The Securities and Exchange Commission unveiled its proposed definition of illegal insider stock trading yesterday, but top securities lawyers criticized the proposal for being full of loopholes.
Acting SEC Chairman Charles Cox told the Senate he favored adoption of a statutory definition of insider trading, saying that if people can go to jail for such trading, the rules "ought to be clearer."
Despite attempts by the SEC and others to come up with a clear definition, the disagreements about how the SEC proposal would work indicate that more work remains. The recent string of highly publicized insider trading cases has been brought under general antifraud statutes.
But under the SEC proposal, illegal insider trading would be prosecuted under a statute that says: "It shall be unlawful for any person, directly or indirectly, to purchase, sell or cause the purchase or sale of any security while in possession of material nonpublic information concerning the issuer or its securities, if such person knows or recklessly disregards that such information has been obtained wrongfully or that such purchase or sale would constitute a wrongful use of such information."
The proposal says that information is obtained "wrongfully" if it is obtained through "theft, bribery, misrepresentation or espionage through electronic or other means; or a breach of a duty to maintain such information in confidence or to refrain from purchasing, selling or causing the purchase or sale of the security." Other provisions prohibit the possessor of inside information from tipping others who may trade.
Theodore Levine, a lawyer who represents former stock speculator Ivan F. Boesky, said exceptions that are part of the SEC proposal would make it possible for violators to evade the spirit of the law. "There are holes which are enormous and will be used and abused," Levine told the securities subcommittee of the Senate Banking Committee.
One reason behind the move to adopt an insider trading definition is the fear that an upcoming Supreme Court review of a case involving former Wall Street Journal reporter R. Foster Winans will invalidate legal theories used in bringing these cases.