1. Insider Trading Nature of “evil” Common law “yawn” Federal “duty” (last updated 5 Oct 06)

2. What’s insider trading (and what’s the problem)? Classic insider trading vs. misappropriation

3. Insider vs. outsider trading Classic insider trading Corporation Investors / shareholders Insider Non-public, material information Buy or sell Outsider trading (misappropriation) Corporation Non-public, material information Insider Shareholders Target Investors / shareholders Buy or sell

4. Evaluate “insider trading” Pros Sends “soft information” to markets – thus protecting proprietary info Encourages insiders to own company stock Compensates insiders for developing “good news” Cons Unfair to those without information Discourages investors from entering market Adds to trading “spreads” in markets Constitutes theft of corporate intellectual property Distorts company disclosures as insiders manipulate company info

5. Evaluate “insider trading” Pros Sends “soft information” to markets – thus protecting proprietary info Encourages insiders to own company stock Compensates insiders for developing “good news” Cons Unfair to those without information Discourages investors from entering market Adds to trading “spreads” in markets Constitutes theft of corporate intellectual property Distorts company disclosures as insiders manipulate company info

6. Common law “yawn”

7. Common law Strong v. Repide (US 1909) Goodwin v. Agassiz (Mass 1933) Corporation Shareholder Insider Non-public, material information Buy What is the common law? What are “special facts”?

8. Common law Insiders generally owe no duty to shareholders But “special facts” Powerful insider Clear knowledge Concealed identity Doesn’t reach Anonymous transactions on stock market Trading on tipped info by non-insider tippees Selling to non- shareholder investors Outsider trading No duty to shareholders in stock market Encourage inside stock ownership Difficult to identify who are plaintiffs What is “material”?

9. Hypotheticals Jack, an insider, knows his company InClone is going to acquire BioGen – good for BioGen’s shareholders, bad for InClone’s shareholders. –Can Jack buy BioGen stock? –Can he sell his InClone stock on a public market? –Can Jack sell “put options” in InClone stock on the CBOE?

10. Federal “duty”

11. Federal “insider trading” law Cady, Roberts (SEC 1961) SEC v. TGS (2d Cir 1968) Corporation Shareholders Insider Non-public, material information Buy Basis for duty Securities professionals have special duty Insiders should not gain personal benefit Investors should have equal access

12. Federal “insider trading” law Chiarella v. United States (US 1980) Corporation Non-public, material information Insider Shareholders Target Shareholders BuyWhat is basis for “insider trading” liability? Printer Eee

13. Federal “insider trading” law Chiarella v. United States (US 1980) Justice Lewis Powell Duty to “disclose or abstain” Relationship gives access to inside information Unfair to take advantage of information Premised on duty of “trust or confidence” between parties Applies when sell to to-be SHs and buy from existing SHs

14. Hypotheticals Jack, an insider, knows his company InClone is going to acquire BioGen – good for BioGen’s shareholders, bad for InClone’s shareholders. –Can Jack sell his InClone stock? –Can Jack buy BioGen stock? Katharina, a stranger, finds Jack’s InClone-BioGen “takeover notebook.” What a lucky break. –Can Katharina sell Inclone short? –buy call options on BioGen?