Report of the Task Force on Regulation of Insider Trading Part I: Regulation Under the Antifraud Provisions of the Securities Exchange Act of 1934
Committee on Federal Regulation of Securities, 41(1): 223–72 (Nov. 1985) This is Part I of a comprehensive Report prepared by the Task Force on Regulation of Insider Trading. The chairman of the Committee on Federal Regulation of Securities appointed the task force early in 1984 and charged it with surveying existing federal statutory regulation of insider trading under the Exchange Act and the rules promulgated under the Act. This part of the task force's Report examines the regulation under the antifraud provisions of sections 10 and 14(e) of the Exchange Act. Part II, to be published later, will examine the reporting and short-swing profits recovery provisions of section 16 of the Act.
Report of the Task Force on Regulation of Insider Trading Part II: Reform of Section 16
Committee on Federal Regulation of Securities, 42(4): 1087–1138 (Aug. 1987)
This Report reviews the history and analyzes the problems of section 16 of the Exchange Act. The Report also includes recommendations for amending section 16 and sample amending language.
Insider Trading Under Rule 10b-5: The Theoretical Bases for Liability
Willis W. Hagen II, 44(1): 13–41 (Nov. 1988)
After briefly discussing the development of insider trading law, this Article analyzes the fiduciary duty theory, the concept of a temporary insider, and the misappropriation theory. It examines two, diametrically opposed positions that the law could take under section 10(b) and rule 10b-5: (i) to impose liability whenever anyone intentionally uses misappropriated, nonpublic information to purchase or sell securities or (ii) to impose liability only when an insider breaches a fiduciary duty in acquiring material nonpublic information that is used in connection with the purchase or sale of securities.
An Insider's View of the Insider Trading and Securities Fraud Enforcement Act of 1988
Stuart J. Kaswell, 45(1): 145–80 (Nov. 1989)
This Article outlines the provisions of the recently enacted Insider Trading and Securities Fraud Enforcement Act of 1988. The Article discusses how the legislation alters the federal securities laws and imposes specific new statutory responsibilities on broker-dealers and investment advisers. It discusses changes to the law that permit the SEC to seek a civil penalty against a controlling person with respect to illegal insider trading committed by a controlled person. The Article also discusses aspects of the legislative process that produced this act.
Law Firm Policies Regarding Insider Trading and Confidentiality
Special Task Force of the Subcommittee on Civil Litigation and SEC Enforcement Matters, 47(1): 235–69 (Nov. 1991)
This Report presents the results of a survey of existing law firm confidentiality and/or securities trading policies that was conducted by the Subcommittee on Civil Litigation and Enforcement Matters of the Federal Regulation of Securities Committee of the Section of Business Law. The Report sets forth excerpts from such policies to assist firms that are deciding whether or not to adopt or revise codes on confidentiality and securities trading by providing examples of how various law firms have dealt with confidentiality and securities trading issues.
Settlement of Insider Trading Cases with the SEC
William R. McLucas, John H. Walsh, and Lisa L. Fountain, 48(1): 79–106 (Nov. 1992)
This Article discusses some of the factors that are considered when deciding what remedy is the most appropriate response to an insider trading violation in the context of a settlement. It provides a brief overview of the law of insider trading and the public policy it is intended to serve, outlines the remedies available under the federal securities laws for violations of the insider trading provisions, and discusses generally the factors that contribute to the settlement process.
SEC Distribution Plans in Insider Trading Cases
Rory C. Flynn, 48(1): 107–39 (Nov. 1992)
Since 1985, the SEC has obtained judgments for more than $1 billion in court-ordered disgorgement for violations of the federal securities laws, including insider trading. In insider trading cases, however, the amount of claims often exceeds the funds available for distribution, and more and more claimants are now fighting over who is first in line. This Article focuses on which investors are eligible to submit claims, how some may still be excluded from a distribution plan proposed by the SEC because of the way compensation of injuries is prioritized, and the little that can be done about it at the district court and appellate levels.
Gollust v. Mendell: Toward an Objective Standard of Standing Under Section 16(b)
Frederick M. Hopkins, 48(1): 373–85 (Nov. 1992)
In Gollust v. Mendell, 501 U.S. 115 (1991), the Supreme Court resolved two important issues relating to standing to maintain an action under section 16(b) of the Exchange Act. The Court held that, after a party has filed a section 16(b) complaint, the statute's restrictions on standing no longer apply, and the plaintiff need maintain nothing more that a nominal interest in the litigation. This Note examines Gollust and concludes that the Court has effectuated Congress's intent that standing under section 16(b) be broad and that the statute remain easy to administer.
A Tale of Two Instruments: Insider Trading in Non-Equity Securities
Harvey L. Pitt and Karl A. Groskaufmanis, 49(1): 187–258 (Nov. 1993)
The prosecution of insider trading has been a centerpiece of the SEC's regulation of equity markets. Extending this regulation outside the equity markets has confronted a quandary: courts have linked insider trading violations to a breach of a fiduciary duty— a duty notably absent between issuers and investors in the options and debt markets. The SEC, however, has relied on the malleability of its enforcement tools to extend its enforcement efforts to options trading and, more recently, to trading of corporate and municipal debt securities.
Possession Versus Use: Is there a Causation Element in the Prohibition on Insider Trading?
Allan Horwich, 52(4): 1235–78 (Aug. 1997)
This Article addresses whether proof that a person affirmatively used material nonpublic information in deciding to engage in a securities transaction, as distinguished from proof only that he possessed the information when the trade was made, is an essential element of a claim that a person engaged in unlawful insider trading in violation of the securities laws. After surveying the common law, decisions under the federal securities laws, legislative history, and commentary relating to the prohibition on insider trading, the Article concludes that proof of use is an essential element. It may be appropriate, however, particularly in civil actions, to shift the burden of proof on this issue to the defendant once there is evidence that the defendant was in possession of material nonpublic information when the trade was made.
Rumors, Possession v. Use, Fiduciary Duty and Other Current Insider Trading Considerations
Stuart Sinai, 55(2): 743–98 (Feb. 2000)
This Article searches for possible defenses to insider trading charges. Topics include prior rumors as making the matter "public" by the time trading takes place and the present position of various courts and the SEC as to the need of the SEC and the Justice Department to prove "use " of allegedly tainted information versus "mere possession" as basis for civil and criminal actions.
Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms
Henry T. C. Hu and Bernard Black, 61(3):1011–1070 (May 2006)
Most American publicly held corporations have a one-share, one-vote structure, in which voting power is proportional to economic ownership. This structure gives shareholders economic incentives to exercise their voting power well and helps to legitimate managers' exercise of authority over property the managers do not own. Berle-Means' "separation of ownership and control" suggests that shareholders face large collective action problems in overseeing managers. Even so, mechanisms rooted in the shareholder vote, including proxy fights and takeover bids, constrain managers from straying too far from the goal of shareholder wealth maximization.
In the past few years, the derivatives revolution, hedge fund growth, and other capital market developments have come to threaten this familiar pattern throughout the world. Both outside investors and corporate insiders can now readily decouple economic ownership of shares from voting rights to those shares. This decoupling—which we call "the new vote buying"—is often hidden from public view and is largely untouched by current law and regulation. Hedge funds, sophisticated and largely unfettered by legal rules or conflicts of interest, have been especially aggressive in decoupling. Sometimes they hold more votes than economic ownership, a pattern we call "empty voting." That is, they may have substantial voting power while having limited, zero, or even negative economic ownership. In the extreme situation of negative economic ownership, the empty voter has an incentive to vote in ways that reduce the company's share price. Sometimes hedge funds hold more economic ownership than votes, though often with "morphable" voting rights—the de facto ability to acquire the votes if needed. We call this "hidden (morphable) ownership" because under current disclosure rules, the economic ownership and (de facto) voting ownership are often not disclosed. Corporate insiders, too, can use new vote buying techniques.
This article analyzes the new vote buying and its corporate governance implications. We propose a taxonomy of the new vote buying that unpacks its functional elements. We discuss the implications of decoupling for control contests and other forms of shareholder oversight, and the circumstances in which decoupling could be beneficial or harmful to corporate governance. We also propose a near-term disclosure-based response and sketch longer-term regulatory possibilities. Our disclosure proposal would simplify and partially integrate five existing, inconsistent share-ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed; we briefly discuss possible strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.
Internal Investigations and the Defense of Corporations in the Sarbanes-Oxley Era
Robert S. Bennett, Alan Kriegel, Carl S. Rauh, and Charles F. Walker, 62(1): 55–88 (Nov. 2006)
Internal investigations long have been an integral part of the successful defense of corporations against charges of misconduct, as well as an important board and management tool for assessing questionable practices. With the heightened standards of conduct and increased exposure created by Sarbanes-Oxley, this essential instrument for safeguarding corporate interests has become even more crucial in identifying and managing risk in the enforcement arena. This article examines from a practitioner's standpoint when and how internal investigations should be conducted in order to protect the corporation in criminal, civil and administrative proceedings. Particular attention is paid to the issues created by a concurrent government investigation and in dealing with employees and former employees in the course of an investigation. The article also addresses the role of the Audit Committee under Sarbanes-Oxley, and the important issue of reporting the findings of the investigation to appropriate corporate officials. The subject of self-reporting by the Company to enforcement authorities is considered as well. In this context, the article explores the SEC's position on crediting self-reporting and cooperation as set forth in the Seaboard report; Department of Justice policy as embodied in the Thompson Memorandum; and the impact of the Federal Sentencing Guidelines for Organizations.
Disclosure Obligations Under the Federal Securities Laws in Government Investigations
David M. Stuart and David A. Wilson, 64(4): 973-998 (August 2009)
With the prevalence of government investigations into corporate conduct, public companies frequently face decisions about whether, when, how, and where to disclose to investors the existence of such investigations and the facts learned in the course of, or as a result of, those investigations. While the federal securities laws (and the rules and regulations promulgated thereunder) require disclosure of specific events that may arise during an investigation, neither those laws nor the courts that have interpreted them provide clear guidance for many of the disclosure decisions that must be made over the course of an investigation. As a result, counsel must carefully analyze numerous facts and circumstances, understand the company's previous disclosures, make "materiality" assessments, and determine whether to make disclosure in a current report or wait until the next periodic filing. This Article seeks to present, through an analysis of precedent disclosures, caselaw, rules, and practical ramifications, the considerations counsel must take into account in evaluating disclosure decisions in the context of an investigation. These considerations can help counsel avoid having a disclosure decision worsen the already difficult circumstances posed by the investigation itself.
What’s So Bad About Insider Trading Law?
Peter J. Henning, 70(3): 751-776 (Summer 2015)
The law of insider trading has been called everything from a “theoretical mess” to “astonishingly dysfunctional,” with calls for change from Congress and the Securities and Exchange Commission to clarify the scope of the prohibition. But is the law really so bad? The elements are now well established, despite gray areas around the edges like other white collar crimes. Congress and the general public have embraced insider trading as something clearly wrongful. If the law needs to be changed, the most likely push would be to expand it by adopting the possession theory of liability used in Rule 14e-3 for tender offers and the European Union that makes trading on almost any confidential information subject to prosecution.
The Legality of Opportunistically Timing Public Company Disclosures in the Context of SEC Rule 10b5-1
Allan Horwich, 71(4): 1113-1150 (Fall 2016)
Commentators have discovered that executives who engage in securities transactions purportedly under the shield of a Rule 10b5-1 Plan, so that their trades do not constitute unlawful insider trading, achieve abnormal returns. There is speculation that these returns may be achieved by influencing the timing of corporate disclosures, so that, for example, bad news is withheld at the corporate level until after a Plan sale occurs.
This Article concludes that so long as this delay in disclosure does not violate an SEC mandated disclosure requirement, Rule 10b-5 is not violated, and the SEC could not expand Rule 10b-5 to reach disclosure timing of this type. The Article also addresses the application of the common law to disclosure timing. The use of corporate information to time corporate disclosure for a personal benefit, to achieve a more favorable outcome in personal securities trading pursuant to a Plan, may be a breach of duty under the corporate common law of some states, including Delaware, applying established principles of the common law of insider trading. It is unlikely, if not impossible, however, that state regulatory authorities could or would pursue such conduct.
If remedial action is needed to discourage, and effectively preclude, disclosure timing, it should be in the nature of SEC mandated disclosures of information regarding Rule 10b5-1 Plans, something the SEC proposed more than ten years ago and then abandoned without explanation, and the exclusion of those who engage in disclosure timing from the benefits of Rule 10b5-1 by amending that rule itself.