In December 2014, I posted my concerns with the law on insider trading. Perhaps someone read it, because the following year, H.R. 1625, the “Insider Trading Prohibition Act,” was introduced in the House of Representatives. I regarded it as imperfect but a start. Of course, it went nowhere, and the state of the law has not changed.
Well, it’s back – sort of – and may have a bit of life. H.R. 2534, with the same title as in 2015, was introduced by Congressman Jim Himes (D-CT), who introduced the 2015 bill, and co-sponsored by Carolyn Maloney (D-NY) and Denny Heck (D-WA). What’s new about the bill is that it was approved – unanimously – by the Financial Services Committee in May. That probably doesn’t mean anything, as Congress seems to be the place where legislation goes to die, but I suppose anything is possible.
Like its predecessor, it’s a start. But I still think it’s imperfect. The title of the first section is promising: “Prohibition Against Trading Securities While In Possession Of Material, Nonpublic Information.” Sounds good, right? The mere possession of MNPI means you can’t trade. Wrong. The text of the section gives the lie to its title. Specifically, the prohibition exists only if the person trading “knows, or recklessly disregards, that such information has been obtained wrongfully, or that such purchase or sale would constitute a wrongful use of such information.” In other words, (1) the bill seems to say it’s OK to trade while in possession of inside information as long as the information was not known to have been obtained wrongfully or is being used wrongfully (whatever the latter means), and (2) it would get us right back into the very issues that make the present state of the law so confusing. You can’t trade in a stock if you know (or should have known) that the MNPI was wrongfully obtained, but what if you don’t know or have no reason to know it was wrongfully obtained? If someone suggests that you buy (or sell) a particular stock, what is your duty of inquiry, and where does it end?
Others may disagree. Admittedly, my concern with the bill reflects my view that all market participants should have a level playing field. Many disagree with that, including one of my faves, U.S. District Court Judge Jed Rakoff (SDNY), who’s been quoted as saying “[a]nyone who thinks that the stock market is a level playing field obviously has no contact with reality.” And Preet Bharara and SEC Commissioner Robert Jackson (see below) seem to believe that insider trading is a problem only where it arises from a breach of some sort of duty.
Perhaps more important, the bill has some good provisions, such as generally eliminating control person liability for insider trading and addressing some issues resulting from modern technology. It would also vitiate the silly outcome U.S. v. Newman, in which convictions for insider trading were reversed because, even though the tipper derived a personal benefit from giving the tip, the tippees didn’t know that he was deriving that benefit. (On the other hand, the bill seems to require the SEC to rethink 10b5-1 plans.)
So where does this leave us? Probably exactly where we are, given that the bill will almost surely go nowhere. But hope springs eternal. You may recall that Preet Bharara (former US Attorney for the Southern District of New York) and SEC Commissioner Robert Jackson announced the formation of an “Insider Trading Task Force”. That was in October 2018, and while we haven’t heard much about the task force since, it’s possible that something will come of it.
In the meantime, however, I’m still where I was in 2014 – there ought to be a law.