FOR EDUCATIONAL USE ONLY

11 Harv. J.L. & Pub. Pol'y 101

Harvard Journal of Law and Public Policy

Winter, 1988

Changing the Law: The Role of Lawyers, Judges and Legislators

Symposium: The First Annual Federalist Society Lawyers Convention-1987

*101 IN DEFENSE OF THE REGULATION OF INSIDER TRADING

Saul Levmore [FNa1]

Copyright © 1988 by the Harvard Society for Law & Public Policy, Inc.; Saul

Levmore

The regulation of insider trading--transactions in the securities of a firm by persons possessing special information that is derived from their advisory or fiduciary relationship or their employment with the firm--has had strong support among those who look to noneconomic values to determine the proper role of government and the ideal content of laws in our society, but it has had much weaker support among observers who identify with the law-and-economics movement. In this essay, I argue that there is little reason to think that unregulated insider trading is a good thing. These comments stress the economic dangers of insider trading and indicate, in passing, that these dangers are related to those that underlie--but that are also insufficiently recognized in--the case for not regulating the behavior of managers seeking to thwart tender offers.

Part I of these comments compares the "disclose-or-abstain" scheme, the current strategy of our federal laws for regulating insider trading, with other schemes, including deregulation. Part II focuses on insider trading and mergers.