United States V. Blaszczak Brings Insider Trading Law to a Tipping Point

Volume 66 Issue 1 Article 4 4-27-2021 United States V. Blaszczak Brings Insider Trading Law to a Tipping Point Michael T. Byrne Follow this and additional works at: https://digitalcommons.law.villanova.edu/vlr Part of the Securities Law Commons Recommended Citation Michael T. Byrne, United States V. Blaszczak Brings Insider Trading Law to a Tipping Point, 66 Vill. L. Rev. 187 (2021). Available at: https://digitalcommons.law.villanova.edu/vlr/vol66/iss1/4 This Note is brought to you for free and open access by Villanova University Charles Widger School of Law Digital Repository. It has been accepted for inclusion in Villanova Law Review by an authorized editor of Villanova University Charles Widger School of Law Digital Repository. Byrne: United States V. Blaszczak Brings Insider Trading Law to a Tippin 2021] Notes UNITED STATES V. BLASZCZAK BRINGS INSIDER TRADING LAW TO A TIPPING POINT MICHAEL T. BYRNE* “When contemplated in its extreme, almost any power looks dangerous.”1 I. THE TIP-OFF: AN INTRODUCTION TO INSIDER TRADING LAW Public confidence in the fairness and integrity of the stock market is necessary for the market to properly function.2 If people believe they are trading at a disadvantage against market participants who possess inside information, they will likely choose to save or spend their hard-earned capital elsewhere.3 This makes the enforcement of insider trading law vital to the preservation of the stock market and the economy at large.4 * J.D. Candidate, 2022, Villanova University Charles Widger School of Law; B.S. 2014, Villanova University. I would like to thank my family members for their unwavering support and my Villanova Law Review colleagues for their diligent assistance throughout the writing and publication of this Note. 1. Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 616 (2012) (Ginsburg, J., concurring in part and dissenting in part). 2. See, e.g., Arthur Levitt, Chairman, U.S. Sec. & Exch. Comm’n, A Question of Integrity: Promoting Investor Confidence by Fighting Insider Trading (Feb. 27, 1998) (transcript available at https://www.sec.gov/news/speech/speecharchive/ 1998/spch202.txt [https://perma.cc/3SK4-F9D4]) (noting public confidence is essential to securities markets). 3. See United States v. O’Hagan, 521 U.S. 642, 658–59 (1997) (explaining that permitting insider trading would deter public from investing in securities); H.R. REP. NO. 100–910, at 8 (1988) (speculating public investors will likely remove their money from market when they feel market is “rigged against [them]”). The public generally and reasonably assumes that securities prices are based on all publicly available data. See H.R. REP. NO. 100–910, at 8. 4. See H.R. REP. NO. 100–910, at 8–9 (examining damaging effects of insider trading on stock market). An important purpose of the Securities Exchange Act of 1934, which is the traditional source of insider trading liability, is to ensure “honest securities markets and thereby promote investor confidence.” O’Hagan, 521 U.S. at 658 (citing 17 C.F.R. pt. 240 (1980)). Given the essential position of the stock market within the U.S. economy, according to the Federal Register, unchecked insider trading may cause undesirable economic effects such as increased market volatility, decreased liquidity, and an increased cost of capital for businesses, while another commentator notes that these undesirable economic effects include less dependable information and more incentive for dishonest behavior by insiders. See Selective Disclosure and Insider Trading, 65 Fed. Reg. 51715, 51731 (Aug. 24, 2000) (to be codified at 17 C.F.R. pts. 240, 243, and 249) (first citing Michael J. Fishman & Kathleen M. Hagerty, Insider Trading and the Efficiency of Stock Prices, 23 RAND J. ECON. 106 (1992); then citing Michael Manove, The Harm From Insider Trading and Informed Speculation, 104 Q.J. ECON. 823 (1989)); and then citing Saul (187) Published by Villanova University Charles Widger School of Law Digital Repository, 2021 1 Villanova Law Review, Vol. 66, Iss. 1 [2021], Art. 4 188 VILLANOVA LAW REVIEW [Vol. 66: p. 187 Given the notoriety of insider trading schemes, it may seem obvious that insider trading is unlawful.5 Yet federal securities law does not expressly forbid insider trading; rather, insider trading liability is based upon several federal antifraud provisions that generally prohibit securities fraud.6 Thus, courts have largely shaped insider trading law by interpreting these antifraud provisions.7 Courts’ varying interpretations have produced widespread ambiguity and have led to the inconsistent application of insider trading law across jurisdictions.8 The Securities Exchange Act of 1934 (the Exchange Act) provides various prohibitions of securities fraud under Title 15 of the United States Code (Title 15).9 Both civil and criminal enforcers have traditionally employed Section 10(b) of the Exchange Act (Section 10(b)) together with U.S. Securities and Exchange Commission (SEC) Rule 10b-5 (Rule 10b-5) in insider trading cases.10 Accordingly, these Title 15 securities fraud proLevmore, In Defense of the Regulation of Insider Trading, 11 HARV. J.L. & PUB. POL’Y 101, 104–05 (1988) (defending insider trading enforcement)). 5. The popular 1987 film Wall Street and its infamous antagonist Gordon Gekko brought public intrigue to insider trading that has endured ever since. See Francesco Guerrera, How ‘Wall Street’ Changed Wall Street, FIN. TIMES (Sept. 24, 2010), https://www.ft.com/content/7e55442a-c76a-11df-aeb1-00144feab49a [permalink unavilable] (proclaiming the film’s “influence on popular culture remains strong”); see also WALL STREET (20th Century Fox 1987). In recent years, numerous high-profile individuals have been found liable for insider trading, including Martha Stewart (TV personality), Jeffrey Skilling (former Enron president), Steven Cohen (hedge fund manager), and Raj Rajaratnam (hedge fund manager). See Joel Anderson, 10 Unbelievable Cases of Insider Trading, YAHOO (Sept. 7, 2020), https://www.yahoo.com/lifestyle/10-unbelievable-cases-insider-trading172050946.html [https://perma.cc/ZGF5-RF87]. Other celebrities, such as Phil Mickelson (professional golfer) and Mark Cuban (entrepreneur), have been accused of insider trading but were ultimately cleared of wrongdoing. See Luke KerrDineen, How Phil Mickelson Escaped Insider-Trading Charges Amid a Federal Investigation, USA TODAY (June 27, 2017, 12:47 PM), https://ftw.usatoday.com/2017/06/ phil-mickelson-insider-trading-golfworld-article-billy-walters [https://perma.cc/ 4KNM-6U5E]; Marc D. Powers, Mark A. Kornfeld & Jessie M. Gabriel, Not in My House: Mark Cuban Defeats the SEC’s Insider Trading Charges, BAKERHOSTETLER (Nov. 14, 2013), https://www.bakerlaw.com/alerts/not-in-my-house-mark-cuban-defeatsthe-secs-insider-trading-charges-11-14-2013 [https://perma.cc/A6G2-GANT]. 6. See, e.g., 4 THOMAS LEE HAZEN, TREATISE ON THE LAW OF SECURITIES REGULATION § 12:160 (...truncated)