Just Do It! Specific Rulemaking on Materiality Guidance in Insider Trading

AuthorJoan MacLeod Heminway
PositionCollege of Law Distinguished Professor of Law, The University of Tennessee College of Law; A.B. 1982, Brown University; J.D. 1985, New York University School of Law. Work on this article was supported by the diligent and capable research assistance of Olatayo Atanda (J.D. 2012, The University of Tennessee College of Law) and summer research...
Pages999-1054
Just Do It! Specific Rulemaking on Materiality
Guidance in Insider Trading
Joan MacLeod Heminway*
Issuers, investors, and regulators have struggled with applying
the materiality test since the enactment of the securities laws.1
I. INTRODUCTION
Insider trading has been in the news on a relatively constant
basis in the new millennium. Raj Rajaratnam and associates,2
Mark Cuban,3 and Martha Stewart4 have been among the many
subjects of legal actions involving insider trading since the Enron
debacle in 2002. Some of these cases have been garden-variety
insider trading cases; others have exposed confusing and evolving
elements of U.S. insider trading doctrine.5 Most recently,
Copyright 2012, by JOAN MACLEOD HEMINWAY.
* College of Law Distinguished Professor of Law, The University of
Tennessee College of Law; A.B. 1982, Brown University; J.D. 1985, New York
University School of Law. Work on this article was supported by the diligent
and capable research assistance of Olatayo Atanda (J.D. 2012, The University of
Tennessee College of Law) and summer research funding from The University
of Tennessee College of Law. The article benefited, in earlier drafts, from
participants in workshops held at Boston College Law School, St. John’s
University School of Law, and The University of Tennessee Corporate
Governance Center. Finally, I owe personal thanks to, among others, Afra
Afsharipour, Joe Carcello, Leah Muriel, Michael Perino, and Cheryl Wade for
helping me think through some of the issues in this article. Their suggestions
were invaluable.
1. Paul S. Atkins, Commissioner, Remarks to the ‘SEC Speaks in 2008’
Program of the Practising Law Institute, U.S. SEC. & EXCH. COMMN (Feb. 8,
2008), http://www.sec.gov/news/speech/2008/spch020808psa.htm.
2. See Press Release, SEC Charges Billionaire Hedge Fund Manager Raj
Rajaratnam with Insider Trading, U.S. SEC. & EXCH. COMMN (Oct. 16, 2009),
http://www.sec.gov/news/press/2009/2009-221.htm; see also Press Release, SEC
Obtains Record $92.8 Million Penalty Against Raj Rajaratnam, U.S. SEC. &
EXCH. COMMN (Nov. 8, 2011), http://sec.gov/news/press/2011/2011-233.htm.
3. See Press Release, SEC Files Insider Trading Charges Against Mark
Cuban, U.S. SEC. & EXCH. COMMN (Nov. 17, 2008), http://www.sec.gov/news/
press/2008/2008-273.htm.
4. See Press Release, SEC Charges Martha Stewart, Broker Peter
Bacanovic with Illegal Insider Trading, U.S. SEC. & EXCH. COMMN (June 4,
2003), http://www.sec.gov/news/press/2003-69.htm; see also Press Release,
SEC Charges Martha Stewart, Broker Peter Bacanovic with Illegal Insider
Trading, U.S. SEC. & EXCH. COMMN (Aug. 7, 2006), http://www.sec.gov/news/
press/2006/2006-134.htm.
5. See generally, e.g., MARTHA STEWARTS LEGAL TROUBLES (Joan
MacLeod Heminway ed., 2007) (exploring, especially in chapters 1, 5, and 10,
1000 LOUISIANA LAW REVIEW [Vol. 72
congressional hearings on the STOCK Act6—a bill providing for
an express congressional prohibition on insider tradinghave made
headlines.7 Public reporting in connection with both recent legal
actions and the introduction and passage of the STOCK Act also
has brought to the fore long-debated questions about insider
trading doctrine in the United States, including the unsettled nature
of the system of regulation.8 This article urges the U.S. Securities
and Exchange Commission (“SEC”)or, absent action by the
SEC, the federal judiciaryto adopt clarifying guidance on
materiality—one unclear area of insider trading law.
various uncertainties in insider trading policy and doctrine exposed in
connection with the SEC insider trading enforcement action brought against
Martha Stewart); Joan MacLeod Heminway, Martha Stewart and the Forbidden
Fruit: A New Story of Eve, 2009 MICH. ST. L. REV. 1017 (using the Stewart case
to identify unclear aspects of U.S. insider trading law); Anthony Michael Sabino
& Michael A. Sabino, From Chiarella to Cuban: The Continuing Evolution of
the Law of Insider Trading, 16 FORDHAM J. CORP. & FIN. L. 673 (2011)
(describing the uncertain state of the requisite breach of a duty of trust and
confidence after the trial and appellate court opinions in the Cuban case).
6. See Stop Trading on Congressional Knowledge Act, S. 2038, 112th
Cong. (2012), available at http://www.gpo.gov/fdsys/pkg/BILLS-112s2038eah/
pdf/BILLS-112s2038eah.pdf (House amendment of Senate bill, adopted on
February 9, 2012).
7. See Paul Kane, Ethics reform bill to ban insider trading by Congress
members, executive branch passed by House, WASH. POST, Feb. 9, 2012,
available at http://www.washingtonpost.com/politics/ethics-reform-bill-to-ban-
insider-trading-by-congress-members-executive-branch-passed-by- house /2012/
02/09/gIQAV3MS1Q_story.html; Robert Pear, House Passes Bill Banning
Insider Trading by Members of Congress, N.Y. TIMES, Feb. 9, 2012, available
at http://www.nytimes.com/2012/02/10/us/politics/house-passes-bill-banning-
insider-trading-by-members-of-congress.html.
8. See, e.g., Matthew Goldstein, Steve Cohen says insider trading rules are
“vague,” REUTERS, Dec. 13, 2011, http://www.reuters.com/article/2011/12/13/ us-
sac-cohen-deposition-idUSTRE7BC1UJ20111213; David N. Lawrence et al.,
Insider Trading 2011: How Technology and Social Networks Have ‘Friended’
Access to Confidential Information, KNOWLEDGE@WHARTON, May 11, 2011,
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2776 (noting that “the
precise conduct under the definition of insider trading has always been vague”);
Jonathan Macey, Congress’s Phony Insider-Trading Reform, WALL ST. J., Dec.
13, 2011, available at http://online.wsj.com/article/SB1000142405297020341
3304577088881987346976.html?mod=WSJ_Opinion_LEADTop (describing
current insider trading rules as “broad and vague”) [hereinafter Phony Insider-
Trading]; Jonathan Macey, Deconstructing the Galleon Insider Trading Case,
WALL ST. J., Apr. 19, 2011, available at http://online.wsj.com/article/
SB10001424052748704529204576256754289698630.html (observing that “[f]or
decades, the SEC has kept the insider-trading rules vague and undefined.”)
[hereinafter Deconstructing]; Frank C. Razzano, Insider Trading: Ambiguous
Statute as Warning, BLOOMBERG L. REP., June 20, 2011, available at
http://www.pepperlaw.com/publications_article.aspx?ArticleKey=2140.
2012] JUST DO IT! 1001
Adoption of this materiality guidance would affect the
discretion of enforcement agents in (and judicial review of) insider
trading actions. Accordingly, the remainder of this introduction
lays a foundation for the proposed guidance by describing the
enforcement discretion, judicial deference, and doctrinal contexts
in which the guidance would operate, before establishing a few
premises from this author’s earlier work in which that guidance is
grounded. The article then proceeds (before briefly concluding) to
propose the desired materiality guidance, identify the SEC as the
most appropriate rulemaking body to adopt the guidance, and
suggest a specific form in which the guidance should be issued.
A. A Matter of Enforcement Discretion
The SEC, historically a primary enforcement agent in insider
trading actions, has asserted a strong role in shaping the unsettled
components of insider trading law in the United States. Because
the SEC has enforcement authority and because various aspects of
U.S. insider trading law are susceptible of multiple interpretations,
the SEC can (and does) assess the facts and circumstances of
individual transactions and, after the fact, call some of those
transactions into question by pursuing enforcement activities that
explore and settle open doctrinal questions.9 The SEC is not alone
among enforcement agents in exercising enforcement discretion in
this manner.10 In arguing for more clarity in U.S. insider trading
9. See, e.g., Dirks v. SEC, 463 U.S. 646 (1983) (in which the SEC
unsuccessfully enforced Section 10(b) and Rule 10b-5 against a broker-dealer
who traded on material nonpublic information, establishing the elements of
tipper-tippee insider trading liability); SEC v. Cuban, 634 F. Supp. 2d 713 (N.D.
Tex. 2009), vacated and remanded, 620 F.3d 551 (5th Cir. Tex. 2010) (in which
the SEC sought validation of a novel interpretation of the duty of trust and
confidence necessary for insider trading liability); see also Lawrence et al.,
supra note 8 (indicating that the SEC preserves enforcement discretion in the
insider trading context so that it may pick and choose those it may prosecute);
Macey, Deconstructing, supra note 8 (noting that ambiguity in insider trading
rules “increases the SEC’s power and allows government lawyers to pick and
choose among prosecution targets.”).
10. See United States v. OHagan, 521 U.S. 642 (1997) (in which the U.S.
Department of Justice successfully prosecuted a lawyer for insider trading on the
basis of his misappropriation of material nonpublic information, validating the
misappropriation theory of insider trading liability); Chiarella v. United States,
445 U.S. 222 (1980) (in which the U.S. Department of Justice’s insider trading
prosecution of a “markup man” at a legal and financial printer was unsuccessful
because of the lack of a requisite duty of trust and confidence, establishing the
classical theory of insider trading liability); see also Macey, Phony Insider-
Trading, supra note 8 (noting generally that “prosecutors enjoy almost
unfettered discretion in deciding when and whom to prosecute”).

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT