The WSJ redefines illegal insider trading

Larry Ribstein —  16 May 2011

Today’s WSJ, in an obvious effort to grab readers seeking more insider trading titillation in the wake of the Galleon verdict, has a story about a new supposed scandal — investment banks offering hedge fund traders special access to dealmakers at exclusive lunches in order to get more trading business from the funds.

The article makes the following silly statement:

Under insider-trading laws, it is generally illegal to buy or sell securities based on “material,” or significant, information that isn’t publicly available.

No.  It’s generally legal to trade on non-public information, even if it’s material.  The exception is when the trader knows the information is obtained illegally, as the jury found in the Raj trial.  Indeed, there’s a question why a non-expert would trade in an efficient market on public information that’s presumably already in the price.

The article discusses situations that might present issues under Reg FD, which doesn’t regulate trading but restricts firms from privately disclosing non-public information without then publicly disclosing it.  But there’s no indication of illegal insider trading in connection with this meeting.  Indeed, there’s a question about how much non-public information is being disclosed.

The WSJ article aids the SEC’s project to, as I said recently, turn the molehill of illegal insider trading into a mountain that oppresses efficiency-enhancing trading.  We expect more from a top financial journal.

Larry Ribstein


Professor of Law, University of Illinois College of Law

One response to The WSJ redefines illegal insider trading


    Insider trading is direct or indirect trading (as tipper or tippee) for some direct or indirect benefit based on material non-public information in violation of a duty of trust (which again can either be direct or imputed).

    What the WSJ described is what is known as the “equal access” theory of insider trading, which the Supreme Court has rejected. Nevertheless, the SEC and DOJ repeatedly attempt to introduce the equal access theory into public discourse because that is a stricter definition that they would prefer as prosecutors.

    For the WSJ to define insider trading using an equal-access theory simply shows minimal attention to detail. The standards of the WSJ, historically the source some of the best investigative work in journalism, have fallen considerably post-Murdoch. I and many of my colleagues have switched to the Financial Times.