Research Handbook on Insider Trading
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Research Handbook on Insider Trading

Edited by Stephen M. Bainbridge

In most capital markets, insider trading is the most common violation of securities law. It is also the most well known, inspiring countless movie plots and attracting scholars with a broad range of backgrounds and interests, from pure legal doctrine to empirical analysis to complex economic theory. This volume brings together original cutting-edge research in these and other areas written by leading experts in insider trading law and economics.
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Chapter 6: The Facebook effect: secondary markets and insider trading in today’s startup environment

Stephen F. Diamond


The ubiquitous social networking company Facebook made headlines in the spring of 2011 when it fired a widely respected senior manager because he violated the firm’s insider trading policy. The dismissal was controversial not only because it surprised Silicon Valley and led many there to rush to the executive’s defense, but also because it opened up a new chapter in a long-running policy debate about the nature of insider trading. The debate revealed a good deal of confusion about the legality and significance of insider transactions. One leading technology sector blog even went so far as to quote unnamed sources in a post on the matter stating—inaccurately—that insider trading was legal as long as it took place in the shares of a private company. Beyond the issue of insider trading, however, the incident raised concerns about the emergence of new private capital markets such as Shares Post and SecondMarket, where prior to their initial public offerings (IPOs) the securities of high-flying companies such as Facebook, Yelp, Zynga, and Groupon could be bought and sold with relative ease without the need to make the kinds of disclosure required of publicly traded companies. The trades that the Facebook executive made were allegedly carried out on such a private trading platform.

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