The Road not Taken: A Comparison of the E.U. and U.S. Insider Trading Prohibitions

This essay, written for a symposium on insider trading in the Washington University Journal of Law and Policy, explores the different paths taken by the United States and the European Union with respect to who is subject to the prohibition on insider trading. After providing an overview of the difference between the U.S. and the E.U. prohibition, the essay explores the different outcomes that would occur under U.S. versus E.U. law in several high profile insider trading cases of recent years. The essay also addresses the jurisdictional reach of each regime’s prohibition and considers the normative lessons of this real world experiment in taking different paths. * Distinguished Professor of Law, University of the Pacific, McGeorge School of Law. 2017 / The Road Not Taken 2 My introduction to the prohibition on insider trading came as a law student in Berkeley in 1976. My notes indicated that the law in the United States—-we did not think much about law outside the United States—-was uncertain regarding whom the prohibition reached. They also pointed out, however, that authority from the Second Circuit, particularly the landmark decision in SEC v. Texas Gulf Sulfur,1 stated that the prohibition reached anyone in possession of material nonpublic information. Four years later, the United States Supreme Court, in Chiarella v. United States,2 held this was wrong. Instead, the Supreme Court redirected the prohibition on insider trading under United States law into a narrower and more complex approach. One wonders what would have happened if the Supreme Court had seen things differently and upheld the Second Circuit’s broad prohibition in Chiarella. A utility of comparative law is that it sometimes allows us to explore the impacts of different choices regarding legal rules without performing a gedanken experiment, searching the multiverse for another Earth on which this particular law is different, or watching the movie Sliding Doors as made by lawyers. The European Union’s adoption of a rule similar to the Second Circuit’s preChiarella approach makes this one of those times. This essay explores the different paths taken by the U.S. and the E.U. with respect to who is subject to the prohibition on insider trading. Part I provides an overview of the different approaches taken by the U.S. and the E.U. law. Part II moves from the general to the specific by exploring the different outcomes that would occur under U.S. versus E.U. law in several high profile cases of recent years. Part III explores a practical implication of this divergence by discussing the jurisdictional reach of each regime’s prohibition. Finally, Part IV considers what normative lessons we can draw from this real world experiment in taking different paths. I. OVERVIEW OF THE U.S. VERSUS E.U. INSIDER TRADING PROHIBITIONS A. The U.S. Prohibition Early in the 1960s, the United States established what appears to be the world’s first prohibition of trading on inside information.3 The Securities and Exchange Commission held that the Cady, Roberts brokerage firm had committed fraud in violation of Section 10(b) of the 1934 Securities Exchange Act,4 and Rule 10b-5 promulgated by the Commission pursuant to that section,5 1. 401 F.2d 833, 848 (2d Cir. 1968). 2. 445 U.S. 222, 235 (1980). 3. E.g., Franklin A. Gevurtz, The Globalization of Insider Trading Prohibitions, 15 TRANSNAT’L LAW. 63, 64-5 (2002). 4. 15 U.S.C. § 78j (2012). 5. 17 C.F.R. § 240.10b–5 (2010).