Elizabeth R. Monnet Author
Order her novel from US bookstores, such as Readers Books and Book Passage, and from Amazon.
Photo of Sonoma Plaza by the author
LEGAL BACKGROUND TO NOVEL DRAMA
In the novel, one of the lawyers, George DeRosa grumbles about the US law of insider trading:
"I don’t like the fuzziness of it. From my admittedly brief research, the law of insider trading looks like a Frankenstein monster. It’s a labyrinth of case law stitched together with various SEC rules and regs, all derived from section 10(b) of the 1934 Securities and Exchange Act. The appellate courts have to keep weighing in on who’s breaking the law—and who isn’t—because there’s no clear statutory guidance on what constitutes illegal insider trading. It’s an unnatural beast.”
He has a point.
In Dirks v. SEC, 463 U.S. 646 (1983) the US Supreme Court established the legal criteria for determining the existence of illegal insider trading. However, the legal battles that have ensued in federal District and Appellate courts since 1983 suggest that the Dirks legal precedent is far from clear.
In US v. O'Hagan, 521 U.S. 642, 666 (1997) the US Supreme Court established the legal criteria for determining the existence of illegal insider trading under the misappropriation theory of insider trading. However federal District and Appellate court decisions since O'Hagan also lack consistency.
In US v. Kim, 184 F. Supp. 2nd. 1006 (2002), the US District court (N.D. California) ruled that a person who learned inside information from a fellow member of a private club could not be found guilty of illegal insider trading under the misappropriation theory.
In contrast, in US v. McGee, 955 F. Supp. 2d 466 (2013), the US District court (E.D. Pennsylvania) ruled that a person who learned inside information from a fellow member of AA could be found guilty of illegal insider trading under the same misappropriation theory. This opinion was later affirmed by the Third Circuit US Court of Appeals.
In SEC v. Steffes, Case No. 1:10-cv-06266 (N.D. Ill. Verdict Jan. 27, 2014) a jury found that employees who learned about a potential company merger from work related observations were not guilty of illegal insider trading.
The battle continues.