Greed, Envy, and the Criminalization of Insider Trading

In October 2011, a U.S. district court sentenced Raj Rajaratnam to eleven years in federal prison for insider trading. This is the longest sentence for insider trading in U.S. history, but it is significantly less than the nineteen to twenty-four-year term requested by the government. Such harsh prison terms (equal in some cases to those meted out for murder or rape) require sound justification in a liberal society. Yet jurists, politicians, and scholars have failed to offer a clear articulation of either the economic harm or the moral wrong committed by the insider trader. This Article looks to fill this gap by offering a rigorous analysis of insider trading, its criminalization, and its punishment from multiple economic and moral perspectives. This analysis reveals that of the three forms of insider trading currently proscribed under section 10(b) of the Securities Exchange Act of 1934, two are economically harmful and morally impermissible, but, surprisingly, one is not—nonpromissory insider trading, where the insider trades on material nonpublic information while having made no promise or other commitment not to trade. Having reached this conclusion, this Article explores alternative justifications or explanations for criminalizing nonpromissory insider trading