XII. TRADING GONE AWRY A. Illegal Insider Trading

Transcript:XII. TRADING GONE AWRY A. Illegal Insider Trading:
XII. TRADING GONE AWRY A. Illegal Insider Trading Unfair capital markets fail to draw capital. Illegal insider trading is traditionally defined as the execution of transactions on the basis of material non-public information. Several statutes are generally relied upon to enforce prohibitions on insider trading. Section 10(b) of the Securities Exchange Act of 1934 prohibits the employment “in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” SEC Rule 10b-5 prohibits “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.” These rules are extended to identify elements of a Section 10(b) or Rule 10b-5 insider trading claim: Possession of material nonpublic information; Trading while in possession of that non-public information; Violation of a relationship of trust and confidence Section 14 of the Securities Exchange Act and Rule 14e-3 impose a “disclose or abstain from trading” obligation on any person who trades in securities that will be sought or are being sought in a tender offer, while that person is in possession of material nonpublic information that he knows or has reason to know has been acquired directly or indirectly from the offer or, the subject corporation … The Securities Exchange Act of 1934 (Section 14e) provided for the initial federal statutory insider trading restrictions, though a 1909 Supreme Court decision in Strong v. Repide interpreted inside trading by corporate officials without appropriately revealing that information to be a form of fraud. A 1980 Supreme Court decision (Chiarella v. United States) defined an insider as one who maintains a "relationship of trust and confidence with shareholders". The Insider Trading Sanctions Act of 1984 authorized penalties for illegal insider trading equal to three times the illegally obtained profits plus forfeiture of the profits. The Insider Trading and Fraud Act of 1988 was intended to help define exactly what constitutes an insider and to set penalties for illegal insider trading activity. Notorious Insider Trading Cases All of the individuals named in the cases that follow were very successful in their businesses, and in most cases, quite wealthy.