From Chiarella to Cuban: The Continuing Evolution of the Law of Insider Trading
Sabino, Anthony Michael, Sabino, Michael A., Fordham Journal of Corporate & Financial Law
What does an old-school financial printer (one from the bygone era of ink and printing presses) have in common with a present-day Internet billionaire (one more often seen on ESPN than CNBC)? Both were accused by the government of "insider trading." While the former defeated the charges brought against him in a case which began the Supreme Court's modern interpretation of federal insider trading laws, the latter recently suffered a setback at the appellate level in the form of a remand to the district court.
By now, legal professionals have likely discerned that the first scenario refers to the seminal 1980 United States Supreme Court case Chiarella v. United States.^ Sports fans and legal scholars alike probably recognize the second scenario as describing SEC v. Cuban? a case brought against the flamboyant owner of the Dallas Mavericks professional basketball team, which was first dismissed by the U.S. District Court for the Northern District of Texas and subsequently reinstated by the Fifth Circuit Court of Appeals. The disparate outcomes reached in Chiarella and Cuban clearly reflect the difficulty the federal courts have encountered in formulating a consistent method of interpreting federal insider trading laws.
Federal securities laws broadly proscribe the employment of fraudulent or deceptive devices in connection with the purchase or sale of securities in the public markets.3 "Insider trading" is a species of such malfeasance and occurs when one uses material, nonpublic information to profit in the trading of stock.4 The titular "evolution" of the law of insider trading has been spawned by a series of contrasting legal decisions and an abundance of interesting twists and turns.
Parts II and III of this Article provide an exposition of the statutory underpinnings of insider trading and a description of the fundamentals of federal securities laws. Parts IV through VII then trace the development of modern insider trading jurisprudence, starting with the Supreme Court's inaugural holding in Chiarella and then moving across three decades of evolving precedent to the recent Cuban decision. Part VIII provides the authors' analysis and commentary on the current state of insider trading laws. The Article concludes in Part DC with some observations as to what the future holds for the law of insider trading.
Insider trading has always captured the public's attention (not to mention the watchful eye of the Department of Justice and the Securities and Exchange Commission ("SEC")). In recent decades, we have witnessed such episodes as the Ivan Boesky/Michael Milken scandal5 and the "Yuppie Five" prosecutions.6 These occurrences were so engrossing that they gave rise to a myriad of exposés, cinematic epics7, and other fictional works depicting stories of Wall Street gone wrong. Even when insider trading was not the actual charge alleged, such as in the Martha Stewart prosecution,8 the mere hint of subterfuge involving confidential corporate secrets had the effect of setting the world on its ear.
Recent episodes lend credence to the adage that, "the more things change, the more they stay the same." Current events detail charges of insider trading at well-known hedge funds,9 illegal tips obtained from an employee inside the behemoth Microsoft Corporation,10 and even a secretary at the Walt Disney Company being arrested for allegedly leaking confidential tips about the House of Mouse's stock.11 Therefore, it came as no surprise when notoriety immediately attached to the SECs filing of charges against Mark Cuban, a well-known business mogul and sportsman, for allegedly trading on material, nonpublic information regarding a technology company in which he held a major investment stake.12
III. THE FUNDAMENTALS OF SECTION 10(B)
Having established the high profile of insider trading cases, we now turn to the first crucial step in our analysis of modern insider framing jurisprudence - an exposition of the well-established foundation for brining such cases under our federal securities laws. …