On October 6, 2022, presenter Don Langevoort gave the lecture “What Were They Thinking? State of Mind Puzzles in Insider Trading”
Don’s paper can be found here: https://go.iu.edu/4BrD
Below you will find the Q&A from the seminar:
[1] Today, how important is it (in terms of judging that the tipee is guilty of insider trading) to prove that the tipper benefitted in some way (not necessarily monetarily) for giving the tip?
It is a requirement imposed by the Supreme Court and applied consistently by the lower courts in cases brought under the general antifraud provision of the securities laws, rule 10b-5. Nearly all insider trading cases are based on 10b-5, but there is a recent case that holds that it is not essential in an action brought as criminal prosecutions under something other than rule 10b-5 (e.g., mail or wire fraud). We will have to wait and see what comes of that distinction.
[2] In your view, what is the fundamental rationale, from a law perspective, for regulating insider trading? Economists have long been debating about whether insider trading improves/harms price efficiency and market integrity. It is like the classical question of efficiency vs. fairness. Is there a simple criterion for regulating insider trading (say, what is the objective function of regulators? social welfare? market quality? fairness?)? Thanks!
To me, insider trading regulation is justified by the impact of informational asymmetries on the cost of capital and the negative incentives insider trading creates to delay disclosure or make partial disclosure to maximize the ability of insider to profit. I acknowledge that fairness per se is not particularly persuasive as a reason to regulate, and that insider trading enforcement is mainly a way of “branding” a certain aggressive style of securities regulation.
[3] Could you please clarify the point re: the amygdalla research? Is that that being faced with an ethical dilemma repeatedly is numbing, or is it the slippery slore point — they are different. Thanks
I’m not sure they are that different. I am referencing this finding in neuroscience as a metaphor as much as anything else by which to describe a tendency reported frequently in studies of white collar crime. The idea is that new ethical dilemmas initially trigger significant activity in the amygdala, but this gradually diminishes as compromises are made. The “darkening” enables more unethicality, and so on. For a better discussion of the neuroscience by two behavioral economists, you might find it interesting to read Engelmann & Fehr, The Slippery Slope of Dishonesty, 19 Nature Neuroscience 1543 (2016).
[4] For deterrence, how important is perceived level of enforcement vs actual enforcement? Martha Stewart case may be more salient to public than prosecution of 100 obscure hedge funds. If perception matters, should DoJ-SEC take advantage of saliency/availability bias so that public overestimates enforcement levels?
It’s a strategy the SEC has long employed, though I’m not sure how well it works in pursuit of overestimation of punishment (i.e., it’s easy to construe the message as “those people are the ones the SEC cares about, not me”). As I noted in answering Question 2, I do think these enforcement actions help sell a brand of securities enforcement to the American population.
[5] How, if at all, would a statutory provision explicitly prohibiting securities trading on wrongfully obtained information affect some of the ethical/psychological rationalizatoins behind insider trading?
It depends on the form of insider trading regulation chosen by Congress. The bill passed by the House of Representatives uses “wrongful” as it way of distinguishing between the legitimate and illegitimate trading, and then provides limited guidance on what that word means for purposes of the statutory prohibition. That, to me, is too ambiguous to lessen the likelihood of rationalization. But I prefer this approach to brighter lines of separation, because the greater clarity leads to either overbreadth or underinclusion, depending on where the line is drawn. I find that more problematic.
[6] In US the definition of inside information is the same for the ban of insider trading and for disclosure by issuers as in EU?
The EU approach is generally thought to be more expansive than in the US—more of a “parity of information” standard, though not without some compromises. To put it most directly, US insider trading law is based on the fiduciary principle, whereas the EU is largely focused on possession.
[7] I agree with slippery slope concept. But Amigdula numbing may just be the person establishing an off pat soloution. “I have seens this problem beforre I know the answer. In behavioural terms establishing recency bias?
That’s an interesting possibility, and probably part of the story. But read the article I cited in my answer to Question 3 for a more thorough discussion of the slippery slope drawn from these experiments.
[8] Thanks for asking this. One challenge for E&C is making sure employees recognize that they are facing an ethical choice when one presents. The conditioned numbing you described suggests it gets harder over time to recognize one is facing an ethical issue. It would be helpful to understand more about this dynamic. Great lecture – lots to think about
Thank you. Obviously, there is much more to learn from neuroscience about ethical dilemmas in organizational settings, as well as from many other disciplines.
Don Langevoort is the Thomas Aquinas Reynolds Professor of Law at Georgetown Law. Prior to joining the Law Center faculty in 1999, Professor Langevoort was the Lee S. and Charles A. Speir Professor at Vanderbilt University School of Law, where he joined the faculty in 1981. The courses Professor Langevoort teaches are Contracts, Securities Regulation, various seminars on corporate and securities issues, and Corporations. Professor Langevoort has received the the Frank Flegal Teaching Award at Georgetown and the Paul J. Hartman Award for Excellence in Teaching at Vanderbilt. He has been a visiting professor at Harvard Law School and the University of Michigan Law School and a lecturer at the Washington College of Law, American University. After practicing for two years at Wilmer, Cutler & Pickering in Washington, D.C., he joined the staff of the U.S. Securities & Exchange Commission as Special Counsel in the Office of the General Counsel. Professor Langevoort is the co-author, with Professors James Cox and Robert Hillman, of Securities Regulation: Cases and Materials (Aspen Law & Business), and the author of a treatise entitled Insider Trading: Regulation, Enforcement and Prevention (West Group). He has also written many law review articles, a number of which seek to incorporate insights from social psychology and behavioral economics into the study of corporate and securities law and legal ethics. Professor Langevoort has testified numerous times before Congressional committees on issues relating to insider trading and securities litigation reform.
For further information on the webinar please contact Professor Jun Yang, Director of the Institute for Corporate Governance at icg@indiana.edu.
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