As a former stockbroker, Martha would understand the rules relating to insider trading. That would put her in a very small minority of Americans. I was listening to a radio program on my way to work this morning, and one of the hosts said Martha was in trouble for allegedly selling her stock after the CEO told her the FDA wasn’t going to approve a drug. Another host, a young woman, was completely puzzled and said, “What’s wrong with that?” There ensued a highly confused effort to explain the law of insider trading, or more properly, trading on the basis of non-public information. Which reminds me that “insider trading,” now a universally-reviled although dimly-understood phenomenon, was legal until the Supreme Court decided the Texas Gulf Sulphur case in the 1960’s. That case held that trading on the basis of non-public information violated the SEC’s Rule 10(b)(5), which prohibits fraud in securities transactions. This in turn reminds me of a funny story: After the Texas Gulf Sulphur decision came down, my law firm’s corporate department put on a seminar for the firm’s lawyers on the implications of the new rule barring trading on the basis of non-public information. On the way out of the room after the seminar, one of the lawyers turned to another and said, “That just blew my entire investment philosophy.” Funny, but telling: until quite recently, it was widely considered foolish to buy or sell securities unless you thought you had some knowledge that was not generally available.
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