Cross‐Border Insider Trading

Publication Date01 Jan 2001
AuthorDonald C. Langevoort
SubjectAccounting & finance
Journal of Financial Crime Vol. 8 No. 3 Analysis
Cross-Border Insider Trading
Donald C. Langevoort
Some 40 years have now passed since the US
Securities and Exchange Commission (SEC) began
seriously to attack the problem of insider trading in
its seminal Cady, Roberts decision.1 Since then, a
complex pattern of regulation has evolved, largely
through a common law process of judicial interpreta-
tion of the open-ended anti-fraud provision of the
federal securities laws, Rule 10b-5. While many
interpretative questions still remain open, US law
in this area broadly prohibits trading based on
material non-public information when:
(1) the trader directly or indirectly owes a fiduciary
duty to marketplace traders on the other side of
the transaction;2
(2) the trader has misappropriated the information
from a source to which he owes some kind of
fiduciary duty;3 or
(3) the trader possesses tender-offer related infor-
mation derived from either the bidder or the
These prohibitions on trading carry with them a
corresponding duty to refrain from 'tipping' others.
If this is violated, the 'tippee' can be held liable as a
co-venturer with the tipper/insider.5
As far back as the early 1980s, the SEC began to
act against instances of cross-border insider trading:
situations where the pattern of trading involved
some conduct outside the USA.6 In a number of
such cases, foreign persons used foreign brokerage
accounts to trade in the securities of multinational
companies on the New York Stock Exchange or
Nasdaq. In 1999, for example, the SEC brought a
case involving trading by an Italian portfolio
manager through the Swiss office of a brokerage
firm in the stock of a Netherlands corporation that
was the subject of a takeover bid by a Swiss com-
pany.7 The incidence of cross-border insider trading
cases is, of course, what led the SEC to begin to
negotiate memoranda of understanding with various
countries to facilitate their investigation.
We are seeing an increasing stream of such cases.
That should not be surprising in light of the increas-
ing globalisation of the securities markets and the
rapid increase in the number of cross-border mergers
and acquisitions the setting in which the largest
insider trading temptation exists.8 As persons from
various countries become involved in the confidential
negotiation or planning of such deals, the locus of
insider trading problems spreads.
Currently, there is no formal SEC policy on when
US insider trading rules (or indeed Rule 10b-5
generally) will be applied extraterritorially. If any-
thing can be gleaned anything from SEC action
during the last 20 years, it is the trading site the
use of US market mechanisms that counts
most.9 Certainly, neither the trader nor the issuer
need be US-based. The author would like to articu-
late in this paper what he thinks is sensible enforce-
ment policy for a nation whether the USA or
any other to adopt. By this, he does not want to
focus on the question of the extent of a country's
jurisdiction to prescribe in accordance with the dictates
of international law.10 Familiar principles of inter-
national law give immense scope to jurisdiction,
permitting enforcement either when conduct in
question occurs in substantial part in the regulating
country or has significant effects in that country.
But clearly, either through prosecutorial restraint or
judicial limitation, a nation can choose to give lesser
scope as a matter of prudence, comity and the wise
expenditure of limited investigatory
This is an issue that all sophisticated capital market-
place nations ought think through. But at present, at
least, the USA is the most likely nation to act extra-
territorially, even when insider trading laws exist in
the other nations involved. Four things tempt a
country like the USA to extend its insider trading
jurisdiction. First, conduct might be unlawful domes-
tically, but not unlawful in the country to which the
jurisdictional reach is directed. This is possible,
though in light of the rapid evolution of insider trad-
ing laws throughout the world, not necessarily
likely.12 Secondly and more likely it is con-
ceivable that the action might be unlawful where it
occurred, but the local authorities do not seem
likely to take action against it. One of the most
obvious, and troubling, phenomena in international
securities regulation is that even as the 'law on the
books' in most developed countries converges on a
common model, the commitment of surveillance
Journal of Financial Crime
8. No.
2001, pp. 254-263
© Henry Stewart Publications
ISSN 0969-6458
Page 254

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