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Anyone familiar with the law of agency will very quickly understand why insider trading is so troublesome. When an insider uses the information of the corporation for their own benefit, the agent violates their duty of loyalty to the corporation.
Over the years, the jurisprudence of insider trading has evolved to meet the changing landscape of the marketplace. In the following cases we start with classical insider trading theory and then progress to more modern evolutions including liability for insider trading under Federal misappropriation theory.EDIT PLAYLIST INFORMATION DELETE PLAYLIST
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|1||Show/Hide More||State-based liability|
State-based insider trading liability takes the form a derivative action by stockholders against insiders. In such an action, the basic claim is that directors (or “insiders”) used confidential information of the corporation for their own benefit and not for the benefit of the corporatoion. As a derivative action based, state-based insider trading liability is prosecuted by stockholders and not by state regulators or the SEC. Oracle as well as the Beam v Martha Stewart case from earlier in the semester are examples of stockholders bringing derivative suits against board members who have allegedly engaged in insider trading in the stock of the corporation.
Consistent with other derivative actions, in state-based insider trading cases, the remedy, if any, is paid to the corporation in the form of disgorgement of profits. Because the state-based action is derivative, neither stockholders nor any governmental entity is entitled to receive any of the profits disgorged as a remedy. Those illicit profits are paid back to the corporation and are not paid as fines to the SEC or any other regulator. In addition, state-based insider trading liability is civil and not criminal.
|2||Show/Hide More||Federal-based liability|
|2.2||Show/Hide More||SEC v Texas Gulf Sulphur|
|2.3||Show/Hide More||Tipper/Tippee Liability|
What about liability for insider trading in situations where the trading doesn't involve an insider? The knottiest of these problems involve situations where insiders have tipped outsiders who then trade.
Tipping is a direct challenge to the classical insider trading doctrine and requires some development of the law. Because the recipient of inside information does not have a fiduciary duty to the shareholders or the corporation, classical insider trading theory does not extend to recipients of inside information. Courts have responded to these situations by finding ways to extend liability to recipients of inside information, “tippees”. Because courts built tippee liability for insider trading on an ediface of fiduciary duty, the reach of liability can at times be limited.
|2.3.3||A note on US v Newman|
|2.3.4||Show/Hide More||U.S. v. Chestman|
|2.4||Show/Hide More||Misappropriation Theory|
Classical insider trading theory generates liability for insiders, temporary insiders, and tippees in the event any of them trade in the stock of the corporation to which they own a fiduciary duty while in possession of material inside information.
However, this classical theory has an obvious limitation. Under the classical theory of insider trading, there is no liability if the insider uses the material inside information of the corporation to trade in the stock of ANOTHER corporation and not the corporation to which the insider has a fiduciary duty.
The following cases lay out the courts' response to the limitations of the classical insider trading theory while holding on to its fiduciary duty core.
|2.4.3||Show/Hide More||SEC v. Dorozhko|
December 12, 2013
Brian JM Quinn
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