Developments in Insider Trading: Lessons from Recent SEC Enforcement Failures and Successes

Abstract

Currently front page news, insider trading is a topic that demands renewed attention by traders, as well as employees with inside information about their employers. In the past few years, the SEC has intensified its already considerable efforts to enforce the insider trading laws. These increased efforts are highlighted by the SEC’s far-ranging prosecution of alleged insider trading relating to the Galleon Group, including corporate insiders who purportedly tipped traders. They are also evident in the SEC’s recent extension of the insider trading laws to debt securities and credit default swaps, which are not generally traded in the United States via regulated securities exchanges and which were traditionally considered to be outside the reach of the insider trading laws. However, the SEC’s zeal in pursuing insider trading cases stands in contrast to the recent dismissal of insider trading claims against two former managers of Bear Stearns’ hedge funds and, in a separate case, Mark Cuban. As the Cuban case indicates, the complex case law circumscribes the reach of the insider trading laws, sometimes arbitrarily. This article analyzes the tension between these case-law constraints and expansive SEC enforcement. Because of this tension, more than one answer can be given to the question—What is the law on insider trading?—depending on whether the question is posed from a litigation or compliance perspective.