Author’s note: This article is adapted from a keynote speech presented at the ABA National Institute on US-Canadian Securities Litigation on May 18, 2016, in Toronto, Canada. The article was drafted prior to the Supreme Court's decision in Salman v. United States on December 6, 2016.
The United States, having pioneered the development of the law against insider trading, has now fallen behind many Western nations in the effective formulation of that prohibition. In particular, the United States, by failing to recognize (unlike many other developed countries) that a simple and straightforward ban on insider trading is best achieved through statute, rather than judge-made law, has created unnecessary uncertainty and difficulty in dealing with this insidious problem.
Let us review the basics. Although trading on the basis of material nonpublic information is not without its apologists, most people view it as a form of cheating (or worse), in roughly the same way that most people regard an athlete who secretly enhances his performance with banned steroids as taking unfair advantage of his fellow athletes and cheating a public that expects the game to be played according to the rules. In both cases, however, there is a lot of money to be made by such cheating. In particular, a securities investor who has, by one or another form of cheating, obtained material confidential information about a publicly traded company that no investor who played by the rules could properly obtain is frequently in a position to make a killing on the stock market.