business ethics Straudler

Argument that insider trading violates fiduciary duties

A fiduciary duty is the duty to utmost loyalty and trustworthiness that an agent has to his or her principal. A lawyer has fiduciary duties to his or her client. The same goes for doctors towards their patients. The same goes for corporate insiders to their shareholders. So, an insider must disclose all relevant information to his principal before engaging in securities transaction with that principal. Is this true? Is it a breach of his or her fiduciary duties if withholding information is necessary to make his or her client money? Isn't the job of the trader to just make as much money as possible for his or her client?

Strudler thinks that each of these arguments, as ordinarily formulated, is unpersuasive. Why does he think that?

He considers a society in which insider trading is legal. He argues that contracts in such a society would be unconscionable. What does he mean by this? Since they would be unconscionable, he argues that insider trading should always be regarded as involving wrongful moral deceit. What is the argument for this?

Argument from deception

Insider trading is wrong because it always involves deception. Deception is wrong even if it does not harm. We have a duty not deceive. Deception is wrong because it compromises my autonomy in my decision-making. My wife gets intercepts a phone call for me about a job offer. She doesn't want me to take the job. And, it turns out that taking the job would be the wrong for my family and me. So, when I ask about the phone call, she says that I did not get any calls. Wasn't that wrong of her? But, is there deception in all cases of insider trading? Texas Gulf Sulpher officers made a bunch of false statements. But, imagine a different case where insider traders did not make any false statements. Is it possible to inside trade without making any false statements? Can silence count as deception? Is refusal to disclose relevant information at type of deception? A used car salesman is silent about some major defects in the engine of a car he is about to sell...isn't this deceptive? With certain kinds of transactions, full disclosure is necessary. But, with other cases, perhaps not. In a competitive market, does one always have to disclose all relevant information?

Harm

Insider trading is wrong because of the harm done to society. In a securities market, there are winners and losers. The people with the best information are in the best positions to identify bargains and the best prices for securities. Thus, competing against insiders is unfair. Ordinary traders cannot compete with insider traders. So they will balk at buying securities. This will deter investment. This then hinders development and economic growth.

Why then should we think that they will not invest because of inside traders?

Perhaps inside trading provides benefits to society. It allows insider information into the market faster. This then improves market performance.

The Argument that insider trading is wrong because it is unfair

The insider has information or access to information that the people he or she is doing transactions with do not have. This gives him or her an unfair advantage. Is it always wrong to make transactions where one has more information than the people one is doing transactions with? Edna is an engineering genius. She knows that there is a design flaw in Toyota's favorite engine. So, she sells her stocks in Toyota. Is this unfair? Is this wrong? If none of the argument we have considered for why insider trading is wrong is any good, what exactly is wrong with insider trading? The argument is that the contracts that would be made in insider trades could never be legitimate. And that is because they would always be unconscionable.

How does Straudler want us to understand "inside trading"?

The legal analysis of insider trading is that occurs when a corporate insider engages in a securities transaction on the basis of material, nonpublic information.

What is it for a contract to be unconscionable?

There are two types—substantive and procedural.

Straudler's response to harm

There is no evidence that insider trading deters investment. There is reason to think that insider trading will not deter investment. Securities traders are accustomed to the idea that other traders may possess advantages in information even if it is not insider trading. Most investors do not believed that they have the same kind of information that Warren Buffett has. But, they still invest. They know that their information is not as good as the investors for Goldman Sachs. But, they still invest.

What are some potential problems with this way of understanding the term?

This excludes cases of insider trading cases where the inside traders—tippees (people who wrongly receive stock tips from corporate insiders) and others who wrongly trade on inside information even though they themselves are not corporate insiders.

Procedurally unconscionable contracts

involve a party who is incapable of understanding the terms of the contract. Example: An old lady agrees to sell of her house for an ice cream cone because she has become senile and does not understand what he is doing.

substantively unconscionable contract

is one where the terms are grossly unfair. We as a society do not want to support or facilitate one party taking advantage of another. We should not partake in other people's wrongdoing. The Hooters of America, Inc. v. Phillips case The terms of the contract between Hooters and its female employees were unconscionable. It made female employers subject to sexual harassment. In such a case, it was necessary to rule the contract unconscionable. And thus, it was necessary to not enforce it.