What’s So Bad About Insider Trading Law?

The law of insider trading has been called everything from a “theoretical mess” to “astonishingly dysfunctional,” with calls for change from Congress and the Securities and Exchange Commission to clarify the scope of the prohibition. But is the law really so bad? The elements are now well established, despite gray areas around the edges like other white collar crimes. Congress and the general public have embraced insider trading as something clearly wrongful. If the law needs to be changed, the most likely push would be to expand it by adopting the possession theory of liability used in Rule 14e-3 for tender offers and the European Union that makes trading on almost any confidential information subject to prosecution.

United States insider trading law seems to be about as popular as catching the flu, at least from the perspective of legal academics. It has been called a “theoretical mess,”¹ “seriously flawed,”² “extraordinarily vague and ill-formed,”³ “arbitrary and incomplete,”⁴ a “scandal,”⁵ and even “astonishingly dysfunctional”⁶— as if it were a family. And like any good bout of the flu, there have been numerous prescriptions offered to treat its symptoms. Thus, scholars have suggested different theories to improve our understanding of the purportedly flawed insider trading legal framework, such as treating it as a form of “private corruption,”⁷ looking at the nature of confidential information from the perspective of intellectual property,⁸ de-emphasizing the role of fiduciary duty principles,⁹ and viewing the prohibition as a means to protect the property rights of corporations whose information is so often misused for illicit gain.¹⁰ There is even a dispute as to whether insider trading should be illegal at all,¹¹ much like how some swear by the annual flu shot while others abjure getting one.

Theoretical problems aside, the practice of trading on confidential information is not abating, nor is the government’s determination to prosecute it—even if much of it appears to go undetected.¹² Of course, the fact that the prohibition has not deterred violators is no indictment of the criminalization of the conduct. So it is interesting to consider whether the law of insider trading should be viewed as working reasonably well; or put another way, what about insider trading law is so bad that it unleashes such sustained criticism—and even venom— from the academic community? One would think that such a deeply flawed legal prohibition would incite a broader public campaign against the law that might lead Congress at least to consider limiting, if not repealing, the government’s authority to pursue violations. But there has been no great hue and cry for reform-ing the law of insider trading by the general public,¹³ or even from the defense bar—apart from occasional complaints about lengthy sentences that treat violators as being on par with some violent criminals.¹⁴ Indeed, Congress almost fell over itself to adopt a statute in 2012 to explicitly subject its members and staff to the prohibition, with nary a complaint about how insider trading law works.¹⁵

This Article considers whether the law of insider trading should be changed to correct its perceived imperfections and, if so, what path Congress is likely to follow. The law developed through judicial decisions rather than from a more precise congressional enactment that would provide explicit guidance about what types of trading were intended to come within the scope of the prohibition. That does not …