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Insider Trading

Insider Trading. Nature of “evil” Common law “yawn” Federal “duty”. (last updated 5 Oct 06). What’s insider trading (and what’s the problem)? Classic insider trading vs. misappropriation. Classic insider trading. Insider vs. outsider trading. Outsider trading (misappropriation).

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Insider Trading

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  1. Insider Trading Nature of “evil” Common law “yawn” Federal “duty” (last updated 5 Oct 06)

  2. What’s insider trading (and what’s the problem)?Classic insider tradingvs. misappropriation

  3. Classic insider trading Insider vs. outsider trading Outsider trading (misappropriation) Investors / shareholders Shareholders Investors / shareholders Buy or sell Buy or sell Insider Insider Corporation Corporation Target Non-public,material information Non-public,material information

  4. Pros Sends “soft information” to markets – thus protecting proprietary info Encourages insiders to own company stock Compensates insiders for developing “good news” Cons Unfair to those without information Discourages investors from entering market Adds to trading “spreads” in markets Constitutes theft of corporate intellectual property Distorts company disclosures as insiders manipulate company info Evaluate “insider trading”

  5. Pros Sends “soft information” to markets – thus protecting proprietary info Encourages insiders to own company stock Compensates insiders for developing “good news” Cons Unfair to those without information Discourages investors from entering market Adds to trading “spreads” in markets Constitutes theft of corporate intellectual property Distorts company disclosures as insiders manipulate company info Evaluate “insider trading”

  6. Common law “yawn”

  7. Strong v. Repide (US 1909) Goodwin v. Agassiz (Mass 1933) Common law Shareholder What is the common law? What are “special facts”? Buy Insider Corporation Non-public,material information

  8. Common law • Common law • Insiders generally owe no duty to shareholders • But “special facts” • Powerful insider • Clear knowledge • Concealed identity • Doesn’t reach • Anonymous transactions on stock market • Trading on tipped info by non-insider tippees • Selling to non-shareholder investors • Outsider trading • No duty to shareholders in stock market • Encourage inside stock ownership • Difficult to identify who are plaintiffs • What is “material”?

  9. Hypotheticals Jack, an insider, knows his company InClone is going to acquire BioGen – good for BioGen’s shareholders, bad for InClone’s shareholders. • Can Jack buy BioGen stock? • Can he sell his InClone stock on a public market? • Can Jack sell “put options” in InClone stock on the CBOE?

  10. Federal “duty”

  11. Cady, Roberts (SEC 1961) SEC v. TGS (2d Cir 1968) Federal “insider trading” law • Basis for duty • Securities professionals have special duty • Insiders should not gain personal benefit • Investors should have equal access Shareholders Buy Insider Corporation Non-public,material information

  12. Federal “insider trading” law Chiarella v. United States (US 1980) Shareholders What is basis for “insider trading” liability? Buy Eee Shareholders Printer Insider Corporation Target Non-public,material information

  13. Federal “insider trading” law Chiarella v. United States (US 1980) • Duty to “disclose or abstain” • Relationship gives access to inside information • Unfair to take advantage of information • Premised on duty of “trust or confidence” between parties • Applies when sell to to-be SHs and buy from existing SHs Justice Lewis Powell

  14. Hypotheticals Jack, an insider, knows his company InClone is going to acquire BioGen – good for BioGen’s shareholders, bad for InClone’s shareholders. • Can Jack sell his InClone stock? • Can Jack buy BioGen stock? Katharina, a stranger, finds Jack’s InClone-BioGen “takeover notebook.” What a lucky break. • Can Katharina sell Inclone short? • buy call options on BioGen?

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