A Legal and Economic Analysis of Insider Trading

Abstract

In the late 1980s, the SEC vigorously investigated, negotiated and prosecuted cases of insider trading. The proliferation of such cases has piqued a discussion of the current confused status of insider trading regulations, the appropriate future development of such regulations, and potential compromise between the extreme viewpoints that insider trading is either (a) unfair, unethical and economically inefficient or (b) justifiable and economically efficient and sound. The following analysis examines the development of insider trading law, highlighting the ways in which legal analysis has strayed from the more salient economic concerns in this area. The current status of insider trading under misappropriation theory is viewed as appropriate to the anti concerns of SEC regulation but inadequate at protecting the economy from more pervasive fraud on the Recommendations that insider trading be permitted when authorized by shareholders are examined, and found to be flawed in light of the need to protect the entire market as well as individual transactions within the market.