(Entry) Insider trading (USA/general)

Revista Espanola De Financiacion Y Contabilidad, 2009

The last three decades have seen the issue of corporate insider trading come to the fore. With the emergence of corporate governance as a central concern to regulators and academics, the trading activity of corporate insiders neatly spans both governance and corporate fi nance policy areas. This review article synthesises the main ideas and the most important empirical research in corporate insider trading. Since regulation is the main backdrop to insider trading, the current law facing European corporations is also discussed. Finally, the review concludes by providing an insight into the future direction of research in corporate insider trading.

This article explores the expansion of the Russian state into financial markets after the 2008 global financial crisis. The main argument is that the Russian state has been unable to pursue its own developmental agenda in the sector despite increased regulation and state takeovers. While independent private market participants were pushed aside by state-controlled financial intermediaries, the state failed to follow its own policy strategy towards establishing an international financial centre in Moscow. Instead, the Russian financial market institutions were rendered into a vehicle for inter-bank lending under control of the Central Bank of Russia. Data from Russian stock market and corporate bond market trading highlights the trend. The study also discusses the role played by informal power networks in redistribution of state-controlled resources and financial flows, and how this factor influenced the state regulation of financial markets in Russia.

We investigate the relation between insider trading law enforcement and stock market quality using a sample of American Depositary Receipts (ADR) over the period from 1998 to 2006. We show that ADR from countries that have enforced insider trading laws have better market liquidity and lower information asymmetry than ADR from countries that have not enforced insider trading laws. In addition, ADR from countries with insider trading law enforcement have greater price efficiency. Our results are robust to different estimation methods and alternative model specifications. We interpret these results as evidence that the enforcement of insider trading laws can effectively deter insider trading and enhance both market liquidity and price efficiency.

Eilf J L Fin Econ, 2009

Information is the most important commodity I know of. Wouldn't you agree? You know why the average fund manager can't beat the S&P 500? Because they're sheep, and sheep get slaughtered. I don't throw darts at a board. I only bet on sure things." 2

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.

Regulators demand the impossible when they require issuers to design and implement an effective insider trading compliance program because insider trading is a crime that neither Congress nor the SEC has defined with any specificity. This problem of uncertainty is then compounded by the threat of heavy civil and criminal sanctions for violations. Placed between this rock and hard place, issuers tend to adopt over-broad insider trading compliance programs that come at a heavy price in terms of corporate culture, cost of compensation, share liquidity, and cost of capital. The irony is that, since all of these costs are ultimately passed along to the shareholders, insider trading enforcement under the current regime has precisely the opposite of its intended effect. This is the paradox of insider trading compliance for issuers, just one more symptom of a dysfunctional insider trading enforcement regime that is in need of a dramatic overhaul. There are a number of conceivable paths to resolving this paradox. The most obvious solution would be for the SEC to issue a rule or for Congress to promulgate a statute defining insider trading with greater specificity. But while simply fixing definitions to the elements of insider trading under the current regime would improve matters, this Article calls for a more radical solution. It is suggested that the current enforcement regime be liberalized to permit insider trading where the issuer approves the trade in advance and has disclosed that it permits such trading pursuant to regulatory guidelines. It is argued that such reform would lead to a more rational, efficient, and just insider trading enforcement regime. Moreover, by aligning the interests of issuers, shareholders, and regulators, it would also offer the most effective solution to the paradox of insider trading compliance.

SSRN Electronic Journal, 2000

Information is the most important commodity I know of. Wouldn't you agree? You know why the average fund manager can't beat the S&P 500? Because they're sheep, and sheep get slaughtered. I don't throw darts at a board. I only bet on sure things." 2

SSRN Electronic Journal, 2000

Insider trading in the United States has been receiving a lot of press coverage in recent years. The press has given the public the impression that insider trading is evil, unethical and illegal, when in fact such is not always the case. In some cases, insider trading is beneficial to the economy and to shareholders. It is not always unethical and it is not always illegal. Whether insider trading is harmful, unethical or illegal depends on many factors, yet the press ignores such nuances. A number of economists have pointed out some beneficial effects of insider trading and legal theorists have written treatises discussing when insider trading is illegal and when it is not. Philosophers have said some good things about insider trading, too, but their scholarly treatises have, understandably, been ignored by journalists.

China’s securities regulator enforces insider trading prohibitions pursuant to non-legal and non-regulatory internal “guidance”. Reported agency decisions indicate that enforcement against insider trading is often possible only pursuant to this guidance, as the behavior identified is far outside of the scope of insider trading liability provided for in statute or regulation. I argue that the agency guidance is itself unlawful and unenforceable, because: (i) the guidance is not the regulatory norm required by the statutory delegation of power; and (ii) the guidance is ultra vires because (a) it addresses something substantively different from what is authorized under the statutory delegation, and (b) because the guidance radically transforms the underlying basis for the breach of insider trading under Chinese law -- from a modified “classical”/fiduciary duty plus misappropriation theory to an extremely robust “equal access”/mere possession of inside information theory. I then outline potential Chinese law challenges to the norms and their enforcement, and analyze why there is such marked tolerance for plainly illegal rule-making and enforcement by one of China’s best administrative agencies. The identified infirmity underlying the basis for well-governed and investor-attracting capital markets has implications not only for China’s securities regulation regime and healthy market development, but also for the entirety of China’s legal and administrative law system in the reform era