When Is it Wrong to Trade Stocks on the Basis of Non-Public Information?: Public Views of the Morality of Insider Trading (2011)

Introduction I. General Background on Insider Trading II. Why Citizens' Intuitions About Moral Blameworthiness Matter III. Previous Studies of Community Attitudes Regarding Insider Trading IV. Possible Psychological Roots of Opposition to Insider Trading V. Empirical Studies of Public Views of Insider Trading A. Study 1--Initial Look at Insider Trading 1. Study 1 Method 2. Study 1 Results Table 1--Ratings of Study 1 Scenarios in Terms of Blameworthiness, Deserved Punishment, and Percentage of the Sample Criminalizing the Activity B. Study 2--Criminal vs. Civil Liability, Tipper vs. Tippee Liability, and Other Doctrinal Puzzles in Insider Trading Law 1. New Distinctions Investigated in Study 2 a. Possessing vs. Using Information b. Amount of Insider Trader's Profits and Professional Status of Trader c. Tipper vs. Tippee Liability d. Existence of Confidential Relationship 2. Study 2 Method 3. Study 2 Results a. Liability for Direct Buyers b. Tipper/Tippee Liability C. Study 3--Subjects' Underlying Reasoning 1. Study 3 Method 2. Study 3 Results Conclusion INTRODUCTION For most people, the prototypical criminal offense involves an action that is clearly and unambiguously morally blameworthy, such as an unjustified act of violence or taking of property. Yet many crimes, especially so-called white collar crimes, exist in a realm of substantially greater ambiguity. In a previous article, we examined lay intuitions toward a series of white collar offenses--fraud, perjury and false statements, and bribery and gratuities--in an effort to determine how lay people distinguish between criminal fraud and sharp dealing, bribery and horse perjury and wiliness on the witness stand, and the like. (1) In this study, we examine lay views of insider trading. Our system of securities law prohibits investors from buying or selling stock on the basis of non-public information unless such information is first disclosed. Those who engage in insider trading can be prosecuted criminally or subjected to substantial civil sanctions. (2) Yet, as in the case of the other white collar offenses we have studied, the line between illegal insider trading and mere savvy investing can seem elusive. Some even argue that insider trading should not be prohibited at all. (3) Even among those who agree that certain core cases of insider trading should be illegal, there is likely to be confusion about exactly how to deal with outlying cases and about what factors should distinguish violations that are criminal from those that are civil. We wanted to know what the general public thinks about various acts of insider trading and related activity. If ordinary people agree with those who advocate for the abolition of insider trading laws, then those who attempt to enforce such laws will operate at a considerable disadvantage. Offenders will generally not be tarred with moral approbation and potential jurors will wonder whether the pursuit of these actors is worth public resources. If, as we believe is more likely, people do tend to support a prohibition on at least some forms of insider trading, then the limits and priorities they endorse should be of interest to policymakers. As we will explain in Part II, there is reason to believe that it is important for the criminal law to maintain a connection to the moral intuitions of the lay public and, when the law must differ from that intuition, for it to do so deliberately and coherently. We begin by outlining in broad terms the scope of insider trading law. We then explain why it is important to consider how the views of the lay public contrast with legal practice. We present a brief discussion of the psychological literature on procedural fairness, which is relevant to understanding lay views on insider trading. …