From the outside In: A Law and Economics Perspective on Insider Trading Cases Involving Cybercrime

By Collier, Jaclyn | The Journal of High Technology Law, October 2016 | Go to article overview

From the outside In: A Law and Economics Perspective on Insider Trading Cases Involving Cybercrime


Collier, Jaclyn, The Journal of High Technology Law


I. Introduction

"It is doubtful whether any other type of public regulation of economic activity has been so widely admired as the regulation of the securities markets by the Securities and Exchange Commission." (1)

To many people, and certainly the Securities and Exchange Commission ("SEC"), it is categorically unfair for insiders who have access to material nonpublic information to trade on it for their own personal gain. (2) On the other side of the argument, the idea that insider trading is "just wrong" is generally not accepted by many law and economics intellectuals. (3) Despite the lack of agreement about whether insider trading should be illegal, hacking into another company's system in order to access the material nonpublic information that is then used to trade is itself a crime. (4) But is it insider trading? (5) Insider trading has long been a significant element of the enforcement regime of the SEC. (6) In 2009, the Dorozhko decision in the Second Circuit opened the door to the SEC to seek enforcement against company outsiders who traded on material nonpublic information obtained through cybercrime; (7) however, the question remains whether it should. (8) Hackers are an interesting species for the SEC because the activities they engage in to obtain the material nonpublic information do not easily fit into the traditional definitions of insider trading. (9)

Through a law and economics analysis, this Note will discuss insider trading cases where traders traded on material nonpublic information obtained through commission of a cybercrime and whether the SEC should pursue those kinds of insider trading cases. Part II will provide historical background on insider trading law and the evolution of cybercrime as it relates to insider trading. (10) it will also discuss the classical law and economics arguments related to the regulation of insider trading. Part III will discuss the SEC's recent complaint in Dubovoy to give substance to the law and economics arguments around prosecution of insider trading cases involving hacking. (11) Part IV will argue that the existing law is not designed or intended to bring actions against company outsiders trading on material nonpublic information obtained though cybercrime. (12) Using economic efficiency analysis, Part V will show that the SEC should not focus on these cases because it is not a good use of resources for a government agency that has a limited budget. (13) Instead, these cases should be prosecuted as a cybercrime by the Department of Justice ("DOJ") and other law enforcement agencies, leaving the SEC to focus on investigating and prosecuting cases where its finite resources could be more effectively deployed.

II. History

A. Background on the Mandate of the SEC

The SEC's mandate is to protect investors through the maintenance of fair and orderly securities markets. (14) The Securities Exchange Act of 1934 ("Exchange Act"), a federal law that was implemented after the great 1929 stock market crash, was designed to regulate the securities exchanges (e.g., the New York Stock Exchange). (15) The congressional hearings and reports preceding the passage of the Exchange Act demonstrate that in the wake of the 1929 crash there was public concern that market abuses caused the crash. (16) The Exchange Act established the SEC, (17) which was empowered through the act to regulate all aspects of the securities industry. (18) This broad authority is divided amongst numerous divisions and offices within the SEC. (19)

The Division of Enforcement is responsible for prosecuting insider trading cases. (20) it works closely with the office of Compliance Inspections and Examinations and other areas of the SEC to obtain evidence of potential violations of securities laws. (21) The SEC is required to provide reports annually to Congress on its enforcement effort, the success of which is critical to the SEC's ability to maintain political support, which in turn allows the agency to get increases in funding. …

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