INSIDER TRADING

a)Who may be hurt by insider trading:

                 1)Target shareholders--they sell too early;

                 2)Other arbitrageurs--they lose a portion of the gain that they make from honest effort

                 3)Other issuers--they lose confidence in the stock market

                 4)The acquiring company--insider trading drives up their cost of acquisition, since the target may adopt defensive measures otherwise not in place.

              b)Possible Sources of Liability:

                 1)Common Law;

                 2)10b-5 traditional;

                 3)10b-5 misappropriation theory (O’Hagan);

                 4)Mail or wire fraud;

                 5)14e-3;

                 6)Statutory liability under 16(b)--insiders are forced to give their profits to the corp, if the y buy and sell securities within a 6-month period regardless of whether they are using insider info. (Need to know 2, 3, 6)

              c)O’Hagan--insider trading violation where a partner in law firm took info rom his firm regarding the firm’s client’s plans for acquisition of Pillsbury and used that info to buy shares in Pillsbury

              d)Penalties For Insider Trading--ITSA (Insider Trading Sanctions Act)--3 measures:

                 1)Out-of-pocket measure--if a sh buys a share for $10, while in fact it costs $9, his out-of-pocket expense is $1.

                 2)Causation-in-fact--because an insider engaged in insider trading, it caused a loss

                 3)Disgorgement--we look at D’s profit. ITSA measures the damage to sh by the amount of profit that D received from the transaction.

                 2)SEC civil penalties--treble damages; SEC may seek penalty capped by three times profit gained or loss avoided.

           

     A.COMMON LAW--under the majority rule, there was no duty to disclose to the shs inside info affecting the value of shares. Therefore, the protection of investors was very weak.

              a)For lability to exist there should be:

                 1)At least fraud or deceit upon purchasers;

                 2)May also be a device or scheme;

                 3)May also be an implied misrepresentation.

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