Tilting at Insider Trading Windmills

Abstract

In his article “Insider Trading via the Corporation,” Professor Jesse M. Fried expresses his frustration that “when insiders are subject to strict trade-disclosure requirements and firms are not, insiders have a strong incentive to exploit the relatively lax trade-disclosure rules that apply to firms in order to engage in indirect insider trading.” Professor Fried divides insider trading into so-called “direct” and “indirect” styles and examines the indirect version – where corporate insiders maneuver the levers of the corporation to buy and sell shares at favorable prices and, in turn, boost the value of their own equity. Professor Fried views indirect insider trading as both costly to public investors and deleterious to the firm’s economic value. The Article also proposes to reduce these costs through the imposition of trade-disclosure rules which more closely mirror those applied to insiders themselves. This short Response aims to lend new insight and perspective to this topic, the importance of which cannot be overstated given the demonstrable increase in the number of corporate buybacks in recent years. The Response proceeds in four parts. Part I offers a summary and prioritization of the Article’s observations. Part II asserts that the problem of insider trading via the corporation is overstated, as any personal benefit obtainable through indirect insider trading is significantly diluted, with an offender unlikely to hold a sufficiently sizeable portion of the firm to make such behavior as desirable as the Article suggests. Part III focuses attention on regulatory and market distortions as the more benign (and more likely) explanation for firms’ stock issuance and repurchase choices. This Part also asserts that decisions can often be defended as in a firm’s interest, and therefore consistent with corporate insiders’ fiduciary duties. Finally, this part suggests that the regulation of corporate repurchases is far more robust than the Article concedes, with firms regularly employing responsible models of corporate governance which consider many concerns beyond those mentioned by Professor Fried. The final section of the Response offers a brief conclusion, positing that Professor Fried’s analysis rests on the tenuous assumption that the corporation and its officers are somehow inherently prone to malevolent action and self-dealing.