INSIDER TRADING

insider trading.The use of material, nonpublic information in trading the shares of a company by a corporate insider or other person who owes a fiduciary duty to the company. • This is the classic definition. The Supreme Court has also approved a broader definition, known as the “misappropriation theory”: the deceitful acquisition and misuse of information that properly belongs to persons to whom one owes a duty. Thus, under the misappropriation theory, it is insider trading for a lawyer to trade in the stock of XYZ Corp. after learning that a client of the lawyer’s firm is planning a takeover of XYZ. But under the classic definition, that is not insider trading because the lawyer owed no duty to XYZ itself. — Also termed insider dealing. [Cases: Securities

Regulation 60.28. C.J.S. Securities Regulation §§ 179, 182.]

“ ‘What is insider trading?’ The term is probably best defined, to the extent any definition is adequate, as ‘the purchase or sale of securities on the basis of material, non-public information.’ What counts as ‘non-public information’? What non-public information can be deemed ‘material’? When is a trader who is in possession of material, non-public information trading ‘on the basis of’ that information? Must the information be about the company whose securities are being purchased or sold? What characteristics establish ‘insider’ status sufficient to warrant legal proscriptions of trading? These are all questions that are derived from the definition of insider trading just offered ….” C. Edward Fletcher, Materials on the Law of Insider Trading 3 (1991).

“A number of different parties may be subject to a variety of monetary penalties under the federal securities laws for engaging in illegal insider trading. These parties may include actual traders, their tippers, as well as broker-dealers and investment advisors (when they fail to take appropriate steps to prevent the insider trading violation(s) or fail to maintain and enforce policies and procedures reasonably designed to prevent the occurrence of such trading). Measures that may be ordered include (1) requiring the subject party to ‘disgorge’ the ill-gotten profits (or loss avoided) in an SEC enforcement action, (2) subjecting individuals to a maximum criminal fine of $1 million and 10 years imprisonment, and (3) in an SEC enforcement action, within a court’s discretion, ordering the subject party to pay into the U.S. Treasury a treble damage penalty

amounting to three times the profit gained or loss avoided.” Marc I. Steinberg, Understanding Securities Law 277–78 (2d ed. 1996).

[Blacks Law 8th]