Stock Market Insider Trading: Victims, Violators And Remedies-Including An Analogy To Fraud In The Sale Of A Used Car With A Generic Defect

Abstract

This Article discusses following two questions: (1) Is act of stock market insider trading (as opposed to accompanying nondisclosure or lie) a victimless crime? (2) Is stock market insider trading fraud? The Article also briefly addresses two additional questions: (1) When does insider trading or tipping violate federal securities law? (Included is an analysis of classical relationship triangle.) (2) Under federal securities law, what are some remedies and sanctions against a stock market insider trader or tipper? To demonstrate that each act of stock market insider trading has specific, although anonymous, victims, Article employs two used car analogies: solitary defect hypothetical and generic defect hypothetical. In solitary defect hypothetical, only one automobile is a lemon. In contrast, in generic defect situation, many individuals are buying and selling cars, all same year model and all with same defect. In generic defect hypothetical, Mr. Greedie, an executive employed by General Motors, receives material, nonpublic information that all 1998 Cadillacs have a major defect. By coincidence, Greedie personally owns a 1998 Cadillac and immediately sells it to a car dealer. Assume in alternative that (1) dealer does not ask Greedie about any defect, or (2) dealer asks Greedie about defects, and Greedie LIES. With both alternatives, problem of demonstrating injury is same. During period between Greedie's sale and time of defect's public announcement, many individuals are buying and selling 1998 Cadillacs, all with same defect. At time of defect's announcement, there are a fixed number of 1998 Cadillacs. If Greedie has one less Cadillac at time of public announcement, someone else must have one more. That someone is victim of Greedie's sale. I call this the of conservation of used automobiles. If Greedie's sale of one car on inside information to automobile dealer causes even a slight lowering of dealer's prices for 1998 Cadillacs, that decline may dissuade or induce a transaction. In other words, dealer may pass injury to another by altering prices and readjusting inventory to level preferred. If dealer's prices do not change (or if price declines fail to dissuade or induce a trade), loss falls on car dealer (an induced buyer). Under law of conservation of used automobiles, Greedie's sale must induce a purchase or preempt a sale. The generic defect example resembles stock market insider trading, especially large block trades between an institutional investor and a block positioner. Such block transactions have aspects of face-to-face dealing. Stock market insider trading has some features of fraud, but differs from traditional fraud in several ways. Disclosure to party on other side or to public may breach other duties. Also, such disclosure would not save victim of insider trade if victim is a preempted trader. Whether a court classifies insider trading as fraud depends in part on whether court is judicially conservative or activist.