Insider trading Summary

  • Last updated on November 10, 2022

Prohibitions against insider trading seek to reassure investors that corporate managers and other with an obligation to the public (that is, those with fiduciary responsibilities) do not act in their own or others’ financial interest on the basis of information that is required to be but has not yet been disclosed regarding business developments, such as serious pending financial losses.

The term “insider trading” first was employed in regard to American business during the 1980’s, when Congress decreed tough penalties for the practice and the U.S. Department of Justice began to move aggressively against those charged with the behavior. The United States is regarded as having the most stringent laws in the world against insider trading.Insider trading

The 1980 the U.S. Supreme Court decision in Chiarella v. United StatesChiarella v. United States clarified the reach of the Securities Act of 1933. Vincent Chiarella worked for a financial printer and was able to profit by discovering the identifies of companies involved in takeovers even though their names were camouflaged in the material with which he worked. He was sentenced to disgorge his takings and to serve a one-year prison sentence, but that verdict was overturned by the Supreme Court on the ground that he was not a corporate insider and therefore not restrained from acting on confidential information.

Insider trading often is difficult to prove because it is essential to show that nonpublic information has spurred a transaction rather than, as the accused is likely to claim, a hunch or some other financial motivation, such as the need for cash. The case of editor and homemaker advocate Martha Stewart, MarthaStewart put insider trading in the limelight, but it is notable that Stewart was convicted not of that offense but of perjury for lying about what she had been told and what she had done about information from her broker.

Considerable debate exists about the value of prohibitions against insider trading. Some insist that it is economically counterproductive because to permit insider trading would alert others at an early moment about impending developments and allow them to arrange their holdings to cope with such contingencies. Those favoring a tough enforcement stance maintain that in the absence of vigilant oversight to ensure market integrity, the capital necessary to fuel the economy would not be entrusted to the stock markets.

Further Reading
  • Bainbridge, Steven M. Securities Law: Insider Trading. New York: Foundation Press, 1999.
  • Szockyj, Elizabeth. The Law and Insider Trading: In Search of a Level Playing Field. Buffalo, N.Y.: William S. Hein, 1993.
  • Wang, William K. S., and Marc I. Steinberg. Insider Trading. New York: Practicing Law Institute, 2005.

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