Elements of Insider Trading George C. Harris

• Pages: 11-22

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CHAPTER 2

Elements of Insider Trading

George C. Harris

The federal securities laws do not expressly prohibit trading of securities

on the basis of material non-public information. That prohibition and the

law on insider trading have been crafted by the courts through interpre-

tation of the antifraud provisions of the Exchange Act of 1934, including

Section10(b) and Rule 10b-5, and the Securities Act, including Section

17(a).1 As a result, the rules for determining what constitutes illegal insider

trading have not always evolved in a way that has created bright-line tests.

The first case interpreting the antifraud provisions of the federal securi-

ties laws as applied to insider trading was an SEC administrative proceeding,

In the Matter of Cady, Roberts & Company.

2

That case involved a corporate

director who notified a colleague at his brokerage firm, before it was pub-

licly announced, that the company on whose board he served was going

to declare a dividend reduction, which would drive down the company’s

stock price. The broker sold shares of the stock in discretionary accounts

that he controlled, including that of his wife. The SEC held that the broker

and his firm had willfully violated the antifraud provisions of the Exchange

Act and the Securities Act. To avoid liability under those provisions, the

1 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; 15 U.S.C. §77q(a).

2 In re Cady, Roberts & Co., Exchange Act Release No. 6668, 1961 WL 60638 at *1 (Nov. 8,

1961) (“This is a case of first impression and one of signal importance in our administra-

tion of the Federal securities acts.”).

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