Insider Trading: The Conceptual Roots of the Doctrinal Mess

Abstract

For decades, scholars have described U.S. insider trading doctrine as confusing and called for reform. Many explain the confusion by pointing to the stark difference in how enforcement officials and federal courts apply insider trading law. Others describe the confusion as the result of policy makers failing to choose between the goal of fostering efficient markets and the goal of fostering fair or equitable markets. Both explanations are incomplete. This article demonstrates that the conflict between courts and enforcement officials is the symptom of a deeper problem. It argues that the conceptual cause of the mess is more precisely the failure to choose between two conflicting notions of fairness. First, both enforcement officials and courts ground the prohibition in consent-based notions of fairness by citing violations of property rights in confidential business information. Second, both sides simultaneously premise liability on a conception of fairness that presumes equal access to material information for all market participants. Attempting to simultaneously foster these mutually exclusive notions of fairness in relation to the same piece of information has caused a slow and inconsistent conceptual creep that has resulted in an incoherent doctrine. This article concludes by recommending that reformers clarify insider trading law by prioritizing one of the two conflicting notions of fairness. Since both norms are embedded in American law and culture, reform requires using the common practice of distinguishing between morally questionable behavior in general and the morally questionable behavior that will generate legal liability. This approach gives market participants the option of attempting to adhere to both principles in their private dealings, while successfully enforcing one of the principles through law.