplifying assumptions to reduce the competitive
realities to a manageable subset of conditions susceptible to
mathematical calculation.").
59. Patrick
J.
Ryan, Rule 14a-8, Institutional Shareholder Proposals, and
Corporate Democracy, 23 Ga. L. Rev. 97, 170 n.295 (1988)
("[E]fficient capital markets' require that participants have
perfect information, incur no transaction costs, and that there
are no externalities not reflected in the market information
....").
60. USX Corp. v. United
States, 682
F.
Supp. 60, 66 (Ct. Int'l Trade 1988) (This last assumption,
though also not without exceptions, is least problematic and is
even taken up by courts.); Tasty Baking Co. v. Ralston Purina,
Inc., 653
F.Supp.
1250, 1275 (E.D. Pa. 1987) (Even then the courts recognize
its limits: "few (if any) sellers are always rational
profit-maximizers.").
61. Paul
H.
Brietzke, The Politics of Legal Reform, 3 Wash. U. Global Stud.
L. Rev. 1, 24 n.57 (2004) ("All models use different
simplifying assumptions in an attempt to be clear and
understandable. The relevant question is how useful is a model for
our particular purposes and does it get us where we want to go?"
ECMH does not get us where we want to go. We want to determine
whether and why insider trading is good for the economy. And ECMH
being a trinity of three theories in one cannot answer the
question courts need to ask.).
62. Ryan
J.
York, Comment, Visages of Janus: The Heavy Burden of Other
Constituency Anti-Takeover Statutes on Shareholders and the
Efficient Market for Corporate Control, 38 Willamette L. Rev.
187 (2002). For example, "[i]f the securities markets
exhibited only a weak form of the EMH, the result would be
"˜inefficiently priced stocks [which] will distort the
functioning of the market for control.'" Id. at 194. That
statement is illogical. Recall that the weak form of ECMH says
that technical analysis cannot work because all technical
information (stock history) is already incorporated into the
price. Stocks are efficiently priced where the stock's price is an
exact reflection of the stock's fundamental value. Under weak ECMH
trading on fundamental data, i.e., the stock's underlying value is
possible (i.e., can outperform the market average). So market
inefficiency, that is divergence between price and value of a
stock, is corrected by trading under the weak form of ECMH. Sure,
a stock under weak ECMH could be wrongly priced, but it is also
possible under weak ECMH to discover this and this profitable fact
explains why the market--true to Adam Smith--self corrects to an
efficient price, i.e., the price equaling the value. Warren Buffet
never claims to speculate in stocks. His profits come in principle
not from speculative bubbles--he missed out entirely on the tech
bubble and still outperformed the market. His profits come from
correctly pricing undervalued stocks.
63. Mark
A.
Helman, Rule 10b-5 Omissions Cases and the Investment Decision,
51 Fordham L. Rev. 399, 431 n.223 (1982).
64. John
F.
Barry, III, The Economics of Outside Information and Rule 10b-5,
129 U. Pa. L. Rev. 1307, 1350 (1981) (noting that "[i]f the
ECMH were completely valid, and capital markets were perfectly
efficient, there would be no need for regulation because the
existence of market prices incorporating all relevant information
would make manipulation and fraud theoretically impossible").
65. William
H.
Widen, Spectres of Law & Economics, 102 Mich. L. Rev. 1423,
1437 n.45 (2004) (noting that "[i]f the perfect market merely
eliminates the subset of costs identified as "transaction costs"
(i.e., the costs associated with bargaining) then scarcity would
still exist and some desires would go unsatisfied, though all
trading would cease because no individual would be able to improve
her position by further exchange"); Jeanne
L.
Schroeder, Rationality in Law and Economics Scholarship, 79 Or.
L. Rev. 147, 223 (2000) ("[A]ccording to neo-classical
theory, if we were ever successful in maximizing our utility, then
the caucus race of trade would stop. But, this will never happen
because the perfect market (i.e., the conditions that would result
in utility or wealth maximization) is both empirically and
theoretically impossible." This illustrates the paradox of
neoclassical economic assumptions: if we accept them all at once
the system simply "freezes up.").
66. See, e.g., Goforth
supra note 11, at 897.
67. Id. at 898.
68. Stanislav
Dolgopolov,
Insider Trading and the Bid-Ask Spread: A Critical Evaluation of
Adverse Selection in Market Making, 33 Cap. U. L. Rev. 83,
146 (2004).
69. Merritt B. Fox,
Measuring Share Price Accuracy, 1 Berkeley Bus. L.J. 113 (2004):
Each newly arriving bit of
information will on average move price closer to actual value
but will, as appears to be the case in the real world, include a
significant amount of random noise. The random noise I refer to
here is not the speculative noise discussed earlier. It simply
reflects the idea that any new piece of information is not
perfect. While, on an expected basis, each bit of information
moves price toward actual value, it contains a random element
that in any given case may move price in the opposite direction.
Id. at 122.
70. David
McGowan,
Between Logic and Experience: Error Costs and United States v.
Microsoft Corp., 20 Berkeley Tech. L.J. 1185, 1187 (2005)
(noting that "[i]nformation is imperfect").
71. Kun
Young
Chang, Reforming U.S. Disclosure Rules in Global Securities
Markets, 22 Ann. Rev. Banking & Fin. L. 237, 258 (2003)
("[A] certain number of transaction costs is inevitable in
cross-border offerings or listings."); Wai Shun Wilson Leung, The
Inadequacy of Shareholder Primacy: A Proposed Corporate Regime
that Recognizes Non-Shareholder Interests, 30 Colum. J.L. &
Soc. Probs. 587, 595-96 (1997) ("Even when parties to the
corporate contract wield similar bargaining power, there are
inevitable transaction costs and information asymmetries or gaps
which disturb that equality.").
72. Michael
S.
Greve, Consumer Law, Class Actions, and the Common Law, 7 Chap.
L. Rev. 155, 157 (2004) ("Information is asymmetric in
business as well as consumer transactions (the seller almost
always knows more than the buyer) ....").
73. Frank
B.
Cross, The First Thing We Do, Let's Kill All the Economists: An
Empirical Evaluation of the Effect of Lawyers on the United
States Economy and Political System, 70 Tex. L. Rev. 645,
656 (1992) ( "Transaction costs are inevitable in a modern economy
even in the absence of lawyers ....").
74. Mark
Klock,
Dead Hands--Poison Catalyst or Strength-Enhancing Megavitamin?
An Analysis of the Benefits of Managerial Protection and the
Detriments of Judicial Interference, 2001 Colum. Bus. L. Rev. 67,
78-79 (2001) ("Greatly simplified models can be quite useful in
pedagogy, in developing an understanding of basic principles, in
gaining insights about how things work, and in applications to
specific situations. However, overly simplistic models can also be
easily applied out of context.").
75. Richard Posner is the
best advocate of wealth maximization as the goal of the common
law. However, I diverge from Posner. Wealth maximization is a
normative goal, not a positive description. Moreover, it is not
even the primary goal of society. We need only look to Locke to
see that the goals of a democracy are preservation of life (here,
Locke echoes Aristotle), liberty, and ownership of property (which
were implemented in the United States as life, liberty and pursuit
of happiness). Aristotle tells us, however, that the state exists
to assure the good life for its members. Posner makes the mistake
of confusing the means, wealth production and preservation, with
the end, the good life for all citizens. Aristotle rejects wealth
as an end (Politics, Book I Part IX) and sees it as but a means to
an end, rather than and not an end in itself. I think Aristotle
has the better argument than Posner. Richard
A.
Posner, Legal Reasoning from the Top Down and from the Bottom
Up: The Question of Unenumerated Constitutional Rights, 59 U.
Chi. L. Rev. 433, 443 (1992).
76. Aristotle,
Politics,
Book I, Ch. 1 (Trevor J. Sanders Trans., Clarendon Press
1995).
77. F.A.
Hayek,
The Use of Knowledge in Society, 35 Am. Econ. Rev. 519 (1945).
78. M.
Bruce
Johnson, Hayek and Markets, 23 Sw. U. L. Rev. 547, 548
(1994) ("Hayek
argued
that markets coordinate the various bits of information and
knowledge scattered among individuals spontaneously, without
design or comprehension by any human mind."). This might
seem to be what Adam Smith said. However, Smith focuses on self
love as the driving economic force reasoning inductively. For
Hayek, in contrast, the driving economic force is information.
Thus, Hayek would reject the labor theory of value. Money to Hayek
is just information. Smith, like Locke and Marx, argues that money
is but crystallized labor (the labor theory of value). For Hayek,
money is reified. It may represent labor, in its origin, but in
its ends it is more than just labor. It is labor applied to
projects. Hayek thinks this is best coordinated by decentralized
market transactions. Money, for Hayek, has both a past (the labor
it represents) and a future (the investments it will fund) and is
also a signal (a quantum of information). This is why Hayek does
not, in my opinion, reject the labor theory of value. His theory
of money and trade, in my opinion, goes beyond what Smith, Locke
and Marx were saying.
79. Bench
v.
Sheldon, 14 Barb. 66,
70-71 (N.Y. App. Div. 1852) ("The policy of the law is ...
to reward enterprise and punish indolence and folly."); Jill
Anne
Farmer, Free to Be You and Me: Librarians and Freedom of
Expression, 85 Law Libr. J. 693, 698 (1993) ("[C]apitalism
... by its very nature is based on unequal distribution of
resources and unequal distribution of consequences (rewards as
well as punishments).").
80. See generally Elaine
A.
Welle, Freedom of Contract and the Securities Laws: Opting Out
of Securities Regulation by Private Agreement, 56 Wash. &
Lee L. Rev. 519 (1999).
81. Ralph
K.
Winter, On "Protecting the Ordinary Investor," 63 Wash. L. Rev.
881, 901 (1988):
Some Speculators and
Institutional Investors can be harmed by insider trading, but
again the inefficient bear the loss. Both are injured only
because inside traders are more efficient at performing the
market function of Speculators and Institutional Investors,
namely moving the price of a company's stock in the most
accurate direction. Not all Speculators and Institutional
Investors are hurt, moreover. Efficient Speculators and
Institutional Investors may notice unexplained trading in a
company's shares, accurately identify it as a consequence of
insider trading, and then trade themselves. So far as performing
the market function of the Speculator or Institutional Investor
is concerned, therefore, insider trading is good rather than
bad.
82. Richard
A.
Posner, Economic Analysis of Law 491-99 (3d ed. 1986)
(common law operates like a market; common law maximizes social
wealth); William
M.
Landes & Richard A. Posner, A Positive Economic Analysis of
Products Liability, 14 J. Legal Stud. 535, 535 (1985)
(common law fosters efficient markets); Richard
A.
Posner, A Reply to Some Recent Criticisms of Efficiency Theory
of the Common Law, 9 Hofstra L. Rev. 775 (1981) (common law
rightly seeks wealth maximization). I do not go quite as far as
Posner. The state exists to enable us to live and to live well.
Wealth is a means to this end but is not an end in itself.
83. Andrei
Shleifer,
Inefficient Markets: An Introduction to Behavioral Finance 4
(2000) (noting that "market efficiency prevails because of
competitive selection"). According to Milton Friedman, irrational
investors are ultimately driven out of markets by natural
selection--they lose their shirts or adapt and become rational
investors.
84. See Theresa
A.
Gabaldon, Assumptions about Relationships Reflected in the
Federal Laws, 17 Wis. Women's L.J. 215 (2002). She critiques
the model not because it is objectively unrealistic, but because
it stereotypes the roles drawn from it--the false image of
professional stock traders as cold and greedy, preying on
uninformed women such as widows. That is, the insider trading
prohibition is founded on some sexist assumptions, and Martha
Stewart illustrates what happens to people who go against the
grain and upset social bias.
85. I do think economics
is a nomothetic science. Of course, all social sciences are
dialectical, not natural. But economic science is the most
verifiable of the human sciences for it is based on measurable
empirical facts. That is my strongest claim from economics.
86. Committee
on
Federal Regulation of Securities, Report of the Task Force on
Regulation of Insider Trading: Part I: Regulation Under the
Antifraud Provisions of the Securities Exchange Act of 1934, 41
Bus. Law. 223, 227 (1985) ("[P]eople will not entrust their
resources to a marketplace they don't believe is fair, any more
than a card player will put his chips on the table in a poker game
that may be fixed."). The analogy is wrong and outright
pernicious. Stock trading is no gamble. A long term buy and hold
strategy over three decades, at most four, always pays out
handsomely. This is of course not the optimal strategy. It does,
however, show that the stock market is just not at all like poker,
even without a "house" taking a "cut" of the "percentage."
87. Lynn
A.
Stout, Are Stock Markets Costly Casinos? Disagreement, Market
Failure, and Securities Regulation, 81 Va. L. Rev. 611, 704
(1995).
88. Annuity Calculator, http://www.1728.com/annuity.htm.
89. Sun
Tzu,
The Art of War, Ch. III, ¶ 18. (Lionel Giles trans.)
(1910), available at http://www.chinapage.com/sunzi-e.html:
If you know the enemy and know
yourself, you need not fear the result of a hundred battles. If
you know yourself but not the enemy, for every victory gained
you will also suffer a defeat. If you know neither the enemy nor
yourself, you will succumb in every battle.
90. Adam
Smith,
An Inquiry into the Nature And Causes of the Wealth of Nations
461 (Edwin Cannan ed., The University of Chicago Press 1937).
91. See David
Ricardo,
On the Principles of Political Economy and Taxation 132-34
(3d ed. 1821), reprinted in 1 The Works and Correspondence of
David Ricardo, 132-34 (Piero Sraffa ed., 1953).
92. Dolgopolov, supra
note 68.
93. Id. at 180.
94. Id. at 146
("[I]nsider trading may be beneficial for an emerging economy,
which is unlikely to possess sophisticated security analysts, in
order to improve price efficiency and allocation of capital.").
95. Id. at 84 n.3.
96. Freeman
v.
Decio, 584 F.2d 186, 190 (7th Cir. 1978):
In addition to the costs
associated with enforcement of the laws prohibiting insider
trading, there may be a loss in the efficiency of the securities
markets in their capital allocation function. The basic insight
of economic analysis here is that securities prices act as
signals helping to route capital to its most productive uses and
that insider trading helps assure that those prices will reflect
the best information available.
97. United States v.
Svoboda, 347
F.3d
471, 475 n.3 (2d Cir. 2003).
98. Acoba, supra note 8,
at 1362 ("In fact, section 10(b) and Rule 10b-5 (or any of the
federal statutes, rules, or regulations) do not define "insider
trading" or "inside information" (or "misappropriation," for that
matter).").
99. Christopher
M.
Gorman, Note, Are Chinese Walls the Best Solution to the
Problems of Insider Trading and Conflicts of Interest in
Broker-Dealers?, 9 Fordham J. Corp. & Fin. L. 475, 478
(2004):
Since there is no explicit
statutory definition of insider trading, it has been established
through controversial case law. One important issue is the
definition of inside information. Inside information initially
meant information concerning a company's assets or earning power
that affected the stock price. Thus, traditional insider trading
usually involved trading by directors, officers, and employees
of the corporation. This definition has expanded over time to
include "market information," which is any information that
affects the market for a company's security, not just
information affecting the company's assets or earning power.
This more expansive definition of inside information has led to
individuals besides traditional insiders being found guilty of
insider trading. Today, courts do not make the distinction
between these two types of information. Therefore, trading based
on traditional inside information as well as outside information
is considered insider trading in violation of Rule 10b-5.
100. Evan
Hendricks
et al., The Conflict Between Commercial Speech and Legislation
Governing the Commercialization of Private Sector Data, 11
Fordham Intell. Prop. Media & Ent. L.J. 59, 78 (2000)
("As a general matter, when you are creating property rights in
information, you are doing a very difficult thing, and something
that is traditionally limited to narrow exceptions. The default
rule remains the freedom of information."); Raymond T. Nimmer
& Patricia Ann Krauthaus, Copyright on the Information
Superhighway: Requiem for a Middleweight, 6 Stan. L. & Pol'y
Rev. 25, 30 (1994) ("Property rights in copyright law are treated
as exceptions from the general rule that information lawfully
obtained is available to everyone ....").
101. Kimberly
D.
Krawiec, Privatizing "Outsider Trading," 41 Va. J. Int'l L. 693,
693 (2001).
102.Henry
N. Butler, Economic Analysis for Lawyers 785 (1998) ("Most
corporation laws are enabling statutes in the sense that they
reflect the philosophy of freedom of contract which has guided
corporation law since the first truly modern general incorporation
laws were passed in the late nineteenth century.").
103.James
D. Cox, Insider Trading and Contracting: A Critical Response to
the "Chicago School," 1986 Duke L.J. 628, 631 (1986).
104.Jonathan
R. Macey, Securities Trading: A Contractual Perspective, 50 Case
W. Res. L. Rev. 269, 273 (1999).
105. Krawiec, supra note
101, at 699 (noting that if information were perfect and there
were no transaction costs that it would be impossible to sell
information). Krawiec's argument is correct but does not follow
this through to its logical conclusion. However, I take Hayek, who
notes that all trading is an exchange of information and then goes
one step further than Krawiec, arguing that no trading would occur
if information were perfect and there were no transaction costs.
But even if we do not follow through to this conclusion, Krawiec
leads us to the logical consequence that if information were
perfect, then no one would produce information. For this reason,
perfect information is impossible. Too much information kills
information.
106. "The term "insider"
is not defined by statute in the context of the U.S. prohibitions
against insider trading." Michael
D.
Mann & Lise A. Lustgarten, Internationalization of Insider
Trading Enforcement: A Guide to Regulation and Cooperation,
PLI/Corp. 7, 14 (1993).
107. Black's Law
Dictionary 718 (7th ed. 1999).
108. Dirks
v.
SEC, 463 U.S. 646, 662 (1983).
109. Id. at 660.
110. Chiarella v. United
States, 445
U.S.
222 (1980).
111. See Dirks, 463 U.S.
at 646.
112. Chiarella, 445 U.S.
at 233.
113. Mann &
Lustgarten, supra note 106, at 7 ("[T]he
relationship
of a person, and the corresponding duty that person owed to: (a)
the corporation that issued the securities traded (the issuer);
(b) the issuer's shareholders; and (c) other entities from which
the person acquired material non-public information concerning
the issuer.").
114. Chiarella, 445 U.S.
at 230 n.12. However, the court determines an "insider" based on
two factors: 1) relationship as a fiduciary either to the
corporation or to the corporation's shareholders (as opposed to
the trading party); and 2) relationship to the information. The
Court has in no way clarified the exact contours of the definition
of an insider.
115. Kim Lane Scheppele,
"It's Just Not Right": The Ethics of Insider Trading, 56 Law &
Contemp. Probs. 123, 126-27 (2003).
116. Id.
117. Id.
118. See, e.g., Dewey v.
Lutz, 462
N.W.2d
435 (N.D. 1990); Hellman v. Thiele, 413
N.W.2d
321 (N.D. 1987).
119. Goforth, supra note
11, at 911 (citing W. Page Keeton et al., Prosser and Keeton on
the Law of Torts § 108 (5th ed. 1984)); Gruber
v.
Price Waterhouse, 117 F.R.D. 75, 81 (E.D. Pa. 1987) ("It is
clear that a plaintiff in a common law securities fraud case must
prove direct reliance. A fraud on the market theory is not
available.").
120. TSC
Indus.,
Inc. v. Northway, Inc., 426
U.S.
438, 449 (1976).
121. Bradford
Third
Equitable Benefit Bldg. Soc'y v. Borders, [1941
2
All E.R. 205 (H.L.) (explaining the tort of deceit).
122. See, e.g., Alpine
v. Friend Bros., Inc., 138
N.E.
553, 554 (Mass. 1923); Robichaud v. Owens-Illinois Glass
Co., 48
N.E.2d
672 (Mass. 1943); McCarthy v. Brockton Nat'l Bank, 50
N.E.2d
196, 199 (Mass. 1943).
123. Securities
Litigation Uniform Standards Act of 1998, Pub.
L.
No. 105-353, 112
Stat. 3227.
124. See Judith
G.
Greenberg, Insider Trading and Family Values, 4 Wm. & Mary
J. Women & L. 303, 303 (1998).
125. United States v.
Chestman, 947
F.2d
551 (2d. Cir. 1991).
126. Transactions in
Securities on the Basis of Material, Nonpublic Information in the
Context of Tender Offers, 17
C.F.R.
§ 240.14e-3 (1999):
(a) If any person has taken a
substantial step or steps to commence, or has commenced, a
tender offer (the "offering person"), it shall constitute a
fraudulent, deceptive or manipulative act or practice within the
meaning of section 14(e) of the Act for any other person who is
in possession of material information relating to such tender
offer which information he knows or has reason to know is
nonpublic and which he knows or has reason to know has been
acquired directly or indirectly from:
(1) The offering person,
(2) The issuer of the securities
sought or to be sought by such tender offer, or
(3) Any officer, director,
partner or employee or any other person acting on behalf of the
offering person or such issuer, to purchase or sell or cause to
be purchased or sold any of such securities or any securities
convertible into or exchangeable for any such securities or any
option or right to obtain or to dispose of any of the foregoing
securities, unless within a reasonable time prior to any
purchase or sale such information and its source are publicly
disclosed by press release or otherwise.
(b) A person other than a
natural person shall not violate paragraph (a) of this section
if such person shows that:
(1) The individual(s) making the
investment decision on behalf of such person to purchase or sell
any security described in paragraph (a) of this section or to
cause any such security to be purchased or sold by or on behalf
of others did not know the material, nonpublic information; and
(2) Such person had implemented
one or a combination of policies and procedures, reasonable
under the circumstances, taking into consideration the nature of
the person's business, to ensure that individual(s) making
investment decision(s) would not violate paragraph (a) of this
section, which policies and procedures may include, but are not
limited to, (i) those which restrict any purchase, sale and
causing any purchase and sale of any such security or (ii) those
which prevent such individual(s) from knowing such information.
(c) Notwithstanding anything in
paragraph (a) of this section to contrary, the following
transactions shall not be violations of paragraph (a) of this
section:
(1) Purchase(s) of any security
described in paragraph (a) of this section by a broker or by
another agent on behalf of an offering person; or
(2) Sale(s) by any person of any
security described in paragraph (a) of this section to the
offering person.
(d) (1) As a means reasonably
designed to prevent fraudulent, deceptive or manipulative acts
or practices within the meaning of section 14(e) of the Act, it
shall be unlawful for any person described in paragraph (d)(2)
of this section to communicate material, nonpublic information
relating to a tender offer to any other person under
circumstances in which it is reasonably foreseeable that such
communication is likely to result in a violation of this section
except that this paragraph shall not apply to a communication
made in good faith,
(i) To the officers, directors,
partners or employees of the offering person, to its advisors or
to other persons, involved in the planning, financing,
preparation or execution of such tender offer;
(ii) To the issuer whose
securities are sought or to be sought by such tender offer, to
its officers, directors, partners, employees or advisors or to
other persons, involved in the planning, financing, preparation
or execution of the activities of the issuer with respect to
such tender offer; or
(iii) To any person pursuant to
a requirement of any statute or rule or regulation promulgated
thereunder.
(2) The persons referred to in
paragraph (d)(1) of this section are:
(i) The offering person or its
officers, directors, partners, employees or advisors;
(ii) The issuer of the
securities sought or to be sought by such tender offer or its
officers, directors, partners, employees or advisors;
Anyone acting on behalf of the
persons in paragraph (d)(2)(i) of this section or the issuer or
persons in paragraph (d)(2)(ii) of this section; and
(iv) Any person in possession of
material information relating to a tender offer which
information he knows or has reason to know is nonpublic and
which he knows or has reason to know has been acquired directly
or indirectly from any of the above.
127. United States v.
O'Hagan, 521
U.S.
642, 645 (1997):
Rule 14e-3(a) forbids any person
to trade on the basis of material, nonpublic information that
concerns a tender offer and that the person knows or should know
has been acquired from an insider of the offeror or issuer, or
someone working on their behalf, unless within a reasonable time
before any purchase or sale such information and its source are
publicly disclosed. Rule 14e-3(a) imposes a duty to disclose or
abstain from trading whether or not the trader owes a fiduciary
duty to respect the confidentiality of the information.
128. Chestman, 947 F.2d
at 556.
129. 15
U.S.C.
§ 78p(a)(b).
130. Id.
131. Id.
132. Herman &
MacLean v. Huddleston, 459
U.S.
375, 387 n.23 (1983) (rejecting expressio unius as
supposedly contrary to purpose of the 1933 Securities Act). A
court ought only to examine legislative intent where the text of
the statute is unclear. When the expressio unius maxim resolves
ambiguity, the court ought to follow it in the interests of legal
certainty.
133. Kern County Land
Co. v. Occidental Petroleum Corp., 411
U.S.
582, 595 (1973).
134. J.
Dormer
Stephen III, United States v. O'Hagan: The Misappropriation
Theory Under Section 10(b) and Rule 10b-5--Can the Judicial Oak
Grow Any Higher, 102 Dick. L. Rev. 277, 314 (1998).
135. United
States
v. Lang, 766 F. Supp. 389, 402 (D. Md. 1991) (finding
criminal penalty under 10b applies despite section 16).
136. 1934
Securities
Exchange Act, 15
U.S.C.
§ 78 J (1994):
It shall be unlawful for any
person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce or of the mails, or of
any facility of any national securities exchange --
(a)(1) To effect a short sale,
or to use or employ any stop-loss order in connection with the
purchase or sale, of any security registered on a national
securities exchange, in contravention of such rules and
regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of
investors.
(2) Paragraph (1) of this
subsection shall not apply to security futures products.
(b) To use or employ, in
connection with the purchase or sale of any security registered
on a national securities exchange or any security not so
registered, or any securities-based swap agreement (as defined
in section 206B of the Gramm-Leach-Bliley Act), any manipulative
or deceptive device or contrivance in contravention of such
rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the
protection of investors.
Rules promulgated under
subsection (b) of this section that prohibit fraud,
manipulation, or insider trading (but not rules imposing or
specifying reporting or recordkeeping requirements, procedures,
or standards as prophylactic measures against fraud,
manipulation, or insider trading), and judicial precedents
decided under subsection (b) of this section and rules
promulgated thereunder that prohibit fraud, manipulation, or
insider trading, shall apply to security-based swap agreements
(as defined in section 206B of the Gramm-Leach-Bliley Act) to
the same extent as they apply to securities. Judicial precedents
decided under section 77q(a) of this title and sections 78i,
78o, 78p, 78t, and 78u-1 of this title, and judicial precedents
decided under applicable rules promulgated under such sections,
shall apply to security-based swap agreements (as defined in
section 206B of the Gramm-Leach-Bliley Act) to the same extent
as they apply to securities.
137. Employment of
Manipulative and Deceptive Devices, 17
C.F.R.
§ 240.10b-5 (1999):
It shall be unlawful for any
person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of
any facility of any national securities exchange,
(a) To employ any device,
scheme, or artifice to defraud,
(b) To make any untrue statement
of a material fact or to omit to state a material fact necessary
in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
(c) To engage in any act,
practice, or course of business which operates or would operate
as a fraud or deceit upon any person, in connection with the
purchase or sale of any security.
138. Anthony
Deglomine
III, Comment, Securities Regulation: The Fraud-on-the-Market
Theory and Its Effect on the Reliance Requirement for a Private
Action Under 10b-5, 13 Stetson L. Rev. 343, 344 (1983-84).
139. 79A C.J.S.
Securities Regulation § 255.
140. But I doubt that
the SEC or courts would accept that argument. United
States
v. Marcus Schloss & Co., Inc., 724. F. Supp. 1123, 1127
(S.D.N.Y. 1989); Jonathan
A.
Blumberg, Comment, Implications of the 1984 Insider Trading
Sanction Act: Collateral Estoppel and Double Jeopardy, 64 N.C.
L. Rev. 117 (1985) (asserting that a successful criminal
prosecution and an ITSA action awarding treble damages would
subject an insider to two essentially criminal actions, thus
violating the double jeopardy clause); but see Carol
B.
Silver, Penalizing Insider Trading: A Critical Assessment of the
Insider Trading Sanctions Act of 1984, 1985 Duke L.J. 960,
1012-17 (ITSA sanctions are civil not criminal and thus cannot be
the subject of double jeopardy prohibition).
141. United States v.
O'Hagan, 521
U.S.
642, 651-52 (1997).
142. Id. at 652.
143. Dirks
v.
SEC, 463 U.S. 646, 662 (1983).
144. SEC v. Warde, 151
F.3d
42, 47 (2d Cir.1998).
145. Id. at 48-49.
146. Id.
147. SEC
v.
Sargent, 229 F.3d 68, 77 (1st Cir. 2000).
148. United States v.
O'Hagan, 521
U.S.
642 (1997).
149. Id. at 652.
150. Id. at 655 (noting
that"if
the fiduciary discloses to the source that he plans to trade on
the information, there is no "deceptive device" and thus no
§10(b) violation").
151. Id. at 652-53
(noting that "[t]he
transaction
and the breach of duty coincide, even though the person or
entity defrauded is not the other party to the trade, but is,
instead, the source of the nonpublic information").
152. Id. at 652.
153. United
States
v. Chestman, 947
F.2d
551, 569 (2d Cir. 1991).
154. O'Hagan, 521 U.S.
at 682.
155. Id. at 660 (noting
that "deceptive nondisclosure is essential to § 10(b) liability
under the theory").
156. Chiarella v. United
States, 445
U.S.
222, 227-28 (1980).
157. See SEC v. Texas
Gulf Sulphur Co., 401
F.2d
833, 848 (2d Cir. 1968) (en banc).
158. Chiarella, 445 U.S.
at 222, 235 (1980).
159. Scheppele, supra
note 115, at 173.
160. Mark
J.
Loewenstein & William K.S. Wang, The Corporation as Insider
Trader, 30 Del. J. Corp. L. 45, 52 (2005).
161. See id.
162. Green v. Hamilton
Int'l Corp., 437
F.
Supp. 723, 728 (S.D.N.Y. 1977) (noting that "there can be no
doubt that the prohibition against "˜insider"™ trading extends
to a corporation").
163. United States v.
O'Hagan, 521
U.S.
642, 652 (1997).
164. Chiarella v. United
States, 445
U.S.
222, 243 (1980).
165. Basic, Inc. v.
Levinson, 485
U.S.
224 (1988).
166. C. Edward Fletcher,
III, Sophisticated Investors Under the Federal Securities Laws,
1988 Duke L.J. 1081, 1114 (1988) ("The
fraud
on the market theory allows a plaintiff to allege a more
attenuated version of reliance ...."); see Steven
R.
Salbu, Tipper Credibility, Noninformational Tippee Trading, and
Abstention from Trading: An Analysis of Gaps in the Insider
Trading Laws, 68 Wash. L. Rev. 307, 314 n.44 (1993) ("The
fraud
on the market theory has also attenuated the privity element by
creating a rebuttable presumption that all contemporaneous
traders have relied on a misrepresentation, because that
misrepresentation defrauds the entire market mechanism.").
The fraud on the market theory has been criticized for imposing
excessive costs on investors. See Paul
G.
Mahoney, Precaution Costs and the Law of Fraud in Impersonal
Markets, 78 Va. L. Rev. 623 (1992).
167. Donald
Eric
Remensperger, Comment, Causation in Fraud-on-the-Market
Actions--Investors' Insurance in the Second Circuit?, 49 Brook.
L. Rev. 1291, 1302 (1983) ("Although other courts have used
a similar standard, the Second Circuit extended the presumption to
cover a more attenuated chain of causation, thereby creating the
possibility of unlimited liability under the fraud-on-the-market
theory of recovery.").
168. Mechanisms of
Market Inefficiency, supra note 17, at 641 ("Combining the ECMH
with the CAPM produces a prediction of fundamental value
efficiency through a different and more troubling analytical
path--by tautology.").
169. Barry III, supra
note 64, at 1340 n.129 ("The ECMH assertion that prices reflect
all relevant information is essentially tautological.").
170. Michael W. Prozan
& Michael T. Fatale, Revising "Truth in securities": The Use
of the Efficient Capital Market Hypothesis, 20 Hofstra L. Rev.
687, 703 (1992).
171. Basic, Inc. v.
Levinson, 485
U.S.
224, 259 (1988) (White, J., dissenting).
172. Schroeder, supra
note 4, at 2050.
173. See Macey, supra
note 104.
174. See Henry
G.
Manne, Insider Trading and the Stock Market 4 (1966).
175. Manne, supra note
3, at 549.
176. Ian
B.
Lee, Fairness and Insider Trading, 2002 Colum. Bus. L. Rev. 119,
141 (2002) ("Fairness could mean many things.").
177. Id. at 141-42:
From where does the normative
force of fairness come? The answer may well depend on one's
philosophy. Some may view it as a corollary of a deontological
obligation to treat others as equals. Utilitarians and other
consequentialists, on the other hand, may view the rules of
fairness as being a condition for the possibility of
welfare-improving cooperative action, the solution to a chronic
Prisoners' Dilemma in which members of society have an incentive
to exploit each other's situational vulnerabilities even though
all of them would be much better off in a society where such
exploitation did not occur. It is also possible that a weak form
of consequentialism can be reconciled with deontology, for
example, if cooperation is not merely an instrumental means of
achieving some overall and independently specified good, but
rather adds a vector of value to the idea of being better off.
Perhaps there is a kind of good that we can only hope to achieve
through cooperation and the logic of such cooperation includes
rules we describe as rules of fairness.
178. Ji-Chai
Lin
& Michael S. Rozeff, The Speed of Adjustment of Prices to
Private Information: Empirical Tests, 18 J. Fin. Res. 143,
144 (1995).
179. Lisa
K.
Meulbroek, An Empirical Analysis of Illegal Insider Trading, 47
J. Fin. 1661, 1663 (1992).
180. See Daniel
J.
Barastow, Comment, Due Process and Criminal Penalties Under Rule
10b-5: The Unconstitutionality and Inefficiency of Criminal
Prosecutions for Insider Trading, 73 J. Crim. L. 96 (1982);
Oliver
Perry
Colvin, A Constitutional Challenge to Rule 10B-5, Insights May,
1992; United States v. Chestman, 947
F.2d
551 (2d Cir. 1991) (In a 14e-3 context a constitutional
challenge for vagueness was specifically rejected by the court.).
181. Alan
R.
Bromberg & Lewis D. Lowenfels, Bromberg & Lowenfels on
Securities Fraud and Commodities Fraud § 2:3 (2d ed. 2005):
Antifraud rules have been upheld
consistently and in diverse contexts when challenged, for
example on grounds of vagueness or excessive delegation of
legislative authority. See, e.g.,
Charles
Hughes
& Co. v. Securities and Exchange Commission, 139 F.2d 434,
436, (C.C.A. 2d Cir. 1943) (Rule 15c1-2 valid; sufficiently
definite; no unconstitutional delegation; broker-dealer
revocation affirmed); Speed v. Transamerica Corp.,
99
F.
Supp. 808, 831-32 (D. Del. 1951) (10b-5 valid; not
unconstitutionally vague; no improper delegation; civil
liability imposed); U.S. v. Persky,
520
F.2d 283, 286-88, Fed. Sec. L. Rep. (CCH) ¶95209 (2d Cir.
1975) (10b-5 valid; despite expansive interpretation in civil
cases, it provided fair warning that defendant's conduct was
unlawful; conviction affirmed); U.S. v. Chiarella,
588
F.2d
1358, 1369, Fed. Sec. L. Rep. (CCH) ¶96608, 3
Fed.
R.
Evid. Serv. 1347 (2d Cir. 1978) (10b-5 sufficiently clear
to satisfy due process and affirm conviction of financial
printer for trading without disclosure of nonpublic information
of forthcoming tender offers).
182. See, e.g., United
States v. Lang, 766
F.
Supp. 389, 402 (D. Md. 1991); United States v. Willis, 737
F.
Supp. 269 (S.D.N.Y. 1990).
183. United States v.
Chestman, 947
F.2d
551, 568 (2d. Cir. 1991) ("[M]arriage does not, without
more, create a fiduciary relationship. '[M]ere kinship does not of
itself establish a confidential relation' .... Rather, the
existence of a confidential relationship must be determined
independently of a preexisting family relationship.").
184. Id. (noting that "more
than
the gratuitous reposal of a secret to another who happens to be
a family member is required to establish a fiduciary or similar
relationship of trust and confidence").
185. Wilson, supra note
5, at 198 ("In
pure
teleological terms, insider trading is good because its
consequences benefit both the trader and the company.").