The Regulation of Insider Trading

A. Historical Precedents - elements

1. Subject to all the requirements of the anti-fraud provision

2. Non-public

3. materiality

   1. Materiality test for uncertain events: balancing both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of company activity.

   2. Mosaic theory: do you have enough pieces of the puzzle to know the ultimate fact

4. Relationship of confidentiality or trust

   1. Insider

   2. Misappropriator

   3. Knowing tipee

5. Purchase/ sell on the basis of the information

   1. Rule 10b5-1: Person deemed to purchase or sell stock “on the basis” of insider information if “the person making the purchase or sale was aware of the material nonpublic information when the person made the purchase or sale.”

   2. 10b5-1(c) executives can enter into plans for buying or selling the company’s stock

      1. Problem: executives can have multiple plans

B. Constriction of Doctrine

1. Duties of insiders and constructive insiders:

   1. Directors, other who have a fiduciary duty to the corporation with the relevant inside information have a duty to either not trade on such information, or to disclose their intent to do so. 10b-5, Chiarella and Dirks.

C. Misappropriators

1. Who are misappropriators

   1. Anyone who misappropriates (steals) information from their employer and trades on that information in any stock (either the employer's stock or the company's competitor stocks, or the company’s client’s stock) is guilty of insider trading.

   2. It was essentially adopted in O’Hagan where insider trading by lawyer who worked for law firm hired by bidder. Adopted by some circuits.

2. Duties of outsiders:

   1. Outsiders having a duty to their own organization, which in turn has some insider information about a transaction, must either refrain from trading on such information, or disclose their intent to do so.

3. 10b5-2 is SEC’s rule that enforces the misappropriation theory.

4. 14e-3(d) provides a statutory version of this rule that applies to inside information about tender offers, specifically.

   1. If substantial steps have been taken to begin a tender offer, then one who takes that information and trades on it violate 14e-3

D. Tippors and Tippees

1. Duties of tippors and tippees

   1. Persons who are not entitled to trade on information themselves (on either of the above theories) will be liable for insider trading if

      1. they disclose such information for reciprocal benefit, or to a friend or...

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