Research Handbooks in Corporate Law and Governance series
Edited by Stephen M. Bainbridge
Chapter 13: The changing demand for insider trading regulation
Insider trading law sweeps broadly but uncertainly, leaving government officials wide discretion in the types of cases they can bring. This chapter presents some original research on which kinds of insider trading cases federal prosecutors decide to bring, and offers a theory to explain their choices. The data presented are consistent with a view that insider trading prosecutions are more a reflection of private interests than public ones. Trading on material, non-public information by certain individuals in certain circumstances is illegal. When it is illegal, the behavior is colloquially known as “insider trading,” but this description is misleading. It is not illegal per se for company executives or other “insiders” to trade in their company’s shares, and lots of people who are not company insiders can be liable for insider trading. Although the parameters of who can and cannot trade and based on what information are far from clear and still being worked out by the courts, there are severe legal consequences for those found to be on the wrong side of the line. The direct consequences primarily flow from government action. The Securities Exchange Commission (SEC) can bring civil charges against individuals, seeking disgorgement of profits earned, as well as other civil remedies, such as bans on serving in particular industries (e.g., brokerage) or in particular capacities (e.g., as a director or officer of a public company). Likewise, the Department of Justice (DOJ) can bring criminal charges against individuals, seeking to impose fines and deprive individuals of their liberty.
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