A reader writes:
One aspect of insider trading law that has always bothered me is the way the Courts have structured the liability is that in theory if the owner of the information gave you permission to use it there can be no 10b5 insider trading liability. Are you aware of any authority on this aspect of insider trading.
FWIW, here's what I wrote about that issue in my book Securities Law: Insider Trading (Turning Point Series)
Suppose a takeover bidder authorized an arbitrageur to trade in target company's stock on the basis of material nonpublic information about the prospective bidder's intentions. Warehousing of this sort is proscribed by Rule 14e–3, but only insofar as the information relates to a perspective tender offer. Whether such trading in a non-tender offer context violated Rule 10b–5 was unclear before O'Hagan.
The O'Hagan majority at least implicitly validated authorized trading. It approvingly quoted, for example, the statement of the government's counsel that "to satisfy the common law rule the trustee may not use the property that [has] been entrusted [to] him, there would have to be consent."
On the facts of O'Hagan, as the majority indicated, insiders would need approval from both Dorsey & Whitney and Grand Met in order to escape Rule 10b–5 liability. Is it plausible that Grand Met would have given such approval? Maybe. Warehousing of takeover stocks and tipping acquisition plans to friendly parties were once common--hence the need for Rule 14e–3--and probably still occurs.
Notice the interesting question presented by the requirement that O'Hagan disclose his intentions to Dorsey & Whitney. Given that O'Hagan was a partner in Dorsey & Whitney, query whether his knowledge of his intentions would be imputed to the firm. As a practical matter, of course, O'Hagan should have informed the lawyer with the principal responsibility for the Grand Met transaction and/or the firm's managing partner.
The authorized trading dictum has significant, but as yet little-noticed, implications. Query, for example, whether it applies to all insider trading cases or just to misappropriation cases. Suppose that in a classic disclose or abstain case, such as Texas Gulf Sulphur, the issuer's board of directors adopted a policy of allowing insider trading by managers. If they did so, the corporation has consented to any such inside trading, which under Justice Ginsburg's analysis appears to vitiate any deception. The corporate policy itself presumably would have to be disclosed, just as broad disclosure respecting executive compensation is already required, but the implication is that authorized trading should not result in 10b–5 liability under either misappropriation or disclose or abstain.
On the other hand, the two theories can be distinguished in ways that undermine application of the authorized trading dictum to disclose or abstain cases. In a misappropriation case, such as Carpenter, liability is premised on fraud on the source of the information. In Carpenter, acting through appropriate decision making processes, the Journal could authorize inside trading by its agents. By contrast, however, Chiarella focused the classic disclose or abstain rule on fraud perpetrated on the specific investors with whom the insiders trade. Authorization of inside trading by the issuer's board of directors, or even a majority of the shareholders, does not constitute consent by the specific investors with whom the insider trades. Nothing in O'Hagan explicitly suggests an intent to undermine the Chiarella interpretation of the traditional disclose or abstain rule. To the contrary, Justice Ginsburg expressly states that the two theories are "complementary." Because the disclose or abstain rule thus remains conceptually distinct from the misappropriation theory, the authorized trading dictum can be plausibly limited to the latter context.
