Trading Liability Research Articles

Rethinking Insider Trading Compliance Policies in Light of the SEC's New 'Shadow Trading' Theory of Insider Trading Liability

Rethinking Insider Trading Compliance Policies in Light of the SEC's New 'Shadow Trading' Theory of Insider Trading Liability

A Shift in the Duties of Directors when the Company is on the Verge of Bankruptcy

The topic of this study is the change of directors' duties with the change of corporate operation status. The main research jurisdiction is the UK, and the main research node is after the company is on the verge of bankruptcy and enters bankruptcy proceedings. The UK law stipulates the general duties of directors in the Companies Act 2006. In the normal operation of the company, promoting the success of the company and protecting the interests of shareholders is almost an accepted fact in corporate law circles. But when a company faces bankruptcy, the duties of directors often change. The UK bankruptcy law stipulates Wrongful trading and fraudulent trading liability to urge directors to consider protecting the interests of creditors when the company is on the verge of bankruptcy. Directors may be legally liable for damage to the interests of creditors due to some improper behaviours. Therefore, in order to avoid being charged, directors will increase the priority of protecting the interests of creditors when the company is near bankruptcy. This study will rely on the relevant provisions of the Company Law 2006 and the enterprise bankruptcy law to analyse the change of directors' duties.

Overview analysis of the regulation of insider trading in Zimbabwe during the corona virus pandemic

PurposeIt is important to note that insider trading is currently outlawed under the Securities Act 17 of 2004 (Chapter 24: 25) as amended (Securities Act) in Zimbabwe. This Act enumerates some practices that may give rise to insider trading liability in the Zimbabwean financial markets. Nonetheless, numerous challenges, such as the lack of adequate financial resources, the lack of sufficient persons with the relevant skills and expertise on the part of the enforcement authorities, lack of political will, inadequacy of insider trading provisions, poor cooperation and collaboration between the relevant authorities and the ongoing coronavirus (Covid-19) pandemic have negatively impeded the effective regulation and combating of insider trading in Zimbabwe. To this end, the author explores the stated challenges and recommend measures that could be used by regulatory bodies and other relevant enforcement authorities to enhance the regulation and combating of insider trading in the Zimbabwean financial markets. This study aims to enhance the detection and combating of insider trading in Zimbabwe.Design/methodology/approachA qualitative research methodology is used through the analysis of relevant legislation and case law.FindingsIt is hoped that the findings and recommendations made in this study will be considered by the Zimbabwean policymakers.Research limitations/implicationsThe study does not use empirical research methodology.Practical implicationsThe findings and recommendations made in this study could enhance the combating of insider trading activities in Zimbabwe.Social implicationsThe study seeks to curb insider trading in the Zimbabwean financial markets and financial institutions in the wake of the covid-19 pandemic-related regulatory and enforcement challenges.Originality/valueThe study provides original research on the regulation and combating of insider trading activities in Zimbabwe.

How Creepy Concepts Undermine Effective Insider Trading Reform

Lawmakers are building momentum towards codifying our insider trading laws to clarify which kind of trading is illegal. In May 2021, the US House of Representatives passed the Insider Trading Prohibition Act for the second time in two years. In January 2020, a Securities and Exchange Commission sponsored task force on insider trading released a report containing proposed legislation. Both the House Bill and the task force proposal would prohibit trading while in possession of “wrongfully obtained” information and prohibit trades that involve a “wrongful use” of information. This article explains why the concept of “wrongful” trading is too ambiguous to improve insider trading law and explores the requirements of effective legislative reform. For decades, scholars have described insider trading doctrine as mystifying 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 argue that the confusion is caused by policymakers failing to choose between fostering efficient markets and fostering fair or equitable markets. This article argues that the conflict between courts and enforcement officials is a symptom of two deeper conceptual problems—one at the doctrinal level and one at the policy level. The doctrinal confusion is more precisely caused by the attempt to simultaneously invoke two conflicting concepts of “fairness.” Fairness meaning consensual transactions, versus fairness meaning transactions in which all parties enjoy equal access to all material information and other economic values. Attempting to simultaneously apply these mutually exclusive notions of fairness has caused a slow and inconsistent conceptual creep, resulting in an incoherent doctrine. The policy confusion is caused by officials relying on economic models that use misidentified theories of “economic efficiency.” Officials describe the policy goal of our insider trading regime as encouraging capital formation in US securities markets and economic growth in general. These goals imply an exclusive commitment to promoting “allocational efficiency”—or maximizing wealth. However, scholars usually rely on the concept of “market efficiency” when evaluating the law and practice of insider trading. The definition of market efficiency relies on assumptions that embody an unacknowledged focus on economic distribution—equalizing wealth. This includes the assumptions that all investors (1) trade at the same price (the correct price) and (2) have equal access to all available information. Conflating these forms of efficiency causes officials to unintentionally oscillate between promoting opaque distribution goals and promoting economic growth. This article recommends clarifying insider trading law by prioritizing one of the two conflicting fairness doctrines and a compatible policy goal. Clarity requires specifying whether consent is a defense against insider trading liability. Enforcing only one fairness doctrine gives everyone the option of attempting to privately adhere to both principles while successfully applying one of the principles through law.

Insolvency law reform in Australia and Singapore: Directors' liability for insolvent trading and wrongful trading

AbstractThis article compares reforms to directors' liability for insolvent trading in Singapore and in Australia. We analyse the law in these two countries because they are important Asia‐Pacific trading partners and their laws were originally largely the same—Singapore's law on insolvent trading reflected the law in Australia from the 1960s. However, the law in the two countries has now diverged substantially. The comparison of these two countries therefore represents an interesting case study in how countries differ in their approaches to balancing the competing interests evident in laws that impose personal liability on company directors for insolvent trading. Reform of the prohibition against insolvent trading was a focus of Australia's insolvency law reforms in 2017, which led to the introduction of a safe harbour for directors from liability. Singapore's omnibus insolvency law reforms of 2018–19 include amendments to update Singapore's fraudulent and insolvent trading provisions by introducing a concept of “wrongful trading.” The article finds that there are some areas of convergence between these two jurisdictions when it comes to debates about such provisions but concludes that the different contemporary legislative histories in Australia and Singapore have affected their approaches to reform. Reformers in both jurisdictions have attempted to find an appropriate balance between protecting creditors, discouraging director misconduct, and encouraging entrepreneurship and innovation; however, this comparison suggests that the weight that reformers place on creditor protection compared with the concern that excessive personal liability can make directors unduly risk‐averse is influenced by their existing legislative framework and experience of those laws. Although Australia has shifted away from a strict focus on creditor protection, to give directors more opportunities to engage in restructuring, Singapore's amendments may provide a more creditor‐friendly regime.

How Statutory Civil Liability is Attributed to a Company: An Australian Perspective Focusing on Civil Liability for Insider Trading by Companies

Where human servants of a company engage in insider trading activities in the course of their employment, the problem may arise as to, inter alia, the civil liability of the company. Questions on the ways in which the act and the knowledge of the person(s) who did the act and/or had the relevant knowledge may be attributed to the employing company will be at issue in determining the company S liability. This article makes an attempt to answer these questions. The article discusses the reasons why rules of agency will only have limited applications in insider trading liability attribution and how the tests that the Privy Council stipulated in Meridian Global Funds Management Asia Ltd v Securities Commission may assist in determining the company's general law and statutory liability for insider trading. The paper argues that it is possible to apply the doctrine of aggregation to combine the act of one servant and the knowledge of another for the purpose of establishing a company's civil liability for insider trading in Australia. It also contends that a company will not lose its memory where it acquires the relevant knowledge through a servant who ceases his or her employment after making relevant business decisions with the knowledge acquired, if the company innocently implemented the decisions after the departure of the servant.

Insider Trading As Fraud

Federal insider-trading law consists, for the most part, of federal common law rooted in a statutory regime that prohibits fraud in connection with the purchase or sale of securities. Commentators have long lamented this fact, viewing the law’s grounding in an anti-fraud statute as a quirk of history with little to recommend it. After all, what does fraud have to do with insider trading? A lot, it turns out. In this article, I develop a theory explaining and defending the fraud-based nature of federal insider trading law. Specifically, I argue that Rule 10b-5, the anti-fraud rule in question, should be understood as altering the common law rule barring parties from contracting for fraud liability. As contract scholars have shown, this common law rule prevents contracting parties from effectively deterring certain hard-to-detect breaches of which insider trading is but one example. Rule 10b-5, I argue, reverses the common law rule, allowing contracting parties to contract for fraud liability and the accompanying extra-compensatory damages for insider trading. The implications of this new theory of insider trading law are significant. First, this theory helps us explain the law as it’s been received, something that competing theories simply can’t do. Second, it implies that insider trading liability under Rule 10b-5 should not be limited to fiduciaries but should include trading by at least some non-fiduciaries as well. Third, this theory provides courts with a tractable way of determining the scope of Rule 10b-5 – they must ask whether the trader and the information source are likely to have contracted for insider trading liability under Rule 10b-5, an inquiry that turns in part on the availability of alternatives to fraud liability for deterring insider trading. Fourth, and finally, the contractual fraud theory of insider trading law implies that, interpreting these implicit contracts over information, the SEC can cast a broader liability net than courts. Consequently, this theory explains not just the Supreme Court’s insider trading jurisprudence but also rules promulgated by the SEC, like rule 10b5-2, which are thought to go beyond the limits of the Court’s interpretation of the statute. This theory implies that the SEC is well within its authority to adopt Rule 10b5-2, a proposition that has been called into question by some federal courts.

Safe Harbor Carve-Out for Directors for Insolvent Trading Liability in Australia and Its Implications

The Issue of Personal Liability for Insolvent Trading is important for existing and prospective company directors. Under section 588G of the Australian Corporations Act 2001 (hereinafter “Corporations Act 2001”), directors of a company have the duty to prevent insolvent trading. Failure to do so will lead to the directors incurring personal liability. “Insolvent trading involves the incurring of debts when circumstances of insolvency in relation to a company exist and the subsequent winding up in insolvency of the company. It has been theoretically disputed whether there is a need to protect creditors by legislative means when a company nears insolvency. Various policy justifications have been invoked for a rule against insolvent trading. These policy justifications appear to be robust, but not without their critics. However, these criticisms have not had much traction in shifting the policy and legislative choices drastically. That said, the practical impact of a stringent approach to insolvent trading in Australia had recently culminated in prompting the enactment of an amendment to section 588G of the Corporations Act 2001 by providing a safe harbor to directors who take a “course of action reasonably likely to lead to a better outcome for the company” and the company’s creditors. The carve-out for directors who intend to use the safe harbour whilst not getting rid of the insolvent trading prohibition does have a significant impact for those who genuinely attempt to turn around the fortunes of their companies. This paper examines the implications of the reform for the personal liability of directors for insolvent trading in Australia.

The Ever-Changing Scope of Insider Trading Liability for Tippees in the Second Circuit

Liability under insider trading law continues to change as federal courts attempt to find new ways to hold insiders liable under the law. As recently as two years ago, the Second Circuit—in analyzing past decisions regarding tipper-tippee insider trading violations—blurred the distinction between legal and illegal insider trading when it fundamentally altered the idea of “personal benefit.” These various decisions provide the basis for antifraud provisions of securities law applying to insider trading, the consequences of which can be detrimental. This Note will discuss the standard that the Second Circuit uses to hold tippees liable for insider trading violations under the Exchange Act Rule 10b-5. It will begin by exploring a line of cases that lead up to the Second Circuit’s decision to alter the personal benefit test, which shifted more responsibility than ever onto the tipper’s state of mind. This Note will analyze that test and discuss the implications and problems that come with it. These include a greater likelihood that tippees will engage in deceptive behavior to extract material, non-public information from tippers. They also increase the potential that more parties caught in the middle of these situations will receive hefty prison sentences. Following that analysis, this Note will suggest an alternative approach—qualifying the personal benefit test to make it depend on more objective factors than it currently does. It will then discuss the court’s decision to amend and supersede its initial holding and replace it with a test which did not have a substantive impact on the outcome. It will ultimately conclude that the same test should apply.

Zone of Insolvency, Directors’ Duties and Creditors’ Protection in U.S.

When a company is navigating in the “zone of insolvency” – usually defined as the extent of the risk that creditors will not be paid – its directors face the dilemma related to their managerial decisions in the light of the foreseeable effects and risks for shareholders and for creditors. It is a generally accepted principle in U.S. that when a company is approaching such “zone of insolvency” or is in the “vicinity of insolvency” no fiduciary duties are owned to the creditors as expression of the shareholder primacy rule. The aim of this article is to demonstrate the existence of provisions of law together with important policy reasons that impose the duties shifting to creditors in the zone of insolvency and that allow to create a presumption of directors’ knowledge of when their duties shift, which means when the company is getting closer to insolvency. Accordingly, this article seeks to demonstrate that directors’ duties toward creditors should shift on the ground of two reasons: Firstly, the directors’ and shareholders’ opportunistic behavior – together with the opportunistic behavior of well-informed creditors–. Secondly, the need to preserve value for creditors. By comparing U.S. principles with UK insolvency system the conclusion is in the sense that in the zone of insolvency directors should have a clear duty to take every reasonable step in order to minimize the risk of potential losses for creditors. Moreover, this article shows that in U.S. from the interconnection of the MD&A provisions with the law of avoidable preferences, a general principle accordingly can be inferred. It brings that directors have the duty to know when the company is in trouble and therefore that insolvency is looming at the horizon, with a presumption that covers the period of time starting from the last financial statements release until the day of the bankruptcy filing. Specifically, the law of preferences as section 547 of the Bankruptcy Code – by striking down last-minute grabs – conceptually admits the principle that directors together with control shareholders and strong creditors know longer time in advance that the company will face a liquidation proceeding than other creditors and outsiders. As a consequence, the Delaware approach of allowing full discretion to the board of directors even at the “end game” stage with its actual risk of opportunistic behavior (asset dilution, asset substitution, debt dilution, conflicts among creditors) is incongruent with the retrospective approach of both state creditors’ remedies and federal bankruptcy law that after insolvency challenges distributions to shareholders and favors creditors and seeks recoupment. Therefore, this article argues for a pre-insolvency, “end stage” rule of constraint by demonstrating that the UK wrongful trading liability of directors is more coherent and congruent with majority legal systems’ post-bankruptcy recapture approaches than the U.S. one found in the Delaware jurisprudence.

'Wrongful Trading' in England and Hungary: A Comparative Study

In the last decades, the idea of harmonization of rules on directors' liabilities has not been indifferent for the European legislator. Although relatively little material efforts have been made in this regard so far, it seems to be instructive for the future to examine one specific example of transplantation of the wrongful trading concept. Apparently inspired by the English model, Hungary implemented (or more precisely: transplanted) the wrongful trading rule in 2006. To begin with, the paper summarises some initiatives of harmonisation of the directors’ liability in the history of the European Communities. Thereafter, the function of wrongful trading concept is discussed. In the fourth (and substantive) section, a comparative analysis of the liability for wrongful trading in England and Hungary is presented. Subsequently, the diverging tendencies in the case law are discussed. In the sixth part, some possible reasons are considered why wrongful trading liability plays a more prominent (and different) role in Hungary than it does in England. In the conclusion, we should be able to answer some questions. Can the Hungarian provisions on liability for wrongful trading qualify as legal transplant? Has the adoption of the English concept of wrongful trading resulted in harmonised rules on directors' liability for wrongful trading in England and Hungary?

Financial Torts and Investor Protection: Is the Europeanisation of Third State Cases a Viable Solution?

Due to the growing globalisation of financial markets, non-EU market operators which act outside the EU are increasingly causing direct harm to European investors. This issue, and its relevant impact on investor protection, has already been considered by the European legislature at the substantive level. This article seeks to demonstrate that, at the private international law level, the Europeanisation of third state cases would increase both the degree of investor protection and investors’ equal access to justice. Focusing exclusively on financial torts, the advantages arising from the application of Brussels I bis heads of jurisdiction to non-EU defendants are assessed with regard to insider trading and Credit Rating Agency liability cases. The paper also examines the main critical elements related to such an extension of the Brussels I bis regime, especially from a systematic perspective, and suggests possible future approaches to this issue.

Beyond Dirks: Gratuitous Tipping and Insider Trading

Did an investment banker who gratuitously shared material nonpublic information with his brother— with no expectation of receiving anything in return — commit securities fraud? And is the investment banker’s brother-in-law jointly liable for trading securities on the basis of what he knew to be gratuitous tips? The Supreme Court is poised to answer those questions in Salman v. United States, after steering clear of insider trading law for nearly two decades. It has been even longer still since the Court last addressed securities fraud liability relating to stock trading tips; it articulated a “personal benefit” test for joint tipper-tippee liability in 1983 in Dirks v. SEC, a decision reinforcing the “classical” theory of insider trading. In 2015, a circuit split arose as to whether gratuitous tipping constitutes a violation of the antifraud provisions in the federal securities laws, and the Court has granted certiorari in Salman to resolve that issue. This article disagrees with the Second Circuit’s finding that gratuitous tips do not result in a personal benefit and supports the Ninth Circuit’s conclusion that such tips are illegal. But in arguing that gratuitous tips satisfy the personal benefit test, this article draws from a potent combination of four post-Dirks developments in corporate and securities law: 1) the Court’s endorsement of the “misappropriation” theory in United States v. O’Hagan; 2) federal securities legislation in 1984, 1988, and 2012 that evidences Congress's support for an expansive antifraud proscription against insider trading and tipping; 3) the SEC’s decision to effectively ban the practice of selective disclosure through its adoption of Regulation FD; and 4) state court decisions that construe fiduciary disloyalty to include not only self-dealing but also other conscious actions taken by agents in bad faith. These developments should prompt the Court not only to affirm the Ninth Circuit’s decision but also to look beyond Dirks to consolidate the Court’s prior complementary theories of insider trading liability — the classical and misappropriation theories — into a new unified framework that would regard insider trading as a “fraud on contemporaneous traders.”

Anticipating a Sea Change for Insider Trading Law: From Trading Plan Crisis to Rational Reform

The Securities and Exchange Commission is poised to take action in the face of compelling evidence that corporate insiders are availing themselves of rule-sanctioned Trading Plans to beat the market. These Trading Plans allow insiders to trade while aware of material nonpublic information. Since the market advantage insiders have enjoyed from Plan trading can be traced to loopholes in the current regulatory scheme, increased enforcement of the existing rules cannot address the issue. But, simply tweaking the existing rule structure to close these loopholes would not work either. This is because the SEC adopted the current rule as a part of a delicate compromise with the courts in the “use versus possession” debate over the proper test of scienter for insider trading liability. The current rule reflects the SEC’s preferred test (mere “awareness”), but it provides for Trading Plans as an affirmative defense in order to pass judicial scrutiny. Thus, any attempt to simply close the loopholes in Trading Plans while maintaining the awareness test would upset this delicate compromise. Only a comprehensive change to the current insider trading enforcement regime can address the issue. The reform proposed here begins with the recognition that Plan trading is generally done with the firm’s awareness and consent. Such trading is therefore a form of issuer-licensed insider trading. Since there are strong arguments that there is no moral wrong or economic harm done by issuer-licensed insider trading, the regulatory regime should openly embrace it as a permissible form of compensation through firm-sanctioned Modified Trading Plans, so long as there is adequate disclosure. Though such liberalization would represent a radical departure from the current enforcement regime, it would be within the SEC’s rulemaking authority, and would be consistent with Supreme Court precedent. Most importantly, it would dramatically improve the current enforcement regime in terms of justice, clarity, efficiency, and coherence. It is sometimes said there is nothing like a good crisis for effecting much needed change. The current media attention and public scrutiny over corporate insiders’ exploitation of rule-sanctioned Trading Plans may be just the crisis to spur the SEC to adopt a more rational and just approach to insider trading enforcement. The outline for such reform is proposed here.

Anticipating a Sea Change for Insider Trading Law: From Trading Plan Crisis to Rational Reform

The SEC is poised to take action in the face of compelling evidence that corporate insiders are availing themselves of rule-sanctioned Trading Plans to beat the market. These Trading Plans allow insiders to trade while aware of material nonpublic information. Since the market advantage insiders have enjoyed from Plan trading can be traced to loopholes in the current regulatory scheme, increased enforcement of the existing rules cannot address the issue. But simply tweaking the existing rule structure to close these loopholes would not work either. This is because the SEC adopted the current rule as a part of a delicate compromise with the courts in the “use versus possession” debate over the proper test of scienter for insider trading liability. The current rule reflects the SEC’s preferred test (mere “awareness”), but it provides for Trading Plans as an affirmative defense in order to pass judicial scrutiny. Thus, any attempt to simply close the loopholes in Trading Plans while maintaining the awareness test would upset this delicate compromise. Only a comprehensive change to the current insider trading enforcement regime can address the issue.The reform proposed here begins with the recognition that Plan trading is generally done with the firm’s awareness and consent. Such trading is therefore a form of Non-Promissory Insider Trading. Since there are strong arguments that there is no moral wrong or economic harm done by Non-Promissory Insider Trading, the regulatory regime should openly embrace it as a permissible form of compensation through firm-sanctioned Modified Trading Plans, so long as there is adequate disclosure. Though such liberalization would represent a radical departure from the current enforcement regime, it would be within the SEC’s rulemaking authority and would be consistent with Supreme Court precedent. Most importantly, it would dramatically improve the current enforcement regime in terms of justice, clarity, efficiency and coherence.It is sometimes said there is nothing like a good crisis for effecting much needed change. The current media attention and public scrutiny over corporate insiders’ exploitation of rule-sanction Trading Plans may be just the crisis to spur the SEC to adopt a more rational and just approach to insider trading enforcement. The outline for such reform has been proposed here.

Insider Trading: Where is the Line?

Following the contours of the Securities and Exchange Commission’s seminal Cady, Roberts opinion in 1961, the federal courts developed the law of insider trading in two reasonably clear and predictable molds. Corporate insiders will incur liability for trading on material nonpublic information in breach of the duty they owe their corporations and shareholders, and corporate outsiders will be liable if they misappropriate and trade on such information in breach of a duty they owe to the source of their information. Recent cases have blurred the lines of liability for insider trading. Courts now may impose liability on defendants in situations where it is unclear whether they assumed any duty to the corporation or other source of their information, where the information in question is vague or speculative in nature, and where it is unclear that they acted with the requisite mental state. Compounding this uncertainty, the SEC and the Justice Department have made insider trading a high prosecutorial priority and are expending substantial resources and using new tools to bring insider trading cases that would not have been pursued in earlier times. Faced with uncertain liability parameters and intense enforcement efforts, prudent traders may conclude that any trade based on significant nonpublic information is just too risky. A wrong guess on any duty, materiality, or scienter element­­––finally resolved years later on appeal––can lead to imprisonment, or at least heavy civil fines, and a ruined career. Yet such a determination not to trade on significant nonpublic information effectively pushes these prudent traders into a so-called “parity-of-information” regime, in which all significant information must be publicly disclosed before it can be used for trading. While Congress, the SEC, and the courts have consistently rejected parity of information as an explicit legal requirement, the European Union’s enforcement model specifically embraces parity. The SEC and DOJ commitment to insider trading enforcement is to be commended for promoting fair markets for both ordinary and sophisticated investors, and thus for encouraging capital formation and economic growth. But it is an enforcement program that can be enhanced­­––and a parity regime avoided––through clear definition of the elements of the offense, through good case selection, and through alternative disposition paths to fairly and efficiently resolve smaller and less clear cases.

Accelerating adoption of genetically modified crops in Africa through a trade liability regime

Given the apparently unbridgeable divide that has developed between the 25 odd countries that grow and trade GM crops and the evolving EU regulatory hurdles, it may be time to consider alternative strategies for realizing a global market for agricultural products. Africa is one area of the world where the battle over GM agriculture is being played out, yet it is the continent where GM could have the greatest positive impact. Numerous African nations, given their long-standing trade connections to European nations, fear that allowing the commercialization of GM crops could lead to comingling of GM and conventional products and, hence, the loss of export opportunities to the EU. These are legitimate concerns. One potential solution that warrants serious consideration would be to establish a pool of funds that could be accessed by African agricultural commodity exporters in instances where exports to Europe are rejected. A production levy could be imposed in leading industrial adopting nations (i.e., Australia, Canada and the United States). The revenue raised would provide an endowment fund that could be used to offset the costs arising from import refusals. African-sourced shipments rejected by the EU will most certainly have alternate markets, but could receive a reduced price or incur higher costs associated with serving alternate markets. The intent of the fund would be to compensate for the real difference between the net returns contracted with European importers and the final market price received. This article examines the feasibility of establishing such a fund and discusses the funding options.

Channel Checking and Insider Trading Liability

This note addresses the potential legality or illegality of channel checking in the context of a private equity buyout. In Part II, this note uses a hypothetical to demonstrate a situation in which a private equity acquirer might engage in a channel check. In Part III, this note analyzes federal judicial and SEC cases that have developed various categories of insider trading liability, and provides a framework for insider trading liability. In Part IV, this note applies the analysis from Part III to the hypothetical described in Part II. Part IV attempts to reach a conclusion about whether the private equity acquirer, who engages in channel checking, could be found liable for insider trading given the current law. Part IV asks whether channel checkers should face potential insider trading liability, and concludes that the SEC’s newfound focus on channel checking should be directed to regulating more harmful conduct.

To Catch a Thief: Extending Outsider Trading Liability to Thieves

This Note addresses the important question of whether all thieves can be held liable for violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Over time the Court has cautiously expanded liability for trading on material nonpublic information from corporate insiders only, to tippees, to outsiders standing in a fiduciary relationship to the source of the confidential information. Recently, the Second Circuit held that a thief who owed no duty to the source of misappropriated information could be held liable if he accomplished his theft by means of affirmative misrepresentation. This decision represents the next step in increasing liability for outsider trading made possible by a relaxing of the fiduciary requirement underpinning classical theory of insider trading.This Note contends that holding all thieves liable, even those who do not obtain information by means of affirmative misrepresentation, represents a logical expansion of liability consistent with 10(b), 10b-5, and caselaw. The requirement of a fiduciary relationship between the misappropriator and the source of the information in outsider trading cases results in under-inclusive doctrine that fails to satisfy fully the purpose of the Exchange Act. Expanding liability to include all thieves is sound policy that will better protect investors and the integrity of the market.

A note on value relevance of mark-to-market values of energy contracts under EITF Issue No. 98-10

This paper examines whether marked-to-market values of energy trading assets and liabilities of companies that enter into energy contracts are related to market value of equity. The Emerging Issues Task Force of the Financial Accounting Standards Board ruled in November 2002 to ban the use of mark-to-market accounting for energy contracts out of concern that fair values can be easily inflated. We find that the excess of fair value over original value of energy trading assets and energy trading liabilities is not relevant for valuation. It may be inferred that fair values which are subject to management estimates and not verifiable are poor signals of worth and performance (Watts, R., 2003. Conservatism in accounting Part I: Explanations and implications. Accounting Horizons 17, 207–221).