The Economics and Ethics of Insider Trading Reform

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Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society’s practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at fedsoc.org.

 

Greg Walsh:  Welcome to The Federalist Society’s Teleforum conference call. This afternoon’s topic is a special episode on “The Economics and Ethics of Insider Trading Reform.” My name is Greg Walsh, and I am Assistant Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today’s call.

Today, we are fortunate to have joining us Johnathan R. Macey, the Sam Harris Professor of Corporate Law, Corporate Finance, and Securities Law at Yale University; John Anderson, the Professor of Law at Mississippi College School of Law and the author of Insider Trading: Law, Ethics, and Reform; and moderating is Mr. Kevin R. Douglas, an Assistant Professor of Law at Michigan State University College of Law. After our speakers give their opening remarks, we will go to audience Q&A. Thank you all for joining us. Professor Douglas, the floor is yours.

Kevin R. Douglas:  Thank you, Greg, and thank you for everyone who is listening right now and I guess for the folks who end up listening when this becomes a podcast. We’re here today because before the COVID-19 pandemic and before the 2020 election became the center of our lives, insider trading reform seemed to be on the agenda. In December 2019, the House of Representatives passed the Insider Trading Prohibition Act with wide bipartisan support. And I mean 95 percent of the representatives voted in favor of the act in a time when, like, the contentiousness within Congress seems to be at an all-time high.

And then very shortly thereafter, in January 2020, the Securities and Exchange Commission sponsored Bharara Task Force on Insider Trading released a report containing proposed legislation. Both the House bill and the task force proposal had some similarities. But I’m going to read essentially a paraphrased version of what was in the House bill, which is -- the primary things is that they want to, quote, make it unlawful for any person to purchase or sell any security while aware of material non-public information relating to that security if that person knows or recklessly disregards that the information has been obtained wrongfully or that such purchase or sale would constitute a wrongful use of the information.

The task force proposal also focuses on the idea that what they want to do is ensure that it’s the wrongful use of information that’s being punished. One difference is that they both define wrongful use as including information that -- or wrongfully obtained information as information that’s gained through a misrepresentation, theft, or hacking electronic devices. The task force goes a little further and also proposes to eliminate what’s called the personal benefit test, which is currently used to limit liability in insider trading cases. And the task force proposal would also explicitly call it wrongful to trade while in possession of information that’s covered by a confidentiality agreement.

Now, both of today’s speakers have written extensively on insider trading reform but from two different angles. Professor Macey has written widely on the economics of insider trading, and Professor Anderson has tackled a broad range of ethical questions on the issue. Beginning with Professor Macey, will you give us your thoughts on the state of the law and your assessment of the current proposals for reform?

Jonathan R. Macey:  Sure. Thank you so much, Kevin, for organizing this. I really appreciate having the opportunity to share these thoughts with folks in this teleforum and hearing what everyone has to say. So the way that I would like to describe what the state of the law is is by telling two quick stories about trading on the basis of material non-public information. And both of the stories are organized around the same constellation of facts.

And that constellation of facts is very simple, which is you have a company. And that company is going to make a bid -- a tender offer for control of another company -- to buy the shares of another company at a significant premium in stock price. So we have this material inside information, but the company -- the bidder -- is going to be buying on the open market through dark tools and through broker/dealer transactions in which their identity is not public.

They’re going to be accumulating shares, and it’s legal to do that under the securities law. This biding firm can buy really theoretically 100 percent of stock in the target without making any disclosure. They can buy -- under the Williams Act, they have to make disclosures ten days after acquiring 5 percent of the stock in the target. But in theory, if they can buy 5 percent and then the rest, that 95 percent, within that ten-day window, they could buy 100 percent of stock of the target.

Imagine that you’re a shareholder in this target firm. Under one scenario, you’re selling your stock in the open market to the bidder. And in the second scenario, you’re selling your stock in the marketplace not to the bidder but to some lawyer or accountant or investment banker or financial printer or somebody who has kind of purloined the information about the bidder’s plans and is front running, buying stock in the target firm in advance.

So basically what we have is, from the standpoint of the selling shareholder, under both scenarios they’re selling stock in their company under conditions of asymmetric information, meaning under conditions in which the person or firm that they’re selling to knows about an impending bid and the seller doesn’t know about it. Now, under U.S. law, as it currently is and as would be contemplated under any new legislation, of course, it’s perfectly legal for the bidding firm with this material non-public information to make these purchases. But it is not legal for the lawyer or accountant or investment banker or what have you who has kind of purloined the information to make these purchases.

And these are simple hypotheticals or obvious in a way, I think, depictions of current law. But what I want to say about them is simply that it seems to me that no -- I don’t know. Maybe I’m wrong about this, but no kind of reasonable person could really think that it’s okay for a lawyer to purloin this information and engage in trading on the basis of that information.

But similarly, it also strikes me as -- both descriptively and normatively -- as entirely uncontroversial that the bidding company has the right to engage in what is, in effect, insider trading.  They’re trading on the basis of asymmetric information. They have material non-public information, and they’re trading on it.

I don’t think that -- so the point is twofold. Number one is that it’s impossible, it seems to me, to take the view that all trading on the basis of asymmetric information is unfair. The other thing, and maybe slightly bolder claim -- and maybe I’m wrong about this, and I’d be interested in hearing views to the contrary -- that the only perspective -- the only kind of theoretical framework that allows someone to understand this very basic fact about the way that the securities markets work and the way that information can and cannot be used in the simple example that I provided -- the only way to think about this is from a property rights perspective.

The idea is that the bidding firm, which has this information about what it’s going to do, owns this information in the simplest, most straightforward lock in sense of property rights and ownership. They created the information. They did the research into the target firm and made a decision that the target firm was an appropriate subject of an investment, whereas the lawyer and investment banker that’s operating -- receiving this information in the course of their work is stealing the information. So we have a property rights perspective.

So I’m happy to say, sure, we can approach insider trading not from an economic perspective. We can approach insider trading from an ethical perspective. But the ethical perspective is simply, to my way of thinking, that stealing is bad, and we should respect property rights in intellectual property just like other forms of property. And inside information is a form of intellectual property, and so we protect it. There’s no kind of special sort of ethical framework in my opinion that helps us very much beyond very solid, important, straightforward property rights orientation.

So that’s kind of how I approach insider trading. And I think that this has implications, which we can get into. I don’t want to run on too long. But this has implications for the other components of the legislation that Kevin was describing in the introduction, particularly the personal benefit rule and this notion of wrongful -- which I actually find a kind of amusing part of the proposed legislation.

I’m in favor of banning things that are wrongful. Of course, I’d like to be the one who gets to determine what is and what is not wrongful. I’m not sure that the SEC is either component or able to do a particularly good job of doing that.

But I think that the impetus for a lot of this legislation is a concern with going too far in a property rights direction. And to that extent I think the legislation is a little bit problematic. But I think that the approach that the courts have taken, particularly the U.S. Supreme Court and particularly the U.S. Supreme Court when Lewis Powell was writing the seminal decisions in Chiarella and Dirks and when the O’Hagan case was decided, which incidentally was written by Ruth Bader Ginsburg.

These are all cases that show a tremendous amount of fidelity and respect for the property rights approach, and I think that from an economic efficiency point of view the major judicial opinions related to insider trading are sources of inspiration and something that people who value and respect the role of property rights in a free market economy should really support. This is not to be confused with the much different approach that the Securities and Exchange Commission has taken and which other people -- people like Preet Bharara, the Southern District of New York -- U.S. Attorney’s Office for the Southern District of New York has taken with respect to saying that any kind of asymmetric information should be -- trading on the basis of asymmetric information is fair game for prosecutors. I think that’s a very bad approach.

So those are my views in a nutshell on insider trading. And pretty much I’ve written a ton of articles about this, and I’m embarrassed to say that this is pretty much what all of them say in essence. Maybe I’m just repeating myself a lot in print. There are issues related to the distributional consequences of different approaches, allocational efficiency, as well as Pareto efficiency, which I’m not going to get into unless people want to in the Q&A. So Kevin, that’s what I have to say about insider trading from a legal and economic and ethical point of view. And thank you for giving me this time.

Kevin R. Douglas:  Thank you, Professor Macey. I appreciate that. Professor Anderson, can you jump in and let us know your perspective on, one, the state of the law and the current proposals?

John Anderson:  Okay. Yeah. Absolutely. Again, thank you, Kevin. Thanks to FedSoc. Thanks to Professor Macey for joining us. It’s an honor for me to be on the call with him. I’ve read his stuff extensively, and it’s influenced a lot of what I’ve done.

Let me just jump right in. I don’t think there’s any -- as far as the current state of the law I don’t think there’s much debate that -- virtually everyone agrees that the insider trading regime in the U.S. right now is in need of reform. It’s been criticized as a theoretical mess, seriously flawed, extraordinarily vague, arbitrary, incomplete, a scandal, and astonishingly dysfunctional. And those are all quotes from different articles.

In fact, Commissioner Jackson and Preet Bharara when they announced the creation of this Bharara Task Force on Insider Trading did so by explaining it as needed to propose new reforms in light of, quote, “the shoddy state of American insider trading law,” end quote. But while everyone agrees that reform’s needed, there’s some widely different views on what that reform should look like. Bharara and Jackson advocate for reform in large part because they think the scope of liability should be broadened.

And I think reform is needed in part because the current regime, if not in terms of kind of the Supreme Court’s articulation of it, in terms of its actual enforcement over criminalizes insider trading law. But I’m not by any means the first one to make this argument. Scholars like Henry Manne and Professor Macey here on this call have offered compelling arguments for why the economic effects of insider trading are not as bad as regulators would have us believe. And indeed, such trading may in fact improve the health of markets.

It’s due in large part to this excellent work that the reality is that most remaining resistance to the liberalization of our insider trading enforcement regime are expressed principally in ethical terms. It’s fairness or it’s unfair or it promotes greed. And a brief perusal of the Bharara Task Force report reflects this, so I’ll give a couple quotes.

Quote, “The rationale for prohibiting insider trading is straightforward, protecting the fairness and integrity of our securities markets and holding wrongdoers accountable,” end quote. Quote, “Most agree there is something fundamentally unfair about insiders with special access to secret corporate information making a profit from trading on such information,” end quote. So Manne referred to these claims as, quote, “it’s just not right” objections, and he was fairly dismissive of them.

But I would like to argue that the failure to engage in debate over the ethics of insider trading leaves both sides, those who would liberalize for economic reasons and those who would increase enforcement on ethical grounds, really speaking at cross purposes. And in the midst of that, this doesn’t advance the discourse and only favors the status quo. Indeed, even Manne in his final years seemed to be resigned to the fact that liberalizing reform was not going to be possible because it was not going to be politically palatable.

Now, I’m more optimistic than Manne. I think liberal reform of our wrongheaded insider trading regime is, in fact, possible, but I think it’s going to require meeting the current regime’s advocates on their own turf, which requires kind of challenging a lot of their ethical foundations and presuppositions explicitly. So I want to point out or argue that our current insider trading enforcement regime is unjust on two levels.

First, regardless what you think about the underlying morality of insider trading itself, our enforcement regime is unjust because it is overly vague, and it is entirely incoherent in that the law leaves -- and for these reasons, the law leaves citizens without adequate notice of when their conduct will incur criminal sanctions. For example, the law has never been defined by statute or rule.

Such definitions have been proposed in the past and rejected principally by the SEC because they wanted flexibility in enforcement -- flexibility to be able to identify and prosecute new innovative insider trading regimes. So it’s really developed as a matter of -- as a common law crime. And historically, under kind of basic principles of western liberal jurisprudence common law crimes are wrong because -- or problematic because they fail to give notice to citizens of when their actions will cross that line from being legal to being illegal and incurring criminal or other sanctions.

But beyond that, beyond just as common law developed, even its core common law elements are ill-defined and controversial. What counts as material? What counts as non-public? What counts as trading on the basis of inside information? What constitutes a personal benefit? All these things are constantly litigated and debated with no clear resolution.

But it’s not just that it’s vague; it’s also incoherent. The SEC has always enforced it effectively as a parity of information or equal access regime while courts continue to insist that, based on its grounding in Section 10(b) of the ‘34 Act, it’s a fiduciary/fraud-based regime. And since the SEC and DOJ’s enforcement approach to insider trading typically has been to ask forgiveness rather than permission of the courts, the average trader is, in effect, left guessing as to whether his trade will trigger an investigation.

But guessing wrong in this regime can lead to draconian sanctions. At the civil level, both disgorgement and treble damages -- so up to four times any profits earned or lost is avoided, in addition to possible injunctive relief that can be granted. And on the criminal side, $5 million fine and 20 years in prison. So my argument is, regardless of what you think about the merits of insider trading, our current regime violates the principle of legality, which is one of the core principles of Western civilization, that there must be no crime or punishment except in accordance with fixed, reasonably specific, and fairly ascertainable pre-established law. So at a minimum, to rectify this injustice, any reform’s going to have to be statutory, and it’s going to have to clearly delineate any proscribed conduct in order to give traders adequate notice of when they’ve crossed the line.

The second way in which our current regime is unjust is that it punishes conduct -- and that is neither morally wrong or social harmful. And what I mean by this is that, in effect, it punishes what I refer to as issuer licensed insider trading. What do I mean by issuer licensed insider trading?

Well, this is where firms allow their employees to trade on their own firm’s material non-public information so long as, one, the insider submits a written plan to the firm that details the proposed trades, the firm authorizes that plan, the firm has previously disclosed to the investing public that it will permit its employees to trade on the firm’s material non-public information when it’s in the interest of the firm to grant such permission, and, four, the firm discloses ex post all trading profits resulting from the execution of these plans. I think, arguably, that conduct could be, under Supreme Court precedent, understood as legal and compliant with the law. But I think we all know the reality is that such trading pursuant to such a plan would be prosecuted criminally and regulated civilly under our current regime that is effectively enforced as a parity of information or equal access regime.

Now, I will kind of very quickly -- and I think I’m already kind of pushing at the end of my time. But one thing I want to -- the immediate reaction that I expect to get from this proposal that we should have an express safe harbor in any proposed statutory regime that would permit issuer licensed insider trading is that there’s something inherently flawed or unfair about such phrasing. And I would expect it to be stated something along the lines of what Preet Bharara and his task force has said, is that just this trading on asymmetrical information is inherently flawed or problematic, along the lines of kind of the concerns that they raised there.

And Professor Macey has kind of, I think, made some good points for why that’s over simplifying things. But we could pick that question up by the handle of kind of a consequentialist or utilitarian understanding from a moral perspective, and I could justify that. And in doing that, I would appeal mostly to a lot of the economic arguments that Professor Macey has offered in the past for why such trading really doesn’t cause any economic harm and might, in fact, increase the size of the economic tide.

But what I think really the principle objection to this would be the people who just stomp their feet and say it’s just consequences be damned. There’s just some things you don’t do to others, and trading on inside information is one of them. So just to very briefly address that question, I think you have to keep in mind that most who would object on those grounds would be objecting along the lines of some sort of absolutist moral theory or deontological moral grounds, something like Kant’s categorical imperative that you ought always to act -- to treat humanity as an end and never as a means.

So in other words, you never treat others -- or never use others for purposes that they would reject. But I think when you look at issuer licensed insider trading -- and I’ll end here because I know I’m already over, and we can just discuss this further in the Q&A. But if you look at issuer licensed insider trading, there is no such use of others as a means to an end that they would not themselves accept because they themselves -- the firm or the owner of the information would authorize a transaction.

So there’s no deception of the firm. Ex-ante and ex-post disclosures to the investing public would force the conclusion there’s no deception of market participants. And authorization and discloser ensure that no interested parties are also used as mere means. So one objection could be that beyond that, okay, it’s not a deontological argument.

It’s just that we need to regulate greed, I’ve got lots of reasons why this would be a really bad way of trying to regulate greed if we want to regulate the character trait of greed in the first place, which raises its own kind of can of worms. But I will stop there and turn it back over to you, Kevin. Thank you so much.

Kevin R. Douglas:  Thank you both. I think going forward -- well, yeah. Thank you both. That was both great, and I think you’ve given us a lot to think about and work with. The first thing I might want to start with is, going back to Professor Macey -- is to ask you to maybe address a concerned raised by Professor Anderson about the potential that sometimes the folks who are making economic arguments in favor of liberalization are speaking at cross purposes with people who are making moral argument in favor of increasing the restrictions.

And in part, this seems like a potentially serious concern since, on the one hand, what you propose or recommended -- you started off by saying that the current regime, especially if you look at the case law, O’Hagan, Dirks, Chiarella, it looks like a property regime. And that’s something you can get behind 100 percent. It looks like a very orderly and sensible way to do things.

But at the same time, the Bharara Task Force, in its recommendation, they begin by saying they’re going to reject -- historically, you’ve defended the property approach using efficiency arguments and argument that it would make the markets better off and increase social welfare or economic efficiency. But in the Bharara Task Force report, they explicitly reject an economic efficiency defense of allowing or liberalizing insider trading, allowing the property owners their consent of use of trading on the information and then go on to say that they’re taking a property approach. And that’s why the activity has to be restricted.

What are your thoughts on this idea that folks are speaking at cross purposes sometimes when they take the ethical approach versus the economic approach, and what do you think might be done to correct that?

Jonathan R. Macey:  So that’s a great question, and I want to address it with specific reference to John Anderson’s very interesting talk, which I think reflects what I view as kind of part of the problem respectfully. So I think in John’s talk he described a world of insider trading regulation in three different ways during the course of his remarks. And I think that these three different ways are fundamentally inconsistent with each other.

We have to -- so we have kind of contradictory views of the world in this talk. And let me -- so what are the three ways in John’s remarks just now -- just how does he describe the world? Well, the first way, he began his talk by saying, “Insider trading regulation is a mess. I’ve got these 47 quotes from people, include Preet Bharara who say mess, mess, mess.” Then the second way he described the world -- and this was through much of his talk -- was saying the legal regime of insider trading is X, or the legal regime is Y. Well, if we can describe a legal regime coherently and the law is not a mess because we can articulate what it is, it’s not vague. So we either have a legal regime or we have vague rules.

And the third way -- and this is the one I actually think is the one that really does accurately describe where we are -- is we have no -- I don’t think the law is at all confused about insider trading. I have had no problem, and I know tons and tons of lawyers who practice in the securities regulation field who don’t have any problem explaining what the rules are. The problem is not that the rules are vague. The problem is that the rules are clear, and people like Preet Bharara don’t like the rules.

The second problem is that the rules articulated by the Supreme Court are very clear. The SEC hates the law articulated by the Supreme Court. They hated the outcome in Chiarella and passed Rule 1483 to try to undermine and erode that. They hated the Tippee Liability rules and articulated it in Dirks. And they eventually passed regulation FD explicitly to undermine the holding of Tippee Liability in Dirks.

So the idea -- we don’t have a legal regime of insider trading in this country. What we have -- and I think this is absolutely fundamental to understanding the topic -- is that we have two sets of insider trading rules. We have the common law property rights respectful regime centered around fiduciary duties articulated by the Supreme Court. And then we have the parody of information fairness approach articulated by the SEC in its -- and the U.S. Attorney’s Office and Preet Bharara in their enforcement regime.

And these regimes are at war, and what we see in this proposed legislation is an effort essentially by the SEC to say, well, obviously we can’t overhaul the federal courts. The federal courts can tell us what to do, but the Congress gets to tell the courts what to do. So we’re going to try to do an end run around.

So my strong view on this is not that the law is vague. It’s just that the SEC and the U.S. Attorney’s Office doesn’t like the rules that have been promulgated by the courts, and they’re trying to erode those rules exactly the way John Anderson said, which is by underlying a property rights approach -- undermining a property right approach and trying to substitute vague notions of fairness. So that’s sort of where I come out on all this is that we need to be very precise and clear in describing what the problem is. And I think the problem is not vagueness. The problem is that the SEC and the U.S. Attorney’s Office often doesn’t like the rules that we have.

Kevin R. Douglas:  Perfect. Thank you. Professor Anderson, would you like to respond?

John Anderson:  Yeah. Sure. I’m not sure I really disagree with anything that Professor Macey just said, so I might not have been as clear as I should have been in kind of articulating my thoughts. But I agree that -- well, on the one hand, I do think there’s something inherently problematic about a common law crime.

So this is not just civilly enforceable. Insider trading is a crime that can land you in jail for 20 years in prison. And it has effectively developed as a common law crime. For 20 years -- for the first 20 years, it was enforced as a parity of information regime. For the next 20 years, it was enforced as a regime that only recognized classical -- or I’m sorry. The Supreme Court said that the only authorized theory of liability is the classical theory. It’s from Chiarella all the way to O’Hagan.

And it wasn’t until O’Hagan -- arguably in Carpenter, had Powell stayed on the Court the misappropriation theory would have been ruled not in compliance with Section 10(b). But as luck would have it, he didn’t stick around. So Carpenter was a 4-4 split. And then we got O’Hagan authored by Justice Ginsburg in ’97. So that’s exactly the problem with the common law crime. You don’t know what you’ve got until the Court rules on it because there’s not a clear statute that constrains the courts in enforcement.

But I totally agree that the basic understanding of the law as articulated by the courts today more or less is enforceable as a basic property -- recognizing information as property that ought to be protected. The problem is that, as you say Professor Macey, that’s not how the SEC enforces it. So we have this schizophrenic regime, and that in itself creates the uncertainty.

Either regime could be stated clearly. Look at the European regime parity of information and statutory regime. It’s quite clear when you violated the law, more or less. And if you just go by the Supreme Court’s articulations of it in the three principle cases it’s quite clear. The problem is that from Oliver Wendell Holmes’ perspective as a legal realist, from the bad man’s perspective, all we care about is am I going to go to jail for that or not? Is the SEC going to harass me for this or not? Is the FBI going to knock on my door for this or not?

And the answer to that question if you’re a trader for a hedge fund on Wall Street is rarely going to be clear, and I think that’s what I’m talking about when I say that the regime today is vague because you just don’t know what you’re going to get. And that’s a problem when the penalties are as severe as they are.

Kevin R. Douglas:  All right. I’d actually like to push back on both speakers. This is Professor Douglas again. Both speakers have kind of described the case law as it currently stands at the Supreme Court level as relatively clear and as even maybe adhering to something that looks like a property regime, as according to Professor Macey.

I’d like to push back and ask you about O’Hagan in the sense that, with Chiarella, yes, it seems like Justice Powell is trying to bring us back to a property regime and common law understandings of fraudulent nondisclosure. He makes it clear that you need a breach of fiduciary duty to face liability and also, when talking about warehousing, makes it seem as if the owner of the information consents to its use for trading that that’s going to be lawful. He even had the DOJ agree to that aspect during oral argument.

So it seems like in Chiarella and Dirks where you have Justice Powell adhering to a property regime analysis when it comes to insider trading -- but when you get to O’Hagan Justice Ginsburg analogizes insider trading to embezzlement, embezzlement followed by trading in the markets on the stolen goods, and suggests that, unlike with embezzlement, you can avoid liability simply by disclosing and recognizing that in regular embezzlement you can’t just disclose to the owner of the information that you’re going to take their stuff. You have to disclose to them in order to get the right kind of consent.

But Justice Ginsburg says with insider trading you can just disclose to the owner of the information that you’re going to trade on it. And you can avoid liability under Rule10(b)5. And to further kind of distance the regime from a consent related regime, one that’s rooted and seems to be rooted in property principles, in the same opinion, O’Hagan, she says that Rule 1483, which prohibits people stating tender offers from engaging in warehousing -- which Powell argued was legal in Chiarella -- she says it’s a reasonable prophylactic because it would stop non-consent -- by stopping consensual trading it would stop non-consensual trading.

So I push back in that way and would love to know your thoughts on how we can still look at O’Hagan as a property rooted case when it eliminates the consent elements from this crime of fraudulent nondisclosure.

Jonathan R. Macey:  I can answer that in 12 seconds which is what O’Hagan says is that the purpose of disclosure by somebody like O’Hagan is to allow the company to whom the disclosure is made -- disclosure that we’re going -- the person is about the engage in insider trading -- the purpose of the disclosure is to allow the recipient of that information, Kevin, to stop it by getting -- there’s a footnote in O’Hagan that explicitly says, if you know someone’s going to do this -- if O’Hagan had disclosed this -- then the company could go out and get an injunction to stop it. It could take legal action against the person. So I think that we have to take that disclosure in context.

We also have to understand that the facts of O’Hagan were that a client of the law firm that O’Hagan worked for, which was Grand Met, was making a takeover for another company, Pillsbury, and there’s no question in the case that Grand Met, the client, had the property rights to go out and buy shares in Pillsbury clandestinely and to maintain through contract and other laws the confidentiality of that information. So I’m very comfortable with characterizing O’Hagan as being consistent with a property rights approach. I totally agree with you that if the opinion had just said, well, you could notify the company, and the company won’t have any recourse against you for what you’re doing, that disclosure gives you a get out of jail free card if you’re O’Hagan, the defendant. But that’s not what it says. That’s not what the opinion says.

Kevin R. Douglas:  Thank you. Any response, John? Can folks hear me? This is still Professor Douglas. Any last thoughts, Professor Anderson, or should we go to Q&A?

John Anderson:  Well, I guess just one last thought would be just I didn’t really say anything about the Himes Bill or the Preet Bharara -- the proposed legislation. So let me just say real quickly that I think that it’s an improvement from -- I noted that there are two ways in which the current regime might think it’s unjust. One is at the common law -- as it’s developed as a common law crime that’s inherently problematic. So the fact that those propose -- both proposals are statutory, that is in itself some improvement.

But one of the biggest problems I just don’t think that it really solves some concerns of notice and certainty, first, because it leaves a lot of key terms undefined, both of them. Both leave what counts as a fiduciary duty undefined. And in the Himes Bill the personal benefit test remains, and it’s still very unclear what that means. I’m really concerned about the Himes Bill imposing liability on Tippees who merely recklessly trade because I think that’s a very easy slippery slope to just claiming that any information that may look suspicious -- you’re trading on it incurs liability.

I think that really will have a problematic chilling effect on trading and is just not right. And I also think that there’s a problem that, if read literally, the wrongful acquisition and use regime that they’re both pushing I think would totally permit issuer licensed insider trading. But I know that as a practical reality it would not be permitted from the standpoint of enforcement. So it really is not going to do what it says it does. So I just wanted to get that out of concerns that I have about the Himes bill, and now I’m happy to open it up to Q&A.

Kevin R. Douglas:  Thank you. Any questions, Greg?

Jonathan R. Macey:  I have one thing to say about this statute versus common law, but let’s get a few questions out there. And then I can throw it in if there’s a lull in the conversation.

Greg Walsh:  We do have an upcoming Courthouse Steps call at 1:00 p.m., so I think we have time for one or two questions and some concluding thoughts from our experts. Professor Douglas, we don’t have any callers in the queue right now. Do you want to direct the conversation one way or another?

Kevin R. Douglas:  Sure. Professor Macey, you had --

Jonathan R. Macey:  Can I just say one thing about this --

Kevin R. Douglas:  Yeah. Jump in.

Jonathan R. Macey: What I wanted to say about the point about preferring statutes over the common law is I think what John means, given his criticism of the extant statutes, is not -- obviously not that any statute is better than any common law rule. It sounds like John would agree with me that some of the current statutory proposals, like the Bharara proposal, would be inferior to the common law that we have now. I mean, if I’m wrong in characterizing your position, John Anderson, let me know.

So the idea has to be that -- I also don’t think that, John, you’re saying that all common law rules are worse than all statutory rules, right? You’re saying that you could craft a statute or you and Kevin and I sitting down could probably craft an insider trading statute that would be better than the current regime. I don’t disagree with that at all, but it’s kind of hypothetical. This question is -- to my way of thinking, the question is is this a statute that we’re likely to get going to be something that we think or you think or I think or Kevin or anybody thinks -- any sensible person thinks is superior to the mushy, vague common law rule that we actually have?

And I think you would agree with me -- although, please correct me if I’m wrong -- that that’s unlikely. So the nirvana world or perfect statute, I totally agree with you. That might be better than the common law. But a statute that we’re actually going to get out of a Congress in 2020 where people like Preet Bharara are the architects of the statute, that’s likely to be worse. Am I wrong in characterizing your position in that way?

John Anderson:  Yeah. No, you’re absolutely correct. What my point was just that, as I kind of noted, I see the current regime as unjust in two respects. One is just from the standpoint of -- regardless of what you think of the merits of trading on material non-public information, that there’s something inherently problematic in any legal or criminal enforcement regime that doesn’t give adequate notice to citizens. And that’s just a simple principle of legality point. I do not think that our current regime satisfies the principle of legality.

The second is substantively that, in terms of what we are counting under our common law regime as criminal or not criminal, I think that that is also unjust to the extent that it criminalizes issuer licensed insider trading. And that was kind of my second point. So substantively, I think it’s unjust.

Now, I agree with you that I think if you read closely the Supreme Court precedent, I don’t think issuer licensed insider trading is illegal. I just know as a practical reality -- kind of going back to Oliver Wendell Holmes’ all bad men perspective -- I know that it’s going to either -- doing it would lead to an SEC investigation or an FBI agent knocking on your door. And I think that’s a problem.

Jonathan R. Macey:  I agree.

Kevin R. Douglas:  Let me ask a follow up real quickly.

Greg Walsh:  Professor Douglas, I want to give everybody an opportunity to give concluding thoughts. We have a teleforum call at 1:00 p.m., and that expert is going to be dialing in in about three or four minutes. So I’d like to give everybody an opportunity to conclude.

Kevin R. Douglas:  Well, let me ask -- well, Professor Macey, in your concluding remarks will you clarify whether you support this idea of issuer licensed insider trading?

Jonathan R. Macey:  So I have two things to say about issuer licensed insider trading. One is, to me, there’s a very large empirical question that I don’t have a strong prior about, and that is I share John Anderson’s view that, if an issuer were really to license insider trading and there’d be problems of the SEC and maybe the U.S. Attorney trying to -- notwithstanding what we view the law -- we, I think both of us together view the law as requiring or permitting, you’d get litigation. So I think that’s the deterrent.

My question would be if the law were perfectly clear and issuers could allow insiders to trade, how much of it would we observe? We haven’t even -- I find it -- I don’t know what to do with the fact that, notwithstanding what seems to be legal rules allowing -- common law judge made legal rules allowing issuers to say, well, it will not be a breach of your fiduciary duties to engage in insider trading, we don’t observe any of it. And that raises the question for me as to whether we would see it or not.

Kevin R. Douglas:  Any other concluding thoughts?

Jonathan R. Macey:  No, that’s it.

Kevin R. Douglas:  Okay.

Jonathan R. Macey:  Thank you.

Kevin R. Douglas:  Professor Anderson, anything, concluding thoughts?

John Anderson:  Oh, okay. Yeah. I’ll just real quickly respond to Professor Macey’s kind of point. I do think we would observe it. I think that we probably wouldn’t observe it as much just given kind of the public political climate because I think there would be a worry about backlash and being open about it. But I think if you look at 10(b)5-1(c) trading plans, Todd Henderson’s done some really interesting research on those.

And apparently we’re seeing that to the extent that firms let their employees kind of strategically terminate those plans in ways that allow them to benefit from material non-public information, you’re seeing that their compensation is actually less in terms of salary and other compensation -- it’s actually less than those companies that are far more restrictive in permitting their employees to kind of play fast and loose with this 10(b)5-1(c) plan. So I do think that there may be that firms might be willing to avail themselves of them, but I also think it would help with cost of compliance. But that’s a whole other story.

Kevin R. Douglas:  Yeah. Interesting. Thank you both so much. And thank you, Greg, and thank you, Federalist Society, for hosting this event for us.

Greg Walsh:  This is Greg Walsh. On behalf of The Federalist Society, I want to thank our speakers for the benefit of their valuable time and expertise today. We welcome listener feedback by email at [email protected]. Thank you all for joining us. We are adjourned.

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Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.