Statutory Regulation of Insider Trading in Impersonal Markets

Abstract

Insider trading occurs when certain persons, through their position in a corporation or their relationship to it, acquire material, nonpublic information that relates to the value of the corporation's securities and trade on it in order to profit when the information is eventually disclosed. Although the regulation of insider trading in impersonal markets has received considerable attention, few courts or commentators have realized that the goals of a system that regulates insider trading necessarily differ depending on whether the corporation in question has a legitimate business reason for keeping the material information secret. Careful consideration of the possible goals of insider trading regulation shows that certain goals are either irrelevant or impossible to achieve if the corporation has a legitimate reason for nondisclosure. This article discusses the various goals that must be considered in developing a regulatory scheme, evaluates the legitimacy and feasibility of each goal, both when the corporation has a good reason for nondisclosure and when it does not, and considers the two most widely advocated schemes of private enforcement to determine which is more rationally related to these goals and will most efficiently effect them.In most circumstances, compensation is either impossible to achieve or conflicts with other, more important goals. The sole private claim against the insider for damages should lie in the corporation, whether or not the corporation had a legitimate reason for nondisclosure at the time of the illegal trading. This specific conclusion may remain open to debate, but the analysis of the goals of insider trading regulation in varying circumstances clarifies the issues around which the debate should revolve.