Some commentators are fretting that the recent blockbuster insider trading case involving Galleon Management (nice summary here) is going to chill market-enhancing research. For example, Prof. Bainbridge argues that:
There is a very serious risk that this case could chill aggressive but legitimate research by hedge funds and other professional investors. If so, the SEC will have done a serious disservice to the ordinary investors it claims to be protecting. Those investors will be left with a less efficient and less liquid market.
Prof. Painter adds, in a comment to Prof. Bainbridge's post, that:
I am as concerned as anybody about illegal insider trading by hedge funds and others. I am also concerned about the great lack of clarity in this area of the law — a topic I and two coauthors raised after the O'Hagan case in a law review article — "Don't Ask, Just Tell: Insider Trading After United States v. O'Hagan" 84 Virginia Law Review (1998). Eleven years later there is still insufficient clarity here. One should not have to have Professor Bainbridge on call to avoid running afoul of a criminal statute.
But I am not convinced that this is such a gray area.
Under Dirks v. SEC, 463 U.S. 646 (1983), we know that:
1. "[A] tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach," and
2. "[T]he test is whether the insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach."
In this case we apparently have evidence of direct exchanges of value for the information as well as seemingly very little doubt on the part of the participants that they were engaging in illegal conduct (e.g.: “You put me in jail if you talk,” and “I’ll be like Martha…Stewart.”). Does this kind of conduct really implicate legitimate research analysts?
