Just when you thought it was safe to avoid yet another article on insider trading comes Sarah Baumgartel’s imaginative and insightful paper. Baumgartel’s point of entry is several recent and pending cases that in some ways extend, and in other ways limit, the peculiar misappropriation theory, a judicial development that continues to prove not only that bad cases make bad law but that they also can make for good scholarship.
Before I get into a few of the details, here’s the bottom line: The misappropriation theory, and especially the Commission’s redaction of “confidential relationship” in Rule 10b5-2, are yet another example of facilitating the economic inequality that has achieved such prominence in contemporary discourse. Baumgartel doesn’t quite put it this way, but she does argue that the manner in which the misappropriation theory has come to impose liability on traders who received their information in the context of personal and often intimate relationships while providing exculpation for professionals and managers who trade on that information satisfies neither the information-protective function of modern insider trading law nor the market fairness rationale that often is invoked. Instead, it sends your golf buddy or your sister to jail while allowing business professionals to reap harvests from fields that ordinary people can’t even locate.
Baumgartel briefly suggests that insider trading law is the result of powerful interests protecting their rents, and this certainly is plausible. She also sees the expansion of insider trading law from professional relationships to personal relationships as a “jurisdictional hook” on which to hang liability for nothing more than personal ethical misconduct, a trend that she situates in other areas of the law.
She also asks that we bid goodbye to the market fairness rationale for insider trading prohibitions. How can it be fair to let professionals benefit from insider trading while precluding market participants whose only hope of getting access to that type of information is the mere dumb luck of personal relationships? She even suggests that fairness, as developed in this context, is an irrational concept. Questioning what fairness means in this context, she reduces it to “nothing more than getting information the owner did not authorize you to have.” Even a cursory reading of the quoted material shows that the word “fairness” has no serious meaning here.
Ultimately, insider trading law is about securing one’s right to protect and use one’s confidential information as one sees fit. Fairness has nothing to do with it, nor does any other market regulatory purpose. It really is a branch of property law (along with the personal ethical regulation mentioned above).
All of this is woven through a doctrinal examination of case law and regulation and, to this reader, provides an example of what really good doctrinal work looks like. Baumgartel amasses the evidence, analyzes it closely, and then steps back and asks: Why does all this matter? While legal change, even if incremental, could result from such work, Baumgartel helps us to see the big picture of what actually is transpiring beneath the details. By doing so, she fits her subject nicely into contemporary social narratives and political debates and unveils rather prosaic material as part of a much bigger (and troubling) trend.
There are a lot of ideas here. Baumgartel has much to say but not much room in which to say it. I get the sense that there are at least several papers waiting to be generated from this one. And I look forward to seeing them all. This is an excellent paper in its own right, but it also reveals the potential its author has for important future work.