The prohibition against insider trading is a judge-made law that has evolved for over fifty years, and has reached a critical impasse in two recent decisions in the Second Circuit Court of Appeals: United States v. Newman and United States v. Martoma. Judges of the Second Circuit are sharply divided over what conduct constitutes improper trading on material nonpublic information (“MNPI”), leaving the law in profound disarray. At bottom, the disagreement stems from a decades-old split within the judiciary about how to (1) ensure a fair securities marketplace, while (2) enabling institutional analysts to probe for corporate information in furtherance of efficient market valuation of securities.
In 1983, the U.S. Supreme Court in SEC v. Dirks sought to strike a balance between these two interests by holding that trading on MNPI is not illegal unless the information was disclosed in exchange for a personal benefit. But the effort to balance these two competing economic and moral interests should never have been the province of the judiciary, nor did its formulation ever win uniform consensus among the judges. After decades of struggle, the Newman/Martoma empasse is the consequence. Congress may finally be ready to pass a law of insider trading that would break the deadlock, but the bill under consideration ignores the market efficiency interests that undergirded the personal benefit element of insider trading. This Article suggests that before passing any law, Congress must undertake an empirical review of the impact that the insider trading bill would have on an efficient market to ensure that the final law is not only clear, but beneficial to the health of the capital markets.
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