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ANDERSON, KIDD & MOCSARY (DO NOT DELETE) 4/16/2021 8:30 AM
1035
Public Perceptions of Insider Trading
John P. Anderson,* Jeremy L. Kidd** & George A. Mocsary***
The U.S. insider trading enforcement regime has been mired in
controversy since the SEC introduced it in 1961. Some have argued that
the SEC should not regulate insider trading because it improves market
performance. Others have argued that the SEC must vigorously regulate
insider trading because it is unfair and undermines market confidence.
Arguments on both sides of this debate, however, rest on empirical claims
that are rarely backed by data. The resulting impasse has left lawmakers
and jurists without a clear sense of what conduct they should proscribe
and why. This, in turn, has placed market participants in a state of
confusion that has been exaggerated by insider trading’s being a common
law offense, never having been defined by statute or rule. But after sixty
years, Congress appears poised to act. With reform proposals pending,
reliable empirical evidence of public attitudes concerning insider trading
has never been more needed. This Article presents the results of the first
large-scale national survey of public attitudes regarding insider trading
since 1986, and the first comprehensive, census-representative study ever
conducted on the subject. It offers valuable data to inform claims
regarding public perceptions of, inter alia, the fairness of different forms
of insider trading, its pervasiveness, and the public’s willingness to
participate in markets where insider trading is common.
*J. Will Young Professor of Law, Mississippi College School of Law. University of Virginia
School of Law, J.D. University of Virginia, Ph.D. (Philosophy).
**Associate Professor, Mercer University School of Law. Antonin Scalia Law School at
George Mason University, J.D. Utah State University Huntsman School of Business, Ph.D.
(Economics).
***Professor of Law, University of Wyoming College of Law. Fordham University School
of Law, J.D., summa cum laude, 2009; University of Rochester Simon School of Business,
M.B.A., 1997. We thank Miriam Baer, William Baude, Joseph Blocher, Kevin Douglas,
Jennifer Fuller Flath, Sean Griffith, Nicholas J. Johnson, Matthew B. Kugler, and Lior
Strahilevitz for their invaluable comments. We are grateful to Jacob Beckett, Tosha
Childs, Nathan Cowper, Najla Hasic, Jessica Hostert, and Teris Swanson for their
excellent research. This Article is dedicated to Jessica Hostert, who passed away before
she could see the results of her work in print.
Electronic copy available at: https://ssrn.com/abstract=3645579
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1036 SETON HALL LAW REVIEW [Vol. 51:1035
I. INTRODUCTION ...................................................................................................... 1037
II. THE STATE OF INSIDER TRADING LAW AND SCHOLARSHIP ......................... 1040
A. Historical Development ................................................................... 1040
1. The Common Law Era ............................................................. 1040
2. Federal Regulation and the Modern Era .......................... 1041
3. The Supreme Court Weighs In ............................................. 1044
4. Twenty-First Century Developments and Unresolved
Questions ..................................................................................... 1051
B. Challenges and Controversies....................................................... 1053
1. The Harmful Consequences of Ambiguity in the Law and
Call for Reform .......................................................................... 1053
2. Ongoing Debate over the Economics and Ethics of Insider
Trading ......................................................................................... 1056
3. Market Confidence, Fairness, and the Importance of
Empirical Evidence of Public Attitudes to Reform Efforts
.......................................................................................................... 1058
III. THE SURVEY INSTRUMENT ............................................................................... 1059
A. Survey Strategy ................................................................................... 1060
B. Survey Design and Administration ............................................. 1064
1. Stage 1: Direct Assessment of Insider Trading Views 1065
2. Stage 2: Scenario-Based Assessment of Insider Trading
Views ............................................................................................. 1066
C. Limitations ............................................................................................ 1070
1. Sampling Error ........................................................................... 1070
2. Respondent Background Knowledge ................................ 1070
3. Respondent Understanding and Question Interpretation
.......................................................................................................... 1072
4. Results Interpretation ............................................................. 1073
IV. PUBLIC ATTITUDES TOWARD INSIDER TRADING .......................................... 1073
A. Comparisons to 1986 ....................................................................... 1075
B. Pervasiveness ...................................................................................... 1075
C. Market Confidence ............................................................................. 1077
D. Moral Views ......................................................................................... 1089
1. Stated Moral Positions............................................................. 1090
2. Revealed Moral Positions ....................................................... 1093
i. Morality via Pragmatism .................................................. 1093
ii. Morality via Legality .......................................................... 1096
3. Self-Conscious Punishment Views...................................... 1098
E. Fiduciary Instincts and Propaganda .......................................... 1103
1. Revealed Fiduciary Views ...................................................... 1104
i. Ethical Track .......................................................................... 1104
ii. Pragmatic Track .................................................................. 1108
2. Propaganda is Effective ........................................................... 1112
Electronic copy available at: https://ssrn.com/abstract=3645579
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3. Instincts About the Nature of Information ..................... 1116
V. RESEARCH AGENDA ............................................................................................. 1118
VI. CONCLUSION ........................................................................................................ 1119
I. INTRODUCTION
In October of 2018, Securities and Exchange Commissioner Robert
Jackson, and former United States Attorney Preet Bharara, announced
the creation of a task force to propose reforms to America’s “shoddy,”
“unclear,” and “confused” insider trading laws.
1
Jackson and Bharara’s
concerns are not isolated. As Professor Peter Henning noted, leading
jurists regularly criticize the U.S. insider trading regime as being “a
‘theoretical mess,’ ‘seriously flawed,’ ‘extraordinarily vague and
ill-formed,’ ‘arbitrary and incomplete,’ a ‘scandal,’ and even
‘astonishingly dysfunctional.’”
2
Much of the frustration stems from neither statute nor regulation
ever defining “insider trading.”
3
Congress and the Securities and
Exchange Commission (SEC) have allowed the law to develop in the
courts and administrative tribunals.
4
But without the benefit of clear
legislative guidance, the area’s sixty years of common law development
has been neither linear in direction nor consistent in outcome.
5
As a
result, insider trading law “has suffered—and continues to suffer—from
uncertainty and ambiguity to a degree not seen in other areas of the
law.”
6
For the first time in U.S. insider trading law’s sixty-year history,
broad-based momentum is building for comprehensive statutory
reform.
7
Congress recently introduced three comprehensive reform
bills, each proposing a different statutory definition of “insider
1
Preet Bharara & Robert Jackson, Insider Trading Laws Haven’t Kept Up with the
Crooks, N.Y. TIMES, Oct. 9, 2018, https://www.nytimes.com/2018/10/09/opinion/sec-
insider-trading-united-states.html.
2
Peter J. Henning, What’s So Bad About Insider Trading Law?, 70 BUS. LAW. 751, 751
(2015) (footnotes omitted).
3
STEPHEN M. BAINBRIDGE, SECURITIES LAW: INSIDER TRADING 26–27 (2d ed. 2007).
4
Id. at 28–29.
5
See infra Part II.
6
PREET BHARARA ET AL., REPORT OF THE BHARARA TASK FORCE 1 (2020).
7
Congress passed two insider trading laws in the 1980s, the Insider Trading
Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of
1988. Insider Trading Sanctions Act of 1984, Pub. L. No. 98-376, 98 Stat. 1264 (codified
as amended in scattered sections of 15 U.S.C.); Insider Trading and Securities Fraud
Enforcement Act of 1988, Pub. L. No. 100-704, 102 Stat. 4677 [hereinafter ITSFEA]
(codified as amended in scattered sections of 15 U.S.C.). Although these statutes
enhanced fines and penalties, neither defined “insider trading.”
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ANDERSON, KIDD & MOCSARY (DO NOT DELETE) 4/16/2021 8:30 AM
1038 SETON HALL LAW REVIEW [Vol. 51:1035
trading.”
8
In December 2019, one of these bills, the Insider Trading
Prohibition Act, passed the House with a near-unanimous 410-13 vote.
9
In January 2020, the Bharara Task Force on Insider Trading issued a
Report recommending comprehensive statutory reform similar in many
respects to that passed by the House.
10
Reform should be deliberate and informed, lest the opportunity for
comprehensive improvement be squandered. After sixty years of
controversy and inconsistency, Congress should implement a fair and
efficient insider trading regime. To the extent that it would impose
criminal penalties, as it almost certainly would, it is particularly
important that the reformers be clear about both the moral and
economic harms the law strives to guard against alongside the good it
seeks to promote.
Congress would be remiss to engage in a statutory overhaul
without considering the public’s attitudes concerning such conduct.
Reformers repeatedly assert, as the principal justification for regulating
insider trading, that the practice leads the public to “question the
fundamental fairness and integrity of the markets.”
11
But neither
Congress nor the Bharara Task Force appear to have informed their
proposed reforms with empirical evidence of what the public actually
thinks of insider trading.
12
Does the average American think that it is
unfair to trade based on material nonpublic information? If so, under
what circumstances? Would the average American be less willing to
participate in markets if he or she knew that insider trading was
prevalent? Given the persistent debate over the ethics and economics
of insider trading,
13
it would be irresponsible simply to assume the
answers to these questions.
This Article looks to correct this empirical lacuna by presenting the
results of the first large-scale national survey of public attitudes
regarding insider trading since 1986, and the first comprehensive,
census-representative study conducted on the topic.
14
It offers a
8
See Stop Illegal Insider Trading Act, S. 702, 114th Cong. (2015); Ban Insider
Trading Act, H.R. 1173, 114th Cong. (2015); Insider Trading Prohibition Act, H.R. 1625,
114th Cong. (2015).
9
H.R. 2534, 116th Cong. (2019).
10
BHARARA ET AL., supra note 6, at 4.
11
Id.
12
The Report of the Bharaha Task Force, for example, offers no external support for
its claim that “[m]ost agree that there is something fundamentally unfair about [insider
trading].” BHARARA ET AL., supra note 6, at 3. Indeed, the report offers no evidence of
public attitudes concerning insider trading. See generally id.
13
See infra Sections III.D–E.
14
Perhaps the most frequently cited studies of public attitudes regarding insider
trading are the pair of 1986 Business Week/Harris polls taken before and after the Ivan
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ANDERSON, KIDD & MOCSARY (DO NOT DELETE) 4/16/2021 8:30 AM
2021] PUBLIC PERCEPTIONS OF INSIDER TRADING 1039
detailed attitudinal assessment of public views about insider trading’s
morality and legality (or lack thereof), as well as its effect on the public’s
willingness to participate in equity markets. The study breaks down its
results by U.S. Census categories according to age, income, education,
race, and political ideology.
The results reflect some ambivalent attitudes concerning the ethics
and harms associated with insider trading. They raise several important
questions. For example, what does it mean that nearly a fifth of
respondents would engage in insider trading even though they believe it
to be immoral? But this Article’s goal is not to draw strong conclusions
from the survey’s results. Instead, this Article presents the results in a
manner that is useful to jurists, scholars, regulators, and legislators as
they work to effect statutory reform. To date, proponents of reform
have speculated about what the public deems “fair” and “unfair.”
15
They
have assumed the impact of insider trading on market “integrity.”
16
This
survey’s results thus inform the public discourse using timely data.
This Article proceeds as follows: Part II offers a brief history of
insider trading law’s common law development and identifies some of
the legal and theoretical issues that have motivated current reform
Boesky insider trading scandal. Business Week/Harris Poll: Outsiders Aren’t Upset by
Insider Trading, BUS. WK., Dec. 8, 1986, at 34 [hereinafter Business Week 12/86]; Business
Week/Harris Poll: Insider Trading Isn’t a Scandal, BUS. WK., Aug. 25, 1986, at 74
[hereinafter Business Week 8/86]. Two more recent studies were published in 2011.
Stuart P. Green & Mathew B. Kugler, When Is It Wrong to Trade Stocks on the Basis of
Non-Public Information?: Public Views of the Morality of Insider Trading, 39 FORDHAM URB.
L.J. 445 (2011); Meir Statman, Is it Fair?: Perceptions of Fair Investment Behavior Across
Countries, 12 BEHAV. FIN. 47 (2011). Professor Statman conducted a “convenience study,”
a preliminary, nonprobability analysis of student views on the subject. Id. Professors
Green and Kugler conducted a more sophisticated, but still exploratory, trio of studies
using Amazon Mechanical Turk, https://www.mturk.com, to investigate American
opinions. Green & Kugler, supra, at 461. Although neither constitutes a fully scientific
survey, both were extremely helpful, and the current survey owes much of its design to
Green & Kugler. A 1961 Harvard Business Review article described a study in which
executives were asked whether they would trade on information learned at a board
meeting. Raymond C. Baumhart, How Ethical Are Businessmen?, HARV. BUS. REV., July-Aug.
1961, at 6–7.
15
See BHARARA E T AL., supra note 6.
16
Id. passim; see also United States v. O’Hagan, 521 U.S. 642, 658 (1997)
(“[I]nvestors likely would hesitate to venture their capital in a market where [insider
trading] is unchecked by law.”). Courts, regulators, and scholars often use “market
confidence,” “market integrity,” and “investor confidence” interchangeably. E.g.,
BHARARA ET AL., supra note 6 (using the term “integrity of our securities markets” to refer
to what others may call “market confidence”); James J. Park, Rule 10B-5 and the Rise of
the Unjust Enrichment Principle, 60 DUKE L.J. 345, 362–63 (2010). This Article’s
reference to the “market-confidence theory” of justification for regulating insider
trading applies equally to claims concerning the impact of insider trading on “market
integrity.”
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1040 SETON HALL LAW REVIEW [Vol. 51:1035
efforts. This Part concludes by outlining the principal goals of this study
in light of current reform efforts. Those familiar with insider trading
law’s historical development and controversies may wish to turn
directly to Part III, which describes the survey’s approach, methods, and
limitations. Part IV presents results and offers some preliminary
explanations. Part V outlines future studies contemplated by the
Authors to supplement and complement this survey’s results.
II. THE STATE OF INSIDER TRADING LAW AND SCHOLARSHIP
From its inception in the early 1960s, the insider trading
enforcement regime in the United States—the first in the world—has
been fraught with controversy, instability, and uncertainty.
A. Historical Development
1. The Common Law Era
Before 1961, insider trading as it is understood today did not incur
criminal or civil liability in any nation.
17
In the United States, state
common law of insider trading was divided.
18
The majority of
jurisdictions did not recognize a broad fiduciary duty of loyalty between
board members or executive officers and individual shareholders in the
context of stock trading.
19
Courts did hold that “special facts” (e.g.,
evidence of affirmative misrepresentations or concealment) might give
rise to an equitable duty for board members or senior management to
disclose information advantages in advance of trading with
shareholders, but not when trading over anonymous exchanges.
20
By
the early twentieth century, a minority of jurisdictions began
recognizing a broad duty of loyalty among board members and senior
management to disclose material nonpublic information to
shareholder-counterparties in arm’s-length stock transactions in their
17
See, e.g., JOHN P. ANDERSON, INSIDER TRADING: LAW, ETHICS, AND REFORM 132–33 (2018);
Utpal Bhattacharya & Hazem Daouk, The World Price of Insider Trading, 57 J. FIN. 75,
89–90 (2002).
18
See STEPHEN M. BAINBRIDGE, INSIDER TRADING LAW AND POLICY 11–13 (2014).
19
See, e.g., ANDERSON, supra note 17, at 23; see also Carpenter v. Danforth, 52 Barb.
581 (N.Y. Sup. Ct. 1868); Bd. of Comm’rs of Tippecanoe Cnty. v. Reynolds, 44 Ind. 509
(1873).
20
See, e.g., Goodwinn v. Agassiz, 186 N.E. 659, 661–62 (Mass. 1933) (holding
insiders have no fiduciary duty to disclose when trading over impersonal exchanges);
Strong v. Repide, 213 U.S. 419, 431 (1909) (holding that board members and officers
may have a duty to disclose before trading with shareholders upon a showing of “special
facts”).
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firm’s shares,
21
but it remained entirely unclear whether even these
courts would extend this duty to transactions over anonymous
exchanges.
22
Before 1961, no state court had recognized a disclose-or-abstain-
from-trading rule for low-level insiders trading on their company’s
material nonpublic information.
23
Moreover, all the early state-law
cases addressed the problem of insider trading as a matter of contract
law or unjust enrichment.
24
No states imposed civil fines or criminal
liability for insider trading prior to the advent of the modern federal
enforcement regime.
25
2. Federal Regulation and the Modern Era
Beginning in 1961, SEC Commissioner William Carey, a former
Columbia law professor, made it something of a personal mission to
introduce “insider trading” into the American lexicon of civil and
criminal liability.
26
Carey, however, confronted a significant obstacle.
The SEC’s rulemaking enforcement power was limited by its statutory
authority, and no statute expressly bars trading in securities on the basis
of material nonpublic information. Section 16 of the Securities
Exchange Act of 1934 (‘34 Act) proscribed short-swing trading by
certain statutorily-identified insiders but was very limited in scope.
27
Further, only the issuer or its shareholders could bring an action under
21
See, e.g., Oliver v. Oliver, 45 S.E. 232 (Ga. 1903); Stewart v. Harris, 77 P. 277 (Kan.
1904); Hotchkiss v. Fischer, 16 P.2d 531 (Kan. 1932).
22
See BAINBRIDGE, supra note 18, at 13–16.
23
ANDERSON, supra note 17, at 24.
24
Id.
25
Id.
26
See, e.g., Kurt A. Hohenstein, Fair to All People: The SEC and the Regulation of
Insider Trading: The SEC Takes Command, SEC HIST. SOC’Y, http://www.sechistorical.org/
museum/galleries/it/takeCommand_a.php (last visited Jan. 10, 2020). Carey’s personal
devotion to this principal may have blinded him to the potential for chaos in the regime
he crafted. Current reform efforts should avoid this pitfall and be based on broad public
sentiment, not the preferences of any individual.
27
See 15 U.S.C. § 78p(b). Section 16(b) imposes only limited restrictions on a limited
number of statutorily defined insiders’ (“directors,” “officers,” and “principal
stockholders”) ability to trade. 15 U.S.C. § 78p. Its trading restrictions are also quite
limited. It provides that any profits earned by these insiders from a purchase and sale
(or a sale and purchase) of their company’s shares that occurs within a period of less
than six months are recoverable by the issuer—regardless of whether the insider traded
bases on material nonpublic information. 15 U.S.C. § 78p(b). Section 16(c) also makes
it unlawful for these insiders to sell their company’s shares short. 15 U.S.C. 78p(c). It
does nothing to restrict trading by insiders who possess material nonpublic information,
but are not “directors,” “officers,” or “principal shareholders.” Even statutorily defined
insiders are not precluded from trading based on their firms’ material nonpublic
information if their trading does not fall within the short-swing period.
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1042 SETON HALL LAW REVIEW [Vol. 51:1035
the statute, and it could not form the basis of a federal civil or criminal
enforcement action.
28
Undeterred, Carey and the SEC began bringing
insider trading actions under the ‘34 Act’s general anti-fraud provision
in Section 10(b).
Section 10(b), implemented as Exchange Act Rule 10b-5,
29
prohibits the employment of “any manipulative or deceptive device or
contrivance” in “connection with the purchase or sale of any security.”
30
Carey brought an insider trading action under Section 10(b), for the first
time since the sections’ 1934 enactment, in In the Matter of Cady, Roberts
& Company.
31
He wrote Cady, Roberts himself, and because the case was
settled, his opinion was subject to neither adversarial fact testing nor
judicial review.
32
Cady, Roberts introduced the violation of insider
trading by interpreting Rule 10b-5 broadly “to encompass the infinite
variety of devices by which undue advantage may be taken of
investors.”
33
With the stage thus set, Carey offered the first articulation
of the “disclose-or-abstain rule” whereby persons
must disclose material facts which are known to them by
virtue of their position but which are not known to persons
with whom they deal and which, if known, would affect their
investment judgment. Failure to make disclosure in these
circumstances constitutes a violation of the anti-fraud
provisions. If, on the other hand, disclosure is prior to
effecting a purchase or sale would be improper or unrealistic
under the circumstances, we believe the alternative is to
forego the transaction.
34
Chairman Carey explained that this broad duty to disclose or
abstain from trading was justified as deriving, first, from the “existence
of a relationship giving access, directly or indirectly, to information
intended to be available only for a corporate purpose and not for the
personal benefit of anyone, and second,” due to “the inherent unfairness
involved where a party takes advantage of such information knowing it
is unavailable to those with whom he is dealing.”
35
These words were
controversial from the start.
28
15 U.S.C. § 78p; see also BAINBRIDGE, supra note 18, at 226.
29
17 C.F.R. § 240.10b-5.
30
15 U.S.C. § 78j(b).
31
40 S.E.C. 907 (1961).
32
ANDERSON, supra note 17, at 33 n.30.
33
In re Cady, Roberts & Co. 40 S.E.C. 907, 911 (1961).
34
Id.
35
Id. at 912.
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Concerning Carey’s first justification for the broad disclose-or-
abstain rule, as noted above, state common law had never recognized so
broad a duty for insiders trading in their own companies’ shares.
36
Concerning the second justification, it is not obvious that trading on an
information advantage is “inherently unfair,” even when the
information is not immediately accessible to the counterparty.
37
Philosophers, economists, and jurists have debated this question for
millennia without clear resolution.
38
Indeed, for two hundred years,
courts have cited Chief Justice Marshall’s decision in Laidlaw v. Organ
for the proposition that, absent evidence of affirmative fraud, a
contracting party is not typically required to disclose even a material
information advantage to a counterparty.
39
In addition to controversy over Carey’s moral justification for the
broad disclose-or-abstain rule outlined in Cady, Roberts, economists
immediately challenged the rule’s economic justification. Among the ‘34
Act’s principal purposes is the promotion of the efficiency,
transparency, and accuracy of markets.
40
But Henry Manne famously
argued that insider trading actually promotes market efficiency and
transparency.
41
Others have challenged this view, but one side has yet
to convince the other.
42
In sum, the U.S. insider trading enforcement regime was
introduced in 1961 as the brainchild of a former law professor and
newly appointed SEC Chairman. It lacked statutory definition and clear
historical or common law precedent. Its moral and market-based
36
See supra Section II.A.
37
ANDERSON, supra note 17, at 143–60.
38
See, e.g., CICERO, DE OFFICIIS 321 (Walter Miller, trans., 1913) (outlining Stoic
philosophers’ contrasting views on the ethics of trading based on information
asymmetries); see also Anthony T. Kronman, Mistake, Disclosure, Information, and the
Law of Contracts, 7 J.L. STUD. 1 (1978) (arguing that a party’s ability to trade based on an
information advantage should turn on whether the information was acquired
deliberately or casually); Randy Barnett, Rational Bargaining Theory and Contract
Default Rules, Hypothetical Consent, the Duty to Disclose, and Fraud, 15 HARV. J.L. & PUB.
POL’Y 783, 796 (1992) (suggesting that sometimes a party suffering from an information
disadvantage in a proposed transaction does not have the right to ask for more
information); Saul Levmore, Securities and Secrets: Insider Trading and the Law of
Contracts, 68 VA. L. REV. 117, 140 (1982) (suggesting that some parties enjoying
information advantages have a right to be dishonest in response to some inquiries in
order to protect their advantages).
39
Laidlaw v. Organ, 15 U.S. 178 (1817).
40
See e.g., Will Kenton, Securities Exchange Act of 1934, INVESTOPEDIA,
https://www.investopedia.com/terms/s/seact1934.asp (last updated Oct. 30, 2020)
(noting that the ‘34 Act was created for the purpose of “ensuring greater financial
transparency and accuracy and less fraud or manipulation”).
41
See HENRY MANNE, INSID ER TR ADING AND THE STOCK MARKET (1966).
42
See infra Section II.B.2.
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1044 SETON HALL LAW REVIEW [Vol. 51:1035
justifications were controversial from the beginning. But the regime
took flight. It received the imprimatur of the federal courts in 1968 in
SEC. v. Texas Gulf Sulphur Co.,
43
in which the Second Circuit gave the
Cady, Roberts disclose-or-abstain rule its broadest expression. The
court explained that the “only regulatory objective” for Rule 10b-5 “is
that access to material information be enjoyed equally.”
44
The court
thus held that Cady, Roberts’s duty to disclose or abstain should place all
traders on an “equal footing,” and therefore applies to “anyone in
possession of material inside information,” without regard to insider
status.
45
3. The Supreme Court Weighs In
Texas Gulf Sulphur’s articulation of American insider trading law
demanding equal access to (or even a parity of) information
46
in
securities transactions held sway until the U.S. Supreme Court
addressed the issue in Chiarella v. United States in 1980.
47
While
working as a “mark-up” man for a financial printer, Vincent Chiarella
decoded documents to discover the targets of tender offers before they
were made public.
48
He then profited from trading on this material
nonpublic information.
49
Because Chiarella’s employer was hired by the
purchasing companies, he was not an actual or constructive insider at
the targets and, therefore, had no cognizable fiduciary or similar duty to
the targets’ shareholders. Consistent with Texas Gulf Sulphur, the
Second Circuit held that Chiarella’s status as an outsider was not crucial
to his liability, holding that “[a]nyone—corporate insider or not—who
regularly receives material nonpublic information may not use that
information to trade in securities without incurring an affirmative duty
43
SEC. v. Texas Gulf Sulphur Co., 401 F.2d 833, 851 (2d Cir. 1968).
44
Id. at 849.
45
Id. at 848, 851–52.
46
An “equal-access” insider trading regime precludes trading by those who have
acquired material nonpublic information via special access to sources that are
structurally closed to other market participants (e.g., from an employer)—regardless of
whether such trading breaches a fiduciary or similar duty of trust and confidence.
ANDERSON, supra note 17, at 118. A “parity-of-information” regime precludes trading
based on all material nonpublic information regardless of its source (e.g., picking up a
draft earnings report that was misplaced on a bus). Id.
47
445 U.S. 222 (1980). The Supreme Court addressed insider trading as a matter of
federal common law in Strong. Strong v. Repide, 213 U.S. 419 (1909). The Court first
addressed insider trading under the federal securities statutory regime in Chiarella.
48
Chiarella, 445 U.S. at 224.
49
Id.
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to disclose.”
50
The Supreme Court reversed, expressly rejecting a “parity
of information” or equal-access theory of liability.
51
In an opinion authored by Justice Lewis Powell, Jr., the Chiarella
Court held that while Section 10(b) is “aptly described as a catchall
provision . . . what it catches must be fraud.”
52
But because Chiarella
made his trades over anonymous exchanges, he never made false
representations to his counterparties. Such trading, Chiarella held, is
fraudulent only if one party trades based on material nonpublic
information that “the other [party] is entitled to know because of a
fiduciary or other similar relation of trust and confidence between
them.”
53
The Court acknowledged common law support for the proposition
that corporate insiders bear such a duty to disclose before trading with
their shareholders,
54
and therefore recognized what has since come to
be known as the “classical theory” of insider trading liability.
55
Under
that theory, a corporate insider who trades in his or her own company’s
shares on the basis of material nonpublic information breaches a
fiduciary or similar duty of trust and confidence to the current or
prospective shareholder-counterparty.
56
Because Chiarella was not an insider at the target corporations in
whose shares he traded, he owed no such duty of disclosure to his
counterparties. The trial court therefore erred by instructing the jury
that Chiarella “owed a duty [of disclosure] to everyone; to all sellers,
indeed, to the market as a whole.”
57
The Court held that Texas Gulf
Sulphur’s parity-of-information rule “departs radically” from the
fiduciary-fraud-based model demanded by fealty to Section 10(b) and
“should not be undertaken absent some explicit evidence of
congressional intent.”
58
The Court instructed that permitting some
50
United States v. Chiarella, 588 F.2d 1358, 1365 (2d Cir. 1978) (emphasis in
original).
51
Chiarella, 445 U.S. at 233.
52
Id. at 234–35.
53
Id. at 228 (alteration in original).
54
Id. at 227–28.
55
United States v. O’Hagan, 521 U.S. 642, 651–52 (1997) (noting that under “the
‘traditional’ or ‘classical theory’ of insider trading liability, § 10(b) and Rule 10b-5 are
violated when a corporate insider trades in the securities of his corporation on the basis
of material, nonpublic information”).
56
Chiarella, 445 U.S. at 230.
57
Id. at 231.
58
Id. at 233. Though the Court does not mention Texas Gulf Sulphur in connection
with its rejection of the parity-of-information rule, the rule it rejects is the same as that
which was laid out in that case, and which was relied upon by the Second Circuit in
upholding Chiarella’s conviction. For example, the Second Circuit decision noted that
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market participants to trade on insurmountable information
advantages may be unfair, but “not every instance of financial unfairness
constitutes fraudulent activity” under Section 10(b).
59
The equal-access
model for insider trading liability that had been advanced by the SEC
and had reigned for nearly twenty years was dead.
Yet, no sooner had the Court killed the equal-access model than the
SEC set to work reviving it (or at least its scope of liability) by
rulemaking and more expansive interpretations of the law. Six months
after Chiarella was handed down, the SEC adopted Exchange Act Rule
14e-3.
60
This new rule imposed liability on anyone possessing “material
information [that relates] to a tender offer [by another person,] which
information he knows or has reason to know is nonpublic and . . . [was]
acquired, directly or indirectly,” from that person or the issuer of the
securities that are targeted by the tender offer.
61
Although limited to the
tender-offer context, Rule 14e-3 dispensed with the requirement that
the trade be made in violation of a fiduciary or similar relationship,
immediately expanding insider trading liability to capture
Chiarella-type trading.
62
The SEC also sought to push the limits of the classical theory of
liability in the tipper-tippee context in Dirks v. SEC.
63
In that case, Ronald
Secrist, a former insider at a publicly-traded insurance company, shared
material nonpublic information about an ongoing fraud taking place at
his former employer with Raymond Dirks, a securities analyst.
64
Secrist
“urged Dirks to verify the fraud and disclose it publicly.”
65
Although
Dirks did not trade on this tip, a number of his clients whom he informed
about the fraud sold out of their positions in the insurer.
66
When the
fraud came to light (largely due to Dirks’s efforts), the insurer’s stock
Chiarella “recognizes, moreover, that since SEC v. Texas Gulf Sulphur . . . it has been Black
letter law that ‘anyone in possession of material inside information must either disclose
it to the investing public, or . . . must abstain from trading.’” United States v. Chiarella,
588 F.2d 1358, 1364 (2d Cir. 1978).
59
Chiarella, 445 U.S. at 232.
60
17 C.F.R. § 240.14e-3. This rule was adopted pursuant to the SEC’s authority
under Sections 14(e) and 23(a) of the ‘34 Act. 15 U.S.C. §§ 78n(e), 78w(a). Tender
Offers, Exchange Act Release No. 17120, 20 S.E.C. Docket 1350 (Sept. 4, 1980), at *15
(noting that the “Commission hereby adopts rule 14e-3. . .pursuant to Sections 14(e)
and 23(a) of the Exchange Act).
61
See generally id.
62
17 C.F.R. § 240.14e-3.
63
463 U.S. 646 (1983).
64
Id. at 648–49.
65
Id. at 649.
66
Id.
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price plummeted and the company entered receivership.
67
The SEC
promptly brought an enforcement action against Dirks for encouraging
his clients to trade on Secrist’s information.
68
The SEC’s theory of Section 10(b) tippee liability was that “[w]here
tippees—regardless of their motivation or occupation—come into
possession of material ‘corporate information that they know is
confidential and know or should know came from a corporate insider,’
they must either publicly disclose that information or refrain from
trading.”
69
The Supreme Court, Justice Powell again writing, rejected
this theory as relying on the same logic that failed in Chiarella,
reminding the SEC that Section 10(b) does not “require equal
information among all traders.”
70
The Court explained that “mere
possession of nonpublic information does not give rise to a duty to
disclose or abstain; only a specific [fiduciary-like] relationship does
that.”
71
Indeed, as a matter of public policy, such a broad parity-of-
information rule would risk damaging markets by impeding analysts in
“ferret[ing] out and analyz[ing] information . . . by meeting with and
questioning corporate officers and others who are insiders.”
72
To
protect such beneficial information gathering, and consistent with
Chiarella, the Court held that
a tippee assumes a fiduciary duty to the shareholders of a
corporation not to trade on material nonpublic information
only when the insider has breached his fiduciary duty to the
shareholders by disclosing the information to the tippee and
the tippee knows or should know that there has been a
breach.
73
An insider or tippee breaches this duty where the insider seeks to
personally benefit from his or her disclosure to the tippee: “Absent some
personal gain [by the tipper], there has been no breach of duty to
stockholders. And absent a breach by the insider, there is no derivative
breach” by the tippee.
74
Because Secrist tipped Dirks only to expose an
ongoing fraud (and not to benefit personally), he did not breach his
fiduciary duty to the insurer’s shareholders, so Dirks committed no
67
Id. at 650.
68
Id. at 650–51.
69
Dirks, 463 U.S. at 651.
70
Id. at 656–57.
71
Id. at 656 n.15.
72
Id. at 658.
73
Id. at 660.
74
Id. at 662.
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derivative breach.
75
The Supreme Court recently affirmed Dirks’s
personal-benefit test in Salman v. United States.
76
Despite setbacks in Chiarella and Dirks, the SEC and prosecutors
continued to press for broader Section 10(b) insider trading liability. In
particular, the government started prosecuting market participants
under a new fraud-based theory that would extend to corporate
outsiders. In briefing Chiarella, prosecutors argued that Chiarella had
“breached a duty to the acquiring corporation when he acted upon
information that he obtained by virtue of his position as an employee of
a printer employed by the corporation.”
77
The Court rejected this theory
as to Chiarella because it had not been presented to the jury, but did not
rule on the merits
78
of this “misappropriati[on]” theory of Section 10(b)
insider trading liability until it decided Carpenter v. United States.
79
Carpenter involved well-known Wall Street Journal columnist R.
Foster Winans, who regularly tipped the confidential pre-publication
contents of his stock-picking column to friends who then traded on this
information in advance of the article’s release.
80
The resulting trading
profits (approximately $690,000) were shared among the scheme’s
participants.
81
Because Winans owed no fiduciary duty to the
shareholders of the stocks he picked in his column, he was not liable
under the classical theory of insider trading. Prosecutors instead
charged that Winans breached a fiduciary duty to the Wall Street Journal
by misappropriating its confidential pre-publication information and
that he did so “in connection with” the purchase or sale of securities
because “the scheme’s sole purpose was to buy and sell securities at a
profit based on advance information of the column’s contents.”
82
Justice
Powell apparently lobbied the other justices to grant certiorari “to reject
the misappropriation theory once and for all.”
83
But in a twist of history,
Powell retired before Carpenter was argued.
84
Consequently, the
75
Dirks, 463 U.S. at 666.
76
137 S. Ct. 420, 427 (2016).
77
Chiarella v. United States, 445 U.S. 222, 235 (1980) (emphasis added).
78
Id. at 236.
79
484 U.S. 19, 24 (1987).
80
Id. at 23.
81
Id.
82
Id. at 24.
83
Kurt A. Hohenstein, Fair to All People: The SEC and the Regulation of Insider
Trading: Counterattack from the Supreme Court, SEC HIST. SOC’Y,
http://www.sechistorical.org/museum/galleries/it/counterAttack_d.php#ftn43.
84
Id.
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Carpenter Court split four-to-four on the misappropriation theory’s
legality.
85
With the common law of insider trading in “limbo,” the SEC sought
help from Congress and proposed a statutory definition of insider
trading.
86
Although Congress apparently stood ready to enact some
version of the proposed statute, the SEC ultimately backed off,
preferring, for enforcement, the common law’s flexibility over statutory
certainty.
87
Congress did, however, respond to the SEC’s calls for
enhanced enforcement tools by passing the Insider Trading and
Securities Fraud Enforcement Act of 1988 (ITSFEA).
88
ITSFEA increased
civil and criminal penalties generally, and extended the civil penalty of
treble damages to “controlling persons” who “knew or recklessly
disregarded the fact that [a] controlled person was likely to engage in
[insider trading] and failed to take appropriate steps to prevent such”
trading.
89
A principal purpose of this provision was to “increase the
economic incentives” for corporations to “supervise vigorously their
employees” through compliance programs and by other procedures.
90
Despite questions concerning its legal validity, the SEC and
prosecutors continued to bring misappropriation-theory cases for the
next decade until the theory of liability finally received the Supreme
Court’s imprimatur in United States v. O’Hagan.
91
James O’Hagan was a
partner at a law firm representing Grand Metropolitan PLC in its tender
offer for Pillsbury Company.
92
Although O’Hagan did not work on the
merger, he learned its details from others at the firm.
93
He profited more
than $4.3 million by trading ahead of the merger.
94
The classical theory
85
Carpenter, 484 U.S. at 24.
86
See generally Joseph Grundfest, Commissioner, SEC, Is the Sky Really Falling? The
State of Insider Trading Law After the Winans Decision, Address at the Federal Bar
Association (Jan. 26, 1988).
87
Id. at 2 (then-Commissioner Grundfest suggesting that it was best to put insider
trading on the “legislative back burner” to allow the law “to evolve on a case-by-case
basis in the courts”); see JONATHAN R. MACEY, IN SIDER TRADING: ECONOMICS, POLITICS, AND
POLICY 64 (1991) (quoting Congressman John Dingell as explaining that statutorily
defining insider trading would “narrow [rather than enhance] the SEC’s ability to bring
enforcement actions”).
88
ITSFEA, supra note 7.
89
Pub. L. No. 100-704, § 21A(b)(1)(A), 102 Stat. 4677; 15 U.S.C. § 78u-1(b)(1)(A).
Issuers were previously subject only to normal damages for derivative liability for their
employees’ insider trading violations under the ‘34 Act’s Section 20(a).
90
WILLIAM K.S. WANG & MARC I. STEINBERG, INSIDER TRADING 814–15 (3d ed. 2010)
(quoting H.R. Rep. No. 100-910, at 17).
91
521 U.S. 642 (1997).
92
Id. at 647.
93
Id.
94
Id. at 648.
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did not apply because he was neither an actual nor a constructive
insider at Pillsbury. His trading, therefore, breached no fiduciary or
similar duty of trust and confidence to his counterparties. Prosecutors
charged him under the misappropriation theory and Rule 14e-3.
95
O’Hagan embraced the misappropriation theory, whereby anyone
(insider or outsider) incurs Section 10(b) insider trading liability if he
or she misappropriates “confidential information for securities trading
purposes, in breach of a duty owed to the source of the information.”
96
The Court reasoned that it would make little sense, under the
classical theory, to hold an attorney liable for trading while representing
a tender-offer target but fail to impose the same liability on an attorney
who trades while representing the offeror.
97
The Court explained that
the two theories should be understood as “complementary”:
The classical theory targets a corporate insider’s breach of
duty to shareholders with whom the insider transacts; the
misappropriation theory outlaws trading on the basis of
nonpublic information by a corporate “outsider” in breach of
a duty owed not to a trading party, but to the source of the
information.
98
O’Hagan thus satisfied the “deceptive device or contrivance”
requirement of Section 10(b) by “dup[ing]” his principals—his firm and
its client—out of the exclusive use of their information by trading on it
despite its confidentiality.
99
O’Hagan was also significant in that it offered the Court its first
opportunity to address the question of whether the SEC had exceeded
its legal authority in promulgating Rule 14e-3. The Eighth Circuit had
held that Rule 14e-3 was ultra vires to the extent that it imposed insider
trading liability absent proof that the trading breached a duty of trust or
confidence; in so holding, the court concluded that “fraud” must mean
the same thing in the ‘34 Act’s Section 14(e) as it means in Section
10(b).
100
The Supreme Court held that it did not have to decide the
question of whether the SEC had defined “fraud” inaccurately in Rule
14(e) because Congress intended 14(e) as a “prophylactic” against fraud
in the tender-offers context.
101
As such, “under § 14(e), the Commission
may prohibit acts not themselves fraudulent under the common law or
95
Id. at 648–49.
96
Id. at 652.
97
O’Hagan, 521 U.S. at 659.
98
Id. at 652–53.
99
Id. at 653–54.
100
Id. at 670–71.
101
Id. at 672–73.
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§ 10(b), if the prohibition is ‘reasonably designed to prevent . . .
acts and practices [that] are fraudulent.’”
102
The Court did, however,
limit its approval of the Rule 14e-3’s application to the facts of O’Hagan
and other cases “of this genre.”
103
But it remains unclear how far the
Court’s approval of the SEC’s exercise of its § 14(e) prophylactic power
under Rule 14e-3 would extend in cases where the trade did not breach
a fiduciary or similar duty of trust and confidence.
104
4. Twenty-First Century Developments and Unresolved
Questions
With O’Hagan, all the basic elements of insider trading liability
enjoyed the Supreme Court’s imprimatur: Section 10(b) insider trading
liability (civil or criminal) arises where one looks to personally benefit
from trading on, or tipping to another, material nonpublic information
in breach of some fiduciary or similar duty of trust and confidence to the
counterparty to the trade (classical theory) or the information’s source
(misappropriation theory).
105
But certainty as to insider trading’s basic
elements has brought little clarity to the scope of the law’s application.
Each element of Section 10(b) liability admits of substantial
ambiguity and controversy that continues to bedevil market
participants, the defense bar, and the government.
106
For example,
there exists significant disagreement over what constitutes a “personal
benefit,”
107
when trading is “on the basis of” information,
108
when
information is “material”
109
or “nonpublic,”
110
what type of “fiduciary
102
Id. at 673.
103
O’Hagan, 521 U.S. at 672, 676.
104
ANDERSON, supra note 17, at 49 (noting that O’Hagan left open the possibility of
reviewing, on different facts, the SEC’s authority in promulgating Rule 14e-3).
105
See supra Section II.A.3.
106
See, e.g., ANDERSON, supra note 17, at 59–87.
107
E.g., BHARARA ET AL., supra note 6, at 8 (“Theories of insider trading have come and
gone, and elements of the offense that once seemed well-settled (like the ‘personal
benefit’ test) have at times been thrown into doubt by unexpected or unclear language
in court decisions.”).
108
E.g., John P. Anderson, Anticipating a Sea Change for Insider Trading Law: From
Trading Plan Crisis to Rational Reform, 2015 UTAH L. REV. 339, 347–50 (2015); Donald C.
Langevoort, “Fine Distinctions” in the Contemporary Law of Insider Trading, 2013 COLUM.
BUS. L. REV. 429 (2013); Carol B. Swanson, Insider Trading Madness: Rule 10b5-1 and the
Death of Scienter, 52 UNIV. KAN. L. REV. 147 (2003).
109
E.g., Joan MacLeod Heminway, Just Do It! Specific Rulemaking on Materiality
Guidance in Insider Trading, 72 LA. L. REV. 999 (2012); Joan MacLeod Heminway,
Materiality Guidance in the Context of Insider Trading: A Call for Action, 52 AM. U. L. REV.
1131 (2003).
110
E.g., Dirks v. SEC, 463 U.S. 646, 678 (1983) (Blackmun, J., dissenting) (“The [SEC]
tells persons with inside information that they cannot trade on that information unless
they disclose; it refuses, however, to tell them how to disclose.”). The SEC has not since
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relation” triggers the duty to disclose,
111
and whether that relation must
be one of “trust and confidence” (as articulated by Chiarella)
112
or “trust
or confidence” (as defined by SEC rule).
113
The range of possible
resolutions to these uncertainties has the potential to significantly
expand or contract insider trading liability.
The SEC tends to interpret ambiguities in the law expansively so
that the scope of liability will coextend with its original parity-of-
information or equal-access vision, at least so far as courts will permit
it.
114
When the courts have pushed back against expansive theories of
liability, the SEC resorted to rulemaking.
115
In 2000, for example, in
response to judicial resistance to the SEC’s position that “possession,”
rather than “use,” in trading of material nonpublic information
constituted trading “on the basis of” such information, the SEC
promulgated Rule 10b5-1.
116
Rule 10b5-1 defines trading “on the basis
of” such information as simply trading while “aware” of such
information.”
117
Similarly, in response to some courts’ restrictive
interpretation of when a fiduciary or similar duty of trust and
confidence arises in the context of the misappropriation theory, as in the
context of familial relationships,
118
the SEC adopted Rule 10b5-2 to
provide explicitly for such a duty.
119
Adopting these rules, however, did
little to settle the legal controversy, which simply shifted to the question
of whether the SEC had statutory authority to promulgate these rules.
120
More recently, a dispute arose in the criminal context regarding the
extent to which prosecutors can end-run around some of the harder-to-
prove elements of Section 10(b) insider trading liability, like
issued a rule on what constitutes proper disclosure, or when information is “public,”
preferring a case-by-case approach. WANG & STEINBERG, supra note 90, at 145.
111
E.g., ANDERSON, supra note 17, at 75–78.
112
See supra text accompanying note 53.
113
Langevoort, supra note 108, at 445.
114
See supra Section II.A.3.
115
See supra text accompanying notes 60–62.
116
See, e.g., BAINBRIDGE, supra note 18, at 71–74 (noting that the SEC adopted Rule
10b5-1 to resolve a split among circuits in the “use versus possession” debate).
117
17 C.F.R. § 240.10b5-1(b).
118
See, e.g., United States v. Chestman, 947 F.2d 551, 568 (2d Cir. 1991), cert. denied,
503 U.S. 1004 (1992) (holding that a marriage relationship alone did not create a
fiduciary or similar relation of trust and confidence for insider trading purposes).
119
17 C.F.R. § 240.10b5-2(3) (providing, inter alia, that there is a presumption of a
relation of trust or confidence among spouses, parents, children, and siblings for
purposes of insider trading liability).
120
See, e.g., Langevoort, supra note 108, at 445 (noting that some courts have
questioned Rule 10b5-2’s validity on the ground that trading does not constitute a
breach of confidentiality and, further, a promise of confidentiality is not necessarily
fiduciary).
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tipper/tippee liability’s “personal benefit” test, by bringing the cases
under other federal fraud statutes. The Securities and Commodities
Fraud statute, 18 U.S.C. § 1348, was adopted as part of the 2002
Sarbanes-Oxley Act. Congress presumably intended this statute to apply
to accounting fraud.
121
The Second Circuit nevertheless held in
Blaszczak v. United States that Section 1348 applies to insider trading
122
and that it effectively overrules Dirks in the criminal context by
removing the personal-benefit element of tipper/tippee liability.
123
Blaszczak so held despite Section 1348’s tracking Section 10(b)’s
language nearly verbatim.
124
If Blaszczak is upheld, insider trading law
will be burdened with still another controversy: proving criminal
liability under Section 1348 will be easier than proving civil liability
under Rule 10b-5.
125
***
Lacking meaningful statutory side rails, the common law evolution
of insider trading law has yielded an enforcement framework whose
basic liability elements are problematically vague. Notwithstanding the
Supreme Court’s insistence on a fiduciary-fraud model, this vagueness
has permitted the government to expand liability to the point of
near-equivalence with the SEC’s original vision of an equal-access or
parity-of-information model. The result is a schizophrenic insider
trading regime that the Supreme Court has shown little willingness to
treat.
126
B. Challenges and Controversies
1. The Harmful Consequences of Ambiguity in the Law and
Call for Reform
The tension in insider trading law imposes on the investing public
some of the harms that the securities laws were implemented to
prevent. Its vagueness has resulted in significant uncertainty for
traders, issuers, and the broader market. As Jackson and Bharara put it,
121
See, e.g., Brief of Amici Curiae Law Professors in Support of Defendant-Appellants’
Petition for Rehearing and for Rehearing En Banc at 4–7, United States v. Olan, 2020 WL
1040819 (2020).
122
United States v. Blaszczak, 947 F.3d 19, 36–37 (2d Cir. 2019).
123
See Andrew N. Vollmer, The Second Circuit’s Blaszczak Decision: Dirks Besieged
(Jan. 11, 2020), https://ssrn.com/abstract=3516082.
124
See Karen E. Woody, The New Insider Trading, 52 ARIZ. ST. L.J. 594, 616 (2020).
125
Id. at 600, 615 (noting that the SEC cannot bring actions under Section 1348
because it lacks criminal-enforcement power).
126
See, e.g., ANDERSON, supra note 17, at 80 (noting with respect to Salman, the Court’s
first insider trading case in nearly 20 years, which did little more than reaffirm Dirks,
that many “were surprised that the Court had waited so long to say so little”).
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the area’s “legal haziness . . . leaves both investors and defendants
unclear about what sorts of information-sharing or other activities by
investors would be considered insider trading, and what are the
acceptable forms of data-gathering and research that are part of any
healthy, functioning financial marketplace.”
127
Such uncertainty,
combined with the threat of what some have termed “draconian”
sanctions, places market efficiency at risk and raises significant due
process concerns.
128
The lack of clarity may, for example, force fund managers to refrain
from making trades that will benefit their investors simply because the
law gives them no clear guidance (even with the assistance of counsel)
on whether the trade is perfectly legal or will land them in prison.
129
Similarly, this lack of clarity leaves compliance departments at issuers
and financial institutions helpless in drafting clear insider trading
compliance programs.
130
Issuers and financial institutions thus find themselves in difficult
situations.
131
For, given that corporations can be held derivatively liable
for their employees’ insider trading,
132
and that prosecutors have
signaled that they will look to compliance programs to determine
whether to prosecute corporations (and the Federal Sentencing
Guidelines look to compliance in determining their “culpability
score”),
133
issuers are compelled to institute overbroad “play-it-safe,”
compliance programs that end up precluding good-faith, efficient
trades.
134
Paradoxically, insider trading law’s ambiguities may inhibit,
rather than promote, proper market functioning.
135
Moreover, in Kolender v. Lawson, the Supreme Court held that, to
satisfy the demands of due process, “a penal statute [must] define the
criminal offense with sufficient definiteness that ordinary people can
understand what conduct is prohibited and in a manner that does not
127
Bharara & Jackson, supra note 1.
128
Stephen M. Bainbridge, Incorporating State Law Fiduciary Duties into the Federal
Insider Trading Prohibition, 52 WASH. & LEE L. REV. 1189, 1191 (1995).
129
See, e.g., BHARARA ET AL., supra note 6, at 1 (noting that the law’s vagueness has “left
market participants without sufficient guidance on how to comport themselves”).
130
See, e.g., John P. Anderson, Solving the Paradox of Insider Trading Compliance, 88
TEMP. L. REV. 273, 287–95 (2016).
131
Id. at 295–96.
132
15 U.S.C. § 78t(a).
133
See, e.g., Justice Manual Section 9-28.300, available at https://www.justice.gov/
jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.300; see
also U.S. SENT’G COMM’N, U.S. SENT’G GUIDELINES MANUAL § 8C2.5(f) (2014).
134
See Anderson, supra note 130, at 295.
135
Id. at 296.
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encourage arbitrary and discriminatory enforcement.”
136
With SEC
commissioners, prosecutors, and sophisticated market professionals
confounded, insider trading law’s due process tension is palpable,
137
even if the courts have never held it to be unconstitutional.
The historic justification for vagueness in the law of insider trading
has been that it aids enforcement by granting maximum flexibility to the
SEC and federal prosecutors in bringing their cases.
138
Although such
justifications should be regarded with a dubious eye in liberal
democracies, they may have some merit in limited circumstances where
the risks to the public are particularly great and the criminal penalties
are moderate.
139
Whether insider trading over anonymous exchanges is
economically harmful or unethical has been hotly contested since
Chairman Cary introduced the crime in the early 1960s,
140
and the
criminal penalties for insider trading are severe (up to twenty years
under Section 10(b),
141
and up to twenty-five years under Section
1348).
142
For these and other reasons, scholars and jurists alike have reached
near unanimity in their call for reform,
143
and Congress is poised to
act.
144
It would, however, be unwise to respond to sixty years of
controversy over the appropriate scope of insider trading liability (with
some arguing that the practice should be legal) by adopting a hastily
drafted statutory definition. Any new statute should be informed by a
clear understanding of the economic harms and moral wrongs that the
law will target. As the following two subsections explain, the availability
of up-to-date empirical evidence will be crucial to achieving informed
insider trading reform.
136
Kolender v. Lawson, 461 U.S. 352, 357 (1983).
137
See Homer Kripke, Manne’s Insider Trading Thesis and Other Failures of
Conservative Economics, 4 CATO J. 945, 949 (1985) (arguing that Rule 10b-5 should be
declared “unconstitutionally vague”).
138
BAINBRIDGE, supra note 18, at 143 n.30.
139
For example, the law sometimes imposes strict liability for “public welfare
offenses” where the risks to the public concerning particularly dangerous conduct are
great. See, e.g., Morissette v. United States, 342 U.S. 246, 252–56 (1952). Such crimes,
however, are usually accompanied by minimal penalties. Id. at 256.
140
See infra Section II.B.2.
141
15 U.S.C. § 78ff(a).
142
18 U.S.C. § 1348.
143
See, e.g., BHARARA ET AL, supra note 6, at 1; Henning supra note 2, at 751.
144
See supra notes 8–9 and accompanying text.
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2. Ongoing Debate over the Economics and Ethics of Insider
Trading
Since Professor Henry Manne’s germinal 1966 book, Insider
Trading and the Stock Market, scholars have debated the economic
impacts of insider trading.
145
Manne and others have argued that it can
generate net benefits to securities markets. For example, insiders are
ideally situated to assess the true value of their own companies in real
time. To the extent that their trading affects stock prices, it pushes them
toward greater accuracy more efficiently, with lower litigation risk than
formal disclosure.
146
Professor Jonathan Macey argues that the price
accuracy offered by insider trading is crucial to healthy markets because
it fosters efficient capital allocation.
147
Insider trading may also provide a useful “market-smoothing”
function.
148
If insiders trade leading up to disclosure, price moves
gradually rather than suddenly as happens when markets must digest
information quickly. This “dampening of price fluctuations decreases
the likelihood of windfall gains and increases the attractiveness of
investing in securities for risk-averse investors.”
149
Insider trading may
thus make markets more attractive for many investors.
Economists have also identified insider trading’s benefits for
issuers. Price movements from insider trading can serve as “red flags”
to management of a fraud or some other issue, allowing management to
isolate and address the problem in real time without having to wait “for
the bureaucratic pipeline to deliver a memorandum.”
150
Insider trading
can also serve as an efficient means of executive compensation, offering
savings to shareholders in terms of reduced executive salaries, while
incentivizing and rewarding in-firm entrepreneurship.
151
145
MANNE, supra note 41.
146
See, e.g., Stephen Bainbridge, Insider Trading, ENCYC. OF L. & ECON. § 5650 (1999);
Dennis W. Carlton & Daniel R. Fischel, The Regulation of Insider Trading, 35 STAN. L. REV.
857, 868 (1983); Henry G. Manne, Insider Trading and the Law Professors, 23 VAND. L.
REV. 547, 548 (1970).
147
MACEY, supra note 87, at 10 (adding that “misallocation of society’s resources will
lead to unemployment, low productivity, and higher interest rates”).
148
Manne, supra note 146, at 574.
149
Bainbridge, supra note 146.
150
MACEY, supra note 87, at 37; Henry G. Manne, Insider Trading: Hayek, Virtual
Markets, and the Dog that Did Not Bark, 31 J. CORP. L. 167, 176, 181 (2005) (also noting
that some firms set up internal virtual-trading markets to inform their
decision-making).
151
Ian Ayers & Steven Choi, Internalizing Outsider Trading, 101 MICH. L. REV. 313, 338
(2002); Manne, supra note 146, at 579. There is some empirical evidence that issuers
do adjust salary based on the stringency of the firms’ insider trading policies. E.g., M.
Todd Henderson, Insider Trading and CEO Pay, 64 VAND. L. REV. 505, 509–10 (2011).
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Economists have also identified potential harmful effects of insider
trading. The adverse-selection model holds that if insider trading is
prevalent, “because of order imbalances and the difficulty of sustaining
a liquid market only with matching [orders], a liquidity provider has to
transact with his own inventory and thus bears the risk of consistently
buying ‘high’ from and selling ‘low’ to insiders.”
152
Market makers will
respond by increasing their bid-ask spreads to compensate for
consistently losing trades against insiders. This effective tax on all
market participants may lead to reduced liquidity, and therefore an
increase in the issuer’s cost of capital. The higher a firm’s cost of capital,
the less flexibility it will have to grow.
153
Insider trading also has the potential to create moral hazard.
“[I]nsider trading might simply be an inefficient private benefit of
control that accrues to managers and other insiders.”
154
Managers
might delay disclosures to provide time to free up capital for their trades
or to allow time for their tippees to trade.
155
And because insiders can
profit from any stock-price movement, they may have the perverse
incentive to generate bad news in order to profit from short positions in
their own company’s shares.
156
Insiders may deprive the owner of material nonpublic
information—the issuer or insider’s employer—of its “right of exclusive
use.”
157
Where insider trading violates the issuer’s instructions or is
misappropriated, it is hard to dispute that some harm results.
158
The question of insider trading’s net economic impact is far from
resolved. As one commentator put it, the empirical evidence supporting
the theoretical economic arguments for and against insider trading is
“so limited and weak that any conclusions . . . should be regarded with
152
Stanislov Dolgopolov, Insider Trading and the Bid-Ask Spread: A Critical Evaluation
of Adverse Selection in Market Making, 33 CAP. U. L. REV. 83, 98 (2004).
153
Laura Nyantung Beny, Insider Trading Laws and Stock Markets Around the World:
An Empirical Contribution to the Theoretical Law and Economics Argument, 32 J. CORP. L.
237, 249 (2007); Dolgopolov, supra note 152, at 100–01; see supra note 147 and
accompanying text.
154
Beny, supra note 153, at 243.
155
See Roy A. Schotland, Unsafe at Any Price: A Reply to Manne, Insider Trading and
the Stock Market, 53 VA. L. REV. 1425, 1448–49 (1967); Morris Mendelson, The Economics
of Insider Trading Reconsidered, 117 U. PA. L. REV. 470, 476–77 (1969).
156
See, e.g., Saul Levmore, Securities and Secrets: Insider Trading and the Law of
Contracts, 68 VA. L. REV. 117, 149 (1982).
157
United States v. O’Hagan, 521 U.S. 642, 654 (1997).
158
If such trading did not impose some cost on the information’s source, there would
be no reason for the owner of the information to have denied the right to trade on it in
the first place. See, e.g., Ayers & Choi, supra note 151, at 354–55 (noting that “the traded
firm itself . . . is much better situated to decide whether particular classes of informed
trading are socially beneficial”).
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1058 SETON HALL LAW REVIEW [Vol. 51:1035
restraint.”
159
Yet the area’s key players appear unfazed by this impasse,
likely because many proponents of insider trading regulation justify it
in attitudinal terms. They typically justify harsh penalties for insider
trading as necessary to protect “investor confidence” by ensuring that
markets are perceived as “fair.”
3. Market Confidence, Fairness, and the Importance of
Empirical Evidence of Public Attitudes to Reform Efforts
Protecting the perceived confidence in the “fairness” and “integrity
of our securities markets” is perhaps the most frequently-cited
justification offered in defense of insider trading laws.
160
Three basic
premises appear to be implicit in the market-confidence theory: (1) a
large portion of the general public believes that insider trading is unfair
and pervasive; (2) this widespread perception leads those who share it
to reduce or end their market participation; and (3) rigorous
enforcement of insider trading is, therefore, necessary to prevent the
harsh consequences to markets (e.g., reduced market liquidity and
increased issuer cost of capital) that would result from (2).
161
But, as premises (1) and (2) above reflect, the market-confidence
theory turns on empirical claims concerning public attitudes. It would
be imprudent to push forward with new legislation statutorily
criminalizing insider trading based on the market-confidence concern
without validating these claims.
162
159
Laura E. Hughes, The Impact of Insider Trading on Stock Market Efficiency: A
Critique of the Law and Economics Debate and a Cross-Country Comparison, 25 TEMP. INT’L
& COMP. L.J. 479, 505 (2009); accord Charles C. Cox & Kevin S. Fogarty, Bases of Insider
Trading Law, 49 OHIO ST. L.J. 353, 357 (1988) (“it cannot conclusively be said that the
economic benefits outweigh the costs of prohibiting insider trading” because “[t]he
comparative costs and benefits have not been quantified”)
160
BHARARA ET AL., supra note 6, at 1; Selective Disclosure and Insider Trading: Final
Rule, 65 Fed. Reg. 51,715 (Aug. 24, 2000); accord Bainbridge, supra note 128, at 1234
(ranking “maintaining public confidence in the securities market” as one of the principal
rationales for regulating insider trading); H.R. Rep. No. 100-910, at 7–8 (1988)
(expressing concern that investors will not participate in markets perceived to be
“rigged” by insider trading); Steve Schaefer, Wall Street Sheriff Preet Bharara Talks
Insider Trading, FORBES (Jul. 18, 2012, 3:58 PM), https://www.forbes.com/sites/steve
schaefer/2012/07/18/wall-street-sheriff-preet-bharara-talks-insider-trading/#727e0
a2b6690; see supra notes 15–16 and accompanying text (Bharara asserting that
aggressive prosecution of insider trading is important to enliven “confidence in the
market”).
161
See, e.g., John P. Anderson, Insider Trading and the Myth of Market Confidence, 56
WASH. U. J.L. & POL’Y 1, 1–2 (2018).
162
See Committee on Federal Regulation of Securities, Report of the Task Force on
Regulation of Insider Trading, 41 BUS. L. 223, 227–28 (1985) (“Although the task force
knows of no empirical research that directly demonstrates that concerns about integrity
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Similarly, appeals to fundamental “fairness” as a justification for
the regulation of insider trading are rarely accompanied by rigorous
philosophical demonstration.
163
Instead, arguments concerning the
fairness of insider trading typically assume that “most agree,” or appeal
to “common sense.”
164
Such appeals demand empirical
support—particularly in the context of insider trading where, as noted
above, the law has permitted parties to profit from trading based on
“unerodable” information asymmetries for centuries without regarding
it as unfair.
165
Consequently, it seems wise to empirically determine
whether the public actually thinks it is fundamentally unfair, and under
what circumstances.
Finally, one risk in basing legislative codification, particularly in the
criminal law, on current public attitudes is that, even if empirical
evidence supports the claim that these attitudes are shared, the public
may be misguided or wrongheaded in holding these views. Such false
consciousness may result from cultural bias, media spin, incomplete
information, and the like. It is therefore important that lawmakers be
apprised of any empirical evidence suggesting public attitudes are
adulterated by such factors.
Although there have been efforts to sound public attitudes
concerning insider trading in the past,
166
this Article’s goal is to inform
reform efforts by providing the first large-scale, census-representative
national survey on the topic since 1986. In what follows, Part III
describes the survey instrument and Part IV presents the results.
III. THE SURVEY INSTRUMENT
The survey’s primary goal was to update and broaden the state of
knowledge of national views on insider trading. First, it aimed to
advance the state of the art of insider trading knowledge by creating a
more nuanced and comprehensive catalog of societal perceptions about
the field. The hope is that, combined with future work,
167
it will provide
affect market activity, both authoritative commentators and common sense tell us that
if investors do not anticipate fair treatment, they will avoid investing in securities.”).
163
See, e.g., BAINBRIDGE, supra note 18, at 192 (noting that the usual “vague and poorly
articulated notions of fairness surely provide an insufficient justification for [insider
trading] prohibition”).
164
BHARARA ET AL., supra note 6, at 3; Committee on Federal Regulation of Securities,
supra note 162, at 227.
165
See Selective Disclosure and Insider Trading: Final Rule, supra note 160; supra
Sections II.A.1–2.
166
See supra note 14.
167
See infra Part V.
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a robust knowledge base on which policymakers, courts, scholars, and
others can rely.
The study’s second aim was to compare general public impressions
about, and attitudes toward, insider trading in 2019 with those
expressed in the famous pair of 1986 Business Week surveys.
168
Much
has changed over the last several decades, including vast technological
improvements, shifts in political views and demographics, and
fluctuations in general understanding of and participation in equities
markets.
169
Although valuable, the Business Week surveys were short
and relatively simple.
170
This Part first discusses the study’s strategy for optimizing, within
its constraints, the survey’s effectiveness in gathering the relevant data.
It then describes the methodology used to collect that information. It
concludes by noting the survey’s limitations.
A. Survey Strategy
The survey rested on two building blocks. The first was a set of
topics related to insider trading that would benefit from being informed
by public opinion. The second comprised insights gained from
conversations with empiricists, surveying scholarship, and legal
literature presenting the results of public surveys.
171
These informed
the task at hand and the development of baseline practices. A
professional polling firm then administered the survey to a
168
Business Week 12/86, supra note 14; Business Week 8/86, supra note 14.
169
See KATIE KOLCHIN, A CHART BOOK ON STOCK OWNERSHIP (2019); B. Ravikumar, How
Has Stock Ownership Trended in the Past Few Decades?, FED. RES. BANK OF ST. LOUIS (Apr. 9,
2018), https://www.stlouisfed.org/on-the-economy/2018/april/stock-ownership-
trended-past-few-decades.
170
The August and December surveys contained nine and eight questions. See
Business Week 12/86, supra note 14; Business Week 8/86, supra note 14.
171
E.g., STEPHEN B. HULLEY ET AL., DESIGNING CLINICAL RESEARCH (4th ed. 2013); Courtney
Megan Cahill & Geoffrey Christopher Rapp, Does the Public Care How the Supreme Court
Reasons? Empirical Evidence from a National Experiment and Normative Concerns in the
Case of Same-Sex Marriage, 93 N.C. L. REV. 303 (2015); Matthew B. Kugler & Lior Jacob
Strahilevitz, Assessing the Empirical Upside of Personalized Criminal Procedure, 86 U. CHI.
L. REV. 489 (2019); Matthew B. Kugler & Lior Jacob Strahilevitz, The Myth of Fourth
Amendment Scrutiny, 84 U. CHI. L. REV. 1747 (2017); Matthew B. Kugler & Lior Jacob
Strahilevitz, Actual Expectations of Privacy, Fourth Amendment Doctrine, and the Mosaic
Theory, 2015 SUP. CT. REV. 205; Lior Strahilevitz & Omri Ben-Shahar, Interpreting
Contracts via Surveys and Experiments, 92 N.Y.U. L. REV. 1753 (2017).
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census-representative group of 1,313 respondents in April 2019.
172
With this sample size, the survey-level margin of error is ±3 percent.
173
Census representativeness—across age, gender, race, and other
categories—was important because insider trading law and policy is set
almost entirely at the national level.
174
More than half of the nation’s
population
175
invests in equities, directly or indirectly.
176
Ownership
spans all income groups.
177
And in today’s enforcement climate, it is
relatively easy for the unknowing—professionals and investing
individuals alike—to be caught up in an insider trading investigation.
178
The survey, in other words, had to be temporally and historically
relevant. Practical considerations, however, limited what could be
accomplished in one instrument. If the survey was too long or too
involved, respondents might abandon or be overwhelmed by it;
therefore, content had to be limited. It was important to obtain updated
figures on the key questions from the 1986 Business Week surveys about
the pervasiveness of insider trading, whether the practice should be
illegal, and whether respondents would trade on a tip.
179
172
These 1,313 respondents passed screening criteria to ensure that they were
taking the study seriously. See infra note 198. The actual number of respondents was
higher.
173
See infra note 209 and accompanying text; text accompanying notes 207–08.
174
States also have IT laws. E.g., Cal. Corp. Code § 25402 (Deering 2020); N.Y. Gen.
Bus. Law § 352-c (Consol. 2020); Vt. Stat. Ann. 9, § 4301 et seq. (2020); see also People
v. Napolitano, 282 A.D.2d 49 (N.Y. App. Div. 2001) (affirming an insider trading
conviction based on N.Y. Gen. Bus. Law § 352-c). Nevertheless, the Securities Exchange
Commission and Department of Justice are the usual plaintiffs in insider trading actions.
175
The survey included both citizens and noncitizens.
176
GARY MOTTOLA, INSIGHTS: FINANCIAL CAPABILITY: A SNAPSHOT OF INVESTOR HOUSEHOLDS IN
AMERICA 1 (2015) (“Approximately 6 in 10 households”); Board of Governors of the
Federal Reserve System, Changes in U.S. Family Finances from 2013 to 2016: Evidence
from the Survey of Consumer Finances 103 FED. RES. BULL. 20–21 (Sept. 2019) (“51.9
percent of families”); Jeffrey M. Jones, U.S. Stock Ownership Down Among All but Older,
Higher-Income, GALLUP (May 24, 2017), https://news.gallup.com/poll/211052/stock-
ownership-down-among-older-higher-income.aspx.
177
Board of Governors of the Federal Reserve System, supra note 176, at 20.
178
See, e.g., Thomas A. Firey, Why Is Insider Trading Illegal?, CATO INST. (May 15, 2017,
11:28 AM), https://www.cato.org/blog/why-insider-trading-illegal (former baseball
player). Joe Gyan Jr., Ruston Dentist Acquitted of Insider Trading Related to Sale of Shaw
Group in Baton Rouge, ADVOCATE (Aug. 10, 2017, 4:15 PM), https://www.the
advocate.com/baton_rouge/news/business/article_823c64dc-7c8b-11e7-a307-
73dcfa0f6461.html (dentist). Even an acquittal is devastating. William Alden, F.B.I. Raid
Was Blamed for the Demise of Two Hedge Funds, N.Y. TIMES, Dec. 11, 2014, at B2; William
D. Cohan, Overturned, FORTUNE, Sept. 1, 2016, at 90.
179
See Business Week 12/86, supra note 14 at 34; Business Week 8/86, supra note 14
at 74.
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The survey had to cover the basic propositions and theories set out
by various players in the insider trading debate, like the fiduciary-duty-
based theories and approaches applied in controlling case law,
justifications for the competing parity-of-information and equal-access
models, the market-confidence theory, questions of morality, questions
of criminality, and other controversies discussed in Part II. Both
absolute and relative measures—like whether one of the basic theories
of insider trading liability (classical or misappropriation) was regarded
as more just, or whether respondents fair-punishment views changed
when considering them in the abstract versus applied to
themselves—were important.
The resulting data had to be “deep as well as broad”
180
so that it
would provide an objective basis for characterizing public opinion
across many dimensions. It was important to know, for example,
whether the public believed that insider trading, in the abstract, was
immoral and, separately, should be illegal.
181
To robustly test various
theories, it was equally important to learn morality and legality views
about insider trading in its various forms and under various
circumstances.
There was further benefit to approaching the individual points of
inquiry from multiple angles. Multiple questions, and juxtapositions of
questions, tested the examined propositions. Testing individual
theories and propositions this way provided internal cross-checks and
allowed for more conclusions to be drawn with increased confidence.
This style of questioning yielded insight into how well-formed and
strongly held public opinions were on these subjects. Juxtaposing
answers to each of two questions about the morality and legality of
insider trading, for example, revealed information that illumined how
strongly individuals held the beliefs that they expressed directly in
answer to each of the questions.
182
Comparing respondents’ answers
about general punishment for insider trading versus what it should be
for themselves if they were caught could yield insight on how
180
Eric Ruben & Joseph Blocher, From Theory to Doctrine: An Empirical Analysis of
the Right to Keep and Bear Arms After Heller, 67 DUKE L.J. 1433, 1433 (2018).
181
There is an ongoing debate, engaged in most famously by H.L.A. Hart and Patrick
Devlin, about whether all that is immoral should be criminally punished. Compare H.L.A.
HART, LAW LIBERTY AND MORALITY (1963) (arguing that morals should not be enforced via
legal sanction), with PATRICK DEVLIN, THE EN FORCEMENT OF MORALS (1959) (arguing the
opposite); see Peter Cane, Taking Law Seriously: Starting Points for the Hart/Devlin
Debate, 10 J. ETHICS 21 (2006) (describing the Hart-Devlin debate); supra text
accompanying note 59 (“not every instance of financial unfairness constitutes
fraudulent activity under § 10(b)”).
182
See infra Section IV.D.2.
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well-considered respondents’ initial punishment views were.
183
Similarly, having respondents face related follow-up questions after
having been exposed to various policy arguments (for, neutral, and
against)—unceremoniously dubbed “propaganda” herein—regarding
insider trading could reveal the extent to which opinions are subject to
outside influences.
184
Although public opinion should not be the sole factor informing
reform efforts, it should be a substantial part of that inquiry, particularly
in the insider trading context.
185
As Professors Green and Kugler point
out, a disjunction between social views about a behavior’s propriety and
the criminal law’s treatment of it causes the law to seem unfair, and
ultimately lose credibility and effectiveness.
186
Similarly, because law
tends to shape and inform social norms,
187
punishing too broadly also
threatens the regime’s legitimacy.
188
Indeed, if one believes that
fairness is simply a function of social views, one might say that a law is
unfair if it is misaligned with public attitudes.
189
This effect “increases
substantially” “when it is not intuitive that certain criminalized conduct
is wrong.”
190
Professor John F. Stinneford shows that the common law is thought
to reflect longstanding propositions enjoying universal acceptance, and
thus reason, while externally imposed sovereign commands were
suspect.
191
The common law is also widely, albeit not universally,
believed to produce more efficient—including more predictable—
results.
192
The longstanding disjunction between the common law of,
183
See infra Section IV.D.3.
184
See infra Section IV.E.
185
See supra Section II.B.3; cf. 6 MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION
§ 32:195 (5th ed. 2020) (noting, in the trademark context, that “[w]hile the courts are
careful in writing opinions not to place all their evidentiary eggs in the survey basket,
starting in last two decades of the 20th Century, an increasing number of judicial
opinions expressly rely upon survey evidence to substantiate the decision”)
186
Green & Kugler, supra note 14, at 450–51 (citing sources).
187
See RICHARD MCADAMS, THE EXP RESSIVE POWER OF LAW (2015).
188
See Green & Kugler, supra note 14, at 451.
189
Cf. U.S. CONST. amend. VIII; John F. Stinneford; The Original Meaning of “Cruel”, 105
GEO. L.J. 441, 470 (2017) (noting that the Eighth Amendment intended to bar
punishments misaligned with “universal, longstanding custom”).
190
Green & Kugler, supra note 14, at 451.
191
John F. Stinneford, The Original Meaning of “Unusual”: The Eighth Amendment as a
Bar to Cruel Innovation, 102 NW. U. L. REV. 1739, 1772–87 (2008). “Reason,” here, refers
to an amalgamation of concepts like common sense and natural law. Id. at 1772, 1772
n.193, 1773, 1773 n.202, 1773 n.203. They can be summarized as “universal, abstract
principles of justice.” Id. at 1774.
192
See RICHARD A. POSNER, ECONOMIC ANALYSIS OF LA W 249, 251 (7th ed. 2007); Frank B.
Cross, Identifying the Virtues of the Common Law, 15 SUP. CT. ECON. REV. 21, 21–22 (2007)
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and regulatory behavior toward, insider trading was, therefore, worthy
of examination.
193
This Article’s goals are primarily descriptive. It offers some
analysis, but only to enhance the study’s descriptive strength. Although
it is tempting to draw why conclusions at this stage, that would be
premature because this survey illuminates the topics about which
detailed why questions should be asked.
194
B. Survey Design and Administration
The survey was administered online using written instructions.
195
Online administration allowed for a substantially larger sample size
given a fixed budget, enhancing precision.
196
Written surveys are
typically more uniform and efficient, and “written information is more
likely to be retained by research subjects.”
197
The survey was divided into three stages. Stage 1 elicited opinions
about insider trading directly. Stage 2 asked participants to imagine
themselves in the roles of individuals who had the opportunity to trade
on material nonpublic information in various situations. Some
respondents were asked whether trading in those roles would be
ethical. Others were asked whether they would, in fact, trade if they
found themselves in the described situations. The survey included two
(citing sources); id. at 24–41 (discussing theories for the common law’s alleged
superiority over legislative and administrative lawmaking); Paul H. Rubin, Why Is the
Common Law Efficient?, 6 J. LEGAL STUD. 51 (1977); Jeffery Evans Stake, Evolution of Rules
in a Common Law System: Differential Litigation of the Fee Tail and Other Perpetuities, 32
FLA. ST. U. L. REV. 401, 401–02 (2005) (citing a comprehensive array of sources and
noting that in the common law “there is a feedback loop, a mechanism that returns the
output of a system back to the system’s input, that provides courts with opportunities
to overturn inefficient common law . . . rules”); id. at 404–10 (describing common law
mechanisms and processes that favor efficient results). Professor Cross empirically
compares the common and civil law, finding that the former is superior in some areas,
like predictability, but finding no difference in others. See Cross, supra, at 46–57.
193
See supra text accompanying note 126.
194
This is planned for upcoming work. See infra Section V.
195
The survey script, available in full in Appendix A, available at http://dx.doi.org/
10.15786/20.500.11919/7122, was crafted into an online survey using Qualtrics.
Respondent selection was designed to achieve a census-representative sample by
Dynata, a reputable provider of first-party survey and research data. See Our Company,
DYNATA, https://www.dynata.com/company/ (last visited Jan. 2, 2021); About Dynata,
DYNATA, https://www.dynata.com/company/about-us/ (last visited Jan. 2, 2021).
196
See supra notes 172–73 and accompanying text.
197
Kugler & Strahilevitz, supra note 171, at 497–98 (citing a study of Miranda
warnings); see HULLEY ET AL., supra note 171, at 232; see also DIANE L. SCHALLERT ET AL.,
ANALYSES OF DIFFERENCES BETWEEN WRITTEN AND ORAL LANGUAGE 6 (University of Illinois at
Urbana-Champaign, Technical Report No. 29, Apr. 1977) (“Readers can sample the text
in the most efficient way for their purposes, while listeners must follow the material as
the speaker presents it . . . .”).
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screening questions asking respondents to enter specified text; answers
of respondents who did not enter the specified text were excluded from
the data set.
198
Answering any given question was optional. Stage 3
asked for demographic information.
Stages 1 and 2 are detailed in the next two subsections. Section II.C
discusses the survey’s key limitations. Part IV presents and discusses
the survey’s findings.
1. Stage 1: Direct Assessment of Insider Trading Views
Stage 1 asked participants a basic set of direct questions about
their general attitudes about insider trading. Most of these questions
were objective, presenting respondents with two to four answer
choices. Participants were asked eight to ten objective questions, with
two of the questions asked, or not, depending on respondents’ answers
to previous questions.
199
Answers to these questions did not have to be
coded; they were used as-is.
198
Appendix A, at 3, 6, available at http://dx.doi.org/10.15786/20.500.11919/7122.
The two screening questions were included (1) between Stages 1 and 2, and (2) before
the propaganda section in Stage 2, to determine whether respondents were reading
questions and answering them to the best of their abilities, or merely selecting random
answers to get to the end of the survey. Because survey respondents were compensated,
this additional step was added to minimize the number of respondents who would click
through the questions quickly simply to receive payment. See infra Section IV.E.2.
199
The survey is available in full in Appendix A, available at http://dx.doi.org/10.157
86/20.500.11919/7122. The objective questions are paraphrased here:
Q1
How common is insider trading?
Q2
Do you personally invest in stocks?
Q3
What might keep you from investing?
Q3.a
Would insider trading in a stock you like make
you more, less, or equally likely to buy it?
Q4
Would insider trading in the market prevent
you from investing in it?
Q5
Would you trade on inside information?
Q6
Is insider trading morally wrong?
Q7
Should insider trading be illegal?
Q7.a
How should inside traders be punished?
Q7.b
How should you be punished for inside trading?
Questions 1, 2, 3, 3.a, 4, 5, 6, and 7 were objective and posed to all participants.
Questions 7.a and 7.b were objective and posed to only those participants who answered
Question 7 in the affirmative.
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Respondents were also asked one or two of four possible
open-ended questions, and the total again depended on the answers to
previous questions.
200
Answers to these questions were coded by a law
student research assistant whom one of the Authors trained. The coding
was straightforward enough that a student could be trusted with it. A
spot-check revealed that the work was accurate. Student coding also
minimized the likelihood that subconscious author bias would impact
the results.
201
In any event, the survey’s results are less prone to
subjective biases because only a small proportion of its responses
required coding.
Stage 1 was followed by a screening question,
202
and then Stage 2,
discussed below.
2. Stage 2: Scenario-Based Assessment of Insider Trading
Views
Stage 2 employed scenario-based, role-playing questions to
indirectly elicit participants’ attitudes toward insider trading in various
situations. The objective scenarios were coupled with short
propaganda narratives about alleged benefits or harms of insider
trading. The Stage’s goals were twofold. First, it aimed to determine
public instincts about insider trading in situations implying fiduciary or
other relational duties. Second, it sought to ascertain the malleability of
respondents’ sentiments about insider trading.
Upon entering Stage 2, participants were channeled into one of two
tracks: ethical or pragmatic. Respondents were then presented with a
series of five scenarios related to the purchase of a small corporation by
200
The open-ended questions are paraphrased here:
Q3.b
One of Q3.b.1–3 based on answer to Q3.a
Q3.b.1
[more likely] Why?
Q3.b.2
[less likely] What about insider trading would
make you less likely?
Q3.b.3
[equally likely] Would any amount of insider
trading change your mind?
Q5.a
[if Q5 answered No]
What factors would stop you?
Question 5.a was asked only to participants who answered Question 7 in the negative.
The actual answers to the open-ended questions are available in Appendix B.
201
Mark A. Hall & Ronald F. Wright, Systematic Content Analysis of Judicial Opinions,
96 CALIF. L. REV. 63, 111 (2008) (stating, in the context of coding judicial opinions, that
“[f]rom a social science perspective, [scholar, as opposed to student, coding] is the height
of unmitigated subjectivism—the opposite of good scholarship”). Much of Hall &
Wright’s article, especially Part IV, is a catalog of best practices for performing case
coding. Many of its recommendations apply to a broad range of empirical studies.
202
See supra note 198 and accompanying text.
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a larger one. The survey asked participants to imagine themselves in
five roles connected to the small firm in which they were exposed to
profitable material nonpublic information. In the ethical cohort, for
each role, participants were asked whether it would be ethical to buy,
first, the small target firm’s stock and, second, the large acquiring firm’s
stock. Participants in the pragmatic track were asked whether they
actually would buy in the given situation.
In the first scenario, participants were asked to imagine themselves
as the CEO—the archetypical insider—of the small firm. From there,
they were asked to step into the shoes of, in turn, a janitorial employee
of the firm, an outside accountant hired to audit the firm, the friend of a
middle manager of the firm at a holiday party, and a quasi-stranger who
encountered a brokerage-firm-employee neighbor in an elevator. Half
of each track was presented with the scenarios in reverse order to reveal
whether question order influenced responses.
Each track was further divided into two groups. Half of the ethical
track was told, in conjunction with assuming the role of CEO of the small
firm, that the firm had expressly granted permission to insiders in their
positions to trade on firm information. Half of the pragmatic track was
asked whether they would trade on the information presented to them
in each scenario knowing that they could do so “without getting caught.”
After respondents passed through all five scenarios, they were
randomly selected to hear and read
203
a piece of text expounding one of
three propaganda statements regarding insider trading. One exposition
presented the traditional fairness view of insider trading, explaining
how it is unfair and detrimental to markets. Another was neutral,
asserting that insider trading likely had no meaningful impact. A third
presented a positive view of insider trading, explaining how it could
benefit individual investors and markets. Equal proportions of
participants were presented with each exposition.
After listening to and reading the text, respondents were again
asked to imagine themselves in situations that were designed to be
substantively analogous to the original own-company scenarios that
203
Although written questionnaires tend to be superior to interviews, see supra note
197 and accompanying text, “[c]ognitive research has established the fact that humans
process information by means of two distinct channels—one for visuospatial
information and one for auditory-verbal information. A given piece of information can
be organized and ‘stored’ in memory in either or both of these representational systems.
According to dual-coding theory, information that is represented in both formats is
more likely to be recalled than information that is stored in either format alone.” Diane
F. Halpern & Milton D. Hakel, Applying the Science of Learning to the University and
Beyond: Teaching for Long-Term Retention and Transfer, CHANGE, July/Aug. 2003, at 39.
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1068 SETON HALL LAW REVIEW [Vol. 51:1035
they already faced.
204
Participants were randomly selected to respond
to three of the five follow-up scenarios. Integrity of the cohorts was
maintained: those in the pragmatic cohort were asked pragmatic
follow-up questions, and those in the ethical cohort were asked ethical
follow-up questions. The follow-up questions maintained the language
respondents initially faced regarding getting caught or having
permission that the respondents initially faced.
The flowchart in Figure 1 illustrates the paths respondents took
through Stage 2 of the survey. The next Section discusses some of the
survey’s limitations. Part IV presents the results.
204
The analog to the original CEO scenario was another CEO scenario involving a
successful product. The analog to the original janitor scenario was one involving a
security guard. The analog to the original accountant scenario was another accountant
scenario in the ethical path, but a scenario involving a junior attorney in the pragmatic
path. The analog to the holiday party was a dinner with the insider friend. The analog
to the quasi-stranger in the elevator was the same quasi-stranger at an adjacent lane in
a bowling alley.
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Figure 1: Paths Through and Variations on Stage 2 Scenarios
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C. Limitations
Surveys are, unavoidably, proxies for perfect knowledge about
what respondents think. Surveys cannot read minds. Their informative
value comes from (1) collecting many answers to maximize the
probability that participants’ answers reflect what they actually think
205
and (2) providing a knowledge base that can be used to intuit additional
information.
206
Few claims can truly be proven or falsified. This Section
sets forth some of this survey’s particular limitations.
1. Sampling Error
As with any nonuniversal analysis, the results are subject to
sampling error. Sampling error is “the possibility that the sample being
tested is not representative of the population from which it is randomly
drawn.”
207
Increasing sample size reduces the magnitude of sampling
error.
208
The survey’s sample size of 1,313 produced a margin of error
of ±3%.
209
In subgroups, which have lower numbers of respondents, the
margin of error is higher. The observed results are, nevertheless, the
best estimates of the actual values.
210
2. Respondent Background Knowledge
It is difficult to know respondents’ background knowledge and
what they assumed about survey questions based on that knowledge.
For example, it cannot be precisely known whether, when asked about
investing in the “stock market,” respondents considered holding
equities in a retirement account or investing in mutual funds to be
205
See supra note 172 accompanying text.
206
See supra text accompanying notes 182–84; infra Sections IV.D.2–3, IV.E.
207
George A. Mocsary, Statistically Insignificant Deaths: Disclosing Drug Harms to
Investors (and Patients) Under SEC Rule 10b-5, 82 GEO. WASH. L. REV. 111, 155 (2013); see
David H. Kaye, David A. Freedman & David H. Kaye, Reference Guide on Statistics, in FED.
JUD. CTR., REFERENCE MANUAL ON SCI. EVIDENCE 211, 296 (3d ed. 2011) (“[T]he estimate is
likely to differ from the population value because the sample is not a perfect microcosm
of the whole.”).
208
Freedman & Kaye, supra note 207, at 246.
209
“Margin of error” is a technical term denoting the range of values lying within a
given “confidence interval” around the observed value. RICHARD D. DE VEAUX ET AL., INTRO
STATS 489–92 (3d ed. 2009). For a given sample size, a confidence interval of a certain
percentage denotes the percentage of samples taken from the population that will
capture the true value. Id. at 489. This study employed the customary confidence
interval of 95% to calculate margins of error. See id. at 490–91. A ±3% margin of error,
therefore, means that one can be 95% certain that the true proportion of the population
that would answer a survey question a certain way is within 3% of the stated number.
See id. at 489–91. The 1,313 does not include respondents who were disqualified for
incorrectly answering two screening questions. See supra note 198.
210
See Mocsary, supra note 207, at 128 n.90.
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investing.
211
Although tradeoffs between survey length
212
are
ever-present, it is often possible, as in this case, to glean indirect insight
into facts that could not be discerned directly.
213
The nuances of insider trading and its interaction with trading
markets are complex and technical.
214
A layperson may not have an
independent basis on which to form opinions about insider trading’s
pervasiveness, economic effects, and the like.
215
It is possible, therefore,
“that this is an area in which the median voter has delegated her feelings
on the matter to her elected officials and to administrative specialists
such as SEC investigators.”
216
Relatedly, what participants said may not reflect what they
thought. It cannot be known for certain whether the respondents meant
what they said or said what they meant. There is evidence in the results
of Stage 2, for example, that some respondents were applying moral
judgments while engaging with the pragmatic scenarios.
217
But in some situations, like measuring the effect of propaganda
herein, the amalgamation of respondents’ “priors”
218
merely presents a
baseline against which effects can be measured. Even if respondents’
biases influenced their initial answers in Stage 2, it is possible to test the
effects of propaganda on those views by directly comparing a
participant’s pre- and post-propaganda answers.
219
Indeed, this
limitation is at least a partial strength because one of the survey’s goals
was to assess the effect of outside influence on public opinions about
insider trading.
220
211
See Business Week 12/86, supra note 14, at 34; Business Week 8/86, supra note 14,
at 74.
212
See supra text between notes 178 and 179.
213
See infra note 262 and accompanying text (offering a possible reason why
answers were different to separate questions asking about reactions to insider trading
in individual stocks and the market); infra Sections IV.D.2, IV.D.3, IV.E.1 (discussing
findings inferred from direct survey answers).
214
Jeffrey Wagner, Wagner Comments on Kidd et al. SEA 2019 (Nov. 23, 2019)
(unpublished conference paper) (on file with authors).
215
See id.
216
Id.
217
See infra Section IV.E.1.ii.
218
“Prior” is short for the statistical terms, “prior knowledge” and “prior probability.”
See Mocsary, supra note 207, at 140 n.165, 153–54. It represents the amalgamation of
an individual’s beliefs and experiences that inform the individual’s assessment of the
probability of a given event happening. See id. More colloquially, the term refers to the
beliefs and preconceptions that one brings to a situation.
219
See infra Section IV.E.2.
220
See supra Section III.B.2.
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3. Respondent Understanding and Question Interpretation
It can be difficult to tell whether any respondents had trouble
understanding the survey. For example, in a nationally representative
sample, some respondents may have experienced a language barrier.
One clue that some respondents did not fully understand some
questions is that they provided answers that were not directly
responsive but nonetheless related to the subject matter. For example,
in response to the question, “If you had done your research and found a
company that you liked and wanted to invest in, is there anything that
might keep you from buying stock in that company?” some participants
entered the name of a specific company.
221
One respondent, who
indicated that insider trading in a company’s stock would make no
difference to his or her likelihood of buying that stock, frankly replied,
“I do not know anything about any of this. I am so sorry,” to a follow-up
question asking whether any amount of insider trading would change
his or her mind.
But such answers were rare enough that their effects were likely
trivialized by the study’s large sample size.
222
In addition, because
measuring the malleability of the public’s views about insider trading
was an important objective, the survey attempted to partially mitigate
respondent misunderstanding of the arguments for and against insider
trading by adding a professionally read and recorded audio clip of the
arguments to the survey’s written text.
223
Even in the absence of misunderstanding, participants may have
interpreted questions differently. Without asking overly detailed
questions that may have been difficult for some respondents to
understand, it is impossible to know whether respondents perceived
absolute or relative increases in the pervasiveness of insider trading as
221
Appendix A, at 1, available at http://dx.doi.org/10.15786/20.500.11919/7122.
For example, Apple, Google, Facebook, and Morgan Stanley. Although rare, some
questions had stranger answers. For example, respondents indicating that they would
be less willing to buy a company’s stock if insiders were trading in it were asked, “[w]hat
is it about insider trading that would make you less willing to buy?” Three respondents
answered, “[p]ersonal information,” “[a] small locally owned company nothing a large
national company the too many finger to get an equal slice,” and “my privacy being
stolen.”
Some answers, however, suggested that respondents were thinking more deeply
about a question. For example, when asked why they would be more likely to trade in a
firm’s stock in the presence of insider trading, two participants responded, “my
children” and “[t]his game can be beat up.” The responses suggest that these
participants believed that insider trading in the stock would somehow benefit them
financially and that they would trade for the benefit of their children or themselves.
222
See supra text accompanying notes 172–73; note 209 and accompanying text.
223
See supra note 203 and accompanying text.
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compared to perceptions in 1986.
224
If the latter, it cannot be known
along which measure—market size, economy size, population,
etc.—respondents were mentally comparing insider trading
frequencies. More simply, and of meaningful research value, the belief
that insider trading is more common today may be a result of greater
exposure to public chatter about the topic.
225
4. Results Interpretation
Although employing objective questions can reduce the potential
for researcher subjectivity to skew results, it does not entirely eliminate
interpretational uncertainty.
226
The same can be said of employing law
students to code subjective questions.
227
Although “there is good reason
to believe that law students are capable of accurately coding a wide
range of variables,”
228
student coders may lack the expertise necessary
reliably to code more nuanced responses.
229
Interpreting objective questions is open to some subjectivity when
analyzing results beyond reporting the hard data. This includes how to
interpret nonresponsive answers and nonanswers.
230
The next Part,
therefore, while presenting the survey’s key findings, offers only
educated speculation on why certain answers were given, leaving a
detailed examination of that topic for a future work.
231
IV. PUBLIC ATTITUDES TOWARD INSIDER TRADING
This Part begins with a comparison of this survey’s results with the
famous pair of 1986 Business Week studies in Section A. It then
summarizes the survey’s findings across four broad dimensions.
Section B discusses results speaking to the public’s views about insider
trading’s pervasiveness. Section C covers the survey’s implications
about the effect of insider trading on market confidence. Section D
224
See Wagner, supra note 214; infra Table 1.
225
Research on the availability heuristic shows that decision-makers tend to assign
heightened probabilities to the occurrence of events that they have heard about more
recently and frequently. Amos Tversky & Daniel Kahneman, Availability: A Heuristic for
Judging Frequency and Probability, 5 COGNITIVE PSYCHOL. 207, 230 (1973).
226
See supra Sections III.B.1, III.B.2.
227
See supra note 201 and accompanying text.
228
Ruben & Blocher, supra note 180, at 1464 (citing Charles A. Johnson,
Content-Analytic Techniques and Judicial Research, 15 AM. POL. Q. 169, 182–96 (1987)).
229
Hall & Wright, supra note 201, at 111.
230
NONRESPONSE IN SOCIAL SCIENCE SURVEYS: A RESEARCH AGENDA (Roger Tourngeau &
Thomas J. Plewes eds., 2013).
231
The Authors intend to survey and flesh out the why in an upcoming article. See
infra Part V. Indeed, this survey informs the topics about which why questions should
be asked. See supra text accompanying note 147.
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1074 SETON HALL LAW REVIEW [Vol. 51:1035
reports respondents’ stated views about the morality of, and
appropriate punishment for, insider trading. It couples this descriptive
account with analyses of individual respondents’ answers to offer
deeper insight into the strength of the expressed views. Section E
describes participants’ expressed views about the propriety of insider
trading in various situations, and the effect on those views of exposing
respondents to various items of insider trading propaganda.
The survey aimed to achieve a census-representative sample
across gender,
232
race,
233
age, education, income,
234
and citizenship. It
also captured views by political ideology and trading status. There were
no significant differences in views across the mainstream political
spectrum. The results suggest that insider trading is simply not a
political issue.
235
Each Section relates the key findings at the survey level and notes
stand-out findings at the demographic-cohort level. The survey, its raw
data, summary spreadsheets, and a readme file are available online at
Mountain Scholar with a unique Digital Object Identifier.
236
232
Participants were given the option to identify as a gender other than male or
female. Three respondents so identified, which was insufficient to draw meaningful
conclusions.
233
The broad racial categories employed by the survey were adapted from the U.S.
Census. They are standard among survey instruments. By their nature as broad
categories, they are poor representations of the actual lived experiences of respondents.
Little can or should be assumed about individual participants based on the various
socioeconomic groups—racial or otherwise—with which they most strongly identified.
The number of respondents identifying as Native American (13) or Other (22) was
small, reducing those results’ reliability.
234
Categories for age, education, and income were standard survey categories. Age
categories were: 18–24; 25–34; 35–44; 45–54; 55–64; 65–74; and 75+. Education
categories were: None; Some High School; High School Diploma or GED; Some College;
Technical or Vocational Degree; Associates Degree; Bachelor’s Degree; Master’s Degree;
Professional Degree; and Doctoral Degree. Income categories were less than $25,000;
$25,000–$34,999; $35,000–$49,999; $50,000–$74,999; $75,000–$99,999; $100,000–
$149,999; $150,000–$199,999; and more than $200,000.
235
This result held throughout the survey, with the only significant difference
between ideological categories arising among participants identifying as socialist,
communist, or libertarian. There was no significant difference between the remaining
categories (very conservative, conservative, moderate, liberal, and very liberal),
indicating that insider trading views are not ideology driven. Further, the number of
respondents identifying as socialist (21), communist (11), or libertarian (17) was small,
reducing those results’ reliability.
236
John P. Anderson, Jeremy L. Kidd & George A. Mocsary, Public Perceptions of
Insider Trading, MOUNTAIN SCHOLAR (2020), http://dx.doi.org/10.15786/
20.500.11919/7122.
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A. Comparisons to 1986
Given the social, political, financial, and technological changes since
the famous Business Week surveys of August and December 1986,
237
it
is valuable, as a threshold matter, comparing those surveys’ results to
those obtained in this study. The surveys overlapped on the three key
points, shown in Table 1, which are referenced throughout this Article.
Table 1: Comparisons to 1986
238
8/86
12/86
4/19
Insider trading is common or very common
63%
67%
80%
Insider trading should be illegal
52%
66%
66%
Would trade on a tip
53%
55%
45%
The August 1986 results were collected before the SEC announced
its famous enforcement action against Ivan Boesky,
239
and the
December 1986 results after that.
240
Although insider trading actions
were relatively rare before 1986, the number of civil and criminal
actions has since increased markedly,
241
with a corresponding increase
in public discussion of the topic.
B. Pervasiveness
The public believes that insider trading is more pervasive
compared to 1986. After the Boesky scandal, 67 percent of respondents
believed that it was common, whereas in 2019, 80 percent believed that
it was common or very common.
242
Table 2 shows overall opinions
237
See supra text accompanying notes 168–69; Ravikumar, supra note 169; Business
Week 12/86, supra note 14; Business Week 8/86, supra note 14.
238
The questions have been paraphrased. See Business Week 8/86, supra note 14,
at 74, Business Week 12/86, supra note 14, at 34, and Appendix A,
available at http://dx.doi.org/10.15786/20.500.11919/7122, for the questions as
administered. The 1961 Harvard Business Review study asking executives whether
they would trade on information obtained at a board meeting reported that 42 percent
responded that they would, 14 percent would have told a friend, 2 percent would have
told a broker, and 56 percent would have done nothing. See Baumhart, supra note 14,
at 16.
239
Stephen R. Martin, Ivan Boesky: American Banker, ENCYC. BRITANNICA,
https://www.britannica.com/biography/Ivan-Boesky (last visited Jan. 31, 2021).
240
See generally James B. Stewart & Daniel Hertzberg, Spreading Scandal: Fall of Ivan
F. Boesky Leads to Broader Probe of Insider Information, WALL ST. J., Nov. 17, 1986, at 1.
241
See Stephen J. Crimmins, Insider Trading: Where is the Line?, 2013 COLUM. BUS. L.
REV. 330, 349 (2013).
242
See supra Table 1. The December 1986 survey reported the percentage of
respondents expressing the belief that insider trading was “Common.” Business Week
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1076 SETON HALL LAW REVIEW [Vol. 51:1035
about the pervasiveness of insider trading at the survey level, and those
broken down by gender, race, and trading status.
Table 2: Answers to “How common do you think insider trading is?”
Very Common
Common
Rare
Very Rare
Overall
25.4%
55.0%
15.0%
4.6%
Gender
Female
24.0%
57.0%
14.4%
4.5%
Male
26.8%
52.7%
15.9%
4.6%
Race
Asian
25.8%
51.5%
18.2%
4.5%
Black
41.6%
38.8%
15.2%
4.5%
Latinx
25.3%
55.4%
14.5%
4.8%
Native Am.
25.0%
58.3%
0.0%
16.7%
White
22.3%
58.3%
15.1%
4.3%
Other
22.7%
54.6%
13.6%
9.1%
Trading Status
Invest
30.5%
52.1%
14.4%
3.0%
Abstain
21.5%
56.9%
15.9%
5.7%
The data revealed that general opinions regarding insider trading’s
pervasiveness—the sum of “common” and “very common”
responses—were likely more relevant than participants’ attempts to
distinguish between “common” and “very common” or between “rare”
and “very rare.” Men were slightly more likely to say insider trading is
very common, for example, but there were no significant differences
between genders when “common” and “very common” answers were
combined. Similarly, Black respondents were more likely to answer that
insider trading is “very common” but did not differ significantly in their
overall views of its pervasiveness.
Investors were more likely than abstainers to view insider trading
as pervasive. If insider trading’s perceived pervasiveness undermines
market confidence, one would expect that those who invest would be
12/86, supra note 14, at 34. The August 1986 survey reported the percentage of
respondents expressing the belief that insider trading was “Very or somewhat
common.” Business Week 8/86, supra note 14, at 74.
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less likely to believe that insider trading is common or very common.
Slight trends emerged based on age, income, and educational
attainment: older, wealthier, and more educated participants were less
likely to view insider trading as pervasive.
C. Market Confidence
Data on public perceptions of insider trading’s frequency are,
perhaps, less useful than on whether those perceptions translate into
reluctance to trade, as the market-confidence theory predicts.
243
The
results are mixed.
54.3 percent of respondents said that they do not invest in the stock
market, which is a significant decrease from the 80.4 percent who
believed that insider trading is common or very common, suggesting
that insider trading does not deter a large portion of would-be investors
from market participation. Of the 25.4 percent of respondents who
believed that insider trading was very common, 13.3 percent—over
half—nonetheless invest.
244
In a strong form of the market-confidence
theory, the group answering that insider trading was very common
should be the group least likely to invest in stocks. Of the 55.0 percent
of participants who believed that insider trading was common, 22.2
percent
245
nonetheless invest. Overall, of the 80.4 percent believing that
insider trading was common or very common, 35.5 percent—less than
half
246
—invest; of the 19.6 percent who believe that insider trading is
rare or very rare, 7.5 percent—significantly less than half
247
—invest.
There was no trend in trading activity between age groups. There
were substantial differences between cohorts, with non-investors
ranging from 47.6 percent for 65- to 74-year-olds, to 59.0 percent for
those 75 or older, but no discernable pattern. Further investigation
might reveal some unseen correlation, such as market downturns
during formative periods in the lives of individuals in cohorts where
trading activity is low. Market participation rose steadily with
education and income, as might be expected.
Some of the individuals who invest may do so reluctantly or to a
lesser degree, preferring to invest excess income in what they believe to
be a substandard market rather than forgo the higher returns that
243
See supra Section II.B.3.
244
That is, 52.1 percent of those who responded that insider trading was very
common nevertheless invest.
245
That is, 40.4 percent.
246
44.1 percent, to be precise.
247
38.1 percent, to be precise.
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1078 SETON HALL LAW REVIEW [Vol. 51:1035
equity markets nonetheless offer.
248
This would support a less-robust
form of the market-confidence theory. The survey addressed, at least
partially, this possibility in two ways. First, it asked respondents, via an
open-ended question, whether anything might keep them from
investing in a company that they researched and liked. Table 3 presents
the results.
248
See infra notes 259–62 and accompanying text.
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Table 3: Answers to “If you had done your research and found a company
that you liked and wanted to invest in, is there anything that might keep
you from buying stock in that company?”
249
No
30.6%
Discomfort with this trade
21.1%
Company’s bad financial reputation
9.9%
Company’s bad moral/ethical reputation
5.6%
Company is a bad investment
2.8%
Company’s stock is unstable
1.4%
Other
1.1%
Insider trading at the company
0.4%
Lack of capital to invest
11.3%
Discomfort trading generally
7.5%
Investing is too risky
3.9%
Don’t trust financial markets
1.6%
Not interested in trading
0.9%
Don’t know how to trade
0.8%
Overall market trends
0.8%
Don’t know
6.3%
Yes
4.7%
Trading is too costly (stock price, fees)
4.0%
Advice from family, friends, or financial advisors
1.8%
Notably, despite knowing that the study was about insider trading,
only 0.4 percent indicated that insider trading in the company would
deter them from investing in that company. Six times as many
individuals, when asked what about insider trading in the stock of a
company that they were researching would make them less willing to
buy, said that it was fear of being innocently caught up in a regulatory
action.
250
The chilling effect of insider trading enforcement may thus
249
12.8 percent of answers were blank or nonresponsive.
250
See infra Table 4, which shows that 48.2 percent of respondents would be less
willing to buy stock in a company if they thought that a small number of people were
trading in its stock based on inside information. See also infra Table 5, which shows that
4.9 percent of that 48.2 percent would be less willing to buy stock in that company for
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1080 SETON HALL LAW REVIEW [Vol. 51:1035
have a greater impact on market participation than does the activity that
it seeks to prevent.
Second, participants were asked two separate questions directly
positing the presence of insider trading and their willingness to trade.
The first asked respondents whether they would be more or less willing
to trade in a company’s stock if they believed that there was a small
amount of insider trading in that stock. The second asked participants
whether they would be more or less willing to engage in trading in the
stock market generally if they knew that insider trading was common in
that same broad market. Summary and outlier answers to both
questions are presented in Table 4.
fear that innocent investors might be implicated in a regulatory action. (48.2)(0.049) =
2.4 percent. This 2.4 percent is six times as large as 0.4 percent. This figure is slightly
higher, because of rounding, than the actual value of 5.8 times as many, which is
obtained by dividing the twenty-nine respondents who indicated fear of innocent
implication by the five who would be deterred from investing by insider trading at a
company of interest.
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Table 4: Willingness to Trade in the Presence of Insider Trading
“If you thought that a small number of people were trading on inside
information concerning a company you have been researching, would it
make you more likely to buy stock in that company, less likely, or make
no difference?”
Less Likely
No Difference
More Likely
Δ Less Likely vs.
Market251
Overall
48.2%
34.3%
17.5%
+4.9%
Gender
Female
46.6%
37.1%
16.3%
+6.5%
Male
50.3%
31.4%
18.3%
+3.4%
Race
Asian
45.5%
28.8%
25.8%
+1.5%
Black
37.1%
30.9%
32.0%
+9.0%
Latinx
42.2%
37.4%
20.5%
+2.4%
Native Am.
50.0%
16.7%
33.3%
-16.7%
White
51.4%
35.0%
13.6%
+4.9%
Other
40.9%
50.0%
9.1%%
+4.6%
Trading Status
Invest
50.3%
24.4%
25.3%
+8.9%
Abstain
47.1%
42.0%
11.0%
+2.5%
251
This column represents the difference between (1) the percentage of
respondents’ answering that they would be less likely to trade in a company’s stock if
they knew that a small number of people were trading on it based on inside information,
and (2) the percentage of respondents’ answering that they would be less likely to invest
in the stock market if they knew that insider trading was common in that market.
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1082 SETON HALL LAW REVIEW [Vol. 51:1035
“If you knew insider trading was common in the stock market, would you
be more likely to invest, less likely, or would it make no difference?”
Less Likely
No Difference
More Likely
Δ Less Likely vs.
Company252
Overall
43.3%
40.6%
14.9%
-4.9%
Gender
Female
40.2%
42.1%
16.7%
-6.5%
Male
47.0%
39.3%
12.5%
-3.4%
Race
Asian
43.9%
36.4%
19.7%
-1.5%
Black
28.1%
39.3%
32.6%
-9.0%
Latinx
39.8%
34.9%
25.3%
-2.4%
Native Am.
66.7%
33.3%
0.0%
+16.7%
White
46.5%
41.7%
10.3%
-4.9%
Other
36.4%
50.0%
9.1%
-4.6%
Trading Status
Invest
41.3%
38.4%
19.1%
-8.9%
Abstain
44.5%
42.7%
11.5%
-2.5%
Overall, fewer than half of the survey’s participants said that they
would be less likely to trade in a given stock if they believed that insider
trading was occurring in that stock, and even fewer said that “common”
insider trading in the broader stock market would deter them from
trading. 51.8 percent responded that their awareness of limited insider
trading (insider trading by a small number of people) in a stock of
interest would either not affect their trading in that stock or make them
more likely to invest in it. Similarly, 55.5 percent responded that
knowledge of common insider trading would either make them more
likely to invest or make no difference. This, again, offers limited support
for the market-confidence theory, in that some of the 48.2 and 43.3
percent of respondents who were less likely to invest in a stock of
252
This column represents the difference between (1) the percentage of
respondents’ answering that they would be less likely to invest in the stock market if
they knew that insider trading was common in that market and (2) the percentage of
respondents’ answering that they would be less likely to trade in a company’s stock if
they knew that a small number of people were trading on it based on inside information.
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2021] PUBLIC PERCEPTIONS OF INSIDER TRADING 1083
interest or the overall market, respectively, might also be abstaining
altogether because of insider trading.
253
Men were slightly more likely to be concerned about insider
trading than women in both scenarios. White respondents were more
likely to be concerned than all minorities in the company-specific
scenario, and more than all but Native American participants in the
broad-market scenario. Black participants were least concerned with
insider trading. Their responses were most evenly split between less
likely, indifferent, and more likely in the company-specific scenario, and
they were least likely to avoid trading when insider trading is common
in the broader market scenario.
This directly expressed aversion
254
to investing because of insider
trading rises generally, though not uniformly, with age in both the
company-specific and broad-market scenarios, as shown in Figure 2. It
may be the result of longer exposure to public chatter—including
much-hyped prosecutions and convictions of figures like Ivan Boesky
and Raj Rajaratnam—that influences views and induces fear.
255
253
Accord supra notes 243–46 and accompanying text.
254
As compared to a discerned aversion. See supra notes 243–46 and accompanying
text.
255
See Elvis Picardo, How the SEC Tracks Insider Trading, INVESTOPEDIA,
https://www.investopedia.com/articles/investing/021815/how-sec-tracks-insider-
trading.asp (last updated June 25, 2019); supra notes 239, 42 and accompanying text;
see infra text accompanying note 271; see supra note 225 and accompanying text.
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1084 SETON HALL LAW REVIEW [Vol. 51:1035
Figure 2: Percentage of Respondents Less Likely to Invest Because of
Insider Trading, by Age
Expressed aversion to investing because of insider trading rises
somewhat with income (Figure 3) and education (Figure 4) in the
company-specific scenario, but those relationships weaken
substantially or disappear when the concern is insider trading in the
broader market.
256
Income is traditionally correlated with age and
education.
257
256
The upward trends might be exaggerated by the Some High School category (with
only forty-six respondents), which was an outlier on the low end.
257
See BOSHARA ET AL., THE DEMOGRAPHICS OF WEALTH: HOW AGE, EDUCATION AND RACE
SEPARATE THRIVERS FROM STRUGGLERS IN TODAY’S ECONOMY, FED. RESERVE BANK OF ST. LOUIS 17
(2015).
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
18-24 25-34 35-44 45-54 55-64 65-74 75+
Company Co. (avg) Market Mkt. (avg)
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Figure 3: Percentage of Respondents Less Willing to Invest Because of
Insider Trading, by Income
Figure 4: Percentage of Respondents Less Willing to Invest Because of
Insider Trading, by Education
Just over half of active traders would be less likely to trade in the
company scenario and fewer than half would be less likely to trade in
the market scenario knowing that insider trading is taking place. A
review of individual responses shows that a sizable number of
participants who indicated a lower willingness to trade in the presence
of insider trading also indicated that they are already not trading. There
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
Company Co. (avg) Market Mkt. (avg)
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
Company Co. (avg) Market Mkt. (avg)
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1086 SETON HALL LAW REVIEW [Vol. 51:1035
are two explanations, each in the nature of a corner solution,
258
that tell
a different story about the market-confidence theory.
Most favorably to the market-confidence theory, it is theoretically
possible that all participants indicating that they would be discouraged
from investing because of insider trading actually do not invest because
of a belief that insider trading is taking place. In this case, the
percentages of respondents who would be less likely to invest in the
stock market in the presence of insider trading are 48.2 and 43.3
percent, as reported in Table 4.
Least favorably to the market-confidence theory, nontraders who
indicated that they would be less likely to invest in the presence of
insider trading may not be trading anyway. If that is the case, they can
be discounted in determining the theory’s strength, and the actual
percentage of respondents whom insider trading would deter drops to
21.5 and 17.7 percent for the company-specific and broad-market
scenarios.
Because some might be less likely to invest due to insider trading
but invest anyway,
259
and some might be less likely to invest but not
invest for other reasons, the actual percentage of individuals who would
be deterred from investing because of insider trading is likely to be
somewhere between these extreme figures.
260
Supporting the market-confidence theory, it is possible that the
difference between the single-company and broad-market views
indicates a desire to diversify away