United States v. O'Hagan: Agency law and justice Powell's legacy for the law of insider trading

Boston University Law Review

Volumn 78, Issue 1, 1998, Pages 13-53

  Pritchard, A C ^a  

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EID: 0032366206     PISSN: 00068047     EISSN: None     Source Type: Journal    
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References (254)

1. The "short-swing" profits rule of § 16(b) of the Securities Exchange Act of 1934, which allows an issuer to sue an insider for "any profit realized by him from any purchase and sale, or any sale and purchase of any equity security of such issuer (other than an exempted security) within any period of less than six months," has a much narrower scope. 15 U.S.C. § 78p(b) (1994).
2. 445 U.S. 222, 234-35 (1980) (holding that in an open-market transaction, no duty arose solely from the possession of inside information).
3. 463 U.S. 646, 660 (1983) (holding that "a tippee assumes a fiduciary duty to the shareholders of a corporation . . . only when the insider has breached his fiduciary duty to the shareholders . . . and the tippee knows or should know that there has been a breach").
4. See, e.g., United States v. Carpenter, 484 U.S. 19, 24 (1987) (raising the question of the validity of the misappropriation theory of insider trading). The Court split 4-4 on the misappropriation theory counts and its opinion therefore did not discuss the theory. See id. The Court unanimously affirmed convictions for mail and wire fraud. See id.
5. 15 U.S.C. § 78j(b) (proscribing the use "in connection with the purchase or sale of any security . . . [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe"). Section 10(b) is implemented through Commission Rule 10b-5, which provides, in relevant part, that: It shall be unlawful for any person, . . . (a) To employ any device, scheme, or artifice to defraud, [or] . . . (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5(b) (1997).
6. 117 S. Ct. 2199, 2206-14 (1997) (holding that a person who trades in securities, using confidential information misappropriated in breach of a fiduciary duty to the source of the information, may be held liable for violating § 10(b) and Rule 10b-5).
7. See id. at 2202-03 (noting that the fiduciary commits the fraud when she uses her principal's confidential information in purchasing or selling securities without prior disclosure).
8. See United States v. Chiarella, 445 U.S. 222, 239 (1980) (Burger, C.J., dissenting).
9. See United States v. Newman, 664 F.2d 12 (2d Cir. 1981). Defendant James Mitchell Newman worked as a securities trader and manager of the trading department of a New York brokerage firm. See id. at 15. E. Jacques Courtois, Jr. and Adrian Antoniu misappropriated confidential information concerning mergers and acquisitions that was entrusted to their employers, the investment banking firms of Morgan Stanley and Kuhn Loeb & Co., respectively. See id. This information was secretly conveyed to Newman, who subsequently purchased stock in companies that were merger and takeover targets of clients Morgan Stanley and Kuhn Loeb & Co. See id. The Second Circuit held that Newman's involvement in the transaction operated as a fraud under Rule 10b-5. See id. at 19. The court reasoned that, "by sullying the reputations of [the investment bankers] as safe repositories of client confidences, [Newman] and his cohorts defrauded those [investment bankers'] clients, whose takeover plans were keyed to target company stock prices fixed by market forces, not artificially inflated through purchases by purloiners of confidential information." Id. at 17; cf. Moss v. Morgan Stanley Inc., 719 F.2d 5, 5 (2d Cir. 1983) (holding in a private damages action, that although there was a duty to disclose or abstain, the duty was owed to the tipper's employer who was neither a purchaser nor seller of securities, and thus no duty was owed to open-market sellers of the securities in question).
10. 484 U.S. 19 (1987).
11. Because the Court ultimately granted certiorari in Carpenter, Powell's dissent was never published. In the course of my research for the government's brief in O'Hagan, I uncovered Justice Powell's draft in the collection of Justice Thurgood Marshall's papers housed at the Library of Congress. Justice Powell's draft is attached as an appendix to this Article. See Draft of Dissent from Denial of Certiorari for Carpenter v. United States, Justice Powell (Dec. 10, 1986) [hereinafter Powell's Draft] (reprinted at Appendix) [Editor's Note: Pincites to Powell's Draft correspond to the page numbers on the original document.]. Justice Powell dissented from the initial denial of certiorari, but after a revote, certiorari was granted. See United States v. Carpenter, 479 U.S. 1016 (1986).
12. 15 U.S.C. § 78j(b) (1994).
13. See Powell's Draft, supra note 11, at 4-5.
14. See United States v. Carpenter, 479 U.S. 1016 (1986).
15. See Carpenter, 484 U.S. at 24 (noting that the Court was evenly divided with respect to the convictions under the securities laws).
16. See United States v. O'Hagan, 117 S. Ct. 2199, 2208 (1997) (holding that a person who trades in securities for profit, using confidential information misappropriated in breach of a fiduciary duty to the source of the information, may be held liable for violating § 10(b) and Rule 10b-5).
17. See O'Hagan, 117 S. Ct. at 2207.
18. Id.
19. In some areas the classical theory may reach more broadly. The classical theory proscribes insider trading while "in possession of" confidential information. See SEC v. MacDonald, 699 F.2d 47, 50 (1st Cir. 1983) (en banc) (noting that the scienter element of § 10(b) "is satisfied if at the time defendant purchased stock he had actual knowledge of undisclosed material information, knew it was undisclosed, and knew it was material") Misappropriation requires that the misappropriator "use the information to purchase or sell securities." O'Hagan, 117 S. Ct. at 2207 (emphasis added). Very little, however, may turn on this distinction. See United States v. Teicher, 987 F.2d 112, 119-21 (2d Cir. 1983) (stating, in dictum, that because a possessor of inside information cannot help but "use" it, proof of possession of inside information is sufficient). The other significant distinction between the two theories is that the misappropriation theory is subject to contractual waiver by the owner of the information, while the classical theory is not. See infra notes 216-20 and accompanying text (noting that misappropriation theory does not apply if insiders trade with the approval of their principal, the owner of the information).
20. Chiarella's duties included the selection of type fonts and page layouts. See United States v. Chiarella, 588 F.2d 1358, 1363 (2d Cir. 1978) (discussing Chiarella's duties as a "markup man"), rev'd, 445 U.S. 222 (1980).
21. See Chiarella, 445 U.S. at 224 (explaining that although the names of the companies were concealed, Chiarella deduced these names from other information in the documents and traded in the securities of the target company to gain $30,000 in 14 months).
22. See Chiarella, 588 F.2d at 1369 (noting that the employer's rules were posted on bulletin boards throughout the office and described the prohibited conduct and the potential criminal consequences).
23. See id. at 1373.
24. See Chiarella, 445 U.S. at 237.
25. See id. at 226 ("[Section] 10(b) does not state whether silence may constitute a manipulative or deceptive device.").
26. Id. at 227-28 (quoting RESTATEMENT (SECOND) OF TORTS § 551(2)(a) (1976)). The general common law rule is well established that silence, absent a duty to disclose, is not fraudulent. See Laidlaw v. Organ, 15 U.S. (2 Wheat.) 178, 193 (1817) (holding that failure to disclose end of the War of 1812 - which caused price of tobacco to increase - was not fraud in purchase of tobacco).
27. See Chiarella, 445 U.S. at 230 ("[S]ilence in connection with the purchase or sale of securities may operate as a fraud actionable under § 10(b) . . . . But such liability is premised upon a duty to disclose arising from a relationship of trust and confidence between parties to a transaction.").
28. Id. at 228 (citations omitted).
29. Id. at 231 (citation omitted).
30. Id. at 233.
31. Id. at 232-33.
32. See id. at 235-36. Chief Justice Warren Burger dissented. See id. at 239-40 (Burger, C.J., dissenting) (arguing that "a person who has misappropriated non-public information has an absolute duty to sisclose that information or to refrain from trading"). He believed that the jury had been adequately instructed on this theory, see id. at 243-44, and that any deficiency in instruction was harmless error, see id. at 245. Chief Justice Burger's views are discussed in greater detail in Part II. See infra notes 109-14 and accompanying text (discussing Justice Burger's acceptance of the misappropriation theory in his dessenting opinion in Chiarella).
33. See SEC v. Dirks, 463 U.S. 646, 648 (1983).
34. See id. at 649.
35. See id. at 649-50 (noting that William Blundell, the Wall Street Journal bureau chief who Dirks contacted, doubted "that such a massive fraud could go undetected and declined to write the story").
36. See id. at 650 n.3 (noting that the SEC was currently conducting its own investigation of Equity Funding).
37. See id. at 649.
38. See id. at 650 (noting that the price of Equity Funding stock fell from $26 per share to $15 per share).
39. See id.
40. See id. at 650-51 (finding that Dirks had aided and abetted violations of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5).
41. See id. at 651-52.
42. See SEC v. Dirks, 681 F.2d 824, 826 (D.C. Cir. 1982).
43. See SEC v. Dirks, 459 U.S. 1014, 1014 (1982).
44. See Dirks, 463 U.S. at 652.
45. See id. at 664 n.24 ("Without legal limitations, market participants are forced to rely on the reasonableness of the SEC's litigation strategy, but that can be hazardous, as the facts of this case make plain.").
46. Id. at 657.
47. Id. at 657-58 (quoting United States v. Chiarella, 445 U.S. 222, 231-32 n.14 (1980)).
48. Id. at 659.
49. Id. (quoting Mosser v. Darrow, 341 U.S. 267, 272 (1951) (holding trustee personally liable for authorizing employee to trade in securities of the debtors' subsidiaries)).
50. Id. (quoting Mosser, 341 U.S. at 271).
51. Id. at 658-59 (citations omitted).
52. See id. at 659-60.
53. See id. at 662.
54. Id.
55. See id. at 666-67.
56. See id. at 667 (holding that Dirks "could not have been 'a participant after the fact in [an] insider breach of a fiduciary duty'" (citation omitted)). In dissent, Justice Blackmun, joined by Justices Brennan and Marshall, disagreed that personal gain by the insider was required for a breach of duty. See id. at 673-74 (Blackmun, J., dissenting) (citations omitted) (arguing that personal gain is not an element of the breach of the duty because the duty does not look to the insiders' motives, but rather to the insiders' actions and the consequences to shareholders).
57. See supra notes 24-32 and accompanying text (discussing Powell's opinion in Chiarella, which required that a tippee breach a duty that the tippee has with the shareholders).
58. See Lawrence A. Hamermesh, Calling Off the Lynch Mob: The Corporate Director's Fiduciary Disclosure Duty, 49 VAND. L. REV. 1087, 1153 n.296 (1996) ("Research has not disclosed any case in which a stockholder selling in the market has successfully invoked fiduciary disclosure duty, as opposed to Rule 10b-5, to recover compensatory damages from a director who concurrently bought stock.").
59. 186 N.E. 659 (Mass. 1933).
60. See id. at 661 (explaining the impracticability of requiring directors and other insiders who buy or sell shares of their corporation to seek out the other transacting party and disclosing to him everything that a court or jury may later find to affect the value of such shares).
61. See id. at 659 (discussing the transactions in question in which the defendants, through brokers, bought 700 shares from plaintiff).
62. See id.
63. See id at 659-60 (noting that the plaintiff did not have this information).
64. see id. at 660 (noting that the defendants agreed that the theory should be disclosed only if absolutely necessary).
65. See id. (noting that the defendants bought many shares of the stock through agents).
66. see id. (discussing the plaintiff's lack of knowledge regarding the defendants' identity and that "[t]here was no communication between them touching the subject").
67. See id.
68. Id.
69. Id.
70. Id. (citations omitted).
71. Id. (citing cases from Arizona, Illinois, Indiana, Kentucky, Michigan, Minnesota, New Jersey, New York, Tennessee, and Utah).
72. See id. at 661 (discussing, in dictum, that had the transaction been face-to-face, relief may have been granted in appropriate circumstances).
73. See Barbara A. Ash, State Regulation of Insider Trading - A Timely Resurgence?, 49 OHIO ST. L.J. 393, 399 (1988) ("Under what has been referred to as the 'majority rule,' an officer or director owed no duty to disclose any information even when the trading transaction was with an existing shareholder.");
74. Charles C. Cox & Kevin S. Fogarty, Bases of Insider Trading Law, 49 OHIO ST. L.J. 353, 361 (1988) (noting that at the time the "Securities Act and the Securities Exchange Act were passed, classic insider trading - transactions between uninformed shareholders and corporate officials possessing inside information - was not regarded as fraudulent in most jurisdictions" and that "[t]he corporate official's fiduciary duties were considered to run to the corporation as an entity, not to individual shareholders"). Although Goodwin is often described as following the "majority" rule, it is worth noting that few courts had addressed the issue at the time Goodwin was decided.
75. See, e.g., Todd A. Bauman, Comment, Insider Trading at Common Law, 51 U. CHI. L. REV. 838, 853 (1984) (noting that "the traditional common law rule allowed insider trading in anonymous markets, while regulating such activity in face-to-face transactions in shares of closely held corporations").
76. See Ash, supra note 73, at 399-400.
77. 213 U.S. 419, 434 (1909) (holding that there was a legal obligation to make the disclosures because of the special facts).
78. See id. at 425 (noting that the defendant knowingly purchased 800 shares from Mrs. Strong's agent). The Court stated that "[i]f the sale should not be consummated . . . the defendant also knew that the value of the lands and of the shares in the company would be almost nothing." Id. at 424-25. Apparently, the government had failed to provide any protection to the lands, thus rendering it essentially worthless. See id. at 425.
79. See id. (describing the scheme the defendant followed in order to purchase the shares).
80. Id.
81. See id. at 433.
82. Id.
83. See id. at 435.
84. See id. at 433 (noting that by concealing his identity, the defendant could "more easily avoid any questions relative to the negotiations for the sale of the lands and their probable result, and could also avoid any actual misrepresentations on that subject, which he evidenty thought were necessary in his case to constitute a fraud"). Professor Keeton describes Strong as a case involving concealed identity. See W. Page Keeton, Fraud - Concealment and Non-Disclosure, 15 TEX. L. REV. 1, 26 (1936) ("[I]t has been held to constitute fraud for a director to conceal his identity along with another fact which makes the stock of much greater worth, and which the stockholder would probably have discovered, either by investigation or inquiry, if he had known that the purchaser was a director." (citing Strong, 213 U.S. at 431)). Keeton notes that "these cases often distinguish between facts which could be discovered by an inspection of the books and facts which are peculiarly within the knowledge of the director." Id.
85. See Lawrence E. Mitchell, The Jurisprudence of the Misappropriation Theory and the New Insider Trading Legislation: From Fairness to Efficiency and Back, 52 ALB. L. REV. 775, 799 (1988) (arguing that "the existence of national securities markets makes the use of agents unnecessary, since the anonymity of the markets is sufficient to conceal the fact that insiders are trading in a manner analogous to that accomplished through the use of agents").
86. See Donald C. Langevoort, Insider Trading and the Fiduciary Principle: A Post-Chiarella Restatement, 70 CAL. L. REV. 1, 7 (1982) (arguing that investors don't know nor do they care "who their buyers or sellers are, there is no bargaining similar to that in face-to-face transactions" and that "given the essential independence of buyer and seller decisions, causation and injury are difficult to trace").
87. See Alison Grey Anderson, Fraud, Fiduciaries, and Insider Trading, 10 HOFSTRA L. REV. 341, 366-67 (1982) ("Silence by a fiduciary is fraudulent primarily because the beneficiary is likely to interpret that silence in a face-to-face transaction as meaning that the fiduciary is aware of no additional material information."). The government is not required, however, to prove reliance to establish a claim of securities fraud because the government was not a party to the transaction. See SEC v. Blavin, 760, F.2d 706, 711 (6th Cir. 1985) (holding that the Commission is not required to prove reliance on the misrepresentations or that the misrepresentations caused damages).
88. See Stephen Bainbridge, The Insider Trading Prohibition: A Legal and Economic Enigma, 38 U. FLA. L. REV. 35, 38 (1986).
89. Michael P. Dooley, Enforcement of Insider Trading Restrictions, 66 VA. L. REV. 1, 59 (1980). Although Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972), holds that reliance can be presumed in the case of a fraudulent omission, that case involved non-disclosure by fiduciaries in a face-to-face transaction. As such, the case is indistinguishable from Strong v. Repide, but readily distinguished from Chiarella and Dirks.
90. See 18 DEL. J. CORP. L. 740, 743 (1992) (providing the unreported case Marhart, Inc. v. Calmant Co. (Del. Ch. Aug. 19, 1992)) ("[F]iduciary duties run to stockholders, not prospective stockholders.").
91. See id.
92. United States v. Chiarella, 445 U.S. 222, 227 n.8 (quoting Gratz v. Claughton, 187 F.2d 46, 49 (2d Cir. 1951)).
93. See Anderson, supra note 86, at 356 (noting that "under state law corporate officers and directors generally have a fiduciary obligation to existing shareholders but not to prospective shareholders").
94. See Chiarella, 445 U.S. at 227 ("[A] corporate insider must abstain from trading in the shares of his corporation unless he has first disclosed all material inside information known to him.").
95. See Mitchell, supra note 84, at 796 (noting that at common law, corporate directors owe a fiduciary duty to the corporation, and that only a few jurisdictions recognize a fiduciary duty to shareholders with respect to purchases of company stock).
96. I am indebted to Steve Thel for the argument presented here.
97. See Cox & Fogarty, supra note 73, at 359 (arguing that a purchaser "is rarely the person whose intermediary meets the insider's intermediary on the exchange floor" and that "[t]he latter person was already in the market and probably would have bought or sold even if the insider had abstained"); Frank H. Easterbrook, Insider Trading, Secret Agents, Evidentiary Privileges, and the Production of Information, 1981 SUP. CT. REV. 309, 324 ("[The shareholder] who sold to Chiarella, might well have sold no matter what Chiarella did. There is no reason to think that Chiarella's 'by' order, placed through a broker, caused additional investors to sell.").
98. See Steven R. Salbu, The Misappropriation Theory of Insider Trading: A Legal, Economic, and Ethical Analysis, 15 HARV. J.L. & PUB. POL'Y 223, 238 (1992) (stating that "it is virtually impossible for a private plaintiff trading in the stock exchange to establish either privity with a particular defendant or casualty of the trade by any trader's particular transaction").
99. See 15 U.S.C. § 78t-1(a) (1994). The statute states that: Any person who violates any provision of this chapter or the rules or regulations thereunder by purchasing or selling information shall be liable in action m any court of competent jurisdiction to any person who, contemporaneously with the purchase or sale of securities that is the subject of such violation, has purchased . . . or sold . . . securities of the same class. Id.
100. See id. § 78t-1(b)(1)-(2). The statute states that: The total amount of damages . . . shall not exceed the profit gained or loss avoided in the transactions that are the subject of the violation . . . . The total amount of damages imposed against any person . . . shall be diminished by the amounts, if any, that such person may be required to disgorge, pursuant to a court order obtained at the instance of the [Securities and Exchange] Commission.
101. Cf. Salbu, supra note 97, at 236 (arguing that the "proper justification for the granting of surrogate status to contemporaneous traders is to achieve 10b-5's goal of deterrence").
102. See A.C. Pritchard, O'Melveny & Myers v. FDIC: Imputation of Fraud and Optimal Monitoring, 4 SUP. CT. ECON. REV. 179, 188-89 (1995).
103. See R. Rene Pengra, Note, Insider Trading, Debt Securities, and Rule 10b-5: Evaluating the Fiduciary Relationship, 67 N.Y.U. L. REV. 1354, 1366 (1996) (arguing for Rule 10b-5 liability for insider trading in debt securities).
104. SEC v. Dirks, 463 U.S. 646, 653 n.10 (1983).
105. See Dooley, supra note 88, at 32 ("Neither insiders nor outside investors have any property right in non-public corporate information. The corporate principal owns the information and may withhold it so long as withholding serves a valid corporate purpose.").
106. See RESTATEMENT (SECOND) OF AGENCY § 395 (1958) (stating that an agent is under "a duty . . . not to use or to communicate information confidentially given him by the principal or acquired by him during the course of or on account of his agency or in violation of his duties as agent, in competition with or to the injury of the principal").
107. See Dooly, supra note 88, at 21 (arguing that requiring insiders to forfeit any profit resulting from a breach of a fiduciary duty should result in payment to the issuer because it has the superior property interest in the information); see also Easterbrook, supra note 96, at 323 ("Chiarella's trading . . . reduced the returns available to the bidders. His trading may have alerted the market to the impending offers and so made them more difficult to consumate. Chiarella's conduct subjected his principals to uncompensated risk.").
108. See Diamond v. Oreamuno, 248 N.E.2d 910, 916 (N.Y. 1969) (requiring that officers and directors account to the corporation for profits made in trading on inside information); cf. Brophy v. Cities Serv. Co., 70 A.2d 5, 8 (Del. Ch. 1949) (requiring that corporate officers account for trading profits made in competition with the corporation's planned repurchase of its shares). But see Freeman v. Decio, 584 F2d 186, 187 (7th Cir. 1978) (rejecting duty to corporation under Indiana law). Section 16(b) also puts recovery for short-swing profits by insiders in the hands of the corporation. See 15 U.S.C. § 78p (1984) (requiring that any profit derived from the purchase or sale of a security by an insider within six to be recoverable by the issuer).
109. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 754-55 (1975) (holding that a private right of action is limited to persons who purchased or sold securities). The purchaser/seller limitation is inapplicable to SEC enforcement actions and to criminal cases. See id. at 751 n.14 (holding that the purchaser-seller rule "imposes no limitation on the standing of the SEC to bring actions for injunctive relief"); see also Holmes v. Securties Investor Protection Corp., 503 U.S. 258, 281 (1992) (O'Connor, J., concurring in part and concurring in the judgment) ("[T]he purchaser/seller standing requirement for private civil actions under § 10(b) and Ruie 10b-5 is of no import in criminal prosecutions for willful violations of those provisions.").
110. See United States v. Chiarella, 445 U.S. 222, 240 (1980) (Burger, C.J., dissenting) (reasoning that "a person who has misappropriated nonpublic information has an absolute duty to disclose that information or to refrain from trading"). Justices Brennan, Blackmun, and Marshall also indicated support for the theory or the broader parity of information theory. See id. at 238 (Brennan, J., concurring) (arguing that "a person violates § 10(b) whenever he improperly obtains or converts to his benefit nonpublic information which he then uses in connection with the purchase or sale of securities"); id. at 245 (Blackmun, J., dissenting, joined by Marshall, J.) (stating agreement "with much of what is said in . . . the dissenting opinion" of the Chief Justice).
111. Id. at 239-40 (Burger, C.J., dissenting) (citing W. PROSSER, LAW OF TORTS § 106 (2d ed. 1955)).
112. See id. at 240 (Burger, C.J., dissenting) (arguing that "the rule should give way when an informational advantage is obtained, not by superior experience, foresight, or industry, but by some unlawful means").
113. Id. (Burger, C.J., dissenting) (citing Keeton, supra note 83, at 25-26). Keeton offers scant authority for this proposition, asserting that "[a]ny time information is acquired by an illegal act it would seem that there should be a duty to disclose that information, irrespective of the nature of the remedy." Keeton, supra note 85, at 25-26; see also id. at 35 (stating that a duty of disclosure exists when information is acquired by an illegal act). But the only authorities offered by Keeton are cases seeking specific performance. See id. at 25 ("There are cases denying the remedy of specific performance in instances where material information undisclosed has been acquired by a tortious act."). These cases denying specific performance are, of course, grounded in the equity doctrine of "unclean hands," which would not apply in an action at law. See, e.g., Precision Instrument Mfg. Co. v. Automotive Maintenance Mach. Co., 324 U.S. 806, 814 (1945) (discussing the equitable notion of "unclean hands," which prohibits relief to those "tainted with inequitableness or bad faith relative to the matter in which he seeks relief").
114. Chiarella, 445 U.S. at 241 (Burger, C.J., dissenting).
115. See id. at 240 (Burger, C.J., dissenting) (arguing that one who misappropriates nonpublic information has an absolute duty to disclose that information to the shareholder on the other side of the transaction or to refrain from trading). Purchasers who have inside information from their own company generally have no duty to shareholders of other corporations. See General Time Corp. v. Talley Indus., 403 F.2d 159, 164 (2d Cir. 1968) ("We know of no rule of law . . . that a purchaser of stock, who was not an 'insider' and had no fiduciary relation to a prospective seller, had any obligation to reveal circumstances that might raise a seller's demands and thus abort the sale.").
116. 664 F.2d 12 (2d Cir. 1981).
117. Id. at 15.
118. See id. at 15-16.
119. See id. at 16.
120. See id. at 16-17 (arguing that Rule 10b-5 applies to any person, and that the court must be concerned with the scope of the Rule and not the plaintiff's standing to sue).
121. See id. at 17 (noting that the clients had takeover plans that depended upon market-based prices, not inflated prices caused by the release of this information).
122. See id. at 18.
123. See SEC v. Materia, 745 F.2d 197, 201 (2d Cir. 1984) (holding that misappropriation of nonpublic information constitutes a violation of § 10(b)).
124. 791 F.2d 1024 (2d Cir. 1986), aff'd, 484 U.S. 19 (1987).
125. See id. at 1026.
126. See id.
127. See id.
128. See id.
129. See id. at 1027.
130. See id.
131. See id. at 1036.
132. See id. at 1034-35.
133. See id. at 1032-34.
134. See Powell's Draft, supra note 11, at 1 (dissenting from denial of certiorari).
135. See id. at 6 (arguing that the misappropriation theory has "little or no support . . . in the language or history of the Securities Act of 1934").
136. Id. at 1.
137. Id. at 3 (citation omitted).
138. RESTATEMENT (SECOND) OF TORTS § 551(2) (1977) (emphasis added).
139. See Powell's Draft, supra note 11, at 4 (arguing that Chiarella found that parties to a business transaction do not necessarily owe a duty to disclose information and that liability arises only in instances where there is such a duty).
140. Id.
141. See id. (noting that the court of appeals found no fiduciary relationship between any of the parties).
142. See id. at 4-5.
143. See id. at 6.
144. Id. (internal quotations marks and citations omitted).
145. See id. (concluding that because there was no fiduciary duty to disclose information, their convictions under § 10(b) and Rule 10b-5 could not be sustained). Powell reiterated the point in his conclusion. See id. ("There appears to be little or no support for the decision below in the language or the history of the Securities Act of 1934.").
146. See Letter from Chief Justice Rehnquist to Justice Powell, (Dec. 11, 1986) (on file with the author) (joining in dissent from denial of certiorari); Letter from Justice O'Connor to Justice Powell, (Dec. 11, 1986) (on file with the author) (joining in dissent from denial of certiorari).
147. See Bench Memorandum, Carpenter v. United States (No. 86-422) (Oct. 7, 1987) (copy on file with the Library of Congress, Manuscript Division, Box 427 of Thurgood Marshall Papers). Certiorari was granted on December 15, 1986. See United States v. Carpenter, 479 U.S. 1016 (1986).
148. See Al Kamen, Justice Powell Resigns, Was Supreme Court's Pivotal Vote, WASH. POST, June 27, 1987, at A1 (reporting that Justice Powell retired on June 26, 1987).
149. See Carpenter v. United States, 484 U.S. 19, 19 (1987) (noting that the case was argued on October 7, 1987); Linda Greenhouse, Reagan Nominates Anthony Kennedy to Supreme Court, N.Y. TIMES, Nov. 12, 1987, at A1 (reporting that Justice Kennedy was nominated November 11, 1987); Stuart Taylor, Jr., Kennedy Sworn In as 104th Justice on High Court, N.Y. TIMES, Feb. 19, 1988, at A10 (reporting that Anthony Kennedy was sworn in as Justice on February 18, 1988).
150. See Carpenter v. United States, 484 U.S. 19, 19 (1987) (noting that the case was argued on October 7, 1987); Linda Greenhouse, Reagan Nominates Anthony Kennedy to Supreme Court, N.Y. TIMES, Nov. 12, 1987, at A1 (reporting that Justice Kennedy was nominated November 11, 1987); Stuart Taylor, Jr., Kennedy Sworn In as 104th Justice on High Court, N.Y. TIMES, Feb. 19, 1988, at A10 (reporting that Anthony Kennedy was sworn in as Justice on February 18, 1988).
151. See Carpenter, 484 U.S. at 24. The Court affirmed the mail and wire fraud convictions unanimously. See id. 150 Conversely, if Justice Kennedy had been nominated and confirmed by the time of argument, the misappropriation theory might well have been upheld, given that Justice Kennedy voted with the majority in O'Hagan. See United States v. O'Hagan, 117 S. Ct. 2199, 2204 (1997) (noting that Stevens, O'Connor, Kennedy, Souter, and Breyer joined in Ginsburg's opinion).
152. See Stuart J. Kaswell, An Insider's View of the Insider Trading and Securities Fraud Enforcement Act of 1988, 45 Bus. LAW. 145, 150-51 (1989) (discussing the debate over the move to define insider trading and the decision against such definition).
153. See SEC v. Cherif, 933 F.2d 403, 410 (7th Cir. 1991) (accepting the misappropriation theory and holding that one "violates Rule 10b-5 and § 10(b) . . . by misappropriating and trading upon material information").
154. See SEC v. Clark, 915 F.2d 439, 449 (9th Cir. 1990) (holding that the misappropriation theory applies to fraud under § 10(b) and Rule 10b-5).
155. 58 F.3d 933, 944 (4th Cir. 1995) (rejecting the misappropriation theory because it lacked support from the language of § 10(b) and Rule 10b-5, Supreme Court decisions interpreting these provisions, or from the purposes of securities fraud provisions).
156. See id. at 937.
157. See id. at 939.
158. Id. at 946 (citations omitted).
159. See id. at 949.
160. See Santa Fe Indus., v. Green, 430 U.S. 462, 473-74 (1977) (holding that deception is necessary to trigger § 10(b) liability).
161. Bryan, 58 F.3d at 950.
162. See supra notes 138-44 and accompanying text (discussing Justice Powell's draft dissent from denial of certiorari in Carpenter).
163. 162 See United States v. O'Hagan, 92 F.3d 612, 662 (8th Cir. 1996) (holding that criminal liability could not be imposed under § 10(b) under the misappropriation theory), rev'd, 117 S. Ct. 2199 (1997).
164. See id. at 614.
165. See id.
166. See id.
167. See id. The SEC obtained summary judgment in a parallel civil action against O'Hagan based on the collateral estoppel effect of the conviction. See SEC v. O'Hagan, 901 F. Supp. 1461, 1461 (D. Minn. 1995).
168. O'Hagan, 92 F.3d at 617.
169. 168 Id.
170. See id. at 620. The Eighth Circuit went further than the Bryan court, however, by also invalidating the SEC's Rule 14e-3, see id. at 627, which prohibits the use in securities trading of confidential information relating to tender offers, see 17 C.F.R. § 240.14e-3(a) (1997). The validity of the Rule had previously been upheld by the Second, see United States v. Chestman, 947 F.2d 551, 562-63 (2d Cir. 1991) (en banc); Seventh, see SEC v. Maio, 51 F.3d 623, 631 (7th Cir. 1995); and Tenth Circuits, see SEC v. Peters, 978 F.2d 1162, 1166-67 (10th Cir. 1992). The Eighth Circuit rejected the Rule because it does not include any requirement of misrepresentation or nondisclosure. See O'Hagan, 92 F.3d at 625-26 (invalidating Rule 14e-3). In the court's view, this omission conflicted with Chiarella's holding that nondisclosure could be fraudulent only when there was a duty to disclose, and the court found no material differences between § 10(b) and § 14(e). See id. at 624-27. The court also overturned O'Hagan's mail fraud convictions, holding that "the indictment was structured in such a manner as to premise the fraud for the mail fraud charges on the acts allegedly constituting the securities fraud." Id. at 627.
171. See United States v. O'Hagan, 117 S. Ct. 759 (1997) (No. 96-842).
172. See Reply Brief for the United States at 6, United States v. O'Hagan, 1997 WL 174119.
173. See id.
174. Id.
175. See id. at 8.
176. Id. at 11.
177. Id.
178. Transcript of Oral Argument at 4-5, United States v. O'Hagan (Apr. 16, 1997), 1997 WL 182584 [hereinafter Transcript of Oral Argument].
179. Id. at 6-7 (emphasis added).
180. See supra notes 135-39 and accompanying text (discussing Justice Powell's view that the fraud had to occur in the securities transaction). The Chief Justice dissented in O'Hagan, while Justice O'Connor joined the majority opinion. See United States v. O'Hagan, 117 S. Ct. 2199, 2204 (1997).
181. See supra note 145 and accompanying text (noting that Chief Justice Rehnquist and Justice O'Connor joined Justice Powell in dissent from denial of certiorari).
182. See Transcript of Oral Argument, supra note 177, at 35 (discussing the unitary concept).
183. Id. at 35-37.
184. See Lyle Denniston, Supreme Confidence, AM. LAW., June 1997, at 75-76 (reviewing the O'Hagan oral arguments).
185. See United States v. O'Hagan, 117 S. Ct. 2199, 2206 (1997) (upholding the convictions under the misappropriation theory).
186. See id. at 2208 (stating that the misappropriation theory "satisfies § 10(b)'s requirement that chargeable conduct involve 'deceptive device or contivance'").
187. Id. at 2208-09. Justice Ginsburg reinforced the point, stating "it [was O'Hagan's] failure to disclosure his personal trading to Grand met and Dorsey, in breach of his duty to do so, that ma[de] his conduct 'deceptive' within the meaning of 10(b)." Id. at 2211.
188. See id. at 2208 (discussing how a fiduciary breaches his duty of loyalty when converting the agent's information for personal gain).
189. Id. at 2209.
190. See id. at 2210 n.8 (discounting O'Hagan's counsels' hypothetical uses of the client's information, such as selling it to a trade journal or using it to seek a legal position with Pillsbury).
191. See id. at 2210.
192. See id. at 2212 ("The Court did not hold in Chiarella that the only relationship prompting liability for trading on undisclosed information is the relationship between a corporation's insiders and shareholders.").
193. Id. (quoting United States v. Chiarella, 445 U.S. 222, 233 (1980)).
194. See id. at 2213 (arguing that Dirks did not support that § 10(b) does not prevent those who acquire nonpublic information through misappropriation and then trade based on that information).
195. Id. at 2210-11.
196. Id. at 2211. The Court also reversed the Eighth Circuit's ruling on Rule 14e-3, holding that the Commission had not exceeded its authority in promulgating the Rule. See id. at 2217 (upholding Rule 14e-3 as applied to cases like O'Hagan). The Court held that § 14(e) authorized the Commission to adopt rules reasonably designed to prevent fraud, even if the conduct proscribed was not itself fraudulent. See id. (upholding the Commission's prohibitions if "reasonably designed to prevent . . . acts and practices that are fraudulent" even if not fraudulent themselves under the common law). The Court accepted the government's argument that Rule 14e-3 serves this preventive purpose by prohibiting trading activity in a class of cases where there is likely to be a breach of fiduciary duty, but the breach is difficult to prove. See id. a 2219 (validating Rule 14e-3 "insofar as it serves to prevent the type of misappropriation charged against O'Hagan"). Having revsersed the Eighth Circuit's judgment on the securities fraud counts, the Court also reversed the lower court's ruling on the mail fraud convictions. See id. 2220.
197. Justice Scalia dissented in part, stating that, "[w]hile the Court's explanatin of the scope of § 10(b) and Rule 10b-5 would be entirely reasonable in some other context, it does not seem to accord with the principle of lenity we apply to criminal statutes." Id. at 2220 (Scalia, J., concurring in part and dissenting in part). Justice Thomas, joined by Chief Justice Rehnquist, also dissented in part. See id. (Thomas, J., concurring in part and dissenting in part) (arguring that the misappropriation theory failed to provide an acceptable interpretation of § 10(b)'s requirement that a deceptive device be used in connection with a securities transaction). While Thomas agreed that the undisclosed misappropriation of confidential information involves "deception," he argued that deception in a misappropriation case is not "in connection with" a securities transaction. See id. at 2221. (Thomas, J., concurring in part and dissenting in part) (arguring that the "in connection with" requirement needs a more "integral" connection than what the majority required).
198. Id. at 2213.
199. Id.
200. See Langevoort, supra note 85, at 47 ("The source of the information is not necessarily defrauded as part of any investment-related activity of its own.").
201. See, e.g., Jill E. Fisch, Start Making Sense: An Analysis and Proposal for Insider Trading Regulation, 26 GA. L. REV. 179, 202 (1991) (noting that fraud in an insider trading case is questionable when the victim is not a market participant); Mitchell, supra note 84, at 830 (questioning the appropriateness of using securities fraud laws against those not trading in the stock about which the misappropriated information concerns);
202. Lawrence A Rosenbloom, Note, Is It Inside or Out? - A Proposal To Clarify the Misappropriation Theory of Unlawful Trading, 18 CARDOZO L. REV. 867, 900 (1996) (proposing that misappropriation theory be limited to fiduciary breaches or similar relationships ; "closely tied to the securities marketplace and pos[ing] a direct and imminent danger to the market" (emphasis omitted)).
203. See O'Hagan, 117 S. Ct. at 2205.
204. See United States v. Bryan, 58 F.3d 933, 950 (1995) (explaining that the West Virginia Lottery Commission has no connection to the securities transaction).
205. See Fisch, supra note 200, at 190. Fisch states: Applying agency law principles to insider trading is problematic . . . because agency law does not generate an obligation to the trading counterparty or to the market. Rather agency law suggests that a corporate insider is unjustly enriched by making use of corporate information for his personal benefit and that any trading profits are rightfully the property of the owner of the information - the corporation. This unjust enrichment takes place, though, whether or not the insider discloses the information prior to trading. Id.
206. RESTATEMENT (SECOND) OF AGENCY § 395 (1958).
207. Id. § 381.
208. See infra notes 224-49 and accompanying text (discussing the effects on the market of trading on misappropriated information).
209. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730 (1975) (holding that under § 10(b) and Rule 10b-5, only actual purchaser and sellers of securities can bring a private damage action); see also Litton Indus. v. Lehman Bros. Kuhn Loeb, Inc., 967 F.2d 742, 749 (2d Cir. 1992) (holding that tender offerors who have purchased securities may have a cause of action under § 10(b) if they can establish loss causation).
210. See Section 20A of the Securities Exchange Act, 15 U.S.C. § 78t-1(a) (1994). Prior to Congress's passage of § 20A, the Second Circuit had ruled that contemporaneous traders had no private cause of action against misappropriators because they were not the victims of the fraud. See Moss v. Morgan Stanley, Inc., 719 F.2d 5, 15-16 (2d Cir. 1983). Section 20A was specifically intended to overrule Moss. See Kaswell, supra note 151, at 167 (noting that § 20A "specifically overturns the holding in Moss v. Morgan Stanley"). Section 20A, of course, creates a doctrinal puzzle of its own, as the plaintiffs entitled to sue under that provision are not the victims of the fraud.
211. But see infra note 222 and accompanying text (discussing limitations of state law on insider trading).
212. See, e.g., Langevoort, supra note 85, at 52 (noting examples that the misappropriation theory does not cover such as where "executives of a company about to award a profitable contract to another trade in the other company's stock, they are not misappropriating the information if they trade with the approval of their own company"). There would be liability, however, under Rule 14e-3 in the context of tender offers. See supra note 195 and accompanying text (discussing Rule 14e-3). The corporation's ability to waive its property rights in information means that market analysts will not risk misappropriation liability for trading on information given to them by the company.
213. See, e.g., Fisch, supra note 200, at 224. Fisch states: A more troubling aspect of treating inside information as property is that such treatment does not justify government intervention to allocate the property rights to information. If inside information is the property of the firm producing it, why is it different from any other firm property, which the firm may allocate, as it chooses, by contract? This view would enable a firm to authorize its officers or employees to trade on the basis of inside information. The firm would, in effect, be opting out of the government enforcement of its property rights. Id.
214. See David D. Haddock & Jonathan R. Macey, A Coasian Model of Insider Trading, 80 Nw. U. L. REV. 1449, 1468 (1986) (arguing that corporations should be allowed to opt out of restrictions on insider trading).
215. A corporation could not authorize such trading in its own shares because it would run foul of the classical theory. See McCormick v. Fund Am. Co., 26 F.3d 869, 876 (9th Cir. 1994) ("Numerous authorities have held or otherwise stated that the corporate issuer in possession of material non-public information, must, like other insiders in the same situation, disclose the information to its shareholders or refrain from trading with them."). Because the duties of the classical theory are owed directly to the individual shareholders, a knowing and intelligent waiver of those duties by the shareholders would be nearly impossible. This aspect of the classical theory also conflicts with common law. See Kors v. Carey, 158 A.2d 136, 143 (Del. Ch. 1960) (holding that corporation has no duty of disclosure to shareholders in repurchasing shares); see also Deborah A. DeMott, Beyond Metaphor: An Analysis of Fiduciary Obligation, 1988 DUKE L.J. 879, 916-21 (discussing problems with treating corporation as fiduciary of shareholders and disclosure obligations in the context of share repurchase).
216. See ERNEST L. FOLK III ET AL., FOLK ON THE DELAWARE GENERAL CORPORATION LAW § 141.2.11 (1992) (";The duty of directors also includes a settled prohibition against waste of corporate assets.").
217. United States v. O'Hagan, 117 S. Ct. 2199, 2214 (1997).
218. RESTATEMENT (SECOND) OF AGENCY § 395 (1958).
219. See id. § 395 cmt. c ("In obtaining consent of the principal to use or disclose confidential information, the agent is under the duty of disclosure stated in § 390.").
220. Id. § 381 cmt. d. This specific duty of disclosure is a part of the agent's broader duty to keep his principal informed: "Unless otherwise agreed, an agent is subject to a duty to use reasonable efforts to give his principal information which is relevant to affairs entrusted to him and which, as the agent has notice, the principal would desire to have" Id. § 381.
221. Id. § 390 cmt. a.
222. See id. § 399 (listing possible remedies for a principal against an agent who has violated her duty).
223. See Bradford Cornell & Erik R. Sirri, The Reaction of Investors and Stock Prices to Insider Trading, 47 J. FIN. 1031, 1032-33, 1045-46 (1992) (presenting empirical evidence that price increases result from insider trading); Lisa Meulbroek & Carolyn Hart, The Effect of Illegal Insider Trading on Takeover Premia, 1 EUROPEAN FIN. REV. 51, 51 (1997) (finding that insider trading results in bidding companies paying larger takeover premia).
224. See Bradford Cornell & Erik R. Sirri, The Reaction of Investors and Stock Prices to Insider Trading, 47 J. FIN. 1031, 1032-33, 1045-46 (1992) (presenting empirical evidence that price increases result from insider trading); Lisa Meulbroek & Carolyn Hart, The Effect of Illegal Insider Trading on Takeover Premia, 1 EUROPEAN FIN. REV. 51, 51 (1997) (finding that insider trading results in bidding companies paying larger takeover premia).
225. See Dooley supra note 88, at 28 (stating that "the typical offense is so furtive in nature that it can be detected only through the use of the broad investigative powers of the federal government").
226. See Easterbrook, supra note 98, at 334 (discussing advantages of public enforcement of insider trading prohibitions); see also RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 393 (3d ed. 1986) (hypothesizing that because of the low probability of detection, it may not be cost effective for companies to stop insider trading because they cannot impose penalties); Cox & Fogarty, supra note 73, at 356 n.12 (arguing that corporate efforts to discourage insider trading may be deterred by "the practical difficulty of undertaking policing efforts whose effectiveness would justify their cost, by the willingness of public authorities to assume some of this burden, and by the imperfect identity of interests between managers and the corporation").
227. There is clearly a strong federal interest in the integrity of the national stock markets See Hamermesh, supra note 58, at 1175 (describing "the regulation of disclosure in the interest of facilitating interstate markets for securities" as "historically and far more properly a federal matter").
228. Liquidity means that there is an active market for shares - that is, at any given time there are plenty of willing buyers and sellers. See JOHN DOWNES & JORDAN ELLIOT GOODMAN, DICTIONARY OF FINANCE AND INVESTMENT TERMS 305 (4th ed. 1995).
229. See Easterbrook, supra note 96, at 325 (arguing that shareholders will pay less for stock when insider trading is expected); Michael Manove, The Harm from Insider Trading and Informed Speculation, 104 Q.J. ECON 823, 823-24 (1989) (observing that "sophisticated outsider" will pay less for share if they are aware of insider trading).
230. See 134 CONG. REC. S17,278 (daily ed. Oct. 21, 1988) statement of Sen. Proxmire) (discussing the view held by small investors that they are cheated by the stock market when corrupted by insider trading).
231. See James D. Cox, Insider Trading and Contracting: A Critical Response to the "Chicago School," 1986 DUKE L.J. 628, 638 (arguing that because investors can discount stocks by the average risk of insider trading for all firms, insider trading does not harm investors who hold diversified portfolios).
232. See Lawrence M. Ausbel, Inside Trading in a Rational Expectation Economy, 80 AM. ECON. REV. 1022, 1036 (1990) proposing that regulations of insider trading are Pareto improvements, creating greater investment and greater returns).
233. See Marcel Kahan, Securities Laws and the Social Cost of "Inaccurate" Stock Prices, 41 DUKE L.J. 977, 1021 (1992) ("If stock prices are inaccurate because they do not reflect some non-public information, but no person who possesses that information traders, uninformed investors would have no reason to anticipate a loss by trading."). Although uninformed investors trading with each other will have gains and losses from individual traders, those gain and losses are random and will balance out over a large number of traders. See Boyd Kimball Dyer, Economic Analysis, Insider Trading, and Game Market, 1992 UTAH L. REV. 1, 59 (observing that some investors who buy when a company is concealing information will gain and some investors will lose, but gains and losses "will be distributed at random among investors and will be equal and offsetting").
234. See Marcel Kahan, Securities Laws and the Social Cost of "Inaccurate" Stock Prices, 41 DUKE L.J. 977, 1021 (1992) ("If stock prices are inaccurate because they do not reflect some non-public information, but no person who possesses that information traders, uninformed investors would have no reason to anticipate a loss by trading."). Although uninformed investors trading with each other will have gains and losses from individual traders, those gain and losses are random and will balance out over a large number of traders. See Boyd Kimball Dyer, Economic Analysis, Insider Trading, and Game Market, 1992 UTAH L. REV. 1, 59 (observing that some investors who buy when a company is concealing information will gain and some investors will lose, but gains and losses "will be distributed at random among investors and will be equal and offsetting").
235. See Manove, supra note 226, at 823 (arguing that where there is insider trading, "shares are more likely to be available when, unbeknownst to them, the economic value of the corporation is low than when it is high").
236. See William S. Wang, Trading on Material Non-public Information on Impersonal Stock Markets: Who is Harmed, and Who Can Sue Whom Under SEC Rule 10b-5?, 54 S. CAL. L. REV. 1217, 1235 (1981) (arguing that the "Law of Conservation of Securities" mandates that profits gained by an insider must be directly offset by losses to other investors).
237. See Nicholas L. Georgakopoulos, Insider Trading as a Transactional Cost: A Market Microstructure Justification and Optimization of Insider Trading Regulation, 26 CONN. L. REV. 1, 19 (1993) (describing the transaction cost of trading without information as the amount of insiders' profits divided by the total number of outsider trades); cf. Cox, supra note 228, at 638 ("[T]he risk of abusive insider-trading practices, even though random for the individual firm, becomes systematic due to the informational asymmetries that characterize public corporations. Because it is systematic, this risk cannot be reduced by diversification . . . .").
238. See Lawrence R. Glosten & Lawrence E. Harris, Estimating the Components of the Bid/Ask Spread, 21 J. FIN. ECON. 123, 141 (1988) (presenting evidence that insider trading increases the bid/ask spread); Lawrence R. Glosten & Paul R. Milgrom, Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders, 14 J. FIN. ECON. 71, 98 (1985) (finding that inside information is one of several factors that widens the bid/ask spread).
239. See Lawrence R. Glosten & Lawrence E. Harris, Estimating the Components of the Bid/Ask Spread, 21 J. FIN. ECON. 123, 141 (1988) (presenting evidence that insider trading increases the bid/ask spread); Lawrence R. Glosten & Paul R. Milgrom, Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders, 14 J. FIN. ECON. 71, 98 (1985) (finding that inside information is one of several factors that widens the bid/ask spread).
240. See Lawrence R. Glosten, Insider Trading, Liquidity and the Role of the Monopolist Specialist, 62 J. Bus. L. 211, 228 (1989) ("Trading on private information . . . leads to less than optimal risk sharing. This occurs because the response of market makers to the existence of traders with private information is to reduce the liquidity of the market . . . [which] reduces the amount of trade and hence the amount of risk sharing.").
241. See Harvey L. Pitt & Karl Groskaufmanis, A Tale of Two Instruments: Insider Trading in Non-Equity Securities, 49 Bus. LAW. 187, 196 (1993) (explaining advantages that option markets provide to insider traders).
242. See Salbu, supra note 97, at 233 (explaining that prohibiting insider trading when traders are made on misappropriated nonpublic information does not ensure market integrity because any disparity in information, even those legitimately obtained, may result in market failure); cf. Fisch, supra note 200, at 223 ("[F]or the investor-victim, it is irrelevant whether the trader has acquired inside information through the breach of a duty or not; anyone who trades based on superior information not available to the investing public has obtained a trading advantage that ia arguably unfair.").
243. See supra notes 199-213 and accompanying text (discussing the broader sweep of the securities laws under the misappropriation theory compared with the classical theory).
244. See supra notes 203-06 and accompanying text (describing the limits that agency law places on the misappropriation theory).
245. See Fisch, supra note 200, at 222-23 ("Market professionals expend a great deal of effort trying to obtain information that does not duplicate what everyone else has, through discussions with corporate insiders, following the progress of important litigation, or monitoring news reports and the Dow Jones tape constantly.").
246. Effeciency means that at any given time prices reflect all available information about the company and its future prospects. See DOWNES & GOODMAN, supra note 225, at 160 (defining the efficient market hypothesis). In other words, the stock price is the best - not perfect - estimate of the net present value of future dividends and the company's growth. Therefore, the more quickly a given market incorporates information into stock price, the more efficient it is.
247. See Jonathan Macey & Hideki Kanda, The Stock Exchange as a Firm: The Emergence of Close Substitutes for the New York and Tokyo Stock Exchanges, 75 CORNELL L. REV. 1007, 1013 (1990) ("Competition among market professionals in a liquid market assures even the more ignorant investors that these market prices reflect all the publicly available information about the firms behind the securities." (internal quotation marks omitted)).
248. See John F. Barry III, The Economics of Outside Information and Rule 10b-5, 129 U. PA. L. REV. 1307, 1318 (1981) ("[T]he securities laws should preserve incentives to market research by recognizing in the collector of outside information a right of trade without disclosure, and to earn profits at the expense of the less informed.").
249. See generally Jean-Jacques Laffont & Eric S. Maskin, The Efficient Market Hypothesis and Insider Trading on the Stock Market, 98 J. POL. ECON. 70 (1990) (modeling trading strategies by insider traders that do not lead to revealing the insiders' information). See also Manove, supra note 226, at 828 (explaining that if insider traders do not exercise restraint but rather trade excessively in a short period of time, the insider traders' knowledge becomes reflected in the share's price and thus the public becomes informed).
250. See Bainbridge, supra note 87, at 44-45 (observing that insider trading does little to convey inside information to the market); Dyer, supra note 230, at 31 (same); Kahan, supra note 230, at 1004 (concluding that insider trading activities do not necessarily convey the presence of insider information to the market because investors may not be able to distinguish between trades motivated by inside information and other motivations because insiders may try to conceal their trading activities). Of course, incompetent or greedy insider traders may be unable to conceal their trading, and they consequently have a greater effect on prices. See Lisa K. Meulbroek, An Empirical Analysis of Illegal Insider Trading, 47 J. FIN. 1661, 1696 (1992) (finding, based on a sample of detected insider trading, that 40 to 50% of the run-up in price before public announcement of takeovers occurs on days with known insider trading).
251. See Mark Klock, Mainstream Economics and the Case for Prohibiting Inside Trading, 10 GA. ST. U. L. REV. 297, 311-12 (1994) (arguing that insider trading reduces competition and has the effect of a monopoly).
252. See Georgakopoulos, supra note 233, at 21 ("A monopolist trader can expect to be able to trade repeatedly on the same piece of information. By contrast, . . . [c]ompetition decreases the number of trades that can be made on the information.").
253. See Macey & Kanda, supra note 242, at 1015 ("[R]ivalrous competition among well-informed market professionals causes rapid assimilation of information accessible to the community of investment analysts into share prices at low cost to investors.").
254. See Manove, supra note 226, at 826 (arguing that the economic value of the release of information through informed trading by market professionals may more than offset the losses attributable to adverse selection and inefficiency and the costs of acquiring the information).