Class 14 Insider Trading

Question 1

what is the Information asymmetry issue?

Answer 1

if the counterparty has better info, you will want more compensation to trade since you are on the losing side.

this decreases liquidity, some of the benefit of secondary markets and thus, capital formation.

Question 2

You have private info. Do you want positive or negative info?

Question 3

Investment incentives issue

Answer 3

insiders may have incentive to take investments that are more volatile or prone to loss. They can make more money this way and shareholders bear the losses.

Question 4

Can fiduciary duties prevent this? (business judgment rule?)

Question 5

Information benefits issue

Answer 5

who should benefit (own) from the info.
The insider works for the shareholders
is this like taking property of the shareholders?

Question 6

What if an outsider stumbles upon the info? can they benefit from the property that ostensibly the shareholders?

Question 7

Strong v. Repide

Facts: strong sold shares in Phillipine Sugar Estates Development Company.
Repide (admin general, like CEO) privately bought the shares through intermediaries.
The gov. had a pending deal to buy the companys lands for a large sum.
Repide had control over decision to sell land.
Share price increased 10 times after sale.

I: did repide have a duty to disclose?

Answer 7

H: yes
R: 1. he had influence over the company
2. The sale was in the majority shareholders control.
3. There was active concealment of identity.
4. Under these facts, the law would be impotent if the sale weren’t set aside.

Question 8

If active concealment is required for a duty, what duty arises in modern secondary public markets?

Answer 8

This case has limited application to impersonal securities markets, like modern public exchanges.

Question 9

How would Strong benefit from the knowledge that Repide was the eventual counterparty?

Answer 9

She could have assumed the stock was undervalued.
But doesn’t this apply with any buyer?

Question 10

What if repide knew the land could not sell?

Answer 10

strong probably would not have won the case.

Question 11

What if repide knew the land could not sell and he sold shares to strong (with concealment)?

Answer 11

Probably the same result as the case. The inside info works against Strong again.

Question 12

How did we get to insider trading through Rule 10b-5?

Answer 12

Deception

Question 13

What does section 20(d) of the exchange act say?

Question 14

What is the classical theory of insider trading?

Answer 14

insiders trade or disclose to others in breach of their fiduciary duty. the corp. itself is also prohibited from trading with an informational advantage. (when is this not the case? are repurchases illegal then?)

Question 15

What is the misappropriation theory of insider trading?

Answer 15

information subject to fiduciary duty of confidentiality is used in trading without disclosing to the owner its use in trading. The person owed a duty and counterparty to the insider need not be the same person.

Question 16

Chiarella v. US

Facts: acquirer used a financial printer for documents.
Chiarella worked at the printer and learned the identity of the target of the deal.
He bought shares and was criminally convicted. He appeals here.

I: did he violate 10b-5? Does someone without a duty have to disclose?

Answer 16

H: reversed, he didn’t violate 10b-5
R: Silence is not a fraud without a duty to disclose. Chiarella was not an insider of target.
He got no info from the target.
Not every unfairness results in 10b-5 liability.
There is no general duty to disclose inside info.

Question 17

Was the bidder liable for the leakage? (chiarella)

Answer 17

possibly if they signed confidentiality agreements.

Question 18

to whom does Chiarella owe a duty?

Answer 18

to the principal

Question 19

so, if there’s a confidentiality agreement, did Chiarella breach his duty to Pandick or clients?

Answer 19

Pandick lacks standing. Clients could possibly win if the court has a misappropriation theory.

Question 20

Why not go beyond a duty and impose liability on parties that were in possession of confidential info to equalize the playing field?

Answer 20

perhaps this would chill info production and acquisition, as parties would fear their info would subject them to liability.