A few years back I received a gift of The Complete Cartoons of The New Yorker. This 650-page collection of thousands of New Yorker cartoons from 1925 through 2006 is a time capsule, a peek into what was considered funny (at least by New York sophisticates) in the course of the 20th Century. Those of the '20s and '30s can be surprisingly risqué, and all of them poke fun at the rich, the famous and the pretentious through the decades. Two in particular are relevant here.
One, from 1937, shows a waiter in white tie and tails, holding a serving platter, entering the kitchen where the staff is busy cooking for what looks to be a private party in the dining room beyond the threshold. He leans over whispers to a kitchen colleague, "Tell 'em to dump their industrials. Further details later."
The second, from 20 years later, shows a building engulfed in flames, with hook-and-ladders and firemen manning hoses trying to douse it. The sign on the building says "Fenwick Chemical Co." A short distance away, a man has jumped out of his car, leaving the door open, and into a phone booth. With phone in hand, he looks at the flames and says, "To hell with a balanced portfolio. I want you to sell my Fenwick Chemical and sell it now."
We find both cartoons funny because we know something's amiss. Both protagonists are exploiting non-public information to profit at the expense of other traders. But here's the real funny part: The waiter is arguably guilty of insider trading; the guy driving past Fenwick Chemicals in flames is not.
That the law treats these two differently has bothered securities law theorists for years. The reason is that insider trading is built on the idea of fraud. When the waiter overhears his dining businessmen, he is pilfering information that the diners expect to keep to themselves. But that Fenwick's on fire is an open and notorious fact, and our passerby learns it innocently. That's why he's free to trade, and the waiter isn't. Mere possession of non-public information is not enough. The key ingredient of the first example that's missing in the second is some bit of deceptive conduct.
Many would just as soon get rid of fraud as the linchpin of insider trading. They suggest your only duty is not to take advantage of your fellow traders. Anything more just makes insider trading law complicated and confusing, forcing us to parse who exactly our waiter defrauded and how. Not to mention the kitchen staff who thereafter trades on his tip.
Admittedly, it can get complicated. However, the securities laws require fraud and deception by statute (section 10(b) of the Exchange Act of 1934), so the only way to change it is by new legislation.
The recently published Report of the Bharara Task Force on Insider Trading
Bharara+Task+Force+on+Insider+Trading.pdf ends up recommending just that. Former U.S. Attorney Preet Bharara put together a blue-ribbon panel "to review and assess the current state of insider-trading law and to explore proposals to improve it." It's not entirely clear who, if anyone, asked him to. Still, it's a high-caliber team, including a couple of renowned law professors, a gaggle of former DOJ colleagues, and United States District Court Judge: