Insider Trading Law: O'Hagan's Pillsbury Bet, Shadow Trading and Friedman

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Insider trading is buying or selling a public company's securities on material, non-public information, and in the United States the core violation is a breach of fiduciary duty by officers, directors or owners of more than 10% of a company. The SEC uses trading surveillance, requires insiders to file a Form 4 within days of a trade, and forces violators to disgorge profits on top of fines or prison. SEC Rule 10b5-1 lets executives sell on a schedule set before they learn a secret. The misappropriation theory reaches outsiders: in a landmark 1997 Supreme Court case, lawyer James O'Hagan, whose firm represented a bidder for Pillsbury, made more than $4 million on Pillsbury options.

Tipping turns on motive. In the Dirks case, an insider who leaked to expose fraud gained no personal benefit, so the analyst who traded was not liable, while the Salman case held that tipping a relative counts as a benefit. A stranger overhearing CEOs at a diner can generally trade legally in the U.S., but not under the EU and UK market abuse model. Newer gray areas include shadow trading in related companies, dark web markets for corporate secrets, and congressional trading; the 2012 STOCK Act followed public outcry, and lawmakers who sold before the 2020 COVID crash were not charged. Milton Friedman and Henry Manne argued insider trading should be legal.

• Defenders say insider trades move prices toward their true value early and call it a victimless crime on anonymous exchanges.
• Japan did not formally outlaw insider trading until 1988.
• Some economists link strict U.S. rules to higher U.S. executive pay.
• SAC Capital portfolio manager Mathew Martoma made $276 million on one trade using clinical trial results and got nine years in prison.
• Canadian lawyer Gil Cornblum, under investigation for a 14-year conspiracy, took his own life the day before an alleged co-conspirator was to plead guilty.