The Problem with Consenting to Insider Trading

BY LEO KATZ, 69 U. Miami L. Rev. 827 (2015).

Introduction: Professor Anderson argues that so long as insider trading is consented to by all market participants, it is hard to find a strong moral objection to it. I agree that explaining why we prohibit consensual transactions is always a tall order. Nonetheless, the fact remains that the law outlaws a remarkable number of mutually beneficial arrangements that all participants have agreed to. Issuer-licensed insider trading is just one of these. Should the law ban it? Professor Anderson is unconvinced by an argument I have given elsewhere to explain why the law should ban it. Here, I will try to restate that argument in what I hope is a more congenial way.

Many years ago, Amartya Sen proved a famous theorem in the theory of social choice, closely related to Kenneth Arrow’s famous impossibility result. It holds that there is a deep incompatibility between rules that create rights and the Pareto principle. The theorem’s significance for the law has gone surprisingly unappreciated. My argument about insider trading is really just an application of Sen’s theorem to a specific context. In this response, I will illustrate Sen’s argument with a very specific example. I will then show how that example explains why assumption of risk arguments so often fail in law. I will conclude by pointing out that allowing someone to consent to be at the other end of issuer-licensed insider trading is to let him assume a risk under circumstances that pose a Sen-type problem. I will avail myself of examples I have used in Why the Law Is So Perverse to discuss related problems. . . . Full Article.

Recommended Citation: Leo Katz, The Problem with Consenting to Insider Trading, 69 U. Miami L. Rev. 827 (2015).

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