Although Congress has mandated extremely draconian civil and criminal sanctions for insider trading, it has never seen fit to define what constitutes insider trading. Admittedly, insider trading is difficult to define with precision, but Congress also was concerned that even if a clear statutory definition could be devised, inside traders would find ways of evading it. See generally Stephen M. Bainbridge, Note, A Critique of the Insider Trading Sanctions Act of 1984, 71 VA. L. REV. 455, 472-73 (1985).
Accordingly, Congress deliberately left the definition of insider trading as vague and unconstrained as possible. In light of the draconian penalties associated with insider trading, however, this decision raises troubling vagueness concerns. As Jonathan Macey bluntly put it, “opposition to a clear, fixed definition for the crime of insider trading constitutes nothing less than a naked power grab by the SEC, a move obviously at odds with the most elemental notions of justice and fair play.” JONATHAN R. MACEY, INSIDER TRADING: ECONOMICS, POLITICS, AND POLICY 64 (1991). Or as Ed Kitch put it, somewhat less bluntly, “[t]he fact that the agency finds it more comfortable to avoid the discipline of defining the offense before bringing the charge is no reason for eschewing the increased fairness and deterrent efficacy that would flow from the exercise.” Edmund W. Kitch, A Federal Vision of the Federal Securities Laws, 70 VA. L. REV. 857, 861 (1984).
According to the WSJ, however, oral argument in an insider trading case pending before the Secomd Circuit suggests that that court may finally be willing to do something about this fundamental unfairness:
In an hourlong hearing in Manhattan, judges of the U.S. Court of Appeals for the Second Circuit signaled that federal prosecutors may have taken too broad a view of insider trading, saying Wall Street needs more of a "bright line" about what constitutes a crime. ...
Two members of the Second Circuit panel in Manhattan expressed concern that the prosecutors' approach is too vague.
"We sit in the financial capital of the world, and the amorphous theory you have gives precious little guidance to all these financial institutions and all these hedge funds out there about a bright-line theory as to what they can and cannot do," Judge Barrington D. Parker said.
The broader federal judiciary is closely watching the appeal, in part, because the law on insider trading is ambiguous.
Daniel Richman, a professor at Columbia Law School, said that because of the statute's ambiguity, most of the law concerning insider trading had been set by the courts, calling the tolerance for this "remarkable."
Remarkable strikes me as valid, but too weak. Try intolerable. Or indefensible. Or appalling.
It is time for courts to finally draw some very bright lines. As for where those lines should be drawn, I direct the interested reader to my article Regulating Insider Trading in the Post-Fiduciary Duty Era: Equal Access or Property Rights? (May 8, 2012). Available at SSRN: http://ssrn.com/abstract=2054814