ESSAY: Insiders, Outsiders, & Fair Access: Identifying Culpable Insider Trading

The Supreme Court’s insider trading doctrine has become increasingly convoluted as each effort to cope with novel fact patterns results in a new rule not tethered to principled understanding of the nature of the wrong committed. That this is not a terribly controversial claim is evidence of how far the Court’s jurisprudence has drifted. This essay proposes that the early error was abandonment of concern for third parties who trade on exchanges but who do not enjoy legal access to information possessed by insiders or tippees who receive information from insiders. The Court’s error, the essay contends, rests on a flawed conception of the nature of the unfairness that the penalties for insider trading respond to: it is inequality of access resulting from an insider’s relationship to the source of information. Justices Blackmun and Marshall made this observation in a dissent nearly forty years ago, and this essay contends that the case for acting upon it has only grown stronger as the regulatory environment and investor capabilities have evolved. The essay proposes a relatively modest regulatory reform, accelerating the regulatory requirement that insiders disclose transactions, to protect third party investors and discourage insider misconduct by leveraging the speed and sophistication of modern securities markets. In an effort to help shift debate away from questions of the duty owed by insiders to their principals, the essay contends that future reforms should be guided by the goal of protecting outsider investors