Kenneth R. Davis is Professor of Law and Ethics at Fordham University Gabelli School of Business. This post is based on a recent article by Professor Davis. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell, discussed on the Forum here.
Since its inception, insider trading law has perplexed the legal community. Scholars have criticized the law for its lack of clarity and over-complexity. Such criticisms are understandable. Insider trading law is a dysfunctional hodge-podge of rules that make little intuitive sense. The problem arises in part because no U.S. statute defines insider trading. Nor does any federal statute specifically prohibit it. Rather, the United States Supreme Court, with minimal congressional guidance, has seized on the general antifraud provision in the Securities Exchange Act of 1934 to construct an incoherent legal regime. Section 10(b) of the Exchange Act makes it unlawful to use “any manipulative or deceptive device” “in connection with the purchase or sale of a security.” The Supreme Court has used this injunction as the starting point to fabricate a confusing brand of insider trading law.