On Thu, 19 Sep 1996, E. Allen Smith wrote:
I'd be curious as to the comments of Black Unicorn and others on that legal finding - it does appear to make things at least a bit better in this area... including making it difficult to claim that insider information shouldn't be transmitted on the Net. Incidentally, I find AP's calling insider trading "fraud" rather biased. -Allen
_________________________________________________________________ Direct Media _________________________________________________________________ INSIDER TRADING NEVER WENT AWAY __________________________________________________________________________ Copyright © 1996 Nando.net Copyright © 1996 The Associated Press
WASHINGTON (Sep 18, 1996 10:35 a.m. EDT) -- One of the most infamous acts in the financial fraudster's playbook, insider trading, remains at record levels, despite a decade of steady crackdowns by regulators.
This is a classic effect of a black market economy for which there is great demand, i.e., that regulation can only change the rules, not stop the conduct.
[...]
The SEC brought one of its more unusual insider trading cases on Monday, when it sued the unnamed account holders in a Swiss and Bahamian accounts with insider trading ahead of The Gillette Co.'s merger proposal for Duracell International.
I'm not sure why this is unusual. This is all the SEC can do when there are secret accounts used. Prediction: The holders of the Swiss accounts will be before a grand jury in 9 months or less. The holders of Bahamian accounts, should they be distinct from the former group, will never be found. (Switzerland shares information with the United States in cases like this with alarming frequency, and often Swiss banks get waivers from clients who wish to trade with Swiss accounts. These waivers release the bank from liability for cooperating with investigations involving such trades.
[...]
One disturbing development for regulators is a recent decision by the 8th U.S. Circuit Court of Appeals that struck down one of the SEC's main enforcement tools in insider trading cases.
The court, which covers several Midwestern states, rejected the so-called "misappropriation theory" in insider trading cases, which is used to nab people trading on inside information who don't owe a fiduciary duty to the company's shareholders. The court also rejected an SEC rule used to snare insider trading in tender offers.
I'm pleased at this decision. Misappropriation theory was designed by creative prosecutors to solve a specific problem. i.e., if Joe, employee of Company X, tells Dave about an impending merger which Dave then trades on, what fraud has Dave committed and against whom? Dave is not an "Insider" of company X, and thus had no strict Duty to the company. As prosecutions relied on sections 10-b and 10-b(5) of the Securities Exchange Act of 1934, they were required to show fraud to make their case. "It shall be unlawful for any person, directly or indirectly, by any means or instrumentality of interstate commerce, or of the mails, or of any facility of any nation securities exchange, (1) to employ any device, scheme, or artifice to defraud, [...] (3) 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." (Rule 10b-5) The misappropriation theory was largely intended to extend the reach of courts to cover individuals who do not fall within the traditionally prosecuted areas (the insider and the tipee [he who gets the tip] were always the easiest to nail). Consider the comments of Professor Barbara Aldave (a regular commentator on insider trading): "Without the aid of the misappropriation theory, section 10(b) and rule 10b-5 would lose much of their efficacy as weapons against insider trading on nonpublic information since they would no longer extend to trading by 'outsiders.'" The theory which founded insider trading law before the dawn of misappropriation was the so called "disclose or abstain" rule. i.e., if you had material nonpublic information by reason of your employment you had a choice. You could disclose that information and then trade on it, or abstain from trading. (Chiarella and Dirks estlablished this line of thinking) Again, courts have been forced to use the concept of fraud in connection with "the purchase or sale of securities" to find liability. When judges saw what they considered illegal behavior by outsiders, the misappropriation theory (that the information had been misappropriated and that therefore the fraud needed to find liability could be found as between the outside trader and the company) provided an easy out for liability. It was, in my view, a stretch to begin with. See Generally, Barbara Bader Aldave, The Misappropriateion Theory: Carpenter and Its Aftermath, 49 Ohio St. L. J. 373 (1988).
The 8th Circuit decision came in August in a Justice Department case against Minneapolis attorney James H. O'Hagan, who was charged with insider trading during the 1988 takeover bid of Pillsbury Co. by Grand Metropolitan PLC. SEC General Counsel Richard Walker has asked the appeals court for a rehearing on the matter.
While the 8th Circuit decision represents a setback for the SEC, the agency usually brings its cases in the New York and Chicago areas, where the federal courts acknowledge these insider trading rules.
What is not mentioned here is that the 4th Circiut recently made a similar decision.
Regulators say these enforcement tools are important because insider trading follows few patterns. In an analysis of 35 cases brought in 1995 that solely dealt with insider trading, Gerlach said 20 involved trading ahead of mergers, three ahead of other positive corporate announcements and six ahead of bad corporate news.
Who cares if there's a pattern? Notice no one here has bothered to try and make the argument that insider trading harms anyone. Now that the 8th and the 4th Circuits are in conflict with the remainder it is likely that we will soon see a Supreme Court case on the topic. It should be noted that in one of the decisions, (I can't recall which at the moment) the insider trading charges were dismissed, but related wire and mail fraud charges stood. Wire and mail fraud have always, in my view, represented a superior means to prosecute insider trading because they force the prosecution to point to fraud with much more clarity than modern 10b and 10b-5 theory required. -- I hate lightning - finger for public key - Vote Monarchist unicorn@schloss.li