Edited by Stephen M. Bainbridge
Chapter 3: What were they thinking? Insider trading and the scienter requirement
On its face, the connection between insider trading regulation and the state of mind of the trader or tipper seems fairly intuitive. Insider trading is a form of market abuse: taking advantage of a material, nonpublic secret to which one is not entitled, generally in breach of some kind of fiduciary-like duty. It is an exploitation of status or access, typically coupled with some form of faithlessness. Certainly the extraordinary public attention that insider trading enforcement and prosecutions command reflects the idea that the essence of unlawful insider trading is cheating. These prosecutions are main-stage morality plays, with greed as the story line. The Securities and Exchange Commission (SEC) in particular seems to sense that it garners public political support by casting itself in the role of tormentor of the greedy. If this is right, then what the legal system should be looking to proscribe is deliberate exploitation—trading on the basis of information in order to gain an unfair, unlawful advantage over others in the marketplace. That involves a fairly tight causal connection between knowledge of the information and the decision to buy or sell.
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