SEC. 20A. (a) PRIVATE RIGHTS OF ACTION BASED ON CONTEMPORANEOUS TRADING.
Any person who violates any provision of this title or the rules or regulations thereunder by purchasing or selling a security while in possession of material, non-public information shall be liable in an action in any court of competent jurisdiction to any person who, contemporaneously with the purchase or sale of securities that is the subject of such violation, has purchased (where such violation is based on a sale of securities) or sold (where such violation is based on a purchase of securities) securities of the same class.
Securities and Exchange Act of 1934
"Although the government might like the law to be different, nothing in the law requires a symmetry of information in the nation's securities markets."Barrington Parker, 2nd U.S. Circuit of Appeals Judge
"Information symmetry is a condition in which all relevant information is known to all parties involved. For example, in the stock market, stock information has a full public disclosure, and all investors are in the same position to share information.""In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure in the worst case. Examples of this problem are adverse selection, moral hazard, and information monopoly."
"In finance, the efficient-market hypothesis asserts that financial markets are 'informationally efficient'. In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made."
The basis of the reversal will be the judgement that the 2nd Court has misapplied the principles in Dirks v SEC. In this case the Supreme Court sought to exonerate the recipient of information from a whistleblower who wished to exposed a corporate fraud, and in doing so released information to Dirks, who while passing it on to the Wall Street Journal, also passed it on to clients who used it to sell their stock in advance of the fraud and stock sell off.
This led to the establishment of 'The Dirks Test' by the SEC:
A standard used by the Securities and Exchange Commission (SEC) to determine whether someone who receives and acts on insider information (a tippee) is guilty of insider trading. The Dirks Test looks for two criteriaI believe this is one of those cases where courts can and will argue about reasonableness. Is it more reasonable to expect a trader who is licensed under Securities Laws to know the difference between legitimate information and material non-public information, moreso than an unlicensed amateur?
1. Whether the individual breached the company's trust
2. Whether the individual did so knowingly
Tippees can be found guilty of insider trading if they know or should know that the tipper has committed a breach of fiduciary duty.
And I think that the 2nd District Court has overreached in declaring that the prosecution ought to demonstrate that the tipper received personal benefit, rather than violated fiduciary trust of the corporation, and that the tippees needed to know this fact, rather than understanding the difference, as a professional, between gossip, information, and material non-public information which provides them a trading advantage which has been obtained in some manner which most certainly involves the violation of fiduciary responsibility in the chain of communication.