Insider Trading Cases Research Articles

Commutative and Retributive Justice in the Administration of Disgorgement in Insider Trading Cases—the Case for the Common Law Approach to Damages

Using Zambia as a case study, this article examines the efficacy of the Zambian regulatory and institutional framework for public distribution of securities in ensuring commutative justice in the administration of disgorgement by the Securities and Exchange Commission. Using the doctrinal and non-doctrinal approaches to examining the effectiveness of regulatory rules and institutions, the main findings of the study are: When it is applied to non-corporate insider traders, the statutory formula for disgorgement which is provided in the Zambian Securities Act 2016 tends to under-regulate by leaving some of the insider trading gains with the insider trader—a commutative injustice to the public; When it is applied to juristic persons (companies and other styles of bodies corporate), the formula for disgorgement which is provided in the Zambian Securities Act 2016 tends to over-regulate by taking away from the insider trader more than they actually gained from insider trading—a retributive and commutative injustice to the insider trader. The central argument of this article is that regulatory rules and institutions which promote retributive and commutative justice are likely to inspire social willingness to pay the cost of socioeconomic exchanges and regulation, and as such, are efficient. As a possible way of promoting commutative and retributive justice in the administration of disgorgement in insider trading cases, the article makes a case for the application of ‘the common law approach to the award of damages’ in the determination of the amount which is to be disgorged. The article also makes proposals for the repeal of the statutory formula, and its replacement with the standard formula for disgorgement which has been proposed.

Sri Lanka’s political-economic crisis; corruption, abuse of power and economic crime

PurposeThis paper aims to examine the present Sri Lankan political-economic crisis and its connection to corruption. The paper will discuss the autocratic rule, elite domination of state extractive systems, which have been moulded and configured by Sri Lanka’s political environment over decades. Elite capture has become a significant factor. Sri Lanka’s authoritarian model exercised by Gotabaya Rajapaksa reduced competitive mode and shifted towards a monopolistic corruption structure, centralising on the first family and military rule where powerful elites supported the model. The paper attempts to find the connection between dysfunctional political model and economic crimes committed through several case studies.Design/methodology/approachThe paper discusses five case studies using qualitative analysis using secondary data. The insider trading case study is discussed with quantitative data. Several political and social analyses were carried out with primary data captured from field research by the author.FindingsSri Lankan economic crisis was triggered because of high-level corruption. The autocratic model introduced by the political authority failed to fight corruption. Transnational mechanisms will fail if there is no credibility and commitment in their own respective nations such as in the USA. External factors such as China in Sri Lanka did have an impact for elite capture.Research limitations/implicationsThis study is limited only to five case studies. Transnational mechanism and recommendations require a lengthy study. Only one external factor was assessed because of its significance; there could be other external factors for elite capture.Practical implicationsThis study has limited access to capture primary data because of sensitivity during a heavy autocratic regime. Because of state and self-censorship, secondary data had to be tested.Social implicationsEconomic crisis in Sri Lanka is an example to many developing nations fighting corruption. The autocratic family rule supported by external forces crippled the state anti-corruption processes. Economic crime is a key driver for poverty and economic crisis.Originality/valueThis is a unique paper that examines Sri Lanka’s present economic crisis and its political model and economic crime. The paper will discuss transnational mechanisms for anti-corruption and attempt to apply to the Sri Lankan crisis.

Trapping Insider Trading Perpetrators with Misappropriation Theory, Is That Possible?

In Indonesia, insider trading is a crime that the perpetrators do not easily catch. This is sourced from the theory of fiduciary obligations in Article 95 of Law no. 8 of 1995 concerning the Capital Market and restrictions on insider trading. In the United States, using the abuse theory in Sections 10(b) and Sections 10b-5, the Securities and Exchange Act of 1934 can reach anyone, without limitation, which is categorized as an insider trader. The main purpose of this paper is to find new ideas about the existing obstacles to ensnare insider trading actors that have been happening in Indonesia so far. For this reason, the method used is to compare regulations and insider trading cases in the two countries. This study shows that it is time for Indonesia to adopt the theory of misappropriation as an alternative to trapping insider trading actors in the capital market. This urgency is needed to foster investor confidence in the growth and development of the Capital Market in Indonesia.

A machine learning attack on illegal trading

We design an adaptive framework for the detection of illegal trading behavior. Its key component is an extension of a pattern recognition tool, originating from the field of signal processing and adapted to modern electronic systems of securities trading. The new method combines the flexibility of dynamic time warping with contemporary approaches from extreme value theory to explore large-scale transaction data and accurately identify illegal trading patterns. Importantly, our method does not need access to any confirmed illegal transactions for training. We use a high-frequency order book dataset provided by an international investment firm to show that the method achieves remarkable improvements over alternative approaches in the identification of suspected illegal insider trading cases.

I only fear when I hear: How media affects insider trading in takeover targets

We study how target firm insiders respond to Wall Street Journal articles referring to illegal insider trading in past mergers. Such articles lead to target insider share purchases before bid announcement to drop by 75%. This effect is stronger nearer the bid announcement and increases with article visibility. It remains significant after controlling for public enforcement intensity, but is weakened by the greater potential for profitable trading. Our results suggest insider trading articles temporarily heighten the perception of litigation and reputation risks. Overall, our study indicates that such articles have a meaningful short-term deterrence effect on opportunistic insider trading, and highlights the disciplinary role of the media. • We document a deterrence effect of media on insider trading. • Insider purchases before M&A drop 75% after WSJ news on past insider trading cases. • Articles temporarily heighten perception of litigation and reputation risks. • Effect is stronger nearer bid and increases with article visibility. • Effect remains unaffected by enforcement but weakened by potential trading profits.

Insider Trading Case Settlement: Studies in Indonesia and The United States

Insider trading is a term that refers to the practice in which corporate insiders conduct securities transactions (trading) using their exclusive information that is not yet available to the public or investors. Indonesia and the United States are 2 (two) countries that prohibit insider trading in the capital market. Through this article, the author wants to analyze the similarities and differences the regulation of insider trading in Indonesia and the United States, and explain the legal process for the settlement of Insider Trading cases in Indonesia and the United States. This research is a normative research, using the laws and regulations on the capital market originating from 2 (two) countries, there are the laws and regulations on the capital market of Indonesia and the United States. The analysis of this paper concludes that Indonesia and the United States prohibit the practice of insider trading in the capital market.

A Machine Learning Attack on Illegal Trading

We design an adaptive framework for the detection of illegal trading behavior. Its key component is an extension of a pattern recognition tool, originating from the field of signal processing and adapted to modern electronic systems of securities trading. The new methodology combines the flexibility of dynamic time warping with contemporary approaches from extreme value theory to explore large-scale order book data and accurately identify illegal trading patterns without access to any confirmed illegal transactions for training. The method is shown to achieve remarkable improvements over alternative approaches in the identification of suspected illegal insider trading cases in a high-frequency dataset provided by an international investment firm.

Enforcement of Chinese Insider Trading Law: An Empirical and Comparative Perspective

Abstract This Article conducts the first comprehensive and systematic empirical analysis of all relevant insider trading cases in China from the birth of Chinese securities markets in the early 1990s until mid-2017, shedding light on the way in which China’s insider trading law has been enforced by the regulator and criminal courts in practice. First, the Article generates descriptive statistics on features of insider trading cases, such as the total number of cases over the study period, the temporal distribution of the cases, the identity of the insider, and the nature of the insider information. Second, it measures the intensity of insider trading enforcement and compares the Chinese situation with six overseas jurisdictions, including the United States, the United Kingdom, Australia, Canada, Singapore, and Hong Kong. Third, using multiple regression analyses, it identifies potential factors determining the administrative and criminal penalties for insider trading. The results of the empirical study indicate that China has significantly stepped up its efforts to crack down on insider trading in recent years, resulting in a sharp increase in insider trading cases, particularly criminal cases since 2008. While the Chinese insider trading law was essentially transplanted from overseas jurisdictions, its; enforcement has exhibited distinctive features in its local environment. Judging by the type, magnitude, and frequency of the sanctions imposed, the intensity of insider trading enforcement in China seems to be at a level comparable to relevant jurisdictions overseas. Administrative and criminal penalties against insider trading are found to be significantly influenced by some factors, notably the amount of illegal proceeds, the magnitude of social impact, the presence of mitigating circumstances, and whether the trader used others’ accounts to trade. The hope is that the empirical findings will help inform the policy debate over the regulation of insider trading in China and beyond.

Liu v. S.E.C.: Supreme Court’s narrowing of SEC disgorgement raises questions for insider trading cases

PurposeTo analyze the U.S, Supreme Court’s decision in Liu v. S.E.C., 140 S. Ct. 1936 (2020) and its potential implications for insider trading cases.Design/Methodology/ApproachProvides context on the history of disgorgement in SEC enforcement proceedings; discusses factual and procedural background underlying the Liu decision; summarizes the Court’s opinion and rationale, with a particular focus on the Court’s pronouncements regarding the permissible scope of SEC disgorgement as an equitable remedy; identifies and explores three possible issues in insider trading cases that may be affected by the Court’s narrowing of SEC disgorgement.FindingsIn Liu, the Supreme Court narrowed SEC disgorgement by stating that, as a general matter, SEC disgorgement is not permitted where: (1) the proceeds are not remitted to investors; (2) one defendant is made to disgorge profits that were received by someone else; or (3) the amount of disgorgement fails to deduct legitimate business expenses, in each case subject to possible exemptions as outlined by the Court.Practical implicationsThis rule may call into question whether courts may: (a) order disgorgement against insider traders, given the difficulty of identifying investors who have been harmed; (b) order insider traders to disgorge profits earned by others on account of their violations; or (c) order insider traders to pay civil penalties under Section 21 A of the Exchange Act based on profits earned by others.Originality/ValueExpert analysis and guidance from experienced securities enforcement lawyers with expertise in insider trading.

Is Illegal Insider Trading a Sure Thing? Some New Evidence

ABSTRACT Using a hand-collected database, we evaluate 328 illegal insider trading cases in the Chinese financial market from 2007 to 2018. Insiders, on average, make less profits than a single buy-and-hold strategy in the same period. This low performance is exacerbated when target firms are state-owned and with high institutional ownership. A firm’s size, 6-month past returns, debt ratio, and firm age have marginal impacts on the illegal returns. Two potential mechanisms derived from the US market are tested but they show divergent roles in our model setting. This study calls for alternative mechanisms in understanding market efficiency in emerging markets.

How Much Insider Trading Really Happens in Stock Markets?

We estimate that the actual prevalence of illegal insider trading is at least four times greater than the number of prosecutions. Using novel structural estimation methods that explicitly account for the incomplete and non-random detection and hand-collected data of all US prosecuted insider trading cases, we estimate that insider trading occurs in one in five mergers and acquisition events and in one in 20 earnings announcements. Key drivers of the decision to engage in illegal insider trading include stock liquidity, the value of the inside information, and the number of people in possession of the information. Detection and prosecution are more likely when there are abnormal trading patterns and more regulatory resourcing.

Identification of Insider Trading Using Extreme Gradient Boosting and Multi-Objective Optimization

Illegal insider trading identification presents a challenging task that attracts great interest from researchers due to the serious harm of insider trading activities to the investors’ confidence and the sustainable development of security markets. In this study, we proposed an identification approach which integrates XGboost (eXtreme Gradient Boosting) and NSGA-II (Non-dominated Sorting Genetic Algorithm II) for insider trading regulation. First, the insider trading cases that occurred in the Chinese security market were automatically derived, and their relevant indicators were calculated and obtained. Then, the proposed method trained the XGboost model and it employed the NSGA-II for optimizing the parameters of XGboost by using multiple objective functions. Finally, the testing samples were identified using the XGboost with optimized parameters. Its performances were empirically measured by both identification accuracy and efficiency over multiple time window lengths. Results of experiments showed that the proposed approach successfully achieved the best accuracy under the time window length of 90-days, demonstrating that relevant features calculated within the 90-days time window length could be extremely beneficial for insider trading regulation. Additionally, the proposed approach outperformed all benchmark methods in terms of both identification accuracy and efficiency, indicating that it could be used as an alternative approach for insider trading regulation in the Chinese security market. The proposed approach and results in this research is of great significance for market regulators to improve their supervision efficiency and accuracy on illegal insider trading identification.

The New Insider Trading

Pursuant to the SEC’s Rule 10b-5, in order to obtain a conviction for insider trading based upon a tipper-tippee theory, the government must prove that the tipper received a personal benefit for the tip, and that the tippee knew about that benefit. The last five years of blockbuster insider trading cases have focused on this seemingly nebulous personal benefit test, and the Supreme Court has been unable to clear the muddy waters. As a result, the parameters of insider trading remain hard to pin down, and often shift depending on the facts of the most recent case. Two terms ago, the Supreme Court, in an unsurprising unanimous decision in Salman v. United States, reaffirmed the holding of Dirks, from which the personal benefit test arose. The Court in Salman, however, failed to elucidate the more problematic areas of insider trading, including the application of the personal benefit test if the tippee is not a trading relative or friend. Legal practitioners, legislators, and academics have offered up various solutions for the problem of having an amorphous law against insider trading, yet none have succeeded. This Article suggests that the hubbub over defining the personal benefit element of insider trading — sure to reach a fever pitch the next time a cert petition on the issue is granted — may be misguided. This is because there may be a simpler way to bring an insider trading case. Since Sarbanes-Oxley, there has been a sleepy provision of the criminal code that could present an end-around to the morass of insider trading precedents under Rule 10b-5. Under 18 U.S.C. §1348, the government can bring an insider trading case under the more general umbrella of securities fraud, which has scant jurisprudential precedent. In other words, the heavily-litigated personal benefit test found in Dirks may not apply to a charge of insider trading under §1348. The elements required to prove a charge under §1348 are similar to other fraud-based offenses such as mail and wire fraud, health care fraud, and bank fraud. Whether §1348 was intended to apply to insider trading in particular is an open question, and a broader question is whether the jurisprudential interpretation for the elements of the crime of insider trading as defined under Rule 10b-5 should be imported into the judicial interpretation of § 1348. In other words, if the conduct that constitutes criminal insider trading under Rule 10b-5 exists only if the elements of the Dirks test are met, then a §1348 charge for criminal insider trading may create an entirely new scheme and definition of the crime. This Article analyzes the potential of this dual paradigm, and argues that, given the uncertainty and shifting parameters of insider trading prohibitions, application of §1348 to insider trading should be afforded the rule of lenity.

Missing the Role of Property in the Prohibition of Insider Trading

For decades, legal scholars have evaluated the law and practice of insider trading through a property lens. Some have debated whether a property rationale is useful for explaining past cases or might make a useful framework for deciding tough cases in the future. Others have explored which market actors should be allocated property rights in inside information in order to increase the efficiency or liquidity of U.S. securities markets. Yet scholars seem to have missed the fact that officials have consistently relied on the violation of some party’s property rights to justify imposing liability for insider trading—including in classical theory of liability cases. Missing the role that property principles continually play in the doctrine has undermined the quality of the policy and doctrinal debate surrounding insider trading. Because there are costs associated with changing the current state of affairs, a discussion of how to allocate rights in inside information is incomplete without recognizing which parties currently hold title to the information. In addition, while many scholars are correct to reject a property rationale as useful for explaining the majority of past insider trading cases, it would be a mistake to dismiss the explanatory power of property principles entirely. If officials consistently rely on the violation of property rights in inside information to justify imposing liability, then property and related doctrines may help scholars and policy makers to understand what changes would be required to bring the regulation of insider trading into greater harmony with its doctrinal and statutory roots. With these opportunities in mind, this article identifies several ways that property principles motivate the U.S. insider trading regime. It concludes by highlighting some considerations that scholars and policy makers should take into account in future analysis.

Real Insider Trading

Government officials and academics offer starkly different portraits of insider trading enforcement. In popular rhetoric, insider trading cases are about leveling the playing field between elite market participants and ordinary investors. Academic critiques vary. Some depict an untethered insider trading doctrine that enforcers use to expand their power and enhance their discretion. Others see enforcers beset with agency cost problems who bring predominantly simple, easily resolved cases to create the veneer of vigorous enforcement. Unfortunately, this debate has, so far, been based mostly on anecdote and conjecture rather than empirical evidence. This article addresses that gap by collecting extensive data on 465 individual defendants in civil, criminal, and administrative actions to assess how enforcers actually operationalize insider trading doctrine. The cases enforcement authorities bring are shaped by a complex and cross-cutting set of institutional and individual incentives, cognitive biases, legal requirements, the history of failed enforcement efforts, and the way in which the agency and the self-regulatory organizations deploy their investigatory resources. SEC enforcement is dominated by small stakes, opportunistic trading by mid-level employees and their friends and family, most often involving M&A transactions. Those cases settle quickly, half within 30 days of filing. Criminal enforcement is generally reserved for more serious cases, measured by, among other things, the type of defendant, the size of the insider trading network, and the profits earned. In both settings, there is little evidence that enforcers are systematically stretching the boundaries of insider trading doctrine, suggesting that there is little need for more precise statutory language to curb enforcement overreach.

Hacking Wall Street: Reconceptualizing Insider Trading Law for Computer Hacking and Trading Schemes

This paper explores how insider trading law addresses computer hackers who employ cyberattacks in connection with the purchase or sale of securities. Current securities law is ill-equipped to deal with such hackers because, unlike the typical defendants in insider trading cases, hackers owe no fiduciary duty to shareholders and no duty of confidentiality to insiders that provide material non-public information. In order to bring hacker-traders within the ambit of federal securities law, the U.S. Securities and Exchange Commission (SEC) developed a novel theory of liability that treats and trading as a form of deception in violation of Section 10(b) of the Securities Exchange Act of 1934. However, the viability of the SEC’s theory remains to be seen as only one decision has endorsed it—SEC v. Dorozhko, 574 F.3d 42 (2d Cir. 2009). This paper argues that, from a normative perspective, the Second Circuit correctly expanded Section 10(b) to and trading. However, this paper takes issue with the Second Circuit's proposition that amounts to deception only when the hacker misrepresents his or her “identity in order to gain access to information that is otherwise off limits, and then steal[s] that information” for purposes of securities trading. Currently, there is little scholarship that thoroughly explores the potential for hackers to use innovative cyberattacks in order to avoid liability for securities fraud. This paper adds to the existing literature by arguing that even if the judiciary were to adopt the SEC’s reconceptualization of insider trading, it is unlikely that the theory would apply to certain sophisticated cybersecurity schemes—such as informed cyber-trading, whereby investors trade “on the basis of advanced knowledge of a cybersecurity breach.” In addition, it is unlikely that Dorozhko would apply to schemes in which a group of hackers short a corporation’s stock and then initiate a cyberattack, such as a distributed denial of service (DDoS) attack, in order to cause a decline in the stock price. Such conduct would not amount to deceptive hacking under Dorozhko because even though the hackers masqueraded their identities, they did not do so in order to obtain the type of confidential information typically at issue in illegal insider trading schemes.

How to Test an Insider Trading Law and Its Effectiveness: Price Movements and Comparative Empirical Data from Taiwan

The enforcement of insider trading law, as well as its effect, has been a quandary in securities law. The main reason for this perplexity comes from the fact that there is no tally of how many illegal trading activities are actually taking place. The exchange of information that incites insider trading is secretive or disguised, and the purported victim has no sense of being harmed or defrauded. If unreported, the crime may go uninvestigated. So, despite the highly publicized insider trading cases that are hailed in newspapers or the victories won in court, it is unclear how many other activities go undetected and how solid the acclaimed victory truly is. This study proposes and applies a method for testing the effectiveness of a law against insider trading through an event study. We use pre-announcement price run-up as a proxy for measuring the effectiveness of Taiwanese insider trading law. After examining mergers and acquisitions data from Taiwan’s Financial Supervisory Commission from 2003 to 2016 and adjusting for market effect, we arrive at an average cumulative abnormal return of 6.62% before the official announcement of the events, which constitutes a 58.8% run-up compared with the post-announcement price increase. This investigation is important because it is the first to suggest an objectively empirical observation that approximates the overall size of illegal insider trading activities in a market. More importantly, this method could serve as a sensitive tool for measuring temporal changes brought about by different legal arrangements within a single country or for measuring comparatively across different legal regimes.

A Contemporary Analysis of the Application of Sentencing Factors in Insider Trading Cases

Insider trading is a complex issue that involves both corporate and criminal law. Since the introduction of civil penalties, the Australian Securities and Investments Commission (ASIC) has only pursued one civil proceeding against insider trading. ASIC prefers criminal proceedings for their deterrent effects. This paper examines various features of Australian convicted insider trading cases from 2004 to the end of 2015 and provides a broad overview of the distribution of these cases. Further, this paper assesses the consistent application of sentencing factors and the determination of criminalities of different kinds of insider trading activities. Finally, this paper proposes renaming current insider trading laws to ‘dealing with privileged information’.

A Case Summary of 20 Years Insider Trading Behavior in China's Capital Market

After more than 20 years of development, China's capital market basically integrates with the developed capital markets in the aspects such as institutional arrangement, trading rules and regulatory methods, but has been plagued by insider trading, stock manipulation and other illegal acts. Learning from the regulatory experience of developed capital markets, to crack down on insider trading will continue to be the focus of China's securities regulators for a long time. With further development of China's capital market, specific insider trading behaviors are becoming more complex and hidden, which is bound to require that the regulatory approaches should also be constantly adjusted to meet insider trading regulatory requirements.Thus, this paper analyzes the characteristics of insider trading cases investigated and dealt with in the past two decades of China's capital market, trying to reveal general characteristics and trends of insider trading behavior, and to provide empirical supports for regulatory authorities to effectively prevent and guard against insider trading. Based on the 196 insider trading cases investigated and dealt with by Chinese securities regulators and judicial authorities from 1994 to 2015, this paper analyzes and sums up general characteristics and trends of cases in three dimensions, namely insider trading legal liability types, insider trading violation characteristics and insider trading supervision characteristics.This paper shows that insider trading cases present the following features:firstly, punishment of insider trading is mainly punishable by administrative penalty, and civil compensation is basically rare; secondly, insider traders are mainly legal insiders, while there is a tendency to spread to non-legal insiders, and show the phenomenon of cronyism, complication of personal identity and more public officials; insider trading mainly occurs in the activities of mergers and acquisitions; the interests of insider trading are huge, and related illegal profits are high; thirdly, the law enforcement efforts of insider trading have been enhanced, which significantly improves the efficiency of case handling; but penalties for insider trading are lighter, and deterrence of insider trading is not strong; fourthly, in terms of time series, in different law enforcement environment, the enforcement effects vary with different law enforcement environment during different periods, but the law enforcement efforts and efficiency of the overall insider trading are increasing rapidly.In addition, combining with the new features and trends, this paper also analyzes the characteristics of two typical types of new insider trading behaviors, and puts forward the corresponding countermeasures. The main contribution of the paper is to use the latest and comprehensive case data to analyze the real insider trading cases investigated and dealt with by the securities regulators and judicial authorities in the Chinese capital market in the past two decades, and to extract the characteristics and trends, which is a useful extension and supplement to this field.The conclusions of this paper also have important implications for the supervision of insider trading in capital market, and provide empirical support for cracking down on and preventing insider trading and revising the legal system of insider trading. In view of the existing problems in the law enforcement system, this paper puts forward the following suggestions:(1) to expand the scope of the insiders, and improve the corresponding legislation; (2) to standardize the information disclosure behavior of listed companies to prohibit insider trading from the source; (3) to improve the legal system of law enforcement, especially the convergence system of administrative punishment and criminal punishment; (4) to establish civil compensation system for punishment to increase the costs of illegal insider trading.

The Road Not Taken: A Comparison of the E.U. And U.S. Insider Trading Prohibitions

This essay, written for a symposium on insider trading in the Washington University Journal of Law and Policy, explores the different paths taken by the United States and the European Union with respect to who is subject to the prohibition on insider trading. After providing an overview of the difference between the U.S. and the E.U. prohibition, the essay explores the different outcomes that would occur under U.S. versus E.U. law in several high profile insider trading cases of recent years. The essay also addresses the jurisdictional reach of each regime’s prohibition and considers the normative lessons of this real world experiment in taking different paths.